Unrepresentative Government – And how Germany is killing the Eurozone

A lack of representative governance is playing havoc with the future of the Eurozone, and its cause is a democratic initiative from the German high court whereby it placed limits on the power of the executive to give away its authority to govern without reference to the elected parliament. The constitutional court ruled that the Bundestag must be given a full vote before further power is transferred to Brussels, and further stating that ultimate sovereignty must rest with the member states.

German parliamentary sovereignty is now threatening the future of the Eurozone, and by extension the wider economic recovery of EU as a whole.

A nation-state is effectively a collective agreement that a people are a family, who have sufficient trust in each other to accept indirect governance from representatives of the prevailing will of a majority, it is also a collective agreement to work together for the benefit of the whole rather than the individual. In short it is a marriage which results in a transfer union.

Inevitably there will be richer and poorer parts of the nation-states economy, and if that economy is not to tear itself apart from the strife resulting from a polarising divergence in wealth then there must be a compact agreed by the people that national taxation will be redistributed in a manner the assists less advantaged areas. In short the rich pay for the poor.

This compact is seen in every developed country, by way of social benefits applied equally throughout the territory, by way of regional development funds to promote wealth creation in poor performing areas, and by concentrating public sector activity in areas of reduced economic potential. It is fundamental to the cohesion and harmony of the society.

This is where the federalist ideology of the EU begins to face problems.

First, there is a massive disparity in wealth between the nations that supposedly have the aim of becoming a single ‘people, far greater in fact than is true of the wealth disparity within the constituent nations themselves.

Second, there is no single ‘people’ within the EU, thus there is no collective agreement to accept governance because it is not seen to be representative, and likewise there is no collective agreement to work to the benefit of the whole because that lack of representation prevents trust that paying money to others will be both used responsibly and reciprocated in time of need.

This is where the implementation of the EU begins begins to face problems.

First, to get around the problem of a transfer union being unacceptable to the separate peoples who have no collective sense of ‘family’ the Eurozone was created as a monetary union instead of an economic union. The single currency was to apparently able maintain its perceived value purely by having agreed targets on a budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of GDP, low inflation, and interest rates close to the EU average. So regardless of the wealth disparity, regardless of the size and acceptance of the black economy, regardless of the potential for abuse from weak members exploiting the low borrowing rates of the strong, and regardless of the inability of national governments to use the economic levers available to sovereign nations to ameliorate the boom-n-bust cycle, the Eurozone was somehow supposed to work.

If the effectiveness of a system can be be judged by its response to a crisis then monetary union can be judged to be a massive failure. Germany’s massive and competitive export driven economy has priced other members out of the market, as there is only one currency value across the Eurozone. Likewise the weaker club-med economies bypassed their lack of competitiveness by massive borrowing at artificially low rates on the back of franco-german economic strength. The result is clear; the PIGS have to rollover 700bn Euros of government debt before the end of 2011 at a time when the global financial crisis has killed economic growth across the EU, and to make things worse Germany is demanding fiscal austerity in return for agreeing to bail out their beleaguered economies, an act that will further depress economic activity and thus reduce their ability to rollover debt. The PIGS cannot pay the money back because there is no growth to do so, and they cannot borrow any further because the markets realise that any further lending is very risky and are thus charging punitive rates. The potential for a debt-deflation spiral hovers over club-med.

Second, the result of the fundamental flaws of monetary union have forced the peoples of the non- Mediterranean countries to club together 700bn Euro’s of their money as surety against a sovereign debt crisis within the PIGS. Worse still, the survival of the Euro and its fixed internal exchange rate is forcing the currently uncompetitive PIGS to accommodate the crisis by shedding jobs rather than devaluing their currency.

So we have a situation where the peoples of europe are being driven further apart by distrust and ill-feeling, the German people in particular are highly reluctant to give money that can never be paid back to people they don’t trust to act responsibly, and likewise the Greeks are up in arms at the prospect of having their economy trashed by fiscal austerity imposed on them in lieu of a devaluation.

And here we come back to the German constitutional ruling on parliamentary sovereignty.

The logical actions to take in this situation are twofold:

1. Allow Greece to restructure its debt and effectively leave the Eurozone

2. Bring about economic union of the Eurozone and accept a tacit transfer union

However the first is not possible because France is ideologically attached to the political ambitions that a united Eurozone represents, and the latter is impossible to entertain because the German Chancellor will get drummed out of office if she asks the Bundestag to agree to economic union with countries deemed pathologically irresponsible.

It would be easy to see France as the idealist in contrast to Germany’s pragmatism, but in reality France occupies both those positions by holding to the ambitions of ever-deeper-union and holding the solution to a flawed monetary union, Germany is merely a country trapped between those two positions.

