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Wednesday, September 18, 2013

No quantum leap on eurozone integration after the German elections

Our Director Mats Persson has an op-ed in today's Wall Street Journal, where he argues,
A satirical cartoon in the Italian magazine L'Espresso, depicting a father and son, illustrated it best: "Papa," says the son, "I have to go to the toilet."

"Hush," answers the father. "Hold it until after the German elections."

By now most commentators have realized that there won't be a quantum leap toward more eurozone integration following the German elections. However, while most have focused on coalition dynamics, there are in fact three far more profound limitations that will continue to restrict Germany's ability to act in Europe long after the Sept. 22 elections, and will prevent any swift move toward a euro-zone banking union or fiscal union: One of these limitations is political, one is constitutional and one is economic.

First, German public support for the euro remains highly conditional. According to a recent Open Europe/Open Europe Berlin poll, a majority of Germans support more euro-zone integration if it means more central controls over other countries' taxation and spending. However, a clear majority remain opposed to any policy that involves putting German cash on the line, such as further loans to struggling euro-zone countries, write-downs of existing loans, a joint banking backstop or fiscal transfers.

This is neither surprising nor new. In the 1990s when the euro was forged, the gulf between public and elite opinion was already conspicuous. But despite mounting scepticism, the cost of saving the euro hasn't actually trickled through to people's wallets. If that ever changes, via a slow-down in the German economy, or if savers start to really feel the pinch from the European Central Bank's low interest rates or future possible money printing, we may quickly hit the limit of what the public is willing to endure.
Let's not forget that, given Germany's regional structure, there's almost always another election on the horizon. Between now and when Greece is supposed to exit its bailout program in June 2015, for example, there will be at least five state elections in Germany, as well as the European elections in 2014. German politicians cannot escape public opinion.

Second, the German republic was set up after World War II specifically to prevent hasty centralizations of power. Ironically, this was done at the behest of the Americans and the British—though both Washington and London have been vocal critics of Berlin's cautious approach in the euro-zone crisis. Systemic circuit-breakers such as Germany's Constitutional Court were put in place to counter rash decision-making, while the modern German constitution in 1949 got rid of the federal government's Weimar-era emergency powers.
Today, slowness and consensus are encoded in the very fabric of the German constitutional DNA. This will not change after the elections, nor should we wish it to. While it is unlikely to rule against the ECB's bond-buying program, the Constitutional Court will continue to lay down new red lines for what Germany can and cannot do. The Court has already said that before the euro zone moves to a transfer union, a change to the German constitution will be needed, which will first require a referendum.
It's constitutionally complicated, for example, to write down Greek debt, given that 75% of it is now owned by taxpayer-backed institutions in Germany and the rest of the euro zone. If those institutions take losses on what until now have been loan guarantees, that will in effect turn the euro zone into a transfer union for the first time, which the Constitutional Court has said is illegal. German politicians will continue to have one hand tied by the court in Karlsruhe for years to come.

Then there is the third and most fundamental limitation: Germany can't afford to underwrite the euro forever. If implicit debt, such as the liabilities of Germany's social-security system, are taken into account, the real level of German public debt would be 192% of GDP—much higher than Italy's 146%. Germany has also racked up an exposure to the struggling peripheral countries of around €1 trillion—equivalent to some 40% of its GDP. If Berlin were to begin accepting losses on this, the cost could snowball quickly, as all its sovereign debtors would look for equal treatment. Furthermore, Germany faces a demographic time bomb.

By 2050, the country's current population of 82 million is projected to have declined to around 70 million—less than in 1963. Far fewer workers will be around to finance the country's pay-as-you-go social-security system. This is worse than it looks. Germany, of course, already has its own deeply unpopular transfer union. In this system, out of 16 federal states, only three—Bavaria, Hesse and Baden-Wurttemburgh—are permanent net contributors, with Hamburg moving in and out of that status. Under a hypothetical euro-zone transfer union, these four German regions would proportionally carry a huge burden.

All of this means that there's a relatively stable trajectory to German's EU politics, which defies electoral cycles. So can we expect any movement after Sept. 22? Maybe a little. Particularly in a coalition government that included the center-left Social Democratic Party, we may see some easing of austerity in favor of structural reforms in countries such as Greece or Portugal. But Germans won't give up their deep-held belief in frugality overnight.

