Helmut Schmidt and the narrative of the Eurozone crisis

Athanasios Orphanides

29 January 2016



Helmut Schmidt’s European vision as Germany’s chancellor during the Cold War, and his subsequent contributions, helped shape the continent and promote European integration.  With his passing in 2015, Europe lost a great leader. Germany’s Schmidt and France’s Valéry Giscard d'Estaing were the grandfathers of the euro, a project finalised by their successors in Germany and France, Helmut Kohl and François Mitterrand.  Franco-German cooperation and leadership for Europe has been crucial to the advancement of the European project.  Similarly, leadership voids have been at the crux of Europe’s failings.  

Schmidt’s insights are especially missed at a time when the future of Europe is in question, not least due to the mismanagement of the Eurozone Crisis, where his advice went unheeded. Six years after the Crisis began, it remains unresolved. And worse yet, Europe’s elite disputes its true causes.  

Understanding the EZ Crisis

Understanding why the Crisis occurred is critical for a consensus on remedies, which is a prerequisite for salvaging the European project.  Recent analysis has identified key economic factors that contributed to the Crisis (Baldwin et al. 2015). Establishment of the euro fuelled current account imbalances and made a number of Eurozone member states vulnerable to a sudden stop.  Greece became the first victim in early 2010. Economic analysis also explains the risks of fiscal profligacy, which was an important aspect of the problem in Greece but—contrary to a narrative prevalent among the European elite—was not the main cause of the Crisis overall.  Although these points are important, economic analysis alone cannot explain the gross mismanagement of the Crisis in the six years since early 2010. It also cannot explain the actions taken by European governments and institutions that caused a small initial shock to turn into an existential crisis for the Eurozone.  This requires understanding the political dimension. 

Crisis management requires strong political leadership. Every crisis generates losses, and effective management is necessary to contain total economic losses and to manage a fair distribution of those losses among different stakeholders. Establishment of the common currency took away from member state governments crucial crisis management tools, but a common political structure that would have ensured cooperation during a crisis was never constructed.  When the EZ Crisis erupted, no institution had the responsibility and authority to act and contain the total crisis losses for the Eurozone as a whole.  Worse, electoral considerations prompted certain governments to attempt to shift losses to stakeholders in other states.  Political survival demands that leaders focus on their own constituency, regardless of whether this inflicts harm on other member states or the Eurozone as a whole.

The Greek crisis is an important example.  As was rumoured in early 2010 and has since been confirmed with the release of previously confidential information, the French and German governments used their leverage to shape the May 2010 Greek bailout in a manner that shifted losses away from French and German financial institutions (Wyplosz 2010, Orphanides 2015).  This leadership failure proved catastrophic for Greece and magnified the crisis losses for the Eurozone as a whole.   

Two speeches Helmut Schmidt delivered in late 2011—when it would still have been possible to defuse the Crisis at a modest cost—are particularly instructive to understanding the political dimensions of the crisis (Schmidt 2011a, 2011b).  The first was delivered in Frankfurt on 19 October at the farewell event marking the end of Jean Claude Trichet’s tenure as president of the ECB. The second was at the SPD party conference in Berlin on 4 December.  In between these two speeches, on 26 October, EU leaders had a summit meeting at which decisions were made that led to further intensification of the Crisis, and a credit crunch-induced recession.

Having followed the euro project for decades, Schmidt was acutely aware of the historical underpinnings of the endeavour as well as the weaknesses of its structure. In his Berlin speech, Schmidt explained the Crisis in the broader historical context of conflict in Europe and drew parallels from centuries of military conflict to the current predicament: 

“[T]he history of the continent might well be regarded as a never-ending succession of struggles between the periphery and the centre and, vice versa, between the centre and the periphery.” (Schmidt 2011b)

Schmidt went on to remind his fellow citizens: 

“[W]e Germans have frequently made others suffer because of our position of power at the centre.” (Schmidt 2011b)

His economic analysis explained how flaws in the establishment of the euro allowed imbalances to emerge.  He identified the development of persistently high balance-of-payment surpluses for Germany as “a very undesirable development”, albeit one that placed Germany in a position of immense economic strength relative to other member states.  Schmidt was concerned about how Germany might use this strength, drawing a parallel with earlier dark episodes in Europe’s history:

“[T]here is once more a growing concern about German dominance. This time the issue at stake is not a central power that is exceedingly strong in military and political terms, but a centre that is exceedingly powerful in economic terms.’’ (Schmidt 2011b)