The scale of the problem Germany is posing is aptly illustrated by comments from George Soros:

Legendary investor George Soros has called on Germany to leave the euro unless it willing to embrace a growth strategy, describing Berlin’s austerity doctrine as a threat to democracy and political stability in Europe.

“German policy is becoming a danger that could destroy the European Project. A collapse of the euro cannot be excluded,”

“Unless Germany changes policy, its withdrawal from the currency union would be helpful for the rest of Europe. At the moment Germany is pushing its neighbours into deflation: this threatens a long phase of stagnation, leading to nationalism, social unrest, and zenophobia. It endangers democracy,”

Mr Soros said Germany was treating the deeply-flawed Maastricht Treaty as it were a “sacred text”, warning that monetary union cannot endure for long as a narrow construct based on debt and deficit ceilings. He said wage rises in Germany are imperative to help lift the whole eurozone, allowing peripheral economies to claw their way out of trouble without fighting the extra headwinds of deflation.

“The truth is that what we have in Europe is not a currency or sovereign debt crisis as many people think, but a banking crisis,” he said. Mr Soros argued that the weaker states cannot easily fund their deficits any longer because some banks are purchasing fewer bonds as a result of damaged balance-sheets.

Are the German people to be blamed for being unwilling to bail-out the club-med nations? Possibly, it is after all their job to inform their elected representatives about their willingness to join as one with another people, they should have considered the consequences beforehand rather than complain about them now.

Is the German parliament to be blamed for its reluctance to rubber-stamp the economic union that might save the political ambitions implicit in the Euro? Patently not, it is their job to represent their electorate, and if their electorate won’t wear it then they should not agree to it.

Is the German constitutional court to be blamed for introducing a ruling that makes it difficult for the executive to overrule the will of the people and their elected representatives? Patently not, an executive that is not accountable to, and acts against the wishes of, the people is plainly a tyranny.

Is Chancellor Merkel to blame for being unable to force Germany to accept the loss of sovereignty necessary to save political union within the EU? Yes, absolutely, she sits in the top-spot and must carry ultimate responsibility for presiding over a government that has acted in a way perceived to be inimical to the interests of the people she is supposed to represent.

What can Germany do to remove itself from this bind? Well, it could follow Soros’s advice and exit the Euro, but it might be a good idea to first consult the people on that most fundamental of questions; “Who governs me?” If the answer is “my” government then clearly Germany should exit a what is a political project, if not then it is time to admit that the Bundestag cannot be sovereign, because to quote Gladstone:

The finance of the country is intimately associated with the liberties of the country. It is a powerful leverage by which English Liberty has been gradually acquired … It lies at the root of English Liberty, and if the House of Commons can by any possibility lose the power of the control of the grants of public money, depend upon it, your very liberty will be worth very little in comparison …That power can never be wrenched out of your hands… That powerful leverage has been what is commonly known as the power of the purse – the control of the House of Commons over public expenditure – your main guarantee for purity – the root of English liberty. No violence, no tyranny, whether of experiments or of such methods as are likely to be made in this country, could ever for a moment have a chance of prevailing against the energies of that great assembly. No, if these powers of the House of Commons come to be encroached upon, it will be by tacit and insidious methods, and therefore I say that public attention should be called to this.

So what will it be, a shrunken post-crisis Eurozone with economic union, or a return to a softer monetary union based on the Ecu ‘basket of currencies’ held by sovereign nation states?

Update – 25/06/10

Interesting UKDF blogspot article on how the Eurozone crisis is causing Germany to build a partnership with Russia, to the unease of both France & Poland:

The Germans have been developing economic relations with Russia since before the Soviet collapse, but the Greek crisis forced them to reconsider their relationship with Russia. If the European Union was becoming a trap in which Germany was going to consistently subsidize the rest of Europe, and a self-contained economy is impossible, then another strategy would be needed. This consisted of two parts. The first was insisting on a restructuring of the European Union to protect Germany from the domestic policies of other countries. Second, if Europe was heading toward a long period of stagnation, then Germany, heavily dependent on exports and needing labor, needed to find an additional partner — if not a new one.

14 responses to “Unrepresentative Government – And how Germany is killing the Eurozone

  1. Even if they wanted to leave the euro, I don’t see how any country can do so in the midst of a recession/crisis. Greece can’t leave the euro because everyone still has euros. If they establish 1 euro = 1 new drachma, people will keep their euros in cash, wait until 1 euro becomes worth 1 trillion new drachma, and only exchange as necessary. In fact, everyone would continue to use the euro unless soldiers shot them. However, the soldiers would still want payment in euros. Greece’s debt would remain denominated in euros.

    If Germany left the euro and established the new mark at parity, it would quickly rise until a new mark was worth 100 trillion euros. While the euro was devaluing, people would change their euros into new marks as quickly as they could, further contributing to the devaluation of the euro. This cannot be stopped while Schengen is in force. Thus the Eurozone would simply start using the new mark. Although, people might also switch their euros into dollars and pounds, which may be a good thing. On the whole, countries can only leave the euro in good times but not in bad.

