Ambitious Germany asserts its power

The battle lines are being drawn in the eurozone in response to a German policy proposal to have a so-called currency commissioner appointed with the power to oversee, and have the right to veto, member states' fiscal policy settings.

This controversial policy proposal has emerged just as it appeared the Germans were softening their stance on the conditionality to be imposed on Spain and other countries as they struggle to meet the criteria or timetable for bailout funding. It now appears that these concessions from Germany had strings attached, with some details of the German plans for the medium-term functioning of the eurozone beginning to emerge.

Ahead of the European Union summit, which starts tonight Australian time, German Finance Minister, Wolfgang Schaeuble went on the record to say that Germany wants to see greater fiscal policy coordination of individual country policy settings. The arbiter of what is right and wrong in an individual budget, or fiscally, according to Schaeuble, will be determined by the currency commissioner.

Schaeuble said, "we must now make bigger steps in the direction of fiscal union”. In hindsight, poor fiscal settings from most eurozone members were the main reason for the sovereign debt crisis, which in turn has driven the deep and protracted recession in the Eurozone.

The proposed policy change would see eurozone member countries have lesser power over their spending and taxing policies. This key aspect of the German plan is likely to meet with significant resistance from some eurozone members, including France, which is the second largest country in Europe. The countries that currently have the greatest fiscal problems and are therefore furthest away from moving their fiscal settings to a sustainable path are also likely to be reluctant to give the German proposal much oxygen.

At first glance, the German proposal seems a reasonable proposition given that Europe's problems now are linked to poorly framed fiscal settings and clear breaches of the 1992 Maastricht Treaty conditions on fiscal policy and the budget. From the current stand-point, the Maastricht criteria are almost laughable.

In relation to government finance, the Maastricht criteria were that for member countries, the budget deficit "must not exceed 3 per cent of GDP” and that the "ratio of government debt to GDP must not exceed 60 per cent.”

Curiously, it was the Germans who were one of the first of the original member countries to breach these rules, so their track record on fiscal management is not as pure as it may seem.

That aside, Germany's proposal for the currency commissioner extends to the point where it will have the right to veto the budget of a member country if it deems it to be inappropriate.

While the specifics of the functioning of the currency commissioner remain scarce, Schaeuble said, "the currency commissioner should have the power to reject national budgets that were not in line with the eurozone's strict fiscal criteria”.

When pressed on this issue, Schaeuble did not given any specifics on what the criteria would be or indeed, what the veto power would mean or the penalties that would be associated with such a result.

Schaeuble and the Germans more generally have been the most vocal critics of the bailout plans for other eurozone countries. His radical proposals are being seen by some as payback for Germany agreeing to allow the open ended bond purchases of the European Central Bank and the so called ‘line of credit' for Spain – policies that it initially opposed.

Germany has similarly been reluctant to allow for changes in the fiscal reform timetable and other conditions for the likes of Greece, Spain and even Italy, as those countries struggle under the weight of an economic recession, if not depression.

Amid all of this posturing ahead of the EU summit, there are some policy reforms where Germany is putting self interest ahead of the greater good. The two main reforms that Germany is reluctant to fast-track or even consider are greater banking supervision and having a single European bank regulator, and moving to common euro denominated government bonds.

While Germany has favourable economic and fiscal positions on its side at the moment, in working through proposals to fix the eurozone it needs to be careful not to antagonise other member countries with its cherry-picking of good ideas and rejection of others because they are not in Germany's self-interest.