Heiner Flassbeck and Friederike Spiecker – Democracy and International Relations

An international fire brigade – one way of looking at the European Central Bank – should brook no interference at the national level when it turns on its fire hose. Its ultimate arbiter is the pan-national European Court of Justice.

Heiner Flassbeck is an economist, as well as publisher and editor of “flassbeck economics international

Friederike Spiecker is an economist and economic journalist

Cross-posted from Makroskop

Translated and edited by BRAVE NEW EUROPE

Dietmar Rabich

“The democratic sovereignty of the people” must also bow to this logic: whoever wants to have functioning international relations between states must subordinate the democratic self-determination of the nation states to international law and international agreements.

In the discussion about the ruling of the Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) on the policy of the ECB, positions are introduced which reject the ruling of the BVerfG on the substance, but which express sympathy for the fact that a national court is trying to impose limits on a supranational institution. Against the background of a lack of democratic legitimacy, the role of international institutions is viewed critically. The only thing one can imagine is a purely technocratic mandate for the ECB.

But a purely “technocratic mandate”, to which the work of a central bank could be limited, does not exist in the real world. At least not for an institution that has been given the task of establishing price stability by democratically elected governments. We have made it clear time and again that the monetarist nexus of money supply and inflation rate that would be needed for a purely technocratic mandate does not exist.

However, if, when deciding on the independence of an institution such as the Central Bank, the democratically legitimate decision-makers should have been objectively in error as to what the real effects of that institution’s policies are or could be, this cannot and must not prevent the Central Bank from doing what is possible and reasonable under the prevailing conditions in order to achieve its objective. A fire brigade has been set up, and lo and behold, the fire brigade puts out fires. Anyone who says that it is not allowed to do so because using a fire hose causes collateral damage must abolish the fire brigade or explain to the fire brigade how to extinguish fires without causing such damage. Those who cannot do the latter and do not want the former should stay silent.

The ECB is accused of playing the role of an economic government of Europe, but has not been legitimised by the parliaments to do so. This argument assumes that when the democratically legitimised politicians decided to set up a joint and independent fire brigade, they had no idea what it meant to put out a fire. It is argued that, although a fire brigade was founded, it was not given the fundamental right to use the amount of water for extinguishing the fire at any time as it deemed necessary in the event of a fire. However, anyone who, in the event of a fire, first wants to initiate a democratic voting process on the amount of water to be used to extinguish the fire for the purpose of legitimation, is deliberately taking the risk of not being able to control the fire at all.

Anyone who wants more than just a change in the ECB’s mandate, namely the abolition of the ECB or the euro, must explain how they intend to extinguish the fires that may result from this abolition itself. It is no use thinking only in abstract terms about the best fire brigade when you are faced with a situation that has evolved historically, though it has got itself into a mess. It is in a mess because the fire protection rules don’t work, i.e. the contracts surrounding European monetary union are flawed. The judgment of the BVerfG has not helped to make the situation clearer because it blames the fire brigade for the damage caused by the fire hose without pointing out the inadequate fire protection rules for which the fire brigade is not responsible.

One should also always bear in mind that democratic legitimacy does not prevent decisions from being taken that could ultimately bring down democracy itself. An uncontrolled break-up of the euro zone with an enormous increase in unemployment would not only give a boost to extreme nationalist forces in Germany, but would also endanger democracies in many countries. What good would it then do the citizens to know that the decisions that led to the end of democracy were at least democratically legitimised?

We are not interested in giving a TINA (There is no alternative) principle the floor or in relying on a benevolent dictator on monetary policy. However, there is a logic in the economic relations between democratically constituted states which must not be overlooked when establishing the institutional rules under which these relations are to be conducted. This logic is worth considering in principle – at least as long as the globalised economy is not confronted with a democratically elected global parliament.

The logic of international trade relations

If all the democracies in the world want to trade with each other, it seems that they must agree on general trade rules that all parliaments can discuss and decide on, which would satisfy democratic legitimacy. It is difficult, however, when all the world’s parliaments approve or demand a policy from their respective governments which, for logical reasons, cannot work across all countries. Mercantilism, i.e. the attempt by countries to have absolute advantages in trade and to achieve balance of trade surpluses, is the classic case where things go wrong exactly when everyone tries the same thing. Then it is of no use that mercantilist trade rules have been democratically legitimised in all countries: they fail quite irrespective of their political origins.

If, for example, all countries simultaneously try to promote their car industry with high subsidies, this automatically damages the domestic economy, because every state is squandering its resources unsuccessfully. If all national parliaments understand this, they will probably find it sensible to set up an international institution to ensure that such a mercantilist subsidy policy is prevented from the outset.

