The Last Thing the Eurozone Needs Is an Ever Closer Union
Germany has proved that it runs the show and writes the rules. So why is France pushing for even deeper integration?
Fuite en avant is a wonderful French expression that is hard to translate into English. Literally, it means “forward flight.” Better approximations include “headlong rush,” “panicky compulsion to exacerbate a crisis,” or even “unconsciously throwing oneself into a dreaded danger.” Faced with Berlin’s power grab to reshape the eurozone along German lines, Paris’s response has been quintessential fuite en avant: proposing even closer ties with Germany in order to try to mitigate the damage done by existing ones. But if a marriage is miserable and divorce is not yet in the cards, might it not be better to have separate bedrooms?
To be fair to France’s president, François Hollande, a headlong rush toward greater intimacy has been the default response to previous crises thrown up by European integration, so it is the most common prescription now. If a fiscal and political union is truly necessary for the eurozone to survive, as many argue, his proposal of a democratically elected eurozone government that would act as a fiscal counterpart to the European Central Bank (ECB) and — whisper it softly — curb German power may make sense. Italy’s finance minister has suggested something similar.
But creating a eurozone government to bridge the economic and political divisions exacerbated by the crisis would be putting the cart before the horse. Or to put it differently, it would be seeking an institutional fix to a much deeper political conflict. Yes, well-functioning common institutions would make Europe’s dysfunctional monetary union work better: Federalism works fine in the United States and elsewhere. But that is because there is broad political acceptance of those federal institutions’ legitimacy — which, in turn, is because the United States is a nation-state with enough of a sense of shared political community to accept majoritarian democratic rule. Unlike the eurozone. Germany and France sharing a government? Hard to imagine. Germany and Greece? Impossible.
Huge numbers of Europeans are unhappy with how the eurozone works. Many don’t trust national elites, let alone European ones. Regrettably, the crisis has revived old stereotypes, such as lazy southerners, and has created new grievances, notably the Troika’s usurping national democracy. Is the solution really to concentrate more powers in Brussels, with France and others giving up even more control over their economic destiny? Is that what French people are clamoring for? Eurozone governance isn’t working, so let’s have more of it. Brilliant.
The conceit in Paris is that a eurozone government would be shaped by France. But why would it be? Berlin rules the roost in the eurozone, so it is scarcely going to subordinate itself to a Franco-European institution in Brussels. When German officials talk about fiscal union, what they have in mind is not the Keynesian eurozone treasury that France would like, but a supranational fiscal enforcer that could rewrite national budgets at will. That would entail an extension of German power, not a reclaiming of French influence.
Traditionally, Germany was loath to go it alone in European politics. It needed to proceed hand in hand with France, to banish fears that it was trying to dominate Europe. But now Berlin is openly seeking a Germanic Europe. It has a coalition of the willing — German economic satellites such as the Netherlands and Slovakia — to provide political cover for its unilateralism. And its policy establishment is much more united, confident, and determined to get its way than France’s is. So until Paris is willing to provoke a rupture, Berlin is in the driver’s seat.
Germany’s veteran finance minister, Wolfgang Schäuble, whose threat to expel Greece from the eurozone has made him Germany’s most popular conservative politician, wants to strip the European Commission of its fiscal-enforcement powers, Frankfurter Allgemeine Zeitung, the country’s conservative newspaper of record, has revealed. Schäuble thinks the commission, which is meant to represent the common European interest, is too “political” because it has dared to distance itself somewhat from the hard-line German stance toward Greece. The commission has also shown some flexibility in enforcing eurozone fiscal rules, which have been greatly toughened at Germany’s insistence. So Schäuble wants to create an independent enforcement body instead. This would put fiscal policy on an austere autopilot, with no discretion to invest or respond to small matters like the economic cycle or elections.
The German Council of Economic Experts, an independent body that advises the government, has also put flesh on Schäuble’s position that Greece must leave the euro in order to obtain debt relief. In a new special report, it suggests that this threat be formalized: A country that breaches fiscal rules and “continually fails to cooperate” should exit the monetary union. This is the opposite of moving toward a political union. Imagine if California were threatened with expulsion from the dollar zone for issuing IOUs in 2009.
