In one of its recent issues „The Economist“ obviously had a bad day. At least Charlemagne had, though usually his commentary on Europe and its politics are right, this time Charlemagne is plain-wrong in blaming German „legalism“ for the crisis and the Eurozone’s slip into the dangerous low-inflation territory.
First, the analysis of the problem is correct. Low inflation and deflation are dangerous. Healthy levels of inflation seem far off, just like healthy interest rates. Further, Charlemagne is right in pointing out the necessity of at least a little bit of fiscal union to make a less-than-perfect monetary union work. Since the Euro area is far from being a Mundellian currency union, it must implement certain aspects of a fiscal union. And it does: the Maastricht criteria should limit the amount of government debt and hence the exposure of public finances to the dangers of deflation. Granted the Maastricht treaty is a nightmare, its rules cannot be enforced and all members have an incentive to misreport – everybody knows that and further rules like the fiscal compact are designed to overcome the Maastricht treaty’s weaknesses. Whether these new rules are better than the Maastricht treaty is another story.
Throughout the more than two decades long history of the Maastricht treaty, the members have by and large ignored its rules – setting the stage for Europe’s severe crisis. And now Charlemagne says it is Germany’s abiding to the rules that is the actual problem? Sorry, Sir, but that’s to easy an answer.
Yes, Germany’s insisting on tight budgets and reforms in exchange for bail-outs are a very harsh medicine. But let me point out that the bail-outs themselves violate the treaties1. The German constitutional court (Bundesverfassungsgericht, BVG) has given the Federal Government and the ECB a lot of leeway in dealing with the crisis. To be frank, to quite a lot of Germans – including me up to a certain point – the court has given the ECB and the politicians far too much leeway. The famous “Yes, but…”-rulings of the court allow things that seem illegal when one would read the treaty, such as bail-outs, OMT, partial surrender of the budgetary supremacy of the Bundestag and so on. Of course, now there are some strings attached, but basically every emergency measure to save the Euro was approved by the court. And its verdicts were not always equivocal. There was quite a bit of dissent within the board of judges and within the number of politicians and experts the court heard before making its decision. Allowing things like the ESM uses probably all the maneuvering space the German constitution allows. The BVG weighs all its decisions against the highest German law, precisely its job. Criticising a court for upholding the law is a very weird attitude of Charlemagne.
Economically we know that it is either the bail-outs (in whatever form, debt forgiveness, direct bail-out, eurobonds, you name it) or the (partial) dissolution of the Eurozone with unknown effects. Yet the treaties stipulate that exactly this happens. You either cope with sharing a currency with advanced economies such as France and Germany – meaning competitive markets, low (government) debt and especially low-regulated labour markets – or you go bust. That’s the spirit of the treaties. We can debate, if this spirit is the right one (it is) or if every member of the Eurozone is fit to be in (they’re not), but remember that the treaties are the law. Surely, Germany benefits a lot from the common currency and while most Germans are a bit grumpy about the emergency measures they still favour being a member. Let me stress two points why any blaming of “German legalism” is dangerous nonsense-talk.
First, Germans like to abide to the rules. You may find that strange or not, but that’s the way it is. The treaties lay out a very good set of rules, stressing responsibility for every member of the Euro to make the common currency work. Germany painfully abided to these rules – the political repercussions of Gerhard Schröder’s Agenda 2010 reform are still felt today, over a decade later. Estonia abided to the rules after it was hit by the financial crisis. In a way, Ireland did so too, after being bailed-out. Greece did not, Italy did not, France did not, and so on. Germans may like to abide to rules, but we also like everybody else to abide to the same rules. Certainly we do not like to feel like the dumb one “paying for lazy Greeks and corrupt Italians”. Of course, such talk is nonsense too, but as with all things political, it matters what people feel, not what is true. I do not hear talk like this often, but unfortunately I hear it more than some years ago. This slow changing of moods is dangerous. A ruling of Germany’s constitutional court usually calms anger down, because the court is almost sacrosanct. It is seen as protecting the constitution and the rights of the people against meddling by idiot politicians. As such the court is met with a lot of confidence. Europe and Germany’s friends should listen closely to what the court says. The best indicator that the court is right, is that there are ideas by the Federal Government to try to curb some of the court’s rights – an outrage, to say the least.
Second – sad that I have to point this out to Charlemagne – is that again and again and again economics has shown that the rule-of-law is both necessary and sufficient for the long-run prosperity of an economy. If you do not like a particular law, fine, campaign for a change or run for parliament and change it there. But the law is the law and the courts protect it. Germany’s constitutional court is one of the most independent in the world and has repeatedly embarrassed our government by sacking unconstitutional laws, e.g. a brand-new electoral law. The judges in their red robes can be trusted to uphold the rule-of-law no matter who they might embarrass. They simply do not care about anything else than the rule-of-law – which is precisely how a constitutional court should work. Less developed countries envy the west’s and especially Germany’s courts for their impartiality and neutrality. If the rules are stupid, it is not the job of the court to fix them. It is the job of the court to make unconstitutional laws compatible with the constitution by setting restrictions or to throw them away altogether.
The judges in Karlsruhe have no interest in harming the Euro – after all, like all Germans, they benefit from the Euro. Their only interest is to protect the constitution and have until now only pointed out that certain aspects of the legal framework of the common currency are unconstitutional. And I am pretty sure that a constitutional court as rigorous, neutral and independent as Germany’s would also find that these rules also violate the constitutions of other members. I am not wondering why it should only violate the German constitution. I wonder whether the constitutions of our friends are not as bullet-proof as the Grundgesetz or whether their courts are independent and bold enough to point out such violations, or both.
Unfortunately, economic crises do not wait for politics to come up with a clean, constitutional solution. Given this basic insight, I find that the ECB was right to intervene in the bonds markets and to announce OMT as an instrument so powerful, that it hopefully never needs to be used. Mr Draghi and probably all the other central bankers know that. The ECB never intended to use OMT because the know precisely that it violates at least the German constitution, if not every other constitution as well. The single purpose of OMT was to buy time for politics to sort the crisis out. And politics failed miserably. To sever the doom-loop between governments and banks, no banking-union is required. It would be sufficient to prop up banks‘ equity, to see government bonds as risky assets that have to be supported by equity, to force banks to set up an fund for winding down bust banks and try to ring-fence them. But this would deprive politicians of a good sink for government debt. Instead they came-up with a miserably bad banking union. BVG will do what they have to do and scrutinise it, which takes time. Exactly the time that was bought by the ECB’s OMT. Probably Mr Draghi is banging his head on the desk given so much stupidity of politics. So, if Charlemagne wants to assign blame, he should blame Europe’s politicians. Starting maybe with Angela Merkel who still does not see that resolving the crisis will require bold and unpopular moves – though, not quite the moves Charlemagne would like her to make.
1 Specifically Article 125 of the Treaty on the Functioning of the EU (TFEU).