Heiner Flassbeck – Final countdown: Change the EU now – or never

It must finally be understood that the EU Treaties are completely unsuitable for the functioning of monetary union. Since the Dublin Agreement on immigration is also obsolete, a final attempt should be made to adapt the treaties to reality.

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


French Finance Minister Bruno Le Maire gave the Financial Times an interview in which he stated clearly that, given the gap in competitiveness between Germany and the other European Monetary Union (EMU) nations, it is “impossible to continue” and that for France the introduction of the euro zone budget is “non-negotiable”. He also stressed that France regards the agreement with the Chancellor in Meseberg as a “breakthrough” and strongly criticises those countries that are already opposing it.

That is far stronger message than what has been issued by France in the past. It almost seems as if Macron and his government, after initial criticism of Italy, have understood that Italy, with its opposition to fiscal orthodoxy, is an important coalition partner in the poker that is on the agenda in Europe these days. This could lead to the final countdown, showing whether the EU and EMU are at all capable of correcting the mistakes made in the past.

Contracts must (can) be changed

If there is one sentence that aptly describes the critical situation in Europe, it is the refrain that we hear over and over again: European treaties can never be changed, because we can never again reach a consensus among all states. But if that is the case, then Europe is dead anyway, because laws that cannot be adapted to new circumstances are an unbearable straitjacket in the long run.

In addition: In Germany, a host of constitutional lawyers are once again warming up, who – spurred on by almost the entire German economist orthodoxy and financed by rich nationalists – have nothing else in mind but, with the help of the Federal Constitutional Court, to exclude any joint liability for individual countries, even in a crisis. At some point in time, the Federal Constitutional Court will bow to this onslaught and force German politicians to implement the absurd European rules point by point. The European economic crisis triggered by this dramatic constitutional crisis in Germany is hardly imaginable.

To put it bluntly, the legal situation, as it currently stands, is completely absurd. The European Central Bank (ECB) for example, is already violating the EU treaties in order to adopt a sensible economic approach. If it had adhered to these treaties, the EMU would probably already have collapsed. Although this was the obvious policy, the response from Germany´s political parties has been hostile, branding the ECB as a lawbreaker. Many countries openly violate the Stability and Growth Pact (including, of course, Germany with its exorbitant current account surplus) without any consequences. This has been due to the pragmatism of the Commission in recent years, but it is not a sustainable situation in the long term.

Five central points

There is no way around the mammoth task called “fundamental treaty change” if Europe is to survive. For the sake of simplicity, here are the five crucial points, which must definitely be adapted to reality as soon as one dares to completely overhaul the treaties:

  1. The conviction underlying the Maastricht Treaty that it is possible to guarantee a uniform rate of inflation simply by setting up an independent central bank with a clear technocratic mandate is wrong. The theory behind this idea, monetarism, is now rejected by practically all the world’s central banks as the basis for their actions. It has had to give way to a pragmatic policy of economic management that no longer relies on a purely technocratic approach to monetary policy.

2: Since there can be no uniform control of inflation via European monetary policy, the EMU needs a coordination of national wage policies in order to be able to function at all. As the link between unit labour costs and inflation is extraordinarily close, all member states must undertake to set out in wage guidelines that the nominal wages negotiated at national level will increase each year at about the same rate as national productivity plus the European target inflation rate.

  1. All the rules governing fiscal policy are obsolete and must be adapted to the findings of sound economic theory. This applies both to the Maastricht Treaty itself and to the subsequent rules in the so-called Growth and Stability Pact. The view underpinning these treaties, that government deficits are relevant for the development of inflation and for the “economic stability” of the member states, is incorrect. Government deficits must always be assessed in the overall context of the financial balances of all important sectors (government, enterprises, private households and foreign). If it is to be imposed on the EMU member states to keep public debt within certain limits, it must also be determined by which means and rigour the states then force companies back into the indispensable role of the debtor for the economy.
  2. The no-bailout clause for states already enshrined in the Maastricht Treaty and the explicit ban on the ECB supporting individuals states financially have proven to be completely impracticable and even dangerous. Instead, it must be stipulated that states may support other states in special circumstances. But it is even more important to make it clear in a new treaty that the ECB is the central bank of each individual member state and must therefore act as lender of last resort for all of these. This means that the ECB must ensure that financing conditions for companies and governments throughout the euro zone are at a uniform level, irrespective of the country, by intervening in the capital market.
  3. The Dublin Refugee Agreement is obsolete and needs to be completely revised. As the new Italian government rightly points out, Europe cannot systematically impose responsibility for the reception of refugees and other humanitarian measures on countries that happen to be on the southern border of the EU. Quotas (depending on the population) must therefore be set for the reception of those whose applications for asylum are likely to succeed. If certain countries do not participate, they must be excluded from all EU funding measures immediately and in the future. In addition, the EU must ensure that every person arriving receives adequate basic financial resources, which are in a certain proportion to the social security of the host country. For all EU countries, half of the median income per employee is considered and enforced as adequate social security.

You can see how incredibly ambitious the attempt to create a realistic economic policy perspective for Europe is. Of course, it is not so much the ambition of this attempt itself, but jettisoning the neo-liberal status quo that makes one doubt that something like this could even be enforced to some extent. However, because European and especially German politicians are acting extremely unreasonably, one can no longer imagine a long-term future for the EU, even with Europe´s best will.

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