Will the European Union survive

How can the euro survive?

In the fourth year of the financial crisis, financial policy has changed from being an anchor of stability to becoming a risk factor. The massive budget problems in the countries of the southern periphery of the EU and in Ireland are pushing the eurozone to the limits of its resilience. In addition to the financial markets, the allegedly failed Stability and Growth Pact is often blamed for this imbalance. In many places, the lack of a political union is lamented, without which the European Economic and Monetary Union (EMU) would be doomed to failure. However, to date none of these critics has defined how much political union is necessary for the success of the euro zone. The constituent element of a political union necessary for the success of the monetary union is the obligation of the decentralized financial policy of the member states to ensure budgetary discipline, i.e. the stability-oriented financial policy coordination at community level. This also applies to economic policy. However, in practice the EMU rules have never been properly applied. The European Commission and the Council of Ministers have each interpreted the political margin of appreciation extensively. Political opportunity prevented the necessary corrections until they were only forced in the context of a deep stabilization crisis under pressure from the financial markets. The common pressure to adapt - the so-called peer pressure - has clearly failed. This is the real cause of the euro crisis.

The European Council of Heads of State and Government met on 16./17. December 2010 set the course for overcoming the euro crisis. By amending the Lisbon Treaty, a new permanent mechanism is to provide financial aid for over-indebted countries from 2013 if the financial stability of the euro area as a whole is at risk. The Stability and Growth Pact is also to be reformed and economic governance in the EU strengthened. In this reform, it is crucial to remove the new rules from political flexibility. Those who continue to insist on the primacy of politics have not understood the eurozone as a sui generis construct with a centralized monetary policy and a decentralized budgetary policy. The eurozone will not survive without strict budgetary discipline on the part of the member states.

The same applies to calls for strengthening economic governance. For decades, Community law has unequivocally required strict coordination of the economic policies of the Member States. At the same time, even in Germany there is now a call for a European economic government that has been propagated by France for years, without anyone having yet provided a definition of what powers such an economic government should have. Should the monetary union develop into a budget, fiscal, social or transfer union? In any case, a strategy based on the motto “one size fits all” is likely to fail here too.

If the new architecture of the European Monetary Union does not exert sufficient pressure to converge, the only remaining effective disciplining instrument for national economic and financial policies is the market mechanism, i.e. an unsound budget policy is sanctioned at an early stage by rising risk premiums or interest on bonds from over-indebted countries. In order to maintain the functionality of the market mechanism, the systemic importance of such countries should be reduced. There are not only systemically important banks, but also systemically important countries due to the degree of integration achieved in the financial markets. If they continue to pose a systemic risk to the stability of the European banking sector - in communiqué for the stability of the euro - the governments of the other euro countries have no choice but to assume the liability or debts of the deficit countries. There is no option of bankruptcy. It is prevented at the expense of the taxpayer in favor of the bondholders. Deutsche Bank boss Ackermann concludes from this correctly: "No price should be too expensive for Europe."

The systemic relevance of over-indebted countries can - as the scientific advisory board at the Federal Ministry of Finance recently pointed out - be reduced through corresponding capital adequacy regulations for the financial institutions that hold government bonds from such countries. The build-up of equity should take place on the timeline; shock therapy would be counterproductive. Only then are insolvency and exclusion of liability by solvent member states possible again. Only then can considerations for debt rescheduling and participation of private creditors in stabilizing the debtor countries make sense. The dismantling of the systemic relevance of insolvent member states is a necessary condition for them to take responsibility for the stability of their public finances again. An orderly insolvency procedure regulated in advance as an institutional underpinning is then the sufficient condition. Realistically, however, it can be assumed that an insolvent state will have no access to the capital market for years. Serving the remaining debt via the financial markets is therefore impossible. In this case it would be justifiable to activate the new crisis fund with strict financial and economic policy conditions as a last resort after a regulated insolvency procedure.

The current reactions of the financial markets show their lack of confidence in the sustainable reform ability of governments. For this reason, many consider the path to a European financial equalization process to be economically inevitable. The purchase of government bonds from over-indebted euro countries by the European Central Bank is already the first concrete step towards a transfer union. It seems almost frightening to see how natural, in the opinion of some European politicians, traditional German “stability cows” should be slaughtered. The issue of euro bonds discussed in the run-up to the European Council not only represents the anticipation of an expansion of the crisis fund, albeit without any conditionality for the deficit countries, but also a subsidization of over-indebted countries by solvent member states. The path to a European financial equalization should not only overwhelm the solidarity of the German taxpayer, but also give a boost to Euroscepticism and right-wing radicalism. As uncomfortable as it may be for some politicians, not only in Germany, to realize that political will alone cannot skip economic laws, what the Austrian economist Eugen von Böhm-Bawerk stated almost 100 years ago: “Power can happen maintain for a while, but ultimately the economic law prevails. "

Wolfgang Glomb
Federal Association of German Economists and Business Economists
[email protected]