* * *
In reflecting on the muddled
and (to many observers) disappointing
outcome of last week’s European
Council summit on banking union—‘yes’ to a not-insignificant Single Supervisory Mechanism (SSM) within the European CEntral Bank (ECB) but ‘no’ to any significant fiscal
shock absorber in the form of resolution fund or common deposit-guaranty
scheme—I couldn’t help but think of the late, great Alan
Milward, perhaps the most influential of all historians of European
integration.
As many readers will know, Milward was the author of the classic
history of the origins of the integration process, The European Rescue of the Nation-State
(1992; 2d. 2000). And it was Milward, perhaps
more than any other observer of European integration, who consistently reminded
us that integration has always been a political
choice rather than an inexorable consequence of growing ‘interdependence’
or some of other functional factor.
Because integration has been a political choice, its direction has also
never been beyond political negotiation or even outright resistance or
rejection. This insight is important to keep in mind as we reflect on the
outcome of last week’s summit on banking union.
Compelling functional demands, such as managing
interdependence or maintaining Europe’s geopolitical influence on the global
stage, undoubtedly feed the process of European integration, Milward
acknolwedged. But these demands do not
necessarily determine the course of integration in a linear, strongly causal
sense. Explanations of the process relying primarily on such functional
explanations, most importantly the growing interdependence of the European economy,
were, from Milward’s historical perspective, ‘shallow and implausible’ (ERNS, p.7).
Of course, we still see such explanations advanced today, particularly
when Euro-federalists argue that, in light of the underlying market
fundamentals, there is simply ‘no
alternative’ to full fiscal and political union. But such claims, at least in the hands of
federalists, are really expressions of normative preference and not the basis
for sound scholarly or lawyerly analysis.
Milward always reminded us that there has never been a perfect historical
congruence between economic interdependence and a subsequent political or legal
process of integration. Increasing interdependence
and other functional demands have certainly created pressures for integration in
general. But in looking to the
historical record, Milward also found that such demands can ‘be rejected by an
act of political will’, although perhaps at great cost (ERNS, p.7). The American economist
Barry Eichengreen recently
echoed this insight in an opinion piece in the lead-up to last week’s
summit: Europe’s leaders, he wrote, had ‘hoped
that establishing a monetary union would generate irresistible pressure for the
creation of an EU that functioned in all respects as a cohesive economic and
political bloc. [They] were right about the pressure…But they were wrong about
the irresistible part. There is no inevitability about what comes next’.
These thoughts bring me back to the sausage-like
negotiations over banking union last week, and Germany’s negotiating
position in particular. Alan Milward’s fundamental
insight regarding the historical interplay between economic interdependence and
political will are directly relevant to understanding not merely Germany’s acceptance
of a scaled down SSM but also to its inveterate resistance to an adequately
funded resolution authority, a common deposit-guarantee scheme, or anything else
that might lead to open-ended budgetary commitments or transfer payments in the
resolution of this crisis. Angela Merkel
may well believe that ‘if
the Euro fails, Europe fails’. But
that doesn’t mean, when push really came to shove in negotiations over banking
union, that Germany would automatically recognize what (to many) were the functionally
demanded policy steps to ensure avoidance of that failure. This is particularly the case because
Germany’s current political-economic
interests (maintaining trade surpluses) and prevailing
conceptions of political-economic morality (it’s the periphery’s fault) lead
it to a very different understanding of the nature of the crisis and what must
be done to solve it. That combination,
as Milward rightly predicted, could give rise to quite a good deal of political
resistance to the purported functional demands of economic interdependence, whether
in the banking union negotiations or otherwise.
The process of institutional change associated with the
process of European integration will always remain a complex brew of functional demands, political interest
calculations, and ideological or moral conceptions of ‘right’—no single factor
dominates. This will be as true for the resolution of the Eurozone crisis as it has been
in the entire course of integration’s
institutional and legal history.
Indeed, just as politics
may undermine what some regard as the functionally essential course for
establishing a banking union, recent experience also suggests that politics can
override functionally sensible choices in the opposite direction: How else to
explain, one might fairly ask, the continuing Greek commitment to remaining in
the Eurozone (most recently here,
but also here
and here)
where the economic fundamentals are so clearly in tension with that course of
action? A significant factor has to be the
political will derived from a Greek variant of what I have previously called ‘the
power of the European idea’, perhaps combined with fear
of the costs that a return to the drachma would entail, or hopefulness
about the (clearly questionable)
success of the current policy.
But in in trying to find a successful resolution of the Eurozone
crisis, all eyes must return to Germany, which holds all the main political and
economic keys. Germany’s partners will
be waiting a long time, it seems to me, if they think that functional
considerations alone (i.e., constant invocations of ‘interdependence’) will somehow
lead Germany inexorably or irresistibly to the right policy solutions. There may well be some (marginal) recent
evidence that Germany’s calculation of its political interests is shifting. The scaled back SSM within the ECB provides
some evidence of that, deriving perhaps from Germany’s increasing
realization that, ‘given extensive trade and financial links, a disorderly eurozone
hurts not just the periphery but the core’.
But those marginal shifts are not enough to lead Germany to
the sort of political and economic commitment of resources and leadership that resolving
the crisis really seems to warrant. What
needs to change, therefore, is not Germany’s calculation of its
political-economic interests or even its understanding of the functional
demands. Rather, as a threshold matter, what
needs to change is Germany’s overall ‘moral’ interpretation of the nature of
the crisis, as deriving from the fiscal profligacy of the periphery.
