I read a story in the German press – Der Euro auf dem Prüfstand (‘The euro on the test bench’, published January 7, 2022) – which reinforced my view that progressives who think the harsh austerity-bias of the Economic and Monetary Union (EMU) have vanished with the invocation of the ‘general escape clause’ within Article 126 of the Treaty of the Functioning of the European Union when the pandemic arrived are off the mark. And when the same commentators/thinkers welcomed the end of the Merkel era and the dawning of the new German government, their assessment reflected that they are trapped within the TINA to the euro thought process. Well, economists with influence in Germany certainly don’t think that and one of the bosses of the Kiel Instituts für Weltwirtschaft (IfW) (Kiel Institute for the World Economy), which is a German research institute, has called for the topic of German exit from the EMU to be debated. He believes that this will put pressure on the other Member States (particularly the so-called “Achse Paris-Rom” (Paris-Rome axis) to abandon any thought of relaxing the economic and monetary rules and force the ECB to tighten monetary policy again. The iron gauntlet of ‘schwarze Null’ is still firmly gripping the European debate.
When the so-called “traffic light coalition” (“Ampel-Koalition”) was formed between the SPD, Bündnis 90/Die Grünen and FDP, I read some preposterous assessments that the terrain had irrevocably changed in German politics and this would lead to a major revision of the fiscal rules that blight the common currency.
I will come back to that.
But what also happened is that the Eurosceptics in Germany, who still fume over the decision to enter the EMU, were also unleashed because they feared the new German government would fall into populist causes aimed at relaxing ‘fiscal discipline’.
The cited article was based on an interview with Stefan Kooths from the IfW who demanded that the “highly indebted countries” of the eurozone be disciplined (“Disziplinierung hochverschuldeter Staaten”).
He claimed that with inflation becoming the threat (his view not mine) that the other EMU states had to be firmly reminded that Germany has alternatives – including exit.
He also demanded that the ECB abandon its ‘ultra expansionary direction’ (“ultraexpansiven Kurs”) as quickly as possible, which was reference to the various bond-buying programs and the maintenance of low interest rates.
He claimed the ECB was ensuring the currency union survived by printing money (“den Währungsraum über die Notenpresse zusammenzuhalten”) and this had allowed Member States to build up unsustaintable debt levels to deal with the pandemic.
He said that now Member States had to enforce fiscal discipline and come back within the Stability and Growth Pact rules.
The alternative was for the ECB to allow some states to become insolvent (“Insolvenzordnung für Staaten”).
Back in June 2015, the ECB, as part of the pernicious Troika (European Commission, IMF and ECB), used its monetary capacity to engage in political blackmail against the Greek government.
The ECB threat to send the Greek banks broke unless the Greek government abandoned its plan to oppose the austerity plans was, in my view, a contravention of the central banks primary charter – to ensure financial stability.
But it was one of the several things that brought the Greek government to heel, after the people had voted on a referendum to oppose austerity, and condemned that nation to almost permanent hardship.
The demands from Stefan Kooth, have those overtones.
Either the southern states (Italy, in particular) come to heel or the ECB and the European institutions will send them broke.
His suggestion that a German exit threat is more of the same.
The article concludes that it should be understood as a power play in upcoming discussions about monetary policy in the EMU (“ein Machtmittel”).
In other words, if the southern states don’t play ball, German will take its bat home and those nations will be on their own.
For me, the surprise is that a German would think the other states (like France or Italy) would see that as a bad thing.
They have become so conditioned to believing in the euro as TINA that they cannot see how such a move by Germany would free their nations from the tyranny of the ‘frugal four’ and the Germany-Dutch axis.
That is how far the dysfunctional nature of the eurozone has penetrated the capacity of policy makers to exercise sound judgement.
Before we jump to think that these views are broadly shared by German economists, one should note that Kooths is the chairman of the Freidrich von Hayek Gesellschaft (Hayek Society), and a member of the Mont Pèlerin Society.
His views are firmly neoliberal.
But it is much more than that.
The new Finance Minister in Germany, Christian Lindner, who is leader of the liberal Free Democratic Party (FDP). Such are the spoils of being the leader of a minor party that was important in ensuring the SPD could gain government.
Lindner was – wait for it – a major critic of the former finance minister Wolfgang Schäuble – for being too lenient with Greece during the GFC.
