Friday, November 28, 2014

Germany versus the Euro

BERLIN – Usually, people or institutions are taken to court when things go wrong and a fight ensues about who is liable for the damage. So the German Constitutional Court’s hearing on June 11-12 to consider the legality of the European Central Bank’s so-called outright monetary transactions (OMT) program was peculiar. Here is a fight over the single most successful monetary-policy measure of recent decades – not just in Europe, but anywhere.

The announcement of the OMT scheme in July 2012 reduced interest rates for companies and governments alike and returned much-needed private capital to crisis-hit countries, thereby helping to soften the blow of the deep recession on Europe’s periphery. It also brought back that scarcest of assets: confidence in the viability of the eurozone economy and its currency, the euro.

Best of all, none of these achievements has cost a single euro. All that was required was a mere statement by ECB President Mario Draghi and its Governing Council that it would do “whatever it takes” to buy eurozone members’ sovereign debt, conditional on their fulfillment of stringent fiscal conditions. No country has come forward so far.

But, while the OMT program’s positive impact on financial markets is proof of its success, it has come under fierce attack by the German public, political parties, and economists. A recent poll shows that only one-third of Germans now favor the scheme, while a majority oppose it. And now the Constitutional Court is being asked to strike it down.

Why would anyone, especially a European, want to kill a program that so far has helped to save the common currency?

The OMT scheme’s German opponents argue that it is unconstitutional, because it is not monetary policy, but fiscal policy aimed at financing insolvent and lethargic eurozone governments. They argue that it is not the ECB’s job to rescue the euro or to prevent countries from exiting the monetary union.

These complaints are all the more peculiar given that Germany is a major beneficiary of the OMT announcement: its direct financial risks, via balances in the eurozone’s Target2 system and the size of the ECB’s balance sheet, have shrunk, despite the eurozone recession.

Given these benefits, it seems masochistic for Germans to oppose the ECB’s strategy. So, again, why is there so much resistance to it in Germany?

One part of the answer lies in Germany’s strong culture of Ordnungspolitik, or stability policy, which almost always gives precedence to rules over discretion. Success can mean failure if it is achieved with questionable tools.

A second reason is that Germans are fed up with being Europe’s scapegoat – blamed for their neighbors’ ills while being asked to take on risks and provide generous financial transfers. Indeed, among some of Germany’s intellectual elite, mistrust toward Europe and its institutions now runs so deep that any new European policy measure is suspected of being a plot to get German money.

This view is gaining ground politically as well, with a new, explicitly anti-euro party, Alternative for Germany, rising quickly. Moreover, an increasing number of Germans, openly or secretly, want to have the Deutschemark back.

The problem is that they could get what they wish for. If the German Constitutional Court imposes limits on the OMT program, the consequences would be dire, for it would render the ECB’s guarantee to do “whatever it takes” ineffective.

Financial markets would undoubtedly react swiftly, reviving the fears of last summer. With no policy institution able to take charge, countries like Italy and Spain would return to the brink of panic-induced insolvency. A deep European depression would result, almost certainly dragging down the German economy and reversing the European integration process.

The German Constitutional Court is, in fact, unlikely to prohibit the OMT program. But it could be tempted to impose some limits on the ECB and thus set Europe on a path into deeper crisis. And, even if the court refrains from setting limits, the underlying problem – growing German aversion to all things European – will not go away.

There is only one sensible way forward. Germany’s European partners, especially France, must persuade it to re-engage with Europe and assume responsibility for European integration. German leaders’ opposition to every proposal for institutional reform may be excusable now, in the run-up to the general election in September. But once the new government takes office, Germany’s continued refusal to adopt an active approach to solving Europe’s problems would be entirely indefensible.

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    1. CommentedRocco Doni

      The only court with jurisdiction to judge whether the EU law has been violated is the ECJ.
      And really paranoid and "perverse" (as Draghi said) is this mania that there are losses arising from the OMT for Germany: quite the opposite, as also this article explains.

    2. CommentedCarol Maczinsky

      The reason is simple, we agreed on a deal in Maastricht and the deal was broken. German backing of the EURO was conditional on these conditions. The EU Treaties clearly forbid liability of one state for the other. Now we are in a stage where the old rules don't apply anymore and we face all the structural antisemitism against "Germany". It would be foolish to accept the hold up and the bullying. Germany wants a protestant EURO so to speak, the Southern nations want a catholic EURO. If some nation breaks a deal it is not in a position to put up demands that make it appear acceptable. It has to accept its faults and take responsibility.

    3. CommentedSantiago Rouco Rodríguez

      Inflation in Eurozone is 1,424 % (May 2013). Inflation is not a problem in Europe now. But deflation is a truly present problem. It destroys economies, causes unemployment and misery. That are the real problems now. We have to urge governments to fix current problems, not problems of a hypothetical future.

        CommentedRocco Doni

        @Carol Maczinsky
        This german fear of inflation is as obsessive as the anorexic fear of gaining weight: she continues to see herself fat even when she's going to die of starvation

        CommentedCarol Maczinsky

        Inflation means savings lose value. Why shall you devalue your currency because other nations can't stick to their budgetary agreements? We have to award prudence and punish abuse. As simple as that. If we do the opposite the Euro breaks.

