Yves here. I wonder if histories will blame the fracture of the Eurozone on Angela Merkel. That might seem unfair, given that the founders of the Eurozone/European Union project knew that they’d left their creation in a perilous half-finished state, but mistakenly believed that crises would overcome the objections to greater integration. But Merkel has been styled the leader of Europe for quite some time, yet as far as I can tell, did nothing to advance the European project. A famously cautious politician, during the acute phases of the Eurozone crisis, not only was she a “kick the can” practitioner, I can recall at least one episode when she held up action at a fraught juncture.
One of the destructive forces has been Germany (and many of the other Northern bloc countries, like the Netherlands) believing in strong-form neoliberalism (the German version being “ordoliberalism”) and regarding deficit spending with horror. That belief has been reinforced in the German press for decades.
Now one might regard that alone as an insurmountable obstacle, but studies of propaganda have found that six weeks of intensive messaging have repeatedly turned national opinion on its ear. But here one could argue that even if Merkel at the height of her powers had wanted to chip away at this toxic orthodoxy, she would have been checked by Wolfgang Schauble, who apparently is seen by the German man on the street as more credible on economics than Mutti.
However, on the negative side, Merkel was all on board with Germany regularly acting as spoiler, playing to its advantage and not for that of Europe, such as actively adopting policies to increase its trade surpluses within the Eurozone when those surpluses were destabilizing.
By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute
Germany’s highest court issued a ruling that could threaten the existence of the euro with a constitutional court decision that said the European Central Bank’s bond-buying operations exceeded the ECB’s legal remit, and violated German constitutional law. The U.S. equivalent of this would be a state Supreme Court limiting the ability of the U.S. Federal Reserve to conduct purchases or sales of Treasury securities.
Even more extraordinary, the court decreed that it could “ignore an earlier ruling of the European Court of Justice in favour of the ECB,” which, in the words of Martin Wolf of the Financial Times, is tantamount to “an act of judicial secession.” To extend the U.S. analogy, that would be akin to a state Supreme Court holding that it would not be bound by U.S. Supreme Court precedent.
Still, “judicial secession” might be too strong a characterization. The European Union has been an evolving structure since its inception and does not have an explicitly federal constitutional framework as a backstop that could quickly eradicate any ambiguity and nip the problem in the bud.
Here’s the problem: the euro is the official currency of 19 out of 27 EU member countries, and its users are governed by a federal monetary system roughly analogous to the U.S. Federal Reserve system. On the other hand, the euro and the ECB are parts of an intergovernmental union, not a real federal state. Europhiles have been hoping that the EU would just develop into the latter organically. The German court has just inconveniently reminded everybody what the true state of affairs is. The very absence of a corresponding federal political structure is what constitutes the longstanding Achilles heel of the entire single-currency union. It can’t just be wished into existence, or created via judicial improvisation.
However understandable, this legalistic approach poses considerable risks for Berlin. As the largest creditor nation in the eurozone and its largest economy, Germany has much to lose if it ends up being the party responsible for the breakup of the single-currency union. After all, if the creditor does not respect the rules of the organization (or family) of which it is part and on which it holds claims, why would the debtor be beholden to that arrangement?
A brief comparison of the two systems helps to illuminate the challenges ahead for the eurozone. The U.S. Federal Reserve consists of a network of 12 Federal Reserve Banks and 24 branches that together comprise a system that operates under the general oversight of the Washington-based U.S. Federal Reserve. The U.S. Fed (via its Federal Open Market Committee—FOMC) sets interest rate policy. The New York Federal Reserve branch is then authorized to buy and sell Treasury securities to the extent necessary to carry out the most recent FOMC monetary policy directive. If a New York-based court sought to limit that ability of the New York Fed to conduct bond-buying operations on behalf of the U.S. Federal Reserve, this would be immediately be shot down by the U.S. Supreme Court on the grounds of ultra vires, i.e., the state court would be said to be acting beyond its legal power or authority. These rules are clearly established, governed, and backed by decades of legal precedent and the existence of a clear corresponding federal structure (that is replicated in the courts system). So, of course, this hypothetical would never arise in the U.S. (short of another act of secession).
The eurozone is ostensibly governed by a similar monetary structure: Just as the U.S. Fed uses the New York Fed to conduct purchases/sales of U.S. Treasuries, the ECB uses the various national central banks (e.g., the Bundesbank for German bonds, Banque de France for French paper, etc.) to purchase European government bonds. As the strains on the system have intensified, so has the scope of the ECB’s purchases, along with corresponding questions about the legality of its expanding operations. So, for example, even though the Maastricht Treaty—the international agreement responsible for the creation of the European Union (EU)—contains an explicit “‘no bailout’ clause” on sovereign bond-buying activities, the ECB has elided this particular legal obstacle in the past, suggesting that these purchases did not constitute bailouts as such, but were simply measures to help enhance the ECB’s ability to conduct its legally mandated monetary policies.
Both the European Court of Justice (ECJ) and German court rulings in the past have previously gone along with the ECB’s justifications. But that all appears to have changed in light of the recent German constitutional court decision succinctly summarized in the Financial Times:
The court in Karlsruhe ordered the German government and parliament to ensure the ECB provided a ‘proportionality assessment’ of its bond-buying to check that its ‘economic and fiscal policy effects’ did not outweigh other policy objectives.
