Thatcher, Merkel and the Euro

Regardless of where one stands politically, it is hard not to pay tribute to Margaret Thatcher. She was one of the truly great leaders of the last century.

Before she came to power, Britain was the “sick man of Europe.” When I first traveled to the island from Germany, where I had grown up in the late 1970s, I was struck by the dismal quality of life there.

There was a pervasive lack of basic household amenities and a poor quality of goods and services. In fact, if it hadn’t been for the British soldiers based near my home village back in Germany, I might have doubted which country had won the war.

Now that I have lived in London for the past 15 years, I have come to appreciate life in a world-class city and country is largely the result of her reforms.

Thatcher turned Britain around through labor market and other reforms. She did not hesitate to incur short-term pain in order to pave the way for long-term benefits. She also showed to the world that supply-side reforms work.

In her day, Thatcher saw that parts of Europe’s left were trying to use the European project to impose center-left ideas in an across-the-board fashion. Using the back door of the then-European Community, they tried to impose their policy views on all members.

In a creative and growth-enhancing response, Thatcher helped to drive the completion of the common market. But she failed to grasp the power of the European idea.

Worse, she did not fully appreciate that most of what Brussels did was to open up the economies of its member countries.

In the vast majority of cases, the common regulations for the common market, while cumbersome, were and are much more liberal than the plethora of national rules they replaced.

It is almost tragic that, steeped in a tradition of Euroscepticism, many of her British admirers today fail to see that what Germany did in 2004-05 — and what the Eurozone periphery is doing today — is almost exactly what Thatcher imposed on Britain in her time: thorough structural reforms.

These reforms are painful and unpopular. But they promise great benefits once the initial pain is over. It is more than ironic that many of her followers today argue that the European periphery should rather try an inflationary gimmick — namely, the likely collapse in value of a new national currency.

They are thus undermining the Iron Lady’s own legacy, which is to persevere with the harsh austerity and supply-side reforms which those countries need in order to turn around their fortunes for good.

Thatcher’s reforms turned Greater London into the thriving services center of Europe. Unfortunately, the Euroscepticism of many her followers today threatens this status through an unlikely, but not fully impossible, exit from the common market after the envisaged in-or-out referendum on the EU in 2017.

Germany and the euro

Angela Merkel is not exactly a German Margaret Thatcher. She doesn’t have to be. Germany reformed itself largely under the stewardship of her predecessor, Gerhard Schröder.

Merkel, then the opposition leader, played a major role in shaping those reforms through her party’s majority in the upper house, the Bundesrat. But like Thatcher, Merkel is not afraid to follow her convictions and persevere with policies, even though they do not promise instant popularity.

To be sure, it is not popular at home to put German taxpayer money at risk to shield reforming countries on the eurozone periphery from market panics. But Germans are ready to reward her leadership. They also acknowledge that, by and large, Merkel is on the right track with her euro policies.

A new anti-euro party, Alternative für Deutschland (AfD), could make some small waves in coming months, mopping up some of the Eurosceptic sentiment in parts of the German population.

In my view, the AfD won’t get the 5% of votes required to make it into the German Parliament. Parties trying to prevent the introduction of the euro also failed 15 years ago. Of course, we cannot rule out an upset with the AfD clearing the 5% threshold.

As the anti-euro group would probably draw most of its support from conservative voters, the AfD could add to the difficulties of the center-right CDU/CSU-FDP coalition to defend its current majority in Parliament.

If so, the likely result would be a CDU/CSU-SPD grand coalition. And you can count on it pursuing almost exactly the same euro policies that Merkel has pursued so far.