    4. CommentedUwe Hild

      Apart from the political opposition to current EU policy, the constitutional court is obliged to intervene. Obliged because budgetary powers are taken away from the German parliament, without being democratically backed up at European level.
      In that sense, checking that European policy is in accordance with the German constitution, the constitutional court - far from being anti-European or any such nonsense - is addressing the democratic deficit at the heart of current European practice.
      While loudly bemoaning the power of "unelected civil servants" (listen to UKIP, British conservatives etc) they are all happy to do back-rom deals in the council of ministers, which have even less democratic legitimacy, because they are not controlled by the European parliament.
      We may be unhappy with Merkel's dithering, but we should be delighted that the constitutional court does its job.


        CommentedCarol Maczinsky

        Hari Naidu is wrong. The Sovereign is the people. The government can take all decisions, including irresponsible ones, but is bound by the constitution.

        Commentedhari naidu

        You're and surely day-dreaming.

        Karlsruhe has no legal and/or fundamental legal basis of arguing the case of OMT.

        Only the sovereign - Merkel as its official representative - has the legal right to raise the case, and she actually approved it, along with her Min of Fin.

        So your nonsense is nothing more than hot air - just like IFOs boss Sinn - try to understand the basic laws of EU Lisbon Treaty.

    5. CommentedPatrick Lietz

      It is strange to see that heated discussion on how Germany should behave, particularly as it does not address the fundamental issue.

      The fundamental issue is that energy, oil in particular, has become so expensive that many countries cannot afford their consumption anymore. As oil prices will not go down significantly, that issue will stay with us.

      The high oil prices affect not just Europe and the US, but also Japan (now trade deficit), Brazil, and Turkey.

      The situation is even worse for countries such as Syria, Egypt and Pakistan because they are crossing the threshold of not being able to afford their daily bread (2012 was a terrible year for crops in the US and elsewhere, driving the costs upwards).

      But coming back to Europe. Whether Germany will acquiesce or not to take on Euro bonds does not matter much in the medium term. The EU will go down because we cannot afford this extreme level of complexity anymore.

      The interesting notion (from a geopolitical point of view) is whether the US will weather the years any better than we Europeans. I would be surprised if that were the case

        CommentedTomas Kurian

        You are right in the part that with less oil economy will only slow down and serious recession will follow.

        But, even after oil ( there was an economy and life even before the excessive use of oil) the problems of debt and unemployment will remain.

        How shall we treat scores of unemployed that will come as a result of ever slowing economy ?
        So far, we are not managing to solve this problem even while we have the oil.

        My theory, is trying to offer an alternative system, which allows for passing the productivity gains towards free time ( chapter 18) and thus solving the unemployment problem.

        Oil is impacting us only to a certain dergee: we can have a good life even with less material products but we must learn how to manage the workload and redistribution.

        Situation where people, who still have the jobs are working 8-10 hours a day and unemployed and just surviving while economy is way below potential means we are failing in management even in good times.

    6. Commentedhari naidu

      The problem with so-called German experts who are opposed to ECBs/OMT policy is that they've little or no political-economic understanding of the European Project, since the inception of EEC/EU.

      They're a dying race of (German) nationalists who will be ii-treated by modern European history, principally because ECB will inevitably ensure that not only Euro survives these *macro-idiots* - who call themselves professional economists! - but also enact EU Banking Union under a single (ECB) monitoring authority.

      Already Landerbanks and SpaarKasse - by definition political institutions to serve state political policies - are organized to block ECBs monopoly of power to restructure under-capitalized banks. They will fail like the dikes on Elbe!

      Finally, the Constitutional Court by definition is a German construct to deal with Basic Laws under its Constitution - not EU laws under Lisbon Treaty that established ECB and EMU. Therefore it a fools errand by neocons/libertarians to petition the Court in Karlsruhe with a view to stop OMT and ECB.

    7. CommentedWalter Gingery

      Herr Fratzscher confirms that many Germans are not yet prepared to come to terms with the realities of their "Exportstaat." Having caused so much destruction in the rest or the Eurozone with their single-minded concentration on exporting and saving while discouraging imports and consumption, they are now blaming the victims. It's time for them to acknowledge that, just as not all the children in Lake Woebegon can be above average, not all economies can be export driven.

        CommentedTobias Wessels

        Even if minimum wages will increase private consumption and reduce german trade surplus significantly (which still has to be proven), it is still not a solution to the main problem of the crisis: the differences in productivity of the EU states.

        And, by the way, it is not so that private german per capita consumption was way behind that of other countries. In fact, it is somewhere in the upper middle and the GfK consumer confidence index for germany performed remarkably well even throughout the crisis.

        CommentedWalter Gingery

        Sorry, I meant raise the minimum wage for certain workers, not just temp workers.

