The Trap of the Monetary Union

Recently the Greek MP and professor of economics Costas Lapavitsas was quoted by the German daily Tagesspiegel with the statement that creating the euro had been a terrible historical mistake, the worst Europe had made for decades, and that the monetary union would only last long enough to ensure that Greece’s economic collapse became irreversible. Given this view it comes as no surprise that Lapavitsas favours a Grexit. In fact these days most European economists who dare to face reality share Lapavitsas’s assessment of the origins of the monetary union. Where opinions differ is on how to solve this problem—if it can be solved. For many the monetary union is irreversible come what may. Or at least the attempt to dissolve it would—in their opinion—immediately lead to a meltdown of the entire financial system (in Europe if not worldwide), so the only option is to create the homogenous super state which one needs to give stability to a common currency. The various nation states are to be subjected to a United Europe which would, in the not too distant future, control not just the budget of the individual states—destined to be mere provinces of some great empire—but also their policies regarding the labor market, pensions or welfare benefits.

For those who believe that “big is beautiful” and that the existence of smaller less powerful states is not fully legitimate, this is a magnificent vision indeed, a vision for which it is well worthwhile making sacrifices (or at least something for which it is worthwhile demanding others to make sacrifices). It is clear that the vision of a united Europe as such has always been popular in Germany at least as a guiding principle of long- term policy, partly because Germany did indeed benefit from European integration for a long time, and partly because many Germans in particular among the older generation are not comfortable with their own identity; they want to escape from it and what better way to do this than a united Europe…

But now the situation has changed somewhat thanks to the perpetual euro crisis. There is not a single day now when one cannot read an article in the Financial Times or some other leading European paper which does not accuse Germany of imposing a futile austerity policy on Europe. Greece is openly demanding more than 300 billion of war reparations from the Federal Republic. Germany is once more the odd man out in Europe: too powerful to be accepted as just another European country, but not powerful enough to assume true leadership in Europe, the old German dilemma after 1870. Yes, there have been repeated calls by various European politicians for Germany to act as a sort of benevolent hegemonic power in Europe. In many cases however, one is left with the impression that “leadership” in such statements is just a euphemism for self-sacrifice, if not downright financial and economic suicide. Many experts believe (rightly so, it seems) that the euro, like any monetary union, can only survive if some sort of permanent system of financial transfers from the “rich” countries in the North (those at present unfortunately include countries such as Slovakia or Estonia which to consider as rich requires an implicit trust in some kind of higher trans-empirical truth, accessible only to the initiated) to the “poor” South is created. Most of the money for such subsidies would of course have to come from Germany, as the only potential candidate among the economically more important states of the EU for providing help to the South (France, is having too many problems of her own and might even be in need of support herself). Would Germany, seconded by the Austrians, the Dutch, the Finns and some other smaller countries, really be able to subsidize not just Greece and Portugal, but Spain and Italy too, so that these countries can reduce their gigantic debts and increase public spending to give a sustained boost to the economy? The amount of money which would be required is enormous (at least for the next 10 to 15 years) and most likely, in the long run, in excess of what German re-unification has cost.

Thus Germany finds itself confronted with the demand to prop up a system which it has largely lost control of. After all, the treaty of Maastricht, laying the foundations for the Monetary Union, which contained a famous clause whose goal was to exclude any obligation to participate in future bailouts, has become largely meaningless. Moreover, German influence within the ECB these days is almost nil. Of course the latter fact is not entirely unwelcome to Chancellor Merkel. As long as Draghi is printing or creating enough new money to finance countries burdened by excessive debt, there will be no further calls for direct support by the German taxpayer, at least that is the assumption—and it is reasonable enough as far as it goes. Unfortunately, experience shows that to finance government spending by just “printing” more and more money may in the long run not be such a brilliant idea after all. It has been tried in Italy in the 1970s for example, or in Greece in the 1980s for that matter, both not perhaps shining examples of good economic management.

The interesting fact is that there is really very little open protest so far against the monetary union as such in Germany. By and large German voters still believe what their politicians—and most of the commentaries in the media—tell them: there can be no EU without the euro (despite the fact that some EU-countries have not yet joined the euro and others are unlikely ever to do so) and that Germany is benefiting from the euro. It is true, Germany is exporting ever more industrial goods, but one needs to be a true mercantilist in the style of the 17th and early 18th century to believe that exports in themselves make a country rich. The greater the cumulative current account surplus of a country grows over time the more capital it has invested abroad as a rule (in the form of various assets and loans, or, in this case, also via the so called target 2-loans which the Bundesbank provides for other central banks in the euro system). The likelihood that a lot of this capital will evaporate in a financial crisis when the next bubble bursts (and burst it will, eventually), not to mention a breakup of the entire euro system, is overwhelmingly high.