Finally, it told the Bundesbank, Germany’s central bank, to stop buying bonds and to draw up plans to sell the more than €500bn it has bought if the ECB failed to comply within three months.
The principle of proportionality in this instance means that the content and form of the actions undertaken by the ECB shall not exceed what is necessary to achieve the objective of the EU treaties. If the ECB fails to satisfy the German court that its actions are consistent with this principle, then further asset purchases (i.e., sovereign bond-buying operations) are impermissible. And existing ECB bond holdings would have to be sold, which would likely create carnage in the European bond markets.
The issue has urgency today, given the backdrop of the COVID-19 virus. In March, the ECB established the €750 billion Pandemic Emergency Purchase Program (PEPP) in response to the mounting economic challenges caused by the pandemic. While it is highly likely that the ECJ will move soon to re-establish its legal primacy against the German court ruling, Ana Bobić and Mark Dawson, two leading Berlin-based legal scholars, have questioned whether the new PEPP in fact meets the legal criteria established in previous court ECJ court rulings, given the absence of any of the ECB’s earlier-imposed constraints on sovereign bond purchases (such as restrictions on future government spending in exchange for the ECB’s help). Given the dire state of economies such as Italy, any legal encumbrance that interferes with the ECB’s bond-buying activities creates the potential for an Italian or Spanish bankruptcy.
Hence, it is highly problematic that the ECB will be undertaking new purchases against a backdrop of maximum legal ambiguity. To sustain its bond-buying operations under the new program, it will need to secure the cooperation of the Bundesbank. But Germany’s own central bank will be faced with two competing claims, given that the nation’s leading constitutional court specifically mandated that the Bundesbank could not continue to participate in the ECB’s asset purchase programs, until the ECB complied with the requested “proportionality assessment” of the program. Against that, as Wolf notes, the Maastricht Treaty “states that ‘neither the ECB, nor a national central bank… shall seek or take instructions… from any government of a member state or from any other body.’”
Imagine the next time the ECB initiates bond purchases under the PEPP, and the German Bundesbank hypothetically refuses to undertake these purchases on the ECB’s behalf, citing its national constitutional court ruling. What happens then?
The ECB could well initiate the program without the cooperation of the Bundesbank, but the lack of cooperation of the latter would be tantamount to initiating divorce proceedings with the rest of the eurozone. You would have a monetary free-for-all. And with no “United States of Europe” Treasury standing behind the ECB, Germany, as the largest creditor nation, would presumably be saddled with a substantial amount of the liabilities of the eurozone debtor countries. The latter (Italy, Spain, Portugal, Greece) would be on very solid grounds to refuse repayment if the violator of the European Monetary Union is Germany itself. So in that sense, an Italian bankruptcy largely creates problems for Berlin, not Rome. One could argue that the German court decision actually gives the debtor nations a “get out of jail free” card.
It is probably unlikely to come to that. If nothing else, the European Union overall has proven itself remarkably adept at kicking the can down the road and resolving difficulties only at the last possible moment. One possible solution is something that I have suggested before, namely “annual distributions of funds to the national governments (credited to their accounts at the national central banks) on a per capita basis… [, which would] give the national governments the fiscal latitude to cope with the pandemic and engender long-term economic recovery.” As the funds would be distributed on a per capita basis, the courts might deem the actions consistent with the proportionality principle, especially if Bundesbank officials were to sign off on such a program.
In any case, these kinds of legal challenges aren’t going away any time soon. Each legal clarification is clearly designed to define the limits of the ECB’s actions, and provide less scope for the kind of ambiguities that have enabled the member states to defer difficult long-term decisions that will truly make or break the union. Germany, in particular, has persistently castigated other nations who have been serial violators of the EU rule book. But much like Shakespeare’s Shylock, who literally insisted on his “pound of flesh” as security for his loan to Antonio, Germany’s rigorous legalism could ultimately backfire if and when the tables are turned.
Longtime economic powerhouses like New York and California understand the value of being part of a larger political union and have willingly subsidized the rest of the U.S. for decades, even patriotically. Will Germany again overreach and squander its historic position of influence in the EU? Or will it accept some form of fiscal transfer union that ultimately consolidates its position and saves the euro, but likely puts Germany in a position of a perpetual net contributor to a broader, but more sustainable European Union? It has its recent domestic parallel to consider, when it absorbed and developed Eastern Germany after the Cold War. It all depends on what Germany ultimately imagines its role in the region to be, builder or breaker.
49 comments
Comments are closed.
Re the last para. That assumes the Germany wants to have a leading role in the EU. Unlike French, it’s not clear that the Germans do, or are even willing to accept it being thrust on them.
The East Germany parallel is unfortunate – but appropriate. It was not handled well at all, and the only lasting thing it managed to create is a split between the West and East Germans.
IMO, the shock of EURozone falling apart and the consequent economic damage to Germany would, likely, make them reconsider the EU project and their role in it. But the question is which way, and I’m not massively optimistic. So while I believe that getting rid of EUR is likely the only way to try to save the EU, it’s very risky on its own.
