We learn that Mario Draghi, head of the ECB, has made a deal with Germany that would allow the central bank to open the monetary spigot only if Germany gets its desired fiscal union. This development reinforces the widely held view that the Germans are playing the Eurozone crisis to their benefit. Of course, the evidence suggests that the Germans have always been playing the currency union to their liking, but the Eurozone crisis is a chance for Germany to take this game to another level. Tony Corn makes this point in an very interesting article titled "Toward a Gentler, Kinder German Reich?" Here are some excerpts:
For the third time in less than twenty years, Germany is trying to force down the throat of Europe a federal “political union” which, in the eyes of too many European observers, eerily resembles a gentler, kinder Anschluss. While Europeans were able to push back against the first two attempts, the two-year long financial crisis has created within Europe a “German unipolar moment” and provided the kind of leverage that had eluded Germany earlier. With the German Chancellor as a de facto “EU Chancellor,” German elites are leveraging the crisis by playing a game of chicken in order to make their federal vision prevail.
Demographically and economically, Germany is one third larger than either Britain or France. In the past ten years, this predominance has already been reflected in EU institutions, both quantitatively (Germany has the largest representation in the EU parliament) and qualitatively (the European Central Bank is a clone of the Bundesbank). But that’s apparently not good enough for Berlin, who has deliberately let the crisis move from the periphery (Greece and Portugal) to the center (Italy and France) in order to extract the maximum of concessions from the rest of Europe.
Germany’s ideal, if unstated, goal? A constitutionalization of the EU treaties, which would irreversibly institutionalize the current “correlation of forces,” and allow German hegemony in the 27-member European Union to approximate Prussian hegemony in the 27-member Bismarckian Reich. German elites have become so fixated on this goal that they are now talking about changing the German constitution itself in the event the German Constitutional Court decides to get in the way of the New European Order.
From a socio-political standpoint, to be sure, this would-be Merkelian Reich would have none of the negative features associated with the autocratic Bismarckian Reich. In all likelihood, the new Reich would be a benign, metrosexual, post-modern (pick your favorite) polity, one that would not be any less “democratic” than the technocratic European Union of today. And from a monetary-fiscal standpoint, one could argue that a Merkelian Reich would probably represent a significant improvement over existing “hybrid” arrangements.
I am less certain than the author that a Merkelian Reich would really lead to better monetary policy given the vast differences in the European economies. The Eurozone is not an optimal currency area and Germany has consistently shown itself to care more about domestic monetary conditions than European monetary conditions. Still, if this is the path the European Union is headed then creating the fiscal union would be a step in the right direction toward making the Eurozone a functional currency union.
HT Milan Brahmbhatt