Of course there is a possible solution to this problem: driving up labor costs and net real wages (which have remained stable at best in Germany between circa 1995 and 2012, and have, according to some accounts, even markedly declined during this period for significant sections of the workforce) which would make German industry less competitive and thereby restore the balance among the great eurozone economies. This is in fact what the unions and the German government are trying to do at the moment. Germany will soon have the highest energy costs in all of Europe and the system of minimum wages and other burdens the government is imposing on companies do not make life any easier for German industry. Is this a good thing? As long as Germany remains part of the euro it is perhaps the best way to come to terms with a dysfunctional system. However, if the German economy becomes less competitive so does the eurozone as a whole, and that is not such a good prospect in the long run. One should not forget that before Chancellor Schröder imposed the Agenda 2010 (a brutal program of harsh reforms) on those in need of welfare benefits, Germany was Europe’s sick man. And it may well revert to this state in a couple of years, when the sweet drug of an undervalued soft currency becomes addictive.

Matters are not made any better right now by the unfortunate fact that Greece will need additional financial support on quite a large scale very soon, and that the Greek government is spilling the beans by openly saying what everybody familiar with the problem knew all along (but politely did not mention in front of the children, that is the voters, of course): the loans the country has received from the eurozone (including Germany) will never be paid back.

Nevertheless, open opposition to the government’s pro-euro policy has been so far a great dog that did not bark in German politics. German voters are docile and like to believe what they are being told by their government, perhaps partly because the real facts would be too awful to behold. Admittedly, politicians of the new anti-euro party the Alternative für Deutschland founded in 2013 are sitting in four regional parliaments now. If there were national elections tomorrow it would probably obtain something like 7% or even 8% of the popular vote, despite the largely hostile attitude most of the German media display towards the Alternative and the severe internal conflicts which haunt the new party. All major parties (CDU, SPD and the Greens) agree not only on supporting the euro, come what may, but also, at least tacitly, on most other political issues (the CDU under Merkel no longer has any real political agenda of its own, apart from trying to stay in power), and there is little room these days in Germany for any fundamental debate about Germany’s role in Europe. With Merkel’s rise to power a new Biedermeier age has begun in Germany, where any sort of open conflict is seen as a serious error of taste, if not indeed highly politically incorrect. This general mood of harmony clearly militates against those who upset the apple cart and dare to ask uncomfortable question, be they politicians of the Alternative für Deutschland or the economists.

However, will this sort of consensus politics last forever? This seems unlikely. One day the chickens will come home to roost, and somebody will have to foot the bill for the misguided euro-policy—in Germany as much as in Spain or Italy. Who is it going to be? The savers who have invested in pension schemes and were in fact persuaded by the German government to do so ever more forcefully over the last couple of years (fleecing the savers via financial repression is the preferred scenario right now)? Or the upper middle class having to pay even higher taxes? Or the sick and the elderly who find themselves confronted by a health care system which is seriously underfinanced even now and which will deteriorate even further because of the burden financial support for other European countries imposes on Germany? The mood of peaceful consensus which has so far dominated German politics will not last forever, that is for sure. For one thing, there is Germany’s position in Europe, already alluded to above. The Germans are now back to where they were in the years after the Second World War, at least as far as relations with Greece are concerned. There are bitter recriminations from both sides and one gets the feeling that the German army left Greece only yesterday. And this may only be the beginning because other countries may follow suit if Greece is even partially successful in claiming reparations. Some German left wing politicians rejoice in this because they think that the moral feel- good factor of supporting Greek claims for war reparations trumps any economic considerations; indeed, the equivalent of the French bobos (the champagne drinking Left) are particularly good at this. But this is largely a luxury phenomenon and is unlikely to find favor with the electorate at large.

The great question is: will the Germans turn away in earnest from the idea of European unification, when they see that they have been led up the garden path by their own politicians with regard to the monetary union? What seems certain is that in Germany it won’t be easy to win support for the United States of Europe, which people like Schäuble, Juncker and Schulz are dreaming of. There is still a chance of giving ever more power to Brussels without openly talking about it—the usual method which has been so successful many times before—but this is as far as it goes. The Alternative für Deutschland may be a small and slightly chaotic party, but its very existence will ensure that politicians who reject the nation state have to tread more carefully than in the past. Resistance against further official transfers of power to Brussels is only one aspect of the change German politics has undergone since the outbreak of the euro crisis. German citizens will in all likelihood become more restive and less easy to lead than in the past. Like the French or the Italians, they will recognize that the first duty of every citizen is to make life difficult for politicians and governments. In France or Italy protest movements of all kinds tend to put the fear of God into governments, whenever they attempt the slightest reform that attacks vested interests. This may seem irrational, but in a system that in itself is dysfunctional, it may be quite rational to sabotage official policy and defend one’s own interests above anything else. It may be the only way to force politicians to reconsider their options—for which allegedly there is no alternative as we are always told—in particular when elections do not matter that much any longer, and that is clearly the case in Germany as well as in many other European countries. Many crucial decisions are taken in Frankfurt (by the ECB) or Brussels anyhow, are not subject to any real control by voters, and at the national level in Germany the cartel of all major parties will be almost impossible to oust for a long time to come. When German citizens have learnt this lesson one day and realize that they are living in a fully- fledged post-democratic system, they may act accordingly, not at the ballot box perhaps, but in industrial disputes for example. As a result, Europe will probably decline even faster than it does partly thanks to the euro anyhow. When politics is only about the orderly management of the decline as seems to be the case in Europe these days, does speed really matter all that much? Sometimes it may be a relief to reach the bottom sooner rather than later.