The euro is on life support, and the on-off switch is in Frankfurt
By Laurence Copeland. The opinions expressed are his own.
The short term solution to the problem of how to manage the euro zone crisis may now be right there in front of us. The central issue, as far as Germany is concerned at least, is how to reconcile bailing out the other member countries with keeping up the pressure on them to put their fiscal house in order. Quietly, without any official recognition of the fact, the ECB has taken charge of the situation and is now effectively running fiscal policy for most of the euro zone by simply buying enough Greek, Italian, Spanish and maybe French bonds to keep yields from going too high, but not buying so many as to reduce yields to anything like comfortable levels.
Moreover, treasury officials in every country will be only too well aware that what the ECB giveth, the ECB can take away. Any relaxation in austerity regimes can always be countered by an end to ECB purchases or even by ECB sales in the secondary market, driving yields back up in the space of a few minutes to 7%, 8% and beyond. In short, most of the euro zone members are now on a life support machine, and the on-off switch is in Frankfurt.
As a temporary situation, this suits everyone. Politically, it is far more acceptable both for Germany and its clients to conceal the fact that power in Europe is now shared only between Berlin and Frankfurt. Moreover, it conceals from the German electorate that the dreaded Transfer Union is already up and running, because they are in fact subsidising their neighbours via the ECB. With transparent subsidies ruled out – the European Financial Stability Fund has failed to get off the ground and Frau Merkel is unwilling to contemplate a Eurobond – the transfers are being made in the most opaque way possible.
Notice also that the current state of affairs is entirely consistent with developments in Greece and Italy, insofar as it means that technocrats are now running the euro zone too. For Europe, it is the culmination of the trend to unaccountable government that stretches all the way back to the Treaty of Rome in 1958.
Convenient as the current ad hoc arrangement may be, however, I suspect it will not hold up for long, though it will probably get us through to the New Year and beyond. Holding a gun to someone’s head only works if you are really willing to pull the trigger. If, or more likely when, one of the ECB’s clients calls its bluff by refusing or simply being unable to implement additional austerity measures for fear of bloodshed in the streets, a decision will have to be taken in Frankfurt and Berlin. Either stop buying bonds and run the risk of being seen to precipitate a collapse in both the economy and possibly in law and order too, or alternatively surrender to moral hazard, abandon any hope of controlling the money stock and accept inflation as the inevitable long run consequence.
Germans who believe, with their Chancellor, that fiscal integration is the ultimate answer might like to ponder the question: how would it differ from the current scenario? Would it involve some kind of rules to set limits on each country’s fiscal policy? If so, they should explain how those rules could be made any more effective than those in the Maastricht Treaty, which even Germany itself flouted. Some in Germany are said to favour fines for overspending countries, which demonstrates that there is in fact such a thing as a Teutonic sense of humour. (Imagine imposing a fine on Greece today. How do you levy a fine on any country, let alone one which is already bankrupt and which you yourself have to bail out? Presumably, Germany would have to pay Greece’s fines too?)
Or rather, is fiscal integration meant to involve some kind of democratic political control of fiscal policy? If so, one can only wonder what sort of voting scheme can be invented to give the thrifty euro zone members a permanent overwhelming majority? Perhaps QMV – Qualified Minority Voting?
There is in the end no way of squaring this circle. The euro zone ties a country with a deeply-ingrained fear of inflation and a longstanding commitment to thrift to a bunch of neighbours most of whom have a historic tolerance of inflation and feckless spending. It is a wonder this marriage has lasted as long as it has. Now that the time has come for divorce, you can’t help thinking it is a pity they didn’t think to draw up a prenup.