FRANKFURT – During the recent hearing on the constitutionality of the European Central Bank’s measures to prevent the eurozone from falling apart, Andreas Vosskuhle, President of Germany’s Constitutional Court, raised an important question: Do non-German economists condemn the ECB’s outright monetary transactions (OMT) as unequivocally as all but one of the German experts testifying?
Of course, there are German economists (not to mention Chancellor Angela Merkel’s government) who support ECB President Mario Draghi’s policies. Still, an overwhelming majority of German (and possibly Dutch and Finnish) economists seem to favor keeping the ECB on the sidelines in the eurozone crisis. It’s a fiscal issue, the typical German economist says, and monetary policy will not help; on the contrary, activating it will only make matters worse.
Of course, everyone would prefer it if the line between monetary and fiscal policy had not become blurred as a result of the crisis. But blindly sticking to principle would have been a highly risky option for the ECB. It would have meant accepting in 2012 what has been called “redenomination risk” – economic newspeak for a eurozone breakup.
Nonetheless, by launching its OMT scheme, the ECB has committed German (and other northern European) taxpayers, without their parliaments’ approval, to a potential obligation to bail out – well, whom, exactly? Indeed, it appears that the typical northern European taxpayer supports the typical stakeholder in northern European banks that are over-exposed to southern European debtors.
Likewise, German legal scholars interpret the ECB’s activities as being incompatible with European treaty provisions that prohibit bailouts and monetary financing of the debt of eurozone members. And one can easily understand civil servants’ strong reluctance to disregard legal obligations and risk criminal liability for breach of trust.
Germany’s Constitutional Court, of course, does not write the rules. But its obligation is to render a dispassionate reading of legal agreements, and it is renowned for doing so, which is one reason why it is the country’s most trusted institution.
Nonetheless, the ECB is right that it is faced with very different monetary conditions in different member states; indeed, the eurozone is akin to a badly working fixed-exchange-rate system, with all of the attendant risks. Ultimately, limiting the ECB to its conventional tool kit amounts to accepting the risk of a eurozone collapse.
Against this backdrop, institutional investors self-insured – quite rationally – against a eurozone breakup by withdrawing behind safer borders. With fiscal policy incapable of responding, the ECB was stuck with a second intermediation role: mitigating with its Target2 system the effects of European financial markets re-segmenting along national lines. This is fiscal dominance in its purest form.
It is here that Vosskuhle’s question matters the most. Debates within eurozone member states typically converge on what legal scholars call herrschende Meinung (“dominant opinion”), which, in turn, appears to reflect their countries’ status as creditors or debtors. Reinforcing this, the typical career-conscious economist has little incentive to deviate. The media are no remedy, as competition for ratings forces them to favor oversimplification over differentiation, complexity, and nuance.
In terms of substance – which the German Constitutional Court explicitly and intentionally avoids – the case for OMT has always been about preventing a liquidity crisis from morphing into a solvency problem, especially on the eurozone’s periphery. From an investor’s perspective, the mechanics of this are simple: all are reluctant to hold private or public debt from a country that is vulnerable to redenomination. This by itself creates a rollover risk, which is why, for example, a small firm in Bozen (Bolzano, in Italy’s South Tyrol) is subject to higher financing costs than its competitor in Innsbruck (in Austria’s northern Tyrol).
The OMT scheme’s success depends on an unlimited capacity to intervene – to do “whatever it takes,” as Draghi famously put it. Legally constraining this capacity would be self-defeating. So, if the OMT scheme is not feasible under current treaty provisions, these provisions – which, after all, are of human, not divine, origin – must be amended.
But a treaty change would require engaging the European public – and, in several member states, submitting the proposed revisions to popular referenda. Given how often such referenda have been defeated in recent years – for example, in France, the Netherlands, and Ireland – that is a scenario that everyone wants to avoid.
What is dispiriting is that we ponder these arguments so infrequently. In fact, the minimal prerequisites for a working monetary union are not discussed upfront and transparently anywhere. With politicians focused on the median voter, and a groupthink-generating media, the eurozone muddles through, just barely surviving.
But, if the eurozone is to be a sensible long-term proposition, mere survival is not enough. The main justification for a monetary union cannot be the possibly disastrous consequences of its falling apart. Even less convincing is the neo-mercantilist point that the eurozone would allow for indefinite current-account surpluses (it does not).
Originally, Europe’s monetary union was supposed to provide a stable framework for its deeply integrated economies to enhance living standards sustainably. It still can. But this requires acknowledging what the crisis has revealed: the eurozone’s institutional flaws. Remedying them calls for a minimum of federalism and commensurate democratic legitimacy – and thus for greater openness to institutional adaptation.
Hans-Helmut Kotz, a senior fellow at the Center for Financial Studies, Goethe University, Frankfurt, and a resident faculty associate of Harvard University’s Center for European Studies, was a member of the board of Deutsche Bundesbank from 2002 to 2010.
Copyright: Project Syndicate, 2013.
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