On top of that, Germany wants to minimize the inevitable cross-border risk-sharing that a common monetary policy and payments system entail, a position that has already shaped how the ECB has implemented quantitative easing. This Germanic euro is becoming like a system of currency boards, as Willem Buiter, chief economist of Citigroup, has observed. Yet an extremely rigid and dangerously unstable fixed-exchange-rate system is not what France and other countries signed up for in the Maastricht Treaty, which created the euro, as Shahin Vallée, a former advisor to France’s economy minister and before that to the previous president of the European Council, has explained.
So instead of a fuite en avant, or acquiescing to Germany’s neo-imperial designs, the French, Italian, and other like-minded governments, along with Europeans of all political stripes, need to take a step back and think things through. Is the current state of affairs in the eurozone acceptable, let alone sustainable? Would the German proposals move the currency union in the right direction? Is it wise to leave a proper critique of a dysfunctional union to the radical left and racist far right? If the answer to those three questions is no — and it ought to be — surely other options ought to be considered.
To use another French phrase, it’s time to break out of the pensée unique (groupthink) about how to make Europe work better. More integration is not always the solution; in fact, it can make matters worse.
Let’s face it: The differences between the German ordoliberal concept of fiscal policy and the French Keynesian one are irreconcilable. Berlin wants a watertight system of rules that strips policymakers of discretion, whereas for Paris economic and political discretion are paramount. Since Germans attribute their postwar economic success to ordoliberalism, they are scarcely going to compromise on this, especially because they have since told themselves a morality tale about the crisis in which their behavior is virtuous and others’ is sinful. But ordoliberalism cannot work as a governing principle for a currency union with different intellectual traditions and divergent economies. Nor is it viable for an unbalanced 10 trillion euro ($11 trillion) economy with a mercantilist German core to outsource its stabilization to the rest of the world. So why not allow greater flexibility at the national level? Germany can pursue one policy and France another.
The traditional argument against fiscal flexibility is that excessive French borrowing would spill over into higher interest rates for the German government. But the crisis showed the opposite: Capital flooded into Germany as a safe haven, pushing down German yields.
The updated argument is that because of the bailouts of Greece, Ireland, Portugal, and Spain and the creation of a permanent bailout fund, the European Stability Mechanism, Germany could now become liable for everyone’s debts. (Never mind that these were actually covert bailouts of German and French banks.) And because liability requires control, Germany must therefore control all eurozone members’ budgets.
Why not instead restore the Maastricht Treaty’s no-bailout rule: that governments should not bail out their peers? After all, it was a key German demand at the time. Now it could be made credible by also creating a mechanism for restructuring the debts of insolvent sovereigns. Greece’s debts to private creditors would thus have been written down in 2010, not replaced with debts to European taxpayers. To further enhance market discipline, bank capital-adequacy rules, which incorrectly treat all government debts as risk-free and place no limits on banks’ holdings of them, would be reformed. That would have removed the incentive for banks to arbitrage away the spread between Greek and German debt. Elements of this have been proposed by the German Council of Economic Experts, as well as by the president of the Bundesbank, Jens Weidmann. If such plans were implemented, surely greater fiscal flexibility at a national level ought then to be acceptable even to Germany. National liability, national control.
Such flexibility would have huge advantages. It would give governments that share a currency greater scope to respond to economic divergences among them — and borrow to invest, if they wanted to. And it would give governments of different political persuasions and countries with different intellectual traditions the scope to live under a common euro roof peacefully. There is only a small step from the German mantra that each government should put its own house in order to accepting that there are diverging views about how to do so. Ideally, the ECB would also be given a mandate to act as a lender of last resort for illiquid but solvent governments — and that knowledge would prevent it from ever having to intervene.
A flexible eurozone would be good economics and sound politics. Trying to impose a single, rigid, and deeply flawed Germanic model on the eurozone is not. A French-style eurozone government is a pipe dream. The only other option, of course, is breakup.
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