German Finance Minister: Markets Out of Control

The man at the eye of the financial storm that has engulfed the euro has learnt to be patient after 20 years confined to a wheelchair. But Wolfgang Schaeuble, Germany’s finance minister, is also a man in a hurry.

Martin Oeser | AFP | Getty Images A trader sits in front of a board displaying Germany's share index DAX at the stock exchange in Frankfurt/Munich, western Germany.

He wants urgently to rewrite the rulebook of the euro zone to prevent any such crisis happening again, and at the same time to revive the momentum of international negotiations on tougher regulation of financial markets. He has returned to the idea of an international financial transaction tax, to make financial institutions share in the costs of the crisis, even if it can be agreed only inside the European Union.

He admits that the greatest problem affecting the markets is one of trust in the ability of the EU, and especially the 16 members of the common currency area at its heart, to bring their debt and deficits under control as they have promised. “That is the task we must perform,” he tells the Financial Times aboard his Luftwaffe Challenger jet bound for Berlin. “But that doesn’t alter the fact that financial market regulation is also necessary.

“I’m convinced the markets are really out of control. That is why we need really effective regulation, in the sense of creating a properly functioning market mechanism.”

Mr Schaeuble’s sense of urgency is compounded by his own state of health. Just 10 days ago, the 67-year-old survivor of a mentally disturbed would-be assassin was rushed to hospital with an allergic reaction to a new antibiotic as he arrived in Brussels for the emergency meeting of EU finance ministers called to agree on the 750 billion euro rescue package.

In his first newspaper interview since returning to work, he is adamant he is up to what is often seen as the toughest job in the German government. “I am quite clear about what I can be responsible for and what I cannot. It is my decision and my responsibility. I feel fine.”

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The euro zone crisis was triggered by fears of a debt default in Greece, in spite of a massive joint rescue package by the EU and the International Monetary Fund. Market speculation switched to the sovereign debt of Portugal and Spain, causing a slump in the value of the euro on foreign exchange markets and sparking angry criticism across Europe of massive market speculation.

Mr Schaeuble’s return from Brussels on Tuesday came just hours before it was announced that Germany was to ban naked short-selling – selling securities without either owning or borrowing them – in euro zone sovereign bonds and credit default swaps as well as in the shares of 10 leading German financial stocks. The move was in line with the minister’s thinking about the danger of disconnection between financial transactions and real economic activity.

“A market does not function properly if the risks and rewards are completely unbalanced,” he says. “We need transparency. Given the complexity of modern technology, the individual needs a chance to judge what he is doing. That’s why we need standardization of products. And we need transparency for all market participants.

“We must regulate over-the-counter transactions, and we must also focus on the ratio of financial transactions to the real exchange of goods and services. They bear no relationship to each other. I understand that we need new financial instruments to cope with the huge financial tasks that we face. But, forgive my saying so, minimum profits of 25 per cent are simply unimaginable in the real economy. It isn’t healthy.”

Mr Schaeuble fears momentum has gone out of the international negotiations on financial regulation, and he is determined to recover it. That view, shared in Washington, was now “getting very strong in Europe”. But the EU needed to speed up its complicated decision-making process.

Although the idea of a global financial transaction tax appears to have been dismissed both by the US and the IMF, Mr Schaeuble says the Group of 20 leading industrial and developing nations “will have another look [at it] in an unbiased way”. He admits it is “very likely” that there would be no agreement at the G20 summit in Canada in June and “then the debate will take off again to see if it is possible to do it in Europe. If we get a Yes, that is good. If we get a No, then we will once again work intensively to see if we cannot have a transaction tax at a European level.”

Mr Schaeuble’s financial regulation agenda was seized on yesterday by Angela Merkel, the German chancellor, in her government declaration at the first reading in the Bundestag of legislation permitting Germany to play its part in the newly agreed euro zone stabilization fund.

Both tighter market regulation and forcing financial institutions to contribute more to the cost of the crisis – through a bank levy that the cabinet has already approved and a possible financial transaction tax – are popular in Germany but providing credit guarantees to weaker economies is not. By linking the two, the government clearly hopes to defuse a backlash.

The euro zone deal would commit Berlin to providing guarantees of up to 150 billion euros, as its share of the total 440 billion euros to come from all the euro zone member states. The rest would come from the IMF and the European Commission. What German citizens fear is that Germany becomes responsible for the entire burden of debt guarantees. They have coined the term “transfer union” to describe an EU that simply moves money from thrifty German taxpayers to extravagant ones in Greece, Spain or Portugal. Bild Zeitung, the mass-circulation Euroskeptic newspaper, has run a shrill campaign condemning any such action.

The minister attempts to be reassuring. “In the end, you know, the Germans are rather more sensible than one might think if one reads newspaper articles,” he says. But as if he does not have enough to do in firefighting the euro zone crisis and planning his own austerity program for the next annual budget, Mr Schaeuble is raring to engage in a debate with German Euroskeptics.