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
I don't see how the evidence supports the conclusion here, at all: If the "path" is flawed, why exactly should we be resigned to power plays shaping the EU? That, at the very least, isn't the shape a politically legitimate institutional structure would have, and I think that proponents of this move are much too optimistic about fiscal union.ReplyDelete
Instead of moving to allow nations more latitude in solving their crises - like employing stimulus when it's needed, having given up domestic currencies long ago - they run in the opposite direction with policies that ignore, as you point out, that Germany has at times decided that the rules shouldn't apply to it. The very fickleness of their own dedication in the last ten years to the Eurozone economic targets should be a sign to the wise that the system is much too rigid to accommodate various national preferences, let alone economic disasters.
I see far too much confidence in the sheer weight of the EU institutions to simply enforce the status quo and try to bash other nations into the proper mold.
I agree with Edwin. My suspicion is that Draghi really wants the ECB to give some ground ( http://reservedplace.blogspot.com/2011/11/easing-in.html ), but he needs some contrite gesture from the politicians to convince the governing council to go along with him. Note that the intention is that the ECB will act IMMEDIATELY, whereas the fiscal framework is more about avoiding a repetition of the present crisis in the FUTURE, and the eurozone has a track record (ie the GSP) of disregarding fiscal rules when they become binding.ReplyDelete
I wonder if ever a nation should give up control of its own currency printing press.ReplyDelete
Having the press is part and parcel of a sovereign. It goes comfort to citizens and bondholders.
There are times when monetary authorities need to juice the action, or deleverage through inflation and growth, and having press helps in that.
There are some items more important than fighting inflation (the current and unhealthy fixation of many monetarists and others).
The EU crisis is neither monetary nor fiscal. It is a democratic crisis as perceptively argued by AShwin on his blog, see http://www.macroresilience.com/2011/06/29/the-democratic-deficit-in-europe-and-the-crisis-in-the-periphery/ReplyDelete
btw, Ashwin's blog is by streets lengths the best econ blog on the internet. just brilliant.
Time for Market Monetarists develop a concrete plan of action, such as the Fed buying $100 billion a month in bonds/securities not to a dollar target, but to a NGDP goal. Also wipe out IOR.ReplyDelete
By speaking in abstractions, we allow the John Taylors of the world to argue back in abstractions, and the argument becomes wonderfully esoteric.
Develop a concrete plan of action, and let the Taylors argue against that, and for doing nothing.
Arguing for doing nothing is a weak plank, under the circumstances.
Good god! You guys are really going to far! May I remind you that the US is quite aggressive when its interests are involved? And that it always were the French who wished for a fiscal union? And that until recently Germany was opposed to it? And that most Germabs are still opposef to it? To come up with the Reich-thing is just cheap.ReplyDelete
sorry for the typos. wrote from a smartphone ... and was evidently shocked by the your post.ReplyDelete
Well, how we have all seen the "fiscal union" was just a bluff, there has not been any federal reform agreement at all and what has been proposed is just a ratification of the present power balance (which of course isn't balanced at all...).ReplyDelete