Germany has surrendered and the euro is saved. That seems to be the markets’ interpretation of last week’s ruling by the German constitutional court on the European Central Bank’s “whatever it takes” policy to save the single currency. The judges’ ruling essentially boiled down to this: “We don’t like what the ECB is doing. We think it illegal. But only the European Court of Justice can strike it down.”
Since the European Court is highly unlikely to accept this invitation, the ECB will be able to preserve its policy of Outright Monetary Transactions – essentially a promise to be the buyer of last resort for the bonds issued by eurozone countries. Had the German courts struck down the ECB’s policy last week you would have seen chaos on the markets. Instead, calm prevailed.
The ECB’s initial announcement of its bond-buying policy in mid-2012 was, without doubt, a turning point in the euro crisis – preventing the borrowing costs of Italy and Spain from soaring to unbearable levels. Now the ECB may be tempted to go even further. With the threat of deflation haunting Europe, the bank is under pressure to launch a European version of quantitative easing, imitating the US, Japanese and British authorities. Mario Draghi, the ECB president, wary of the reaction in Germany, has hitherto suggested that such a policy would be illegal. But now that he knows the German courts are likely to refer any such decision to the more integrationist ECJ, he may decide to be a bit bolder.
The court’s ruling has profound political implications. Germany seems essentially to have accepted that, even though the euro is Germany’s currency, its management is not subject to control by German institutions. Since the German representative on the ECB board is easily outvoted by the board members from the rest of Europe, German eurosceptics feel checkmated.
But European integrationists should restrain their cheers. They could pay a heavy political price for victories of this sort. The cost could be a steady undermining of the legitimacy of the European project and the euro in Germany, the EU’s largest state and strongest economy.
Two of the most respected institutions in Germany, the Bundesbank and the constitutional court, are now on record as registering profound objections to the policies underpinning the euro.
As long as the German economy is strong, such laments are unlikely to churn up mainstream German politics. But when things get tough, as they inevitably will at some point, the intellectual groundwork has been laid for a “stab-in-the-back” theory that will explain Germany’s problems by reference to the illegal and improvident acts of the European institutions.
In European countries that are already suffering economically, the political backlash against the EU and the euro is already rising. The EU’s own polls show the popularity of the union plummeting in core countries such as France, Italy and Spain. Henri Guaino, a close adviser to Nicolas Sarkozy when he was president of France, recently gave an interview in which he speculated gloomily: “Monetary policy mistakes can destroy a society.”
May’s European elections will provide a test of strength for anti-EU parties across the continent. Discontent with a weak economy and the euro is likely to merge with the growing backlash against free movement of people within the EU. This was shown in the weekend’s referendum that rejected the policy in Switzerland, which is not a member of the EU but is part of the free-movement zone.
The results of the European elections in May are likely to be a shock, with anti-European or borderline racist parties, such as the French National Front, winning or coming close to victory in France, the Netherlands, Greece, the UK and Austria. Such dramatic results could destabilise markets and will make it harder for centrist politicians to make the compromises that are always needed to keep Europe going.
In response to this Doomsday scenario, an optimistic pro-European could point out that, even if the anti-EU parties make big gains, there will still be a safe pro-euro and pro-EU majority in the European parliament once the centre-right and centre-left parties group together. As economies gradually recover, so the strength of anti-European forces could recede. Ultimately, the euro will not only have survived, it will emerge strengthened from the crisis, since key institutions, in particular the ECB, will have gained the powers they need to make it work.
That is certainly one way things could work out. But there is also a different, darker interpretation that I find more convincing. This holds that the economic crisis has gravely damaged the euro. It has stripped the project of support and legitimacy and exposed the design flaws in the single currency. The biggest flaw remains the lack of a large central budget and a transfer union of the sort that makes other federal currencies, such as the dollar, work.
That weakness can only be remedied by the creation of something much closer to a European state. But the crisis has profoundly undermined the pro-European sentiment that would be necessary to build a United States of Europe. Even in Germany, which has historically supported the European ideal, the country’s most respected institutions are crying foul.
As a result, the euro is stuck with a floundering economy, inadequate institutions and weak support. That does not sound like a long-term recipe for success to me.
Copyright The Financial Times Limited 2014