Working for Siemens Medical at the time of unification, as chief scientist, I can only say the southern Germans dispise the Eastern Germans and still do. Then again they despise the northerners as well.
Haha! That’s so true!
The Bavarians hate everybody.
It’s not hate. They think their way of life is the best.
And as a punishment, the rest of germany says “Yeah…the bavarians” while rolling their eyes.
The irony is, that, even after WW2, bavaria was a poor german state, that consisted mostly of farmland.
Their current economic prosperity was only possible because of decades of subsidizing following the end of WW2. And the billions of subsidies where paid by ‘rich’ german states.
Seems, bavarians don’t want to remember that.
And this may be the main problem for the EU – regardless of the many fancy words, theories, and/or financial footwork. Underneath it all is the very deep-seated tribalism of most Europeans. Growing up in a border town, it always baffled me how two different cultures and languages can exist so close together, and yet without any attempt or willingness to blend or build on commonalities (even for the betterment of both). On the contrary, they either lorded it over the other or fought for power – over many centuries.
I imagine the EU was an attempt to impose a seemingly rational and “modern” solution/structure on the perpetually warring tribes. Whether it can succeed long-term is just “too early to tell” (as someone once said).
Europeans face a dilemma, today exacerbated by globalisation: too many disparate groups on a landmass that is just too small. (Compare 44 European countries, spread on what is effectively a peninsula off Asia – or, at best, a subcontinent – vs 48 countries in the “Asia proper” landmass. The newer maps of the world make quite clear just how small Europe really is.)
Most European countries are too slight to compete in the world (unfortunately, with capitalism, it is all about competition). But they are also too different (historically, economically, demographically, culturally, linguistically, etc.) to maintain effective unity through thick and thin. Someone is always trying to “disobey.”
And a crisis won’t help to solve the problem. The current pandemic proved that. Nations tend to look inward in a crisis. (And to Susan’s point below, no apologies to Italy – well after the fact – can erase the perception of damage.)
A fun fact – the main reason we have azbuka today dates to the 9th century (AD), when some Slavs sought to counter power games by Franks (a Germanic tribe). So how far have we really moved since then?
There is also a streak of religion running through all this. I was once in a tiny German village which was on the Protestant-north & Catholic-south divide. I was told that all the people on one side of the main street were Protestant and all the people on the other side were Catholic and it was not until WW2 that there was a marriage between people from both sides. On the other hand, in the same area I saw a church which was for both Catholics and Protestants. They both used the same building but jiggled when their services were.
>> Some Slavs sought to counter power games by Franks
That would be the Bulgarians, whose empire at the time bordered the Frankish one. And yes, very interesting story: https://en.wikipedia.org/wiki/Saints_Cyril_and_Methodius
That is a mistake, deplorado – perhaps easily made because the students of Cyril and Metod did end up going south, all the way to Bulgaria.
But the original idea came from Rastislav, the ruler of the Great Moravian Empire, who wrote to the Byzantine emperor around 862AD to send him someone, who could translate the bible into an old Slavonic language. The two brothers did just that, and taught at the court (the ruins of a Slovak castle still stand).. But Frank priests’ machinations drove them out, with adherents scattering to Bulgaria and Serbia.
The page you linked to actually explains all this – under the “Great Moravia” title. (It also seems to me that Bulgaria did not border a Frank-ruled region at that time… too far south.)
I’m not sure whether you understand the meaning of ‘tribalism’. A national identity is not tribalism.
Replacing a group of functioning national states with some hybrid abomination of a union that is basically governed by a small group of not elected commissioners is a bad idea.
Nobody wanted that. The europeans never voted for the EU in its current form.
The EU is not based on democratic principles.
To oppose that isn’t tribalism.
But while we’re at it:
How about we merge all south american countries into one big state?
They don’t want that? Oooh, ‘tribalism’!
Most european countries in the EU have declined economically and only a few have benefited from it at the cost of the former.
So, to quote you:
‘Europeans face a dilemma, today exacerbated by globalisation: too many disparate groups on a landmass that is just too small.’
So it’s ‘too many…groups’ and ‘…too small landmass’ because you say so, or big business says so?
Maybe there are much worse problems than many countries on europe’s landmass, for instance the euro and the way the EU was conceived?
But it looks like your ‘dilemma’ will be resolved in the near future.
Soon, there will be only two groups left: The very rich and the rest.
It is very important, when reviewing this in the light of the ECB and its bond purchasing programme, to — while taking care to understand the implications on the ECB’s interplay with the EU Member States’ central banks — appreciate the German Constitutional Court’s reasons and the effects they have on the entire legal basis for how the EU “works”. At all times, keep in mind that the EU is a supranational entity that has to, if it is to operate, impose it’s superiority on extant sovereign states.
It is this intrinsic tautology which caused much consternation in europskeptics. How can a self-declared confederacy be both over-arching yet at the same time subservient? Hard-line euroskeptics would label the EU as “a con” because it was trying to bootstrap a new state-like entity onto existing sovereign state constitutions without the legal basis for doing so. I would, rather, characterise it as “Tinkerbell supranationalism” — so long as everyone believes in it, it exists. So long as the peoples of Europe and their government are happy to go along with the legality sleight-of-hand that is being pulled by the EU, then it can continue on its merry way.
