The battle of the euro – how much will Germany stomach?

Ever further union

Our European neighbours used to sneer at us Brits for our apparent obsession with World War Two. But the unfolding Eurozone crisis has shown that those same feelings have been always been present in continental Europeans, they just hid them behind a wall of rhetoric about shared futures and broad smiles at places like Maastricht. The question of wealth has shattered the façade.

Back during the wars that it’s now ok to mention again, the Germans used to worry about fighting on two fronts, quite rightly as it turned out. Now the struggle over the future of the euro is also settling down to a war on two fronts: the monetary and the fiscal. At the heart of the struggle is the question of whether, and if so, how German wealth can be transferred to heavily indebted PIIGS.

On the monetary front the Germans are trying to hold the line that the job of the European Central Bank is to fulfil its mandate of price stability.

On the other side of the hill are those – the PIIGS, most eurocrats (though few have the bottle to stick their head over the parapet), the Obama administration, and the British government – who think it should be focusing on employment or GDP growth. To accomplish this they want the ECB to print money which, the Germans believe, would be inflationary and scupper the ECB’s price stability mandate.

This is what lays behind the bond buying plan which the ECB announced recently.

When yields on Spanish or Italian bonds reach a given level the ECB will step in to buy these bonds with newly created euros in an attempt to drive these yields down. Crucially, the programme is, on paper at least, effectively unlimited. Under this programme the ECB can expand the monetary base of the eurozone as much as it likes as long as it is used to buy the sovereign debt of PIIG – something which isn’t in short supply.

The other front, the fiscal front, has also been far from all quiet lately. The German Constitutional Court recently ruledthat the European Stability Mechanism does not violate the country’s constitution. This gave the green light for a program which will see Germany liable to bail out stricken PIIGS directly. The German judges did leave one potential poison pill however; they ruled that any increase in German liabilities beyond €190 billion be subject to a vote in the Bundestag.

Both the ESM and unlimited bond buying represent ways by which German wealth can be moved to PIIGS. The ESM is a frontal assault while Mario Draghi’s bond buying is an oblique approach. Creating money does not create wealth, it only redistributes it. In this case debtors would benefit from having a devalued currency in which to pay back their creditors. In many cases the debtors are PIIGS and the creditors are German. Either way, the result is the same.

Last week the BBC broadcast a show about John Maynard Keynes. The host, Stephanie Flanders, attempted to draw parallels between the reparations imposed by the Allies upon Germany at Versailles at the end of World War One (which Keynes famously opposed) and the demands made by Germany now for fiscal restraint in PIIGS in return for their money.

This is a pretty inexact comparison. The war debts of the Allies were exogenous to the German economy; they were just dumped upon it in 1919. The debts of PIIGS, by contrast, were incurred by them quite consciously. Nothing the Germans did made the Greeks promise to pay pastry chefs and hairdressers to retire at 50 on 95 percent of their final salary.

A more exact comparison, in fact, in comparing the sudden requirement to pay exogenously incurred debt which Germany faced in 1919, is with Germany now. As at Versailles, Germans are being asked to foot the bill for the spending decisions of others.

Given the aggression of Wilhelmine Germany you could even argue that ‘reparations’ are less justified now. Germany’s invasion of Belgium in 1914 might have necessitated Britain’s war expenditures, but what German action could conceivably have necessitated the Irish tripling their welfare budget?

Germans seem to have some inkling of this. The court case against the ESM was brought after a petition was raised with 37,000 signatures. According to a recent poll, 49 percent of Germansnow see the EU as a hindrance.

Keynes wrote of Versailles that “If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp.” This is not to say we are about to see a rerun of 1933 in Germany, but it is worth reflecting how long Germans will continue to abide by the economic and political arrangements of the euro and EU that exist to redistribute its wealth to others.

This article originally appeared at The Commentator

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