  2. They may not have a choice, if Spain is forced to apply for the bail-out fund it could trigger a crisis in confidence that would push borrowing rates sky high throughout the Eurozone, because it would announce that Greece was not a one-off event in a country too small to matter, it is a mortal problem endemic to all the PIGS.

    Likewise it is unlikely that Germany could tolerate providing another bail-out fund for Spain, simply as the German people would not wear it.

    One of the objectives of the recent Euro summit was to discuss the creation of a ‘graceful’ mechanism by which countries could exit the Eurozone.

    There really is only one future for the Eurozone, and that is economic union, which if impossible to agree for political reasons will signal that it is time to return to the ECU and its ‘basket’ of currencies concept, i.e. a gradual disengagement from the fixed exchange rate.

  3. Very nice work, JBT. The paragraph on what took the place of a transfer union is really first-class, a reminder that the economic and foreign-policy journals ignore “amateur” blogging at their peril.
    Starting with monetary union was always a bad idea, if one wanted a fairly straight historical line from the base built by Spaak et al. The problems with that were twofold anyway: first that it was a top-down project run by elites in charge of centralized political and economic systems most easily enlarged further and integrated in an era of dirt-cheap energy inputs (first coal and then the golden age of petroleum), second because it created a structure easily drawn in by the gravitational pull of French great-power politics and German economic recovery.

    Deconstruction of the euro would be ugly, unless planned out in public by the members, for the sorts of reasons XFSF mentions. But in the longer term I don’t know that it means the failure of “Euopre” any more than did the slow end of the Holy Roman Empire — much less so, possibly, since that helped yield the angry Great Power states who gave us two world wars (three if you count Napoleon’s shenanigans.) This was a bad model; a functional “Europe” will have to come from the bottom up, and along the way healthier national states whose political economy si less skewed to financial elites (and I don’t mean socialism, certainly not as we’ve seen it, I mean curtailing the combined power of central bankers and financial-instruments rentiers to run a kind of bastard feudalism at the expense of many national economies’ structural health) can play an important role. Ironic, but there you are. We haven’t even “perfected” national states based on ethnos/federalzied ethnos-plus-immigration, so getting out beyond those bounds of connection yet wasn’t on the cards.

    Some loosely connected thoughts:

    A number of professional pundits have mentioned as a danger of Eurozone disintegration the old core of the postwar European Project, namely keeping the French and the Germans from killing each other (sometimes French-v-French and German-v-German too) as they did at regular intervals from the Wars of Religion until 1945. The Eurozone in particular emerged, partly by the inertia of circumstance, partly by convergent designs, and on rare occasion deliberate strategic choice, as the main alternative to that: a return to Frankish power at the center of west-central Europe. By “Frankish” I’d say a concatenation of French, western German (plus their cultural bretheren in western Berlin and along the Baltic coastline), and Walloons. Indeed some conservative German politicians have offered that kind of “Kerneuropa” up as a Eurozone alternative in think-tank discussion, marrying the general economic resources of those regions, reinforced by France’s expeditionary military power (incl. nukes) and the weight of German central banking (in bank-balance terms, from its start the Euro has been very much a “Deutschmark Area” with real currency integration and budgetary teeth.)

    One key question is whether an end to the Eurozone will crack or reinforce that alternative. I think one can see the jockeying with regard to Russia in those terms. Germany does have energy concerns which exceed those of France (with its nuclear grid and overseas oil interests.) In general, I think neither public nor policy opinion in Germany favors greater closeness with Russia. But it is important to show France, whose historic strategic attitude towards Germany is either to weave it into a Frankish core (from the Confederation of the Rhine to the Eurozone) or to checkmate a Germany not closely bonded to France with a Russian alliance.

    If it breaks, how does it break? A lot depends on the state (or absence) of a Franco-German falling out. Otherwise I would guess it fractures much more on a north-south model than an east-west one. In that case, some kind of Anglo-Dutch-German-Polish axis (say that five times fast) makes sense as an anchor. To the south centuries of history, strategic habit, and sheer geography (physical and cultural) start to play in again, and you have France, Italy, possibly either Russia or Spain finding common interests and havinga relationship with the other Mediterranean shore where powerful ties of trade and migration run up against renewed conflict with the modern equivalent of “The Turk,” perceived as violent Islamists plus big demographic shifts in favour of the Med’s southern shore. (Possibly economic ones too if the states of the Maghreb figure out how to sell power from massive “backyard” Saharan solar grids to depopulating southern European states.)

    If not north-south, then I’d think it looks loosely like East Asia, with that Frankish “Kerneuropa” in the Chinese role. In that instance, I think Britain, the Netherlands, and Spain, would do well to embrace the big ironies that often drive significant historical change and help integrate a “European rim” including themselves, the Scandinavians, Ireland, and Portugal.