Or, to put it in more colloquial terms, if the EU every minute of every day implicitly asks its citizens “does my bum look big in this jurisprudential garb?” and the people of the EU unhesitatingly answer “oh, no, not at all, you look absolutely lovely”, all is well.
However, the CJEU in the ECB bond-buying case donned a tight spandex mini dress with horizontal stripes and not only that, in the past 30 years or so since the Maastricht Treaty had definitely put on a few pounds or 20. So when it strutted its stuff in front of the German Constitutional Court and asked its usual question about its deportment, the Constitutional Court said “you’re not going out dressed like that!”
More serious analysis than mine, which I’ve only written to try to make a dry and at times difficult-to-interpret subject interesting and approachable, can be found on the Bundesverfassungsgericht’s website. Quoting sections denies them context and the entire analyses should really be read from top to bottom, but to draw attention to a key point the German Constitutional Court had to decide on:
I’ve highlighted the pivotal sentence. The EU is not a federal state. So its institutions can’t go around acting, as the ECB did and the CJEU did in reaffirming the ECB’s actions, like it is one. The final arbiter of an EU institution’s actions, so the German Constitutional Court held, are the Member States.
The EU’s entire legal basis has just disappeared in a puff of German Constitutional Court smoke.
A much more excitable version of these concepts are outlined in this Project Syndicate article: https://www.project-syndicate.org/commentary/german-constitutional-court-ecb-ruling-may-threaten-euro-by-katharina-pistor-2020-05 (which does rather hyperventilate, but it gets the basic questions out there).
Your analogy is great! It also points out that the original assumption of a crisis forcing further integration was a poor plan. It assumed and required that the crisis be a European unifying crisis, any other crisis would risk individual states decrying the emperor has no cloths instead of calling for more unity.
When I think about the end of the original American Confederacy (post revolutionary war), the founding fathers lived in the shadow of England just across the boarder waiting and hoping for nothing more than a failed American experiment demanding a “peace keeping” invasion. When they convened to “fix” the confederacy that unspoken shadow help create that unifying influence that helped sow the federal constitutional drive in enough of the delegates that we ended up with the current framework. Absent that I’d suspect there would have been more can kicking of the EU style.
So, the EU needs a greater urgency to unite them all and in so doing create a common sovereignty? I’d almost think Covid19 is it. The EU members are (many) cooperating to create a “peoples vaccine”. And since it is now a brave new world that action and the atmosphere of cooperation in the EU might actually lead to a sovereign monetary arrangement that, in effect, is a federal political structure. (I think that is actually what we have here in the US but it is obfuscated with a lotta propaganda.) It was shocking, almost, to see the rest of the EU apologize to Italy for not coming to their aid sooner. That indicates an awareness of a higher level of cooperation.
I agree Covid-19 could be that unifier, but it hasn’t played out fully yet. During FDR’s New Deal era there was a semi similar judicial issue in the US as the Supreme Court shot down several New Deal laws. FDR floated the political idea of changing the number of justices and the court figured out how to cooperate. It didn’t have to go that way. They could have dug their heals in and hoped for the populate to put FDR in his place or they could read the tea leaves and capitulate. I personally don’t know enough about day to day Europeans to be speculating on tea leaves, but it definitely could turn out to be this type of situation – do the justices have the people or do the people need to put the justices in their place?
The whole structure is a mess. Even the section you quoted makes that clear. This part is also included:
So in fact, member states are not supposed to go around messing with CJEU decisions. It’s only when the CJEU oversteps. But what is to prevent a state-level court from going off the reservation and getting pissy about a CJEU decision just because? Look at how nutters Poland has gone.
This sounds an awful lot like “I know pornography when I see it.”
Now having said that, the ECB acting as a Eurozone central bank but with national central banks responsible for its liabilities was a bad idea and it’s not surprising that it was hard to manage the legalities and they blew up when stretched by the ECB, particularly when it also looks like the CJEU cover didn’t even rise to the level of being a handwave.
I think the key is in the next sentence to the one you quote:
“Yet if the Member States were to completely refrain from conducting any kind of ultra vires review, they would grant EU organs exclusive authority over the Treaties even in cases where the EU adopts a legal interpretation that would essentially amount to a treaty amendment or an expansion of its competences.”
So it’s an ultra vires question, and to do with that untranslatable concept “competence”, which means a devolved (or in this case transferred) right to take decisions and manage issues. Competences, in European administrative law, have to be explicitly given, and can in theory be revoked. Here, the argument is that through its decisions, the CJEU was essentially modifying competences by stealth – a really major sin in the context. (Bear in mind that the judgement only ruled out the ability of member states “to decide in the validity of EU acts”, which refers to the institutions of the EU and their administrative decisions, not decisions of the CJEU, which is a separate issue.)
So I doubt if, in practice, the Poles could do something silly, unless they could find an argument that the Court had acted ultra vires – though that wouldn’t necessarily stop them from trying.
Very helpful, thank you Clive. Re the last line in that Project Syndicate article (“An institution that, by design, no one governs is out of control”), I couldn’t help thinking of another venerated institution: the UK Parliament, with its doctrine of parliamentary supremacy.
