Op-Ed: Germany will not rush into euro area fiscal union
Hannelore Foerster | Getty Images. The European Central Bank started on Monday releasing its weekly corporate bond purchases. ·CNBC
Dr. Michael Ivanovitch
Updated
There was a time, not so long ago, when the German Green Party, governing with Social Democratic Party (SDP), was forcefully advocating a federal EU government to preserve and advance the European project of a political, social, economic and monetary union.
More recently, Martin Schultz, the man leading the SPD in the general elections next September, is championing the same idea – with the fiscal union at its core.
The Greens lost power in 2005, and a German commentator quipped last week that Schultz "will get his bill for federalist ideas in the fall," anticipating that SDP will be trounced by the center-right Christian Democrats in the forthcoming elections.
Interestingly, calls for the federal Europe tend to be revived at times of crisis. In the aftermath of the last financial debacle earlier this decade, Germany's hard-put euro area partners pleaded for solidarity – a short-hand for issuing euro area bonds to finance their deficit- and recession-ridden economies. Germany refused, arguing that the euro area was not a federal state with a unified fiscal policy.
Don't blame the "populists"
As a result, the only thing Berlin offered was a devastating pro-cyclical fiscal austerity in countries already sinking into recessions, with soaring unemployment, poverty, Caritas soup kitchens, falling governments and changing political leaderships, with more than 120 million Europeans experiencing various forms of marginalization and economic precarity.
The ensuing social, economic and political problems have become the sources of "populism," "nationalism," EU exits and people's alienation from their once cherished dreams of peace, prosperity and brotherhood symbolized by the EU anthem of Beethoven's Ninth Symphony "Ode to Joy."
Now what? "More Europe" say those who believe that problems were caused by an inadequate integration process that allowed policy mistakes by incompetent national governments. To avoid similar mistakes in the future, they are now urging a unified fiscal policy to complete the monetary union.
That is what the French call the "fuite en avant" – a semiotic delight roughly translated as fleeing from an unsolvable problem.
Here is what that problem looks like: The fiscal union implies a euro area federal state with a common management of public finances. The area's budget, public debt financing, tax policies, transfer payments, etc. would be managed by a euro area finance ministry. That would also require harmonization of labor, health care and education policies, and a whole range of other social welfare programs.
Institutionally, this integration drive cannot stop at the finance ministry. There would also have to be a euro area executive and legislative authority to exercise administrative and democratic controls over tax and spend decisions.
If you think that this is "mission impossible," here is an even harder part to the story.
Shall we dream?
How could Germany, with a budget surplus last year of 0.8 percent of GDP and the public debt of 68.3 percent of GDP, accept a fiscal union with Spain running the euro area's largest budget deficit of 4.5 percent of GDP and a public debt of 100 percent of GDP?
France and Italy have similar public finance profiles. Last year, France had a second-largest euro area budget deficit of 3.4 percent of GDP and a public debt of 96 percent of GDP. During the same period, Italy ran a budget deficit of 2.4 percent of GDP and a public debt of 133 percent of GDP.
This means that half of the euro area economy (France, Italy and Spain), with serious structural problems of public finances, would become part of a de-facto federal state with a fiscally sound Germany.
Hard to imagine, isn't it? And yet, that's the program that the new French President Emmanuel Macron will apparently discuss tomorrow (Monday, May 15) when he visits the German Chancellor Angela Merkel in Berlin.
France, Italy and Spain already know the answer. Chancellor Merkel is relieved and delighted that the most dangerous anti-EU parties in France and The Netherlands lost the recent elections, but her government is firmly opposed to the euro area fiscal union.
The German public opinion fully shares that position. And the German media of all political stripes are having a field day lampooning the idea that German taxpayers should be asked to pay for countries that cannot control their debts and deficits.
This is also an awkward moment to even talk about the call on the German public purse while the country is gearing up for general elections on Sept. 24, 2017.
The best that Germany can offer, under these circumstances, is a strict enforcement of existing euro area fiscal rules: Budget deficits limited to 3 percent of GDP and the gross public debt to 60 percent of GDP. About half of the euro area members are now falling far short of these criteria.
I believe that is what Germany will do. After the elections -- which will most probably leave the center-right Christian Democrats in charge of a new governing coalition -- Germany will also insist on further budget deficit cuts and declining public debt in the euro area by stepping up the supervisory pressures through the EU Commission.
Investment thoughts
But Germany will be under pressure, too. Advocates of "more Europe" will demand an irreversible march (no pun intended) toward a euro area federal state. They consider that the monetary union should serve as a "hard core," "avant garde" and an unassailable rampart to protect from "vulgar anti-European populist hordes."
I believe these people are wrong, dead wrong. They are just showing a total disconnect between EU elites and the people they are supposed to serve. They don't understand that economically unsound and mismanaged integration projects will fall apart, leaving them as an easy prey to "populist hordes" they abhor. And I wonder how these integrationists-at-all-costs can realize that jobs, incomes and people's welfare should be the litmus test of any further measures of shared sovereignty.
Germany, in particular, would do well to heed this warning from Jürgen Habermas, one of its most distinguished contemporary philosophers: "Germany is dozing on a volcano." And more explicitly: "Germany is risking a historic failure with its shortsighted wrangling."
Investors will be reminded of this as they see the "wrangling" unfold in the months ahead, because Chancellor Merkel has to win her re-election next September.
Meanwhile, the euro area fiscal union should not be investors' main concern. They should watch instead the progress toward the convergence – if any -- to euro area's existing fiscal rules.
That convergence would imply a significant degree of fiscal restraint, which should be offset by an appropriately easy monetary stance.
If implemented, such a policy mix could support the euro area's moderate growth dynamics in an environment of low cost and price pressures, increasing corporate profits and sustained asset valuations.
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