Many in the eurozone’s crisis countries complain that the source of their suffering is a rigid economic-austerity regime – including reductions in wages and pensions, tax increases, and soaring unemployment – imposed on them by Germany. Hostility against Germany has reached a level unseen in Europe since the end of World War II.
And yet, despite this antagonism, loud calls for Germany to assume “leadership” in Europe can also be heard. Germany is undoubtedly Europe’s most important economy; and, with low unemployment and relatively sound public finances, it is also the best-performing one – at least for the time being. So Germany is asked to take the lead in saving the eurozone, an outcome that is in the interest not only of the entire European community, but also of Germany, which is widely seen as having gained the greatest advantage from the single currency.
Complaints about the imposition of a “teutonic regime” and appeals for German leadership seem to contradict each other – a kind of continent-wide cognitive dissonance. In fact, the complaints and calls for leadership are mutually reinforcing. The implementation of austerity policies in the periphery has caused these countries to ask for help and request that Germany take the lead by putting more money on the European table.
Nobody would deny that Germany has an interest in preserving the euro. So why shouldn’t it support its partners with financial help to overcome the crisis?
Such support can already be found via the various rescue mechanisms – above all, the European Stability Mechanism and the implicit guarantees of TARGET 2 – that have been erected since the crisis began. But these mechanisms must be distinguished from a regime of more or less automatic, permanent transfers. As long as a fully-fledged political union remains a vision for the future, fiscal transfers must be legitimized by national parliaments.
For now – and probably for a long time to come – the eurozone will continue to be a union of sovereign states, with each country responsible for its own policies and for their outcome. The no-bailout clause that was included in the monetary union’s founding treaty is an indispensable corollary. Eurobonds, for example, would not only create moral hazard; “taxation without representation” would also violate a fundamental tenet of democracy and undermine support for the European idea.
The creation of a European banking union is another area in which misguided calls for solidarity prevail. Establishing a single supervisory authority and a resolution mechanism are valid proposals. But asking others to pay for the legacy of banks’ past irresponsible practices is hard to justify.
What would be the reaction if, say, Italian or Spanish taxpayers were asked to pay for the reckless behavior of the German IKB or HRE banks? Who would not find such a request inappropriate, to say the least? And yet when the bailout is presented the other way around, with German taxpayers asked to backstop reckless Italian or Spanish banks, somehow it is supposed to be an act of solidarity. Legacy problems in national banking systems should be solved at the national level before the banking union moves forward.
Bailing out governments and banks is not the direction in which Germany should lead. If Germany should lead at all, it should do so by providing a model of good economic policies for others to emulate. It should lead by respecting the commitments enshrined in the European treaties. Indeed, Germany set a disgraceful and damaging example when, back in 2003-2004, it undermined the European Union’s Stability and Growth Pact by not adhering to it.
Walter Hallstein, the first president of the European Commission, repeatedly stressed that the union is based on the principle of a community of nations under the rule of law (Rechtsgemeinschaft). Today, credibility can only be restored if treaties and rules are respected again.
Think of the eurozone as a selective club. Unless its members respect the rules by which it is defined, it will wither. Those who violate the rules must be warned and finally sanctioned – preferably in an automatic fashion. Those who violate the rules consistently, and even announce that they will continue in their misbehavior, should not be allowed to blackmail the community and should ultimately consider leaving the club.
Those who are concerned about permanent German dominance of the European “club” can rest easy. Having emerged from the position of the sick man of Europe only a decade ago, Germany is now willfully, if thoughtlessly, undoing the reforms that had so strengthened its economy. By reinforcing already-strict labor-market regulation, pursuing a misguided energy policy, and reversing pension reform, Germany is undermining its current economic position and will move in the direction of problem countries.
This regression will take time, but it will happen. Accordingly, calls for German leadership will disappear and its strained public finances will suppress requests for financial transfers. One wonders how the discussion about “leadership” for Europe will look then?
Otmar Issing, former Chief Economist and Member of the Board of the European Central Bank, is President of the Center for Financial Studies at Goethe University, Frankfurt.
Copyright: Project Syndicate, 2014.