Obviously, Westminster and Germany’s Constitutional Court are very different beasts. But it is interesting to see how these two ‘loci of the last word’ have acted as fracture points for a European order under enormous (often self-inflicted) stress…
Clive, if I may, you have been in quite a philosophical state of late, I hope your as well as can be expected. As to “Member States remain the ‘Masters of the Treaties”, that is a very heavy duty declaration, in fact when thinking of Brexit, if one were to apply that logic, it seems one could make any treaty and claim later in meant anything or nothing at all. Dangerous stuff.
Sometimes I just get sick of medicine & engineering, the lab, and all of it, and go off teaching philosophy at the University. Your raise issues of ‘belief’ not just in this comment but in a few about Covid-19. Beliefs go to first the nature of ontological and once we can agree we exist on to existentialism as in now that I’m here, what and or why should I do anything. Lastly, epistemology as to be certain, what we know and what we don’t know. And I know you know all of this. While it would be prosperous to say one believed in the sun, not so for an object like money, at least one attribute of it, i.e., that at this moment it has value (value X to be precise).Value itself is a whole other discussion. That the E.U. should exist only because it is believed in, ultimately I will grant you, but normatively not so much. Like the American civil war breaking up isn’t so much a matter of everyone (I’m not sure if you need everyone or a some kind of majority, or just German as it were) no longer believing it being one nation. Yes there are differences, but Lincoln’s beliefs effected everything. I’m not sure there even is a uniform belief in what the E.U. is in the E.U. The E.U. strikes me as very tenuous and I’ll use Jared Diamond’s criteria on entities such as the E.U. and the problems it has as to whether it will survive. I doubt it.
Ha, the only Homer I resemble is of the “Simpson” variety.
But more seriously, what has increasingly perturbed me about the EU over the years and driven me from a strong position of being pro-EU to being Eurosceptic (in terms of, I should clarify, a scepticism about the EU) is to see just how far it has drifted from the lofty and laudable aims it started out with. I simply believe that us Europeans are entitled to expect a whole lot more than the EU has amounted to.
Europe is, for me, our birth right. And I really don’t reckon that view is too dissimilar from a great many, certainly a significant majority who live in European countries. I don’t believe, either, that there is some great yearning for a return to nationalism and to a disparate, often conflicted and pitied-against each other melee of them-and-us-mentality in the people of Europe. Despite, for example, Brexit, there was no desire in Britain to return to the great European empires of old — just the opposite.
What many who voted “Leave” in the Brexit referendum were objecting to wasn’t an idea and an ideal of Europe and a yearning for the England (or the Great Britain) of the past. It was a vote against the miserly gruel that the EU offered as an ersatz vision of that ideal of Europe.
Frankly, many of us in the UK thought we deserved better than that.
I’d say, at the risk of outsider’s ignorance, that that was also partly what motivated Lincoln. He didn’t want conflict, he didn’t want separatism and he didn’t want domination. He only wanted something better than what there was today (the “today” being in his era of course!). When I write about the EU — invariably critically — I write with somewhere lurking at the back of my consciousness a wonderment about what us Europeans could become, if we were able to manifest that becoming. The intellectual rigour, discipline and organisation brought from Germany. The flair and imagination of France, with the ability of the French to wrestle it into reality. The carefree joy of life of your average Italian teasing us to go out there and do it. The relaxed easy-going ambience but combined with surprisingly earnest thinking of Spaniards to bring us fun, but only after working for it. And Britain bringing… well… umm… whatever it is that Britain brings, that I’m never really able to quantify what, exactly it is, but it possibly might, if it is ever identified, be something to do with pies. Or whatever.
I’m jesting and letting my imagination run a little wild here, perhaps whatever Amfortas the hippy is smoking has drifted a long way across the Atlantic. Nevertheless, that is what I see and that is what I want. A Europe with European people together, united and living in true fellowship.
That is not what the dreary dollar-store reject carbon copy of Beltway self-serving duplicitous nincompoops which sit in the Berlaymont look like bringing to us any time soon. And so, in my humble soapbox’ing, they have to go.
“one could make any treaty and claim later it meant anything or nothing at all”
You mean like the United States routinely does?
The Bundesverfassungsgerichts language is pretty diplomatic; focused on cooperation. Let’s cooperate to resolve the issues. They haven’t construed any laws to cover this yet. So “maximum legal ambiguity” is/was one of the objectives in the first place. Germany is in no position to be Tinkerbell right now because, per Auerback, debtors like Italy can just make a case that Germany’s actions lack mutuality and walk away from their debt. I don’t think Germany ever intended to get in such a mess. For Germany to be both the lender of last resort for the ECB and the EU’s main vigilante seems to be almost a tragic conflict of interest. That’s what money does to us. No? It also does not surprise me that this edict comes down just as a recession is hitting Germany’s auto industry and even Germany can see things are not in ordnung.
Thanks for translating the issue to colloquial terms! Made it clear as well as relatable.
Might be worth also highlighting the role of think tanks backing up and propagating the ideology.
An excellent suggestion.
The end-game appears to be whether or not a country can be allowed to default. The finance industry (or at least some actors in it) would prefer it if debts were never to be discharged in a bankruptcy, they’ll use people to shout for solidarity to get others to pay the debts but in essence it is all about they will stop at nothing to get paid in full.