Schmidt’s advice to his fellow Germans was direct:

“In view of our central geopolitical location, the unfortunate role we played in European history up to the middle of the twentieth century and the strong economy we have today, every German government is called upon to show the utmost sensitivity towards the interests of our partners in the EU. And our willingness to help is indispensable.” (Schmidt 2011b)

Opposing the dominant narrative of the European elites, Schmidt voiced concern about the risks inherent in calls for economic austerity in member states already weakened by the Crisis:    

“We should also avoid advocating an extreme deflationary policy for the whole of Europe.  . . . No country can consolidate its budget without growth and without new jobs.” (Schmidt 2011b)

Helmut Schmidt was concerned that Europe had lost its way and risked “a self-inflicted marginalisation”. The EU could degenerate into a “mere confederation”, he warned, leading to continued decline of Europe’s influence in the world, which he felt would harm Germany and Europe alike. He recognised that the crisis Europe faced transcended simple economic challenges. 

Europe’s inability to tackle the Eurozone Crisis fundamentally reflected a failure in political leadership. Schmidt had emphasised as much a few weeks earlier in Frankfurt.  Speaking to an audience that included numerous European leaders, he stressed:

 “What we have, in fact, is a crisis of the ability of the EU’s political bodies to act. This glaring weakness of action is a much greater threat to the future of Europe than the excessive debt levels of individual Eurozone countries.”  (Schmidt 2011a, emphasis in the original)

The problems faced by the Eurozone could be traced to the flawed, incomplete framework of the Maastricht Treaty. 

“But there was a failure to set down the economic and legal rules of the game for the currency union. A powerful authority with responsibility for fiscal and economic policy was not set up subsequently either. And there was also a failure to assign the necessary legal status to the Stability and Growth Pact, which Germany and France violated long before Greece did.”  (Schmidt 2011a, emphasis in the original)

However, Schmidt warned, the shortcomings of the framework should not be used as an excuse to avoid fulfilling mutual obligations:

“It will not be possible in the foreseeable future to change these structural shortcomings in the Treaties. But under no circumstances can they be used as an excuse not to fulfil our obligations of mutual solidarity and subsidiarity, to which we are bound both morally and through Articles 3 and 5 of the Treaty on EU.” (Schmidt 2011a, emphasis in the original)

Schmidt’s plea for better European cooperation

Schmidt pointedly reminded his audience of the solidarity other nations had shown Germany after World War II, citing the Marshall Plan of the US and the London Debt Conference. He ended with a plea for better cooperation:

“The success of the EU is thus in the national interest of all of us, whether we are French or Polish, Slovakian or Greek. And we will certainly retain all of our national characteristics, our own languages and our nation states. Nevertheless, we must work together much better than we do at present. And those who are temporarily stronger must of course help those who are weaker.” (Schmidt 2011a, emphasis in the original)

These words, spoken from the stage at Frankfurt’s Old Opera, were effectively directed at German Chancellor Angela Merkel and French President Nicolas Sarkozy, who were seated in the front row.  Unfortunately, Europe’s leadership during the Crisis did not share Helmut Schmidt’s vision.  


Baldwin, Richard et al. (2015), Rebooting the Eurozone: Step 1 – Agreeing a Crisis narrative  CEPR Policy Insight No. 85. November 2015. 

Orphanides, Athanasios (2015). The Eurozone crisis five years after the original sin. MIT Sloan School Working Paper  5147-15. October 2015. http://ssrn.com/abstract=2676103

Schmidt, Helmut (2011a). Remarks at farewell event for Jean-Claude Trichet, 19 October 2011, Frankfurt am Main. (English translation of the original German text)

Schmidt, Helmut (2011b).  Germany in and with and for Europe.  Speech at the SPD party conference, 4 December 2011, Berlin.  https://www3.spd.de/scalableImageBlob/23344/data/20111204_speech_schmidt-data.pdf

Wyplosz, Charles (2010). My big fat Greek conspiracy theory.  Financial Times, 5 February. http://www.ft.com/cms/s/0/da5c40da-1283-11df-a611-00144feab49a.html#axzz3y5hRB3wa



Topics:  EU institutions Macroeconomic policy

Tags:  EZ crisis, Helmut Schmidt

Professor of the Practice of Global Economics and Management, MIT Sloan School of Management