I am not arguing, in the manner suggested, say, by Paul
De Grauwe, Dani
Rodrik, or Harold
James, that it is wrong at all to interject moral considerations of blame
or fault into the discussion. To the
contrary, I am in fact arguing that it is time to join issue with Germany precisely on the terrain of morality,
blame, and fault (and indeed democracy, as I’ll elaborate more below). That was the upshot of my post this past July,
‘Fault,
Not Solidarity: A Normative Argument to Save the Eurozone?’ Germany’s moral
certitudes regarding the causes of the crisis be must be challenged and German
domestic political discourse must acquire a new element. To wit: that Germany’s
democratic system of government, as a willing participant in the construction of a deeply flawed monetary union, bears
a significant degree of ‘fault’ (and therefore ‘responsibility’) for the
current crisis.
I will not recapitulate the argument here, aside from citing
two brief passages from other commentators whose subsequent analyses that are in
line with the gravamen. First, ‘[t]he
Spanish bubble was after all a joint venture’, as Ambrose
Evans-Pritchard has written. ‘Spain was flooded with cheap capital from
Germany and Holland that it could not prevent or control under the EMU system.
Did the German and Dutch regulators recognise the danger, or try to stop the
excesses? Not really. They were complicit’.
Second, even though Dani
Rodrik claims ‘this has nothing to do with morality’ and that ‘[t]his is a
crisis of economic interdependence, not of morality’, he still gets the
essential moral point and states it in ultimately moral terms: ‘The economic
fact is that the assumptions on which German lenders and the Southern borrowers
acted have proved to be wrong and now both are in trouble. Neither Greek and
Spanish borrowers, nor German and Dutch lenders can be absolved’ (my emphasis on Rodrik’s moral language).
The key point is that the (highly imperfect) ‘economic
interdependence’ that allowed German and Dutch banks to lend to the periphery so
extensively were the consequence of
policy choices in the construction of the EMU that Germany’s own elected
governments knowingly undertook. This is
precisely the terrain of moral (and, frankly, legal) responsibility on which advocates
for the Eurozone periphery must now engage Germany. Most importantly, this
engagement must address, in moral terms, the problem
of ‘legacy assets’ that Germany has, to this point at least, steadfastly
refused to recognize as a shared responsibility. This was apparently a key
point of contention in the banking union negotiations last week, at least
according to published reports. As Charlemagne
put it, ‘Germany and the creditors resist any suggestion that they should be
made to pay for the problems of others’.
And according to Wolfgang
Münchau: ‘Angela Merkel has made it clear that Berlin is not ready to pay
for the resolution of other people’s banks’.
And yet there can be no solution to the crisis if commonly-funded
resolution authority is not part of the mix. Germany’s position loses its
‘moral’ veneer once it is recognized, as Paul
De Grauwe has maintained, that responsibility for the crisis is ultimately
‘shared by the North and the South’. The
legacy assets are not ‘the problems of others’.
They belong to Germany too.
But defenders of the German position might at this point
note that this is not the sort of monetary union to which Germany thought it
had agreed—indeed Germany arguably sought to protect itself against such
open-ended liabilities, inter alia, through the ‘no bailout clause’ and similar
contractual protections. And thus to
impose these costs would violate the democratic consent of the German people
and parliament.
Anyone who has read my prior posts on this crisis (see,
e.g., here
and here)
knows that I’ve generally been sympathetic to such arguments. But it must be recognized that this sort of ‘democratic’
argument in fact cuts both ways, particularly when the perspective on the
crisis shifts from ‘contract’ to ‘tort’; that is, from the negotiated legal
protections in the treaties to the scope of responsibility necessarily flowing from
the mistaken design of the EMU itself.
In an exchange
following ‘Fault, Not Solidarity’, I made the point this way:
It is difficult to
deny that, via the institutions of representative government (yes, those count
as “democracy”), Germany did in fact make a democratic decision in the 1990s in
favor of the EMU, with all its attendant risks…But [the legal protections
Germany demanded in the treaties (the no-bailout clause, the ban on monetary
financing, the prohibition against excessive deficits)] have proven illusory or
misdirected primarily because the problem with the EMU was in its very design,
not in its implementation.
And further
in the same exchange, I elaborated:
In entering into the
treaties, Germany told itself that the ban on monetary financing or strictures
against fiscal indiscipline, if complied with, would make the EMU work. But
this ignored a myriad of other risks associated with EMU, inter alia the
differences in competitiveness, unit labor costs, and the resulting balance of
payments problems, which proved to be much greater threats to the stability of
the project. Germany took no precautions against those risks (which frankly
might have led a “reasonable government” not to enter the EMU in the first
place). In that respect, Germany and all the other EMU participating states
acted “negligently” by breaching the fundamental duty of reasonable precaution
in the structuring of the monetary union as a whole.
The problem is that the periphery is now bearing all the economic
dislocation resulting from this flawed design, while Germany gets the benefit
of an undervalued currency feeding its export economy and trade surpluses, thus
keeping its unemployment rate low while the rate in the periphery skyrockets. This is the ‘economic interdependence’ that political
choice in favor of the EMU has wrought.
It has worked overwhelmingly in Germany’s favor. Hence the crucial importance of engaging
Germany on moral grounds. Germany must recognize unfair distribution of
dislocations as an aspect of its ‘democratic’ responsibility for the Eurozone
crisis.
I have no illusions that German public opinion or political
class is going to shift away from its conveniently exculpatory narrative any
time soon. But there is no chance for moving the policy in a more sensible
direction—i.e., overcoming Germany’s political resistance—without joining issue
precisely on the grounds of shared ‘moral’, and indeed ‘legal’, responsibility
for the crisis to date. Only then will
you get the needed resolution authority and common deposit-guaranty scheme that
will make the banking union more than just a ‘euphemism
for exactly the opposite’.
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