Many in Germany can hardly hide their schadenfreude at the conflict in Britain concerning Brexit. But be careful, the real loser sits east of the Elbe.
Heiner Flassbeck is an economist, as well as publisher and editor of “Makroskop” and “flassbeck economics international”
Originally posted in German at Makroskop
Translated and edited by BRAVE NEW EUROPE
These days, many “Friends of the EU” in Germany and elsewhere are mocking Great Britain because the British government cannot seal a deal with the EU and the country is paralysed by mass hysteria instead of finding a solution. German centre-right politicians say that the British should be punished for daring to leave the union, while the German centre-left decries that we must seriously tackle a fundamental reform of the EU instead of hoping for a break-up of Europe. There is a major debate within the left because some people believe that Brexit proves that leaving the EU is “madness”. Perhaps the truth is in the middle or somewhere else.
The real failure
The contrary positions on the EU that are now in conflict in Germany do not really address the issue at hand. Neither can the EU be sacrosanct, no matter how it looks or behaves, nor can a break-up of the EU solve the problems it is currently confronted by. The left correctly points to the neoliberal mistakes in Germany, which have been and are being made completely independently of the EU. However, this side does not even sufficiently acknowledge that the situation in Europe has deteriorated under German “leadership” and that this is by no means a coincidence.
The repeated reference to the European Treaties and above all to the Maastricht Treaty, which had been signed by all member states, does not help in the least. The European Treaties are a direct result of German neoliberalism, which was promoted by the Christian Union (CDU/CSU) and Liberals (FDP) since the “spiritual and moral change ” at the beginning of the 1980s. Most member nations in Europe signed the treaties in the hope that things would somehow turn out well. It was expected before Maastricht that the Germans would have to be formally accommodated in order to persuade them to join the monetary union. In turn Germany would then adapt to a pragmatic interpretation of the treaties.
This was realistic, as can be seen from today’s flexible interpretation of the role of monetary policy – and the criticism of it. The European Central Bank (ECB) has relatively elegantly avoided the German corset banning state financing through its interpretation of monetary policy, which has meanwhile been confirmed several times by the European Court of Justice (ECJ) at the insistence of the German Constitutional Court. Quantitative easing was and still is a measure in the grey area of the treaties that was clearly sensible and yet was repeatedly attacked violently by the German political class and media.
When it comes to monetary policy, however, one must also bear in mind that twenty years ago it was politically taboo in Germany to even address the central bank in a political statement. Today every Bavarian provincial political prince is allowed to criticise the ECB, no matter how absurd, without the German Finance Ministry or the Chancellor’s Office exhorting all parties to exercise restraint in criticising an institution that is independent of politics. This, too, is a piece of European normality that pleasantly sets itself apart from German dogmatism.
The real European disaster occurred when Germany – large, but not yet so powerful – became the most important creditor and lender after the global financial crisis. Germany’s surplus position in foreign trade, which it had obtained through wage dumping in the first ten years of European Monetary Union, was decisive in this respect. Because Germany was the most important creditor nation in some countries’ dwindling capital markets, it gained EU hegemony without any action on its part. But the nation could not cope with this power in a reasonable way.
Because Germany is also doing relatively well in economic terms, a sense of superiority has developed in recent years that puts more pressure on Europe than anything else. On the one hand, Germans were and are hardly prepared to take note of the difficult, in some cases desperate, situation in other EU nations. Should the Germans accept that something is going wrong in other EU states, they claim that these states have not done their “homework”. Yes, in Germany nobody notices that it is not customary for civilised nations to assign each other homework.
But German dogmatism would not even have played a decisive role in the crisis if the European Central Bank had acted like a normal central bank. It would then have treated EMU member states that had difficulties on the capital markets as if it was their own central bank. But it did not, misjudging its tasks, instead dictating to them – as the International Monetary Fund does with crisis states – neoliberal conditionality that opened the door to German neoliberal dogmatism.
German spirit …
There is nothing to gloss over: The neoliberal spirit of the EU is at home in Berlin. In addition to wage policy and the labour market, the issue of state financing by the central bank is the crucial sticking point that will sooner or later lead to a rupture. A monetary union can only function in the long run if the joint central bank regards itself as the central bank of each individual country in every situation. But here, even more than with quantitative easing, the ECB is bound by the ban on state financing in the Maastricht Treaty from the German point of view.
But again, the German position is more than questionable. Here, too, it is debatable what the ECB should ideally do in a crisis, is compatible within the state financing clauses contained in the Maastricht Treaty. What the treaty precludes is permanent financing of public spending, because that was expected to lead to inflation. We have shown often enough that this assumption is incorrect, but the crisis is not even about that, but about something completely different.
Crisis means that the capital markets expect a country to stop repaying its loans taken out on the markets at nominal value in euros. If the central bank wants to counter this expectation in the same way as many central banks do every day with currency speculation, it must buy up government bonds from the country in question. Since we are not dealing with a currency, the yield on government bonds in EMU acts as a surrogate for assessing the movement of a currency because it affects the price of an internationally traded security.
If the ECB is “market maker” here in an extreme situation, it is correcting the expectations of the markets, which it regards as wrong or overshooting. In this way, the Swiss National Bank (SNB) has for years maintained the Swiss franc exchange rate and “finances” euro states at the same time, because it buys EU government bonds with the exchanged euros instead of holding them in cash. Why shouldn’t the ECB do what the Swiss central bank takes for granted? Obviously, it is not the SNB’s aim to provide public finance in the euro zone, but to maintain reasonable prices against irrational market movements and nothing else.
… or German demon
But the ” legalisation ” of this simple monetary policy operation will fail one hundred percent because of the German demon of the past ten years. Not only have no lessons been learned from the past, but further retrograde steps are already planned. Conservative German economists and politicians are convinced that a complete ban on ECB intervention is “needed” in order to make the EMU “safe in the future”. This means nothing less than that the very nation that caused the current economic misery now wants to destroy the last means of correcting this aberration. For the partner states, this means having to live with a treaty, which they never wanted in this form. No country had renounced having an effective central bank by signing the Maastricht Treaty. No reasonable person can want that, and the EMU cannot survive with such a misconstruction. Exiting the euro may be insane, but remaining is equally mad.
I can only repeat what I have often said: Anyone who wants to reform the EU does not have to move to Brussels, but to Berlin. Any German who questions the EMU because he dismisses Brussels’ view of the obvious defects in the EMU, must imagine what unfettered madness he would face with a German government that is no longer even integrated in Europe. Anyone who, like me, has consciously experienced how a permanent (unelected) coalition of “independent” Deutsche Bundesbank and arbitrary governments made one wrong decision after the other over decades is horrified when he imagines a German government “freed” from European constraints.