The situation in Argentina:
https://www.batimes.com.ar/news/economy/argentine-bonds-climb-on-hopes-new-offers-will-spark-a-deal.phtml
Messy situation based on refusal to accept anything less than being paid in full. I believe it might be time to decide on how to deal with national restructurings rather than doing nothing (possibly better expressed as allow the markets + friendly courts decide what is the best for the general public).
& those who believe that the FIRE-sector can be outgrown and actually hinder growth might have the opinion that New York isn’t so much an economic power-house subsidizing the rest of the country and that it might be more of a parasite grown too big and might be killing the host.
Wall Street driving the economy? Serving the economy? A leech on the economy? A combination of many things?
My opinion is that the central bank bond-purchases is about rescuing the financial sector and then hoping that there’ll be trickle down effects. The reasoning being: The first thing that happens is that the financial sector is bailed out. The next? Anyones guess. Crumbs or more to the general public somehow?
May I ask, “Proportional to what?” Proportional to the severity of a crisis? Or proportional to national population (Auerback’s solution)? Or what, exactly did the German court rule was the denominator of its “proportion”?
Sorry. I was distracted by Auerback’s solution.
Ah, proportionality. As in Alice in Wonderland, in the EU words mean what I want them to mean….
Proportionality is a slippery European Law concept (quite possibly a Napoleonic Code concept, but not I think a Roman Law concept – they weren’t embarrassed about strong rule). In Orwellian style, proportionality has no denominator. It is not a quantitative thing. It is an ineffable quality of justice and administration – does the punishment fit the crime, if you will? European law would not break a butterfly on a wheel. It would however provide a qualified derogation to ensure the proper function of the EU treaties from the protection of butterflies from discoid rotors.
You might be tempted to think it is something like equity in a common law jurisdiction. But equity is about outcome whereas proportionality is about procedure. I was only following orders and they were proportional….
It hasn’t had much exposure in the Anglo-Saxon media (though here’s a report from the Guardian) but Merkel and Macron gave a joint video press conference yesterday, announcing a proposal for a €500Bn rescue fund, which would be added to the EU budget, rather than being repaid by the states benefiting. A typical reaction is this editorial in Le Monde, which talks of “a new start for France and Germany” and a front page story about “relaunching Europe.”
The politics of this are significant. Historically, the Franco-German “couple” was described as “the motor of European integration.” It largely depended on personal relationships between the leaders, and these took a severe turn for the worse under Sarkozy and Hollande, and Macron, as the truest of true believers, was keen to relaunch it. One important function of the original EC of course (as with NATO) was to allow the rapid re-entry of Germany into the international system, but under supranational control. This was accompanied (from the 1962 Elysée Treaty) by a bilateral relationship which was politically dominated by France, and for a long time the French managed to manipulate the Germans politically by playing on the sense of guilt of the German political class. This started to fall apart after 1992, when Mitterrand made the disastrous decision (in retrospect) to concentrate on the political side of the nascent EU, and to let the Germans largely have their way on the economic side. Over the last generation, the boot has changed foot quite spectacularly, and one of Macron’s major priorities has been to reduce German dominance. To the extent that this initiative originated with Macron (at least that’s what’s claimed) then if it’s adopted it will be seen by everyone as a slight but significant rebalancing of relationships.
Yes, you really have to look under rocks to find it. Here’s the FT’s take https://www.ft.com/content/c23ebc5e-cbf3-4ad8-85aa-032b574d0562 (which I had to click through from the homepage, through “world” then down into the nether regions of “Europe” to eventually find).
I suppose it (the “ho-hum” reaction) is mainly because it is, as the FT’s headline states, a “call” for Doing Something rather than an actual Doing Something. And the Usual Suspects were making the usual mooing noises (again, from the FT):
So the usual monetary “how many angels can fit on the head of a pin” difference between “loans” and “grants”. Plus of course the numbers, even if we take €500bn at face value, are an entry point. Italy’s banks could probably swallow that as a starter, let alone it being the main meal.
But at least they’re trying.
Yes, this is going to be interesting. A generation ago, the Franco-German axis would have steamrollered al opposition; now, I’m not so sure. Whether one of the smaller nations (the Dutch maybe?) are willing to risk taking on Berlin and Paris simultaneously I’m not sure.
God for forbid the German give any a dime and apply debt forgiveness, it seems to create overwhelming cognitive dissonance so great to stop the brain function. Kaput. Maybe it’s just the Italians and yet the northern Italians and southern Germany seem to have formed their own country. Maybe it’s a matter of borders.
David, I understand the need of periodically strengthening the Franco-German axis but to my Italian eyes the conference seems a Franco-German trick to make my ( dupe ) Italian government swallow the same old bad medicine .These are the paragraphs from the official joint Macron Merkel declaration :
“The funds of the economic recovery fund will be used in a targeted manner to meet the challenges of the pandemic and its aftermath. It will be a supplementary exception, anchored in the own funds decision, with a clearly defined scope and time limit and linked to a binding repayment plan beyond the current multiannual financial framework, beyond the EU budget…..This support for economic recovery complements national efforts and the package agreed by the Eurogroup, and is based on a clear commitment by Member States to sound economic policies and an ambitious reform agenda.”