Back in 2017, when Angela Merkel was facing the possibility of having to form a coalition with the FDP, Lindner, who had just taken on the leadership role demanded much tougher EMU fiscal discipline and said Germany should not use debt to reduce taxes or deal with its need to upgrade its appalling digital infrastructure.
He said the third aid package to Greece that Schäuble had agreed to was a mistake and that Greece should have been sent broke.
More recently (December 2021), Lindner told the press that Germany would not fall into a regime of ‘fiscal dominance’ (“Situation fiskaler Dominanz”), which would allow the ECB to reign in its programs.
His views are becoming more broadly held in Germany, which have dubbed the ECB boss (Madame Lagarde) “Madame Inflation”.
As the new Finance Minister, Lindner will be influential in shaping the direction that the EMU takes. Like Kooths, Lindner is a member of the Hayek Society which promotes the inflation anxiety in Germany and calls for ever more deregulation.
Lindner’s aversion to any form of fiscal dominance and his willingness to impose the harshest austerity on what he sees as recalcritant Member States is the German view of old.
It hasn’t changed a bit.
There is no nuance here.
These Austrian economics organisations have become covers for the Alt Right in Europe, so they are much more than being purist Austrian School organisations.
The rest of Europe doesn’t seem to like Lindner – which is no surprise given his outrageous demands for more punitive austerity during the GFC.
This Capital article (November 5, 2021) – Warum ein Finanzminister Lindner in Europa auf Skepsis stößt – details how Lindner is poorly thought of in other European countries.
He is seen as being the proponent of an austerity mindset that is now unfashionable (“Vertreter einer aus der Mode gekommenen Sparpolitik.”)
The European branch of Politico posed the question in an article last year (November 3, 2021) – Christian Lindner as German finance minister: Does he add up? – challenged Lindner’s qualifications for the job and asked the question:
Finance minister or “fuck-up”?
Oh, how liberal we have become in the media.
Politico thinks that apart from the question of whether he is qualified for the job, Lindner’s “hawkish fiscal views represent a mortal threat to the euro”.
He built a career as a media personality driving a “black Porsche” and charging huge speaking fees.
But his political position is frugality – demanding the German debt brake be reinstalled and spending throughout the EMU be severely cut to fund tax cuts.
He is also among a growing group of influential characters who want to stop the bond buying programs of the ECB.
The appointment of Joachim Nagel as the new Bundesbank President, brought calls from the likes of Lindner for the ECB to reassert a stability-oriented monetary policy (“stabilitätsorientierten Geldpolitik”), which is code for raising interest rates and abandoning its bond-buying programs.
The tagesschau article (December 20, 2021) – Nagel soll neuer Bundesbankpräsident werden – quoted an economist from the Zentrum für Europäische Wirtschaftsforschung (ZEW) (Centre for European Economic Research) as saying:
Hoffnungen in Südeuropa, dass nun auch die Bundesbank sich unkritisch für unbegrenzte Anleihekäufe einsetzen könnte, sind damit erledigt.
(“Hopes in Southern Europe that the Bundesbank will uncritically advocate unlimited bond purchases are now over”).
Nagel need to be the ECB “Verstärker von Christian Lindner” (amplifier of Christian Lindner) and resist the “Begehrlichkeiten aus Frankreich und Italien” (desires of France and Italy).
The situation is now interesting.
France and Italy have formed a sort of power axis while the German political situation took some time to resolve and they are now trying to shift the policy focus somewhat away from the harsh frugal mentality.
But my bet is that they won’t get far.
Bullying is the hallmark of politics in Europe it seems.
Germany knows it is the most powerful influence in the design of the EMU, despite the delusions that France held that it would become a more powerful state within Europe.
But, Germany’s power, to some extent, relies on the citizens of the Member States being conned into believing the TINA mantra – that the euro is a success and nothing else is possible.
So the threat of a German exit is a power play to play on that fear that the world will collapse in the other Member States if the euro is abandoned.
Progressives, who oppose austerity, give succour to that power play by continually playing the ‘Europe’ card.
They would be better off educating the public (after they eduate themselves) that there is life after the euro and the progressive policy space would open up if the EMU was disssolved.
Then the German exit threat would just fall on deaf ears and their blackmailing strategies would come to nought.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.