If an international institution is then set up to counter such undesirable developments, the national governments and parliaments must cede power to this institution so that it can fulfil its function. In Europe, for example, it has been agreed – politically fully legitimised by the national parliaments – to create a single market. And an institution (the European Commission) has been given the task of ensuring that the Member States do not abuse membership by allowing national governments to grant advantages to their own companies that distort competition in this internal market. This is the European state aid regime, which gives the Commission the right to penalise Member States that infringe it.

Now we can argue about whether the Commission is fulfilling its mandate properly. It is also possible to take the dispute to court, but not, of course, to a national court, only to a European one. If all the Member States were to insist that their national courts can ultimately challenge the European judgments, the trade regime would be dead and all the advantages that the regime could reasonably have would be lost. Democracies do not, of course, have to be sensible. Those responsible in each democracy should only be aware of how much unreasonableness their democracy can endure before it is fundamentally challenged by its citizens.

An even more relevant example: let us suppose that all the countries of the world were trying to improve their national competitiveness by putting pressure on domestic wages, in other words, to gain absolute price advantages in international trade, thereby achieving trade surpluses and thereby achieving growth. So all countries were trying to devalue their currency in real terms, as economists call it. Logically, this cannot work. After all, a country’s competitiveness (= its real exchange rate) is not an absolute quantity, but a relative one. It can only ever exist in relation to other countries (an exchange rate does not consist of just one currency, but always of the ratio of one currency to at least one other). Again, if one were wise, one would have to realise that one needs an institution that tries to prevent countries from pursuing such policies, which necessarily damage domestic demand around the world and create deflation. Once again, it would be a question of giving this institution powers that would be removed from national institutions and subject to international jurisdiction.

The logic of monetary relations in Europe

It is no different with monetary relations in Europe. After many countries in Europe had decided in the 1980s to adjust their inflation targets to the German target and to aim for fixed exchange rates to the D-Mark, the question had to be answered whether German monetary policy with European implications or European monetary policy for Europe should be pursued in this system. Most countries opted for the latter, because German monetary policy with European implications for the economy in Europe as a whole could only be appropriate at one time or another by chance. Consequently, attempts were made to persuade Germany to support such a monetary policy system as well, whereby part of the economic policy would then be taken over by a European institution.

Germany’s democratically legitimised institutions have agreed. And they have also agreed, even insisted, that European monetary policy should be executed day by day by a politically independent institution, the ECB. To stick to the metaphor, the European partners have set up a European fire brigade; they have also provided it with access to water. And Germany insisted that no-one should be allowed to interfere with the way this fire brigade puts out fires.

Nevertheless, it must also be possible to criticise an independent organisation at European level. However, anyone who criticises it for causing damage when it turns on the fire hose is making it too easy for themselves. Anyone who thinks that an excessive amount of water was used must give a good reason for this. In any case, one cannot conclude from the damage caused by a fire hose in one room of a burning house that the overall use was disproportionate. You have to ask all tenants and fire-fighting experts if you want to be taken seriously and arrive at a balanced judgment.

One can still be of the opinion that the ECB exceeded its mandate and made other serious mistakes. Firstly, there is a regular system of reporting and discussion between the ECB and other European institutions for this exchange of views. What is said there and how the ECB justifies its actions is publicly available. Secondly, for more serious cases of litigation, there must be a jurisdiction to which this independent institution is subject. But, of course, this must be a court at European level and that is the European Court of Justice (ECJ). Even if one is of the opinion that the ECJ has done a lot of things wrong in the past in many individual cases, it remains irrefutable that a genuinely European institution such as the ECB has legal responsibility only at European level and nowhere else.

You can also reject the whole European apparatus in order to regain national sovereignty. Then you have to leave the EU and strive for self-sufficiency. Anyone who does not want self-sufficiency should look to Switzerland before leaving the EU in order to assess how sovereign one really becomes by taking such a step. Switzerland, a country that considers itself to be immensely sovereign, is always following European lines, even in the detail, because – in the eyes of its elected politicians – the economic advantages outweigh the loss of sovereignty. The United Kingdom is facing the same choice, and it will be seen that in a few years’ time economic reason will triumph there too over supposed national self-determination.

Nor, in view of these interrelationships, must we refuse to answer the question of how international agreements on genuinely global issues such as climate protection are to be reached if we reject the cession of power to supranational institutions even in monetary cooperation.

The judgment of the Federal Constitutional Court remains a heavy burden for the management of the Corona crisis, from which we cannot draw any positive conclusions. Anyone who considers it “from the point of view of the democratic sovereignty of the people” in any way laudable that an attempt was made to show a hard limit to the ECB’s current power, accepts that the ECB was thereby weakened in the middle of the biggest economic crisis of the post-war period. If this weakening leads to reduced monetary policy support and therefore to even more crisis-related unemployment in Europe, which is to be feared, this is likely to fundamentally endanger “democratic sovereignty of the people”.

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