V.Constancio ,the ECB vice president:”The French/German proposal for a €500 bn Recovery Fund to be integrated in the multi-year budget, is a great proposal. The Funds will be distributed as budget transfers, not grants, prioritising the more affected countries and not according to GDP (or GNI) “.
So repayment , conditionalities , and the good old refrain of the sound economic policies, if anybody could be tempted to forget the treaties’ rule warnings.
Mind that Italy is already a net EU contributor.
At least yesterday Mrs.Lagarde told that the Stability and Growth Pact should be reformed, just words but better than the rest.
That’s a reasonable point of view, I think. The Italians have always been the biggest losers from the Franco-German axis (they were one of the original six, after all) and have often felt taken for granted . In the early 90s there was actually an abortive attempt to get a UK-Italian axis together on a number of issues. Here, though, I detect some fairly lively and even brutal negotiation behind the rather opaque language they actually agreed: I suspect that the French believe they can continue to push the Germans in the right direction given time. Don’t forget that the proposal will now be discussed at 27, so the French will be assuming that some of the others will be prepared to do some of the lifting for them.
I understand your political points,but my practical point is that the Macron’s rhetoric (which you apparently buy, if I got it right ) is based on the assumption that the future Recovery Fund will be built on grants, transfers, whatever, while in the declaration he signed it’s written the opposite, as I reported.
I could be wrong, but all that stuff that Kurz and the Dutch etc are overshooting now , to me looks like media noise . Ok, the declaration is very synthetic, but in my eyes it’s written.No grants, no transfers.
I, of all people, am not one to be short of skepticism. But this really is, to use a hackneyed but perhaps not overwrought phrase, an existential crisis.
Yes, the departure of the U.K. could always be rationalised away that we were always on the fringe and never really had it in ourselves to truly “get” the European Project, certainly in the terms the EU defined it in.
But Italy will simply not survive as an EU Member State and Eurozone participant without a bailout. And that bailout can not be a Greece-style Troika austerity torture chamber. Try that, with Italy in its current position and Italy will leave the Eurozone, the EU or both. Italy. A Treaty of Rome founder signatory. There, right from the start, day-1 True Believer Italy.
It would be the beginning of the end. Macron can outdo Trump in the narcissism stakes. Don’t underestimate his willingness to avoid being seen as the French President who saw it unfold and just let it happen.
The EU that survives, if it does survive, will be inevitably very different from the EU we have today. Better, perhaps, I’m willing to hope.
We shall see.
It’s a declaration, not a decision or even an EU policy statement. All such declarations are laboriously negotiated, and are interpreted in different ways by different parties. It’s not really a question of believing Macron (who is essentially untrustworthy anyway) so much as accepting that the game the French are probably playing is, firstly to get a joint statement with Berlin that commits the Germans to certain things, and secondly to count on the general atmosphere of crisis to push them towards the French position subsequently, with help from other members of the 27. It may or may not work ; we’ll see.
Secession is certainly becoming popular these days.
Here in the USA the various State alliances to deal with the Pandemic amount to de facto Secession, the Federal Government’s failure left a power vacuum and not surprisingly States have banded together to provide basic goods to their populaces.
It’s going to get very interesting indeed between now and the end of the year.
Certainly popular with me, yep, I was telling Jeb, time for Version 2.0 of the Confederacy but better all the the red states are welcome. No more money from blue states, no sir. That would be like welfare. Live free (get it) or die. New Hampshire stole that from Georgia. Trump gets to president for life.
With that German high court ruling, could it be that they were putting their foot down on the centralization of power in the EU? That ruling seems to have reversed previous rulings on EU financial procedure. Ever since Maastricht, power has been more and more centralized in the EU and the countries of the EU have been bypassed when agreement was needed to do so. It has been said to never let a good crisis go to waste and right now the present pandemic is a helluva opportunity to push through a lot of radical changes in the structure of the EU, particularly on the financial side.
So maybe, just maybe, this is the Germans drawing a legal line in the sand saying that enough is enough. If this scenario sounds unlikely, remember that one of the main arguments for Brexit was to regain sovereignty as so much decision-making had been ceded to Brussels. The UK cannot be the only country that feels this way. What happens next? No idea, but would it be so bad if the members of the EU went back to their own currencies for a long while to better deal with the preset financial fallout until the machinery is in place to once again try to integrate the EU financially?
Power was never really centralised in the EU. People argue it with a straight face at the same time as they argue that you can’t get anything done in the EU because anyone can veto it. There is admitedly a lot of confusion here, as the EU legislative process is complex, but ultimately, the Council (which are the EU governments) can torpedo anything – because if the Council disagrees (and, under some condition, the legislation may require unanimous consent) with the EU legislation and a compromise is not found within six weeks of this being the case (technically from convening the Conciliation Comittee) , the legislation automatically fails. There is no way for an EU legislation to be enacted with a majority of the EU Council disagreeing – and even France and Germany cannot push it themselves.
So claiming that it’s Brusels is incorrect, no matter how much various people repeat it. The Council are legitimately elected representatives of the EU countries who are supposed to represent their national interests. If they fail so (as the UK one was failing except for very narrow areas), it’s really their problem, not the EU’s. Brussels is a convenient scape goat for a number of national governments (that all is not to say that the Brusells is whiter than white, but the national governments are way more complicit than the anonymous Brussel beaurocrats).