        CommentedWalter Gingery

        Frau Merkel & M. Hollande recently proposed two programs to rectify the situation. The one designed to aid young people I deem to be mere window dressing. The other, though, to raise the pay of temporary workers, looks to be a serious attempt, albeit a tiny one, to address the problem. Frau Merkel tends, by her own admission to prefer to advance by "baby steps." Well, here is a "baby step" in the right direction: toward increased domestic consumption. Perhaps this is an indication of the direction she intends to pursue after the elections.

        CommentedTobias Wessels

        Recently I've read many posts like the above, stating that the german export policy is the main cause for southern countries struggeling in WORLDWIDE competition. But people taking up that case are clearly forgetting something.
        First of all, if someone sells a product there is always someone buying, and he had a choice to buy a german, a spanish or a greece product, but he made a choice for a german one - that's a remarkable fact, because it shows either some german innovation over other markets or better prices.
        Second, Germany is not flooding markets with cheap products out of cheap workforce as china did it in the past, but it is developing and producing high quality products. Seems to me like there is a structural advantage of the german economy over other markets.
        Third, it is still the company's decision where to develop and produce their products. Many decided to do so in germany and they may have their reasons (better infrastructure in many fields?).

        Anyway, what are you even demanding? That German's economy shrinks it's productivity? That would be rediculous. Or that Germans spend their savings for a better life? I predict that none of that money would find it's way into southern europe economies.

        German trade surplus might be one factor influencing world economics, but it is not the main cause for the european crisis. And depicting Germany as the main cause of the crisis and the other countries as victims is just not fair.

        But still it's written on a different paper how we should attack the differences in competitiveness in european economies and especially how to distribute the burdens which we have to take in order to get europes economies on one level.

    8. CommentedAlex D.

      Marcel Fratzscher, perhaps you could be more honest here.

      The so called German "elite" consists, among others, out of economists who are internationally excluded. One example of these second rate economists is Professor Sinn!

      1. This "elite" believes in Monetarism. Thus every solution that brings a little bit more inflation within Germany will be declined.

      2. These poeple are against Eurobonds. They argue that the risk is too high. But they often ignore that healthy companies in other countries have to pay higher interest rates.

      3. They think a huge surplus is something great, although it punishes the German people and the weaker Euro members.

      4. They think (or at least they claim) that German taxpayers have to pay for Central Bank losses.
      A REAL central bank doesn't have to care about its losses because it is not a regular bank. It is an institution above every other bank and can print money as much as it needs. Professor Sinn and his friends would now explain that this is dangerous which leads us to number 5.

      5. The so called "elite" claims that money printing leads directly to inflation. I ask myself where is this inflation in the US or in Great Britain? Funny who the FED calmed the markets, and the US went back to growth while Europe is going down the edge with a fake Central Bank.

      6. These people think Austerity is a solution. When you take a look at the numbers it is easy to tell that Austerity is a catastrophe, from the beginning till now. In most countries you don't even have a sign of recovery. In others the situation gets worse and worse.

      7. The media in Germany supports these people and their opinion. Some newspapers are still conviced that we have a Government debt crisis in Europe and that Austerity is the right way to solve the crisis.

      As you can see. With these (false) convitions it is not easy to solve a crisis like the current. And I guess I left out many other important points.

      Anyway, as Marcel Fratzscher said, we most likely we will have to wait till the elections in Germany are over. The question is, what will happen?
      Most likely the very same German elite will try to force the other Euro members to become like Germany which means they will have to focus on export and nothing but the export. We will see if the German government will be smarter than the German economists.

    9. CommentedCarol Maczinsky

      I don't get the point why Ordnungspolitik is bad. Adherence to agreed principles comes first, otherwise there is no foundation for cooperation, and no trust. Apparently financial markets are smarter than apologetics for irresponsible conduct.

        CommentedCarol Maczinsky

        Alex D; It was news to me that people suffer from a hard currency. It is inflation which ruins the small savers and a feature of crap economies. You don't need discipline to have a high inflation regime, in fact high inflation shows economical unbalance or bad political governance. we build a monetary Union on principles and now is the time to be more serious about them to restore trust in the joint currency.

        CommentedAlex D.

        @ Carol Maczinsky

        "I don't get the point why Ordnungspolitik is bad."

        Because "Ordnungpolitik", you might call it also Monetarism is the wrong model in the current crisis.

        For example: In the late 1990's the bundesbank kept the interest rates too high altough the unemployment rate was very high and the inflation low.

        No Europe and espeacially Germany has to make a decision, again. Mass unemployment in the other countries or higher inflation inside of the strong Euro core, especially in Germany.

        If you take a look at the German real wages workers during the last 15 years (they stayed the same) the answer should be easy. But the German idiology forbids this simple step.

        Another part of German "Ordnungspolitik" is the Assumption that a big trade surplus is a good thing. This assumption is dangerous especially because every suplus in Germany is a trade deficit in the other countries. Instead of increasing the wages in Germany the German governemnt forces the others to export more, which is not possible since German wages won't go up. So German politicians think the wages of the others have to go down....

        In the end Europe is trapped in an infinite loop of falling wages with no solution regarding the Euro crisis.

        With other words, every possible solution is forbidden by Germany but the status quo will lead to a catastrophe.