So “Merkel acts to save the euro”, as various British headline writers misleadingly put it. This action consists of proposing that the 17 eurozone states make a side-agreement – therefore not requiring a full Inter-Governmental Conference – to have a European authority scrutinise their budgets and fine them if they run big budget deficits. Crucially, this would be approved by qualified-majority voting rather than unanimity, so there would be no national veto over the sanctions. It is somehow amusing how literally every great and little issue in the European Union seems to end up in a row about qualified-majority voting. Of course, this is an example of the basic truth that politics is about power. But it is in practice pretty rare that the distinction matters much.
Now, don’t kid yourself that any of this is going to happen quickly. All 17 will have to get round a table, agree, ratify, etc. Although Merkel apparently said that it wouldn’t affect German sovereignty (I’m moving home and reliant on spotty Internet connectivity, so I don’t have her actual words to hand, so this may be wrong), I find it hard to imagine that the same little caucus of law professors as always will not demand that the Constitutional Court rule on the matter, so we’ll probably be waiting a good long time while the sages of Karlsruhe mull it over.
But speed is not really the biggest problem here. It’s a big problem – one of the underreported issues in the mainstream media is the degree to which this crisis is still about banks and the dread of a run on the banks, and few things move faster than a bank crisis. Here’s a data point – the volume of funds banks (and big industrial companies that happen to have a bank licence somewhere around, like Siemens) are holding on deposit at the European Central Bank, for fear of putting them anywhere else, is spiking. But it’s not the only problem with this proposal. The problem with this proposal is that it is simply irrelevant in terms of its content.
Had it been in force through the 2000s, what would have been different? It would have been much easier to sanction the decade’s violators of the Stability & Growth Pact – Germany and France. Of course they got sanctioned anyway, but perhaps they would have had to pay a fine. Let’s be charitable for a moment and assume that this would indeed have caused them to run a lower public sector deficit. This would have changed what, precisely? Had it depressed internal demand in Germany, all other things being equal, it would have caused Germany to increase its trade surplus. A bigger trade surplus implies a bigger deficit elsewhere, and it also implies that German and French banks would have lent the private sector “elsewhere” the money they needed to buy the additional exports. An additional problem might have been that, had German bonds been in shorter supply, investors would have sought other AAA-rated assets and piled up even more bubbly mortgage-backed securities, which the banks would have been delighted to sell them.
Perhaps lower deficits in Germany or France would have inspired German and French consumers to spend via the magic of Ricardian equivalence, but this does feel awfully like assuming a pony. You can argue about that.
But one thing this proposal would categorically not have done is to stop Italy or Spain or Ireland running up more public debt. Public debt fell in these countries from 1995 to 2007. Even Portugal and Greece didn’t exactly explode. Ireland would still have a budget surplus if it hadn’t massacred itself to save the banks (in part because the ECB wouldn’t help). Greece, well, perhaps, but it seems to be clear that just yelling at the Greeks is insufficient to fix Greece’s problems.
We’ve had a massive asset price bubble, funded by an explosion of private debt, largely borrowed from a few huge banks that grew to enormous size processing the international settlements required by the huge intra-eurozone trade imbalance. But this proposal says nothing about asset prices, private debts, banks, or trade, and very little about growth. Instead, if we were to try to reverse engineer this proposal’s purpose from its design, we would have to conclude that the source of the eurozone crisis is that the German Government has too much debt.
And I think we can all agree that, whatever explanation you prefer for the crisis, that isn’t it.
There are other problems, too. The combination of “Durchgriffsrechte” – rights of direct intervention – with no eurobonds has toxic politics, as it gives whoever will “durchgreifen” power without giving them any responsibility, and also doesn’t give the other eurozone states any benefit (like lower interest rates) in exchange for this concession. It seems hard to imagine why anyone would accept this.