Almost any German government is also likely to continue to insist on strong controls over other countries' taxation and spending, most likely via the EU institutions, as quid pro quo for more cash. So the complicated sequencing that's pitting the Germans against the French will continue to dog the euro zone. Make no mistake, Germany will remain a slow, deliberating and frustrating actor for years to come.


Average Englishman said...

Once more I do not understand or agree with Mats Perssons summarized conclusions. He writes: "Germany will remain a slow, deliberating and frustrating actor for years to come."

I do not see what is frustrating about the sensible operation of a democratic process that was put in place to stop the sort of dumb move that many elected German politicians and others in Brussels would love to implement, with potentially disastrous results. That is, the acceptance by Germany that the country can indefinitely bank roll Southern Europe and thus keep the Euro and the 'grand project' on track, notwithstanding that the vast majority of the good people of Germany have no desire (or over time ability) to meet the horrendous cost that would be involved.

No Mats, this is not just Germany acting out a part on a slow but cautious road towards spending more gold and accepting more integration, it is the operation of democracy to keep the country solvent, stable and free.

The sooner that the Eurocrats in Brussels and elsewhere, (including Open Europe it would appear), wise up to the fact that neither a European currency union nor a European political union can be achieved without the full and comprehensive democratic backing of all of the people of Europe, the better. Continued attempts to force the pace will only continue to cause problems that are more likely to cause the type of conflict that the EU enthusiasts proclaim their proposed new superstatey will avoid.

Anonymous said...

Average Englishman

I whole heartedly agree.

I see the replacement of sovereign conflicts in Europe with internal conflicts as the parliaments of EU nations go the opposite way to that demanded by the people.

Civil war instead of just war. From a personal perspective, anybody or entity that continually denies me my democratic right to say "No" must, by default, be my enemy.

I want my Referendum and EEA/EFTA membership only.

Free trade - Yes
Sovereignty - No


Rik said...

1. Agree with the fact that even a Grand Coalition government is unlikely to change much for mainly the reasons given.

2. Do completely not agree with the fact that if AfD would make the 5% that would be bad for Cameron.
There might be some downside but there is also a lot of upside.

It likely would lead to a Grand Coalition. With the SPD in general being more pro-bail out.
However it would make the CDU/CSU simply more Euro-sceptic at the same time.
The way the AfD is profiling itself (not aware of any marketingstrategy btw) simply means that longer term it will be mainly a CDU problem. Simply as it tries to step over the stage in which it is a general protest party and it is the natural successor of the CDU in a time of secularisation and populism.
This would give a huge opportunity (for AfD) especially if as expected there will be a Merxit, before the elections after these. Or a FDP getting below 5% and keep coming up with incompetent and not appealing idiots as leaders.

AfD simply puts the CDU under pressure similar as UKip has done with the Tories.
Anyway it is written on the wall if things go as now that AfD will make a huge jump in next year's EP elections. Again like in the UK and in the UK before. This will make a lot of CDU people very nervous (who subsequently will probably do the wrong thing) and Merkel as now simply not being able to keep them quiet (as it will become more evident that it wil be her last term).

Simply hard to see how that would be negative from a mild Euro-sceptic pov. I place Cameron in that camp btw. Balance in Germany will move to Eurosceptic.

Especially longer term (and 2017 is very long term in politics). Shorter term it might be but basically Cameron has (simply given by circumstances) a long term issue at hand, 2017 as said.
The main problem for him could be if he keeps making big mistakes (latest being Syria, but gay marriage and referendum are a few recent others and all on the issue itself and the way it was managed by him) he might need a short term success: electorally or on EU-reneg credibility (and indirectly electorally).

But as the competition is worst than poor that would imho be a situation he himself would have to create (better as usual blundered into).
Just have a look at what happened in Holland when a)Wilders came as a longer term force on the votermarket and b) started to use the Euro as his co-main issue.
The rest simply had to move and did (although too slowly).

It is not very democratic in a direct sense anyway. As most Germans are against further assistance when directly asked.
It is however democratic in a representative parliamentary system sense. Which is clearly a system that reacts much too slow for these sorts of issues.
And with important lon tem problems like this it will put the whole political system under heavy pressure.

Anyway with the 'normal' German Euro policy (likely to be continued after the election the EuroZone problems will not be solved. It is simply kicking the can. Which is for all involved imho a bad thing with challenges like global competition and aging and debt level, even within non crisis countries, basically not really or even not at all being attacked because everybody keep 'Euro-crisising'.