Friday, 18 November 2011

Solving the Euro Crisis without Germany Paying More

Nat O'Connor: It seems that domestic politics in Germany are focused on dealing with a perception by German taxpayers that they are at risk of 'paying' for the euro crisis.

Yet, there seem to be obvious political institutional solutions, using the ECB, that could help resolve the immediate euro crisis without the Germans having to 'pick up the bill'.

First of all, and partially an aside, it is calculated by German development bank, Kreditanstalt für Wiederaufbau (cited by the influential Hans Böckler Stiftung, bottom of page 5, in German), that Germany benefitted from having the euro, as a relatively weaker currency than the Deutschmark would have been. They argue Germany benefited by €50-60 billion in the last two years by not having their own currency (which would have been stronger and therefore raised the cost and lowered the competitiveness of their exports). Although this argument is circulating within Germany, it is not influencing the European debate as much as it should.

Secondly, even leaving aside this important line of argument about the less-often-calculated benefits to Germany, there is the obvious solution to any euro crisis: change the rules governing the European Central Bank (ECB). Currently the ECB is constrained to only focus on inflation. It should have a new mandate: to remain strongly independent, but to also focus on maximising employment and also act as a lender of last resort, which John Bruton spoke about very clearly on RTÉ Morning Ireland yesterday (17 Nov).

What the lender of last resort means is that the ECB would buy the government bonds of any state that is having a hard time getting a sustainable rate of interest on the private markets. Of course, if some countries benefit from this facility more than others, that would be effectively a form of fiscal transfer between eurozone members. The ECB would remain independent and could not be instructed when to buy bonds, but it would still be open to excess use.

The risk (to Germany and other stronger economies) is that currently weaker economies (like Italy, Greece or Ireland) might lean heavily on this facility instead of making the necessary (and politically difficult) structural reforms in their own economies and public spending.

One possible solution (and this is open to constructive criticism as I may have missed an equally obvious flaw!) is for a simple mechanism to be instated to resolve this: the ECB could simply keep track of how much each country benefits from it acting as lender of last resort. This record could in turn affect the annual contributions each country has to make to the EU. So although stronger countries like Germany would pay in the short term, this would be equalised in the long term by relatively poorer countries paying a little over the odds in their annual payments to the EU for a period of years (or decades if necessary). Such a mechanism should provide a disincentive for countries to lean too heavily on the lender of last resort and be obliged to make harder domestic decisions. Yet it would prevent the kind of unnessary crisis that Italy and others are facing at this time. (Note that Italy has been running a Government surplus, not a deficit - as I think John Bruton pointed out in the above interview).

The proposal of such an equalisation mechanism might also be the sugar-coating necessary for German voters to accept the need for the ECB to have as full a mandate as the Bank of England or US Federal Reserve.

1 comment:

Paul Hunt said...

It's not just Germany. What we are seeing in the EU now is a conflict between the Community method – where the EU’s institutions collectively engage to make law and establish new institutions – and the Inter-governmental method – where the powerful member-states seek to impose their will on all. It has been forced by the increasing lack of democratic legitimacy in the application of the Community method where the Commission has largely driven the agenda, with some support from the Parliament, and where national governments, following some ‘horse-trading’ in the Council, have reached agreement and used their executive dominance over their national parliaments to transpose primary EU legislation and regulations into national law.

National parliaments in the northern EU states have become increasingly assertive in establishing their primacy over governments and this is becoming the case particularly in Germany. There seems to be little understanding in Ireland of the background to the leaking of Irish budget proposals to members of the German Bundestag. Deriving from the Basic Law (drafted in the main by US and British constitutional lawyers after the war), the German Constitutional Court has confirmed the basis for the primacy of the Bundestag over the Federal Government when it comes to giving concrete expression to German solidarity with other EU member-states. And it runs with the grain of popular sentiment. Excessive use of the Community method delivered the Euro and German voters were assured that all the necessary safeguards were in place to allow them to abandon their beloved Deutschmark. They now see they were sold a pup. We are used to politicians lieing routinely to us, but many Germans, for some reason, consider this offensive – and they are very angry. By seeking to re-assert the primacy of the Bundestag over the Federal Government – and by exercising oversight of the fiscal behvaiour of other countries receiving their support – politicians there are seeking to re-assure their voters and to persuade them of the benefits of increased solidarity with worse-off and less well-governed member-states. A similar exercise is being conducted in the Netherlands, Austria, Finland and the newer and smaller central and eastern European members.

Hopefully this spasm of national parliaments asserting their primacy, though a very necessary corrective, will pass and a more effective application of the Community method will be secured.

But this - and any possible solutions favoured by the centre-left (such as the one you have outlined) - must be considered in the context of the map of the EU being coloured the blue of the centre-right. Spain has just fallen. Austria and Slovenia alone remain in the cetre-left camp, but their governments are being driven right and elections are due in the near future. Denmark switched recently to the centre-left, but its not in the EZ. Even in France switches in May and Germnay on Oct. 2013, there is no certainty a different tune will be played.

The voters aren't listening to the centre-left and are not being persuaded. It should convey a message that the tune needs to be changed. But is there any evidence of that? Not that I can see. Just a certainty that the scales will fall eventually from people's eyes and they fall gratefully in to the arms of the centre-left.