Vlad, was that a definition of what people are supposed to do and things are supposed to be organized as opposed to actually how people really behave and where. I’m not looking to pick at fight nor do I have any ill will go on, I just don’t believe all of that comment. Like we’re do the lobbyist hang out? Often that’s a good clue to where the action is. I worked in government for 6 years and although I shouldn’t have been I was amazed at how things work. Indeed I was.
There is no way for an EU legislation to be enacted with a majority of the EU Council disagreeing.
But there is every way for EU legislation to be enacted over the wishes of a minority. That was the fundamental step towards supra-national sovereignty and away from a confederation of nations with vetos. And it was Mrs Thatcher who pushed for it hardest, in the sphere of the single market. Oh the Iron Lady irony.
Tooze has weighed in:
https://foreignpolicy.com/2020/05/13/european-central-bank-myth-monetary-policy-german-court-ruling/
I have always said that the first step in fixing the Euro is to get Germany out.
First, it will not cause widespread capital flight from Germany, and second, it will remove the yoke of Germany as predatory exporter from the Euro Zone, and eliminate the influence of German Sado-Monatrisim from the enterprise.
Unlike the chaos that would occur in the 2-4 years it would take to leave the Euro if a country like Greece or Italy were to leave the Euro, you won’t see the widespread capital flight, etc from Germany, and at the end, the Deutschmark would appreciate, making it harder for Germany to continue its dominance of the export market within the EU. (Beggar their neighbor)
The ECJ should call Germany’s bluff.
You can’t ‘get’ a country out of the eurozone.
And in germany’s case, no german politician in his/her right mind wants that.
While eurozone would probably benefit from germany’s exit,
having the Deutsche Mark back would be a disaster for germany.
The exchange rate of the ‘new’ Deutsche Mark would most likely go through the roof
and germany’s inflated export sector would collapse because german goods would be way too
expensive on the international market.
While concentrating on the domestic market would solve that problem in the long run,
the solution of drastically raising wages to increase aggregate domestic demand is probably beyond what
german politicians and their austerity mantra can imagine.
My hazy observation is that Demand is the force behind any economy. It is the thing that gives any country or federation an upper hand dealing in international trade. The EU as a trading block is a powerhouse – about 500 million strong. So it’s not so much that Germany needs a poorer, less industrialized Europe to offset the currency and give them an edge monetarily, it’s more that without the demand clout of the EU Germany is just another little country that cannot entice lower prices from other countries. That alone would set off the dreaded inflation that their “sado-monetarism” tries to prevent. But the bigger reality is that by using demand to force down prices to make a better profit in trade deals, all countries – especially the USA – create an imbalance in the environment that has become a monster debt which which we will only pay-in-full by cleaning it up. And there is no way to offset what looks to be “inflation” of money if we want to survive. There’s inflation and then there’s inflation.
They have made a right old mess of running the Euro-zone from day one.
Policymakers didn’t know what they were doing as they thought banks were financial intermediaries and they used neoclassical economics that doesn’t consider debt.
Everyone thought it was great when the periphery nations boomed on borrowed money, e.g the Irish Celtic Tiger economy.
It was just the money creation of bank loans that made these economies roar, as the bank credit went into things like real estate that didn’t grow the economy with the debt.
They were on a one way trip to a financial crisis.
The banks of richer nations lent money to the poorer nations to fuel speculative bubbles, and no one had a clue what was really going on.
A US Ivy league professor looks at the data.
https://www.youtube.com/watch?v=B6vV8_uQmxs&feature=em-subs_digest-vrecs
(The important stuff starts at 16 mins., long intro.)
When it all went wrong, nations didn’t have their own central banks and couldn’t bail out their banks; so it went from bad to worse.
You can’t make something like the Euro-zone work if you have no idea what you are doing.
The Germans are getting worried, and so they should be.
Why are things so bad?
The neoliberal ideology was just a wrapper to bring back dodgy, old 1920s neoclassical economics.
They* knew the international elite would never dig down far enough to see what was really going on.
(They* – I think it must have been those sneaky little devils in the Mont Pelerin Society)
The Americans are gluttons for punishment.
They are making all those old 1920s mistakes again.
1929 and 2008 look so similar because they are; it’s the same economics and thinking.
https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
At 18 mins.
The twin peaks.
As a CEO, I can use the company’s money to do share buybacks, boost the share price, cash in my share options and get my bonus.
Share buybacks were found to be a cause of the 1929 crash and made illegal in the 1930s.
What lifted US stocks to 1929 levels in 1929?
Margin lending and share buybacks.
What lifted US stocks to 1929 levels in 2019?
Margin lending and share buybacks.
A former US congressman has been looking at the data.
https://www.youtube.com/watch?v=7zu3SgXx3q4
Kamikaze!
She’s going down.
I don’t think Putin and Xi have got a lot to worry about.
The Americans seem to be on a suicide mission.
As neoliberalism was dishing out the rewards, my name wasn’t on the list.
If it had, I probably wouldn’t have bothered to find out what was going on either.
I’m alright Jack.
But, I wasn’t.
I didn’t do too badly, but it was a bit too much like hard work for my liking.