    But really, it’s hard to see how it will turn out at the moment, there are a gloriously messy number of moving parts, and stubbornness, skill, or stupidity on the part of any of them can have real effects on the outcome.

  4. My thanks, the problem we all suffer from when trying to read the runes of european politics is that the whole thing is so damned opaque, which is precisely the problem, it must be opaque because it is patently unrepresentative, and undemocratic to boot!

  5. Well, amen to that — nothing would prepare someone for a Brussels posting like reading up on the mid-medieval conduct of Imperial Electors. Hell, in their better moments they look like the Levellers by comparison ….

  6. Before this marriage took place the parties drew up a legally binding pre-nuptial agreement that they would each retain control over their own income and expenditure, within certain constraints, and above all they would each remain responsible for their own debts. The terms of that solemn agreement have already been broken in several different ways.

    It remains to be seen whether the German constitutional court will insist that the agreement must stand. So far, the judges have only refused to grant complainants emergency injunctions to prevent German participation in the bailouts, they have not delivered a final verdict on their legality under EU law and the German Basic Law.

  7. Indeed, it will be interesting given the discontent among the German electorate if the bailout fund is called upon by Spain whether they will choose to set aside Bundestag sovereignty or force members (possibly themselves) out of the Eurozone.

  8. ” Are the German people to be blamed for being unwilling to bail-out the club-med nations? Possibly, it is after all their job to inform their elected representatives about their willingness to join as one with another people, they should have considered the consequences beforehand rather than complain about them now. ”

    The German PEOPLE were NEVER ASKED !
    Not asked if they wanted to have EU ” citizenship ” forced upon them…and not asked if they wanted the Euro ! The Euro was forced onto Germany by the French in return for France accepting re-unification. The deal ( now ignored ) was that the Maastricht treaty would protect German taxpayers from abuse. The un-elected Kommission have clearly acted in an ilegal manner…but have granted themselves immunity from criminal prosecution ( as all dictatorial regimes in history have done ).

    • Thank you for your reply Johannes, there is obviously a lot of anger from within portions of the german electorate, I guess I am curious to find out how typical this is of a broader meme of german society……?

  9. As a member of a “broader meme of German Society” who, although english by birth, has lived in the country for 30 years, may I express my view. I am not as economically literate as some of the previous posters but I do have some insight as to how the average German around here (Koblenz) feels. When the Euro came into being, it was understood that it was esssential for each member country to abide by the “entry qualifications” relating to debt levels. I think most people were somewhat cynical about the ability of Italy, Greece etc to achieve and maintain these requirements but for the sake of getting the project off the ground there was a lot of shoulder-shrugging and “I don’t believe it but we’ll see).

    I remember also the widespread dismay even anger at the dumping of the Mark. Nobody asked us nor were we given the opportunity to vote on the matter. It was particularly the feeling of the older generation who had spent their working lives in the 1950s and later reconstructing West Germany often in hard and difficult circumstances to create a leading idustrial nation with a currency admired the world over – the Mark.

    Over the last ten or so years, in order to counter the problems brought about by re-unification with the East and general world economics, Germany had to tighten its collective belt and become leaner and fitter. Personally, it has not been a particularly easy time. Workloads have risen, pay has been squeezed or frozen but I have been lucky to have had continuous employment. AS a nation (excuse me here, being naturalised I am probably more german than a german!)we have been exhorted to stick to the financial rules of the Euro and be good europeans.

    Just as we are reaping the benefits of our sacrifice, we are told that we are making things bad for the Greeks, Spanish et al because of our work ethic and exporting too much and not spending enough money on consumer goods and…

    German money has been used to bail out Greece though according to even the German papers this is only a temporary solution. Now it is being said that we may have to do the same for Portugal or even Ireland. I don’t think darling Angela is going to run that one past the Bundestag whatever the Constitutional Court judges decide – it would be political suicide.

    Increasingly frequently and more among older people there is a spoken desire for a return to the tried and trusted DM. Whether this is a solution I don’t know but I agree with the opinion expressed by previous posters that it will be MESSY whatever happens.

    Richard A

    • Thank you for your insight, for while it is easy write about dry and dusty financial probabilities in reality so much depends on the character of the people, and the history that underpins their shared experience. You have the advantage on me in this situation, and it is much to my benefit to get an inside view of the framework of ideas that will underpin the German response to a failing eurozone.

      The recent failure of Chancellor Merkel in getting France to sign on to automatic sanctions, free of political interference, does increase the possibility that Germany might be the country to walk away from an unworkable monetary union the next time a southern member threatens to bring financial ruin down upon the rest of its members.

      Let us hope it will not be that bad, although I can certainly understand the attraction of a swift return to an independent Deutsche Mark.

      My thanks.

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