France’s Emmanuel Macron and Italy’s Mario Draghi are now trying to push the envelope even further, signing the bilateral Quirinale Treaty in Rome last month in a bid to take control of Europe’s fiscal regime as well.
They aim to dismantle the legal architecture of budget discipline, allowing states to run much bigger deficits by excluding public “investment” from the normal figures. They are right in one sense: the austerity bias in the deficit rules led to frightening economic blunders during the EUM debt crisis. But while their proposal looks like a variant of Gordon Brown’s Golden Rule, the implications are radically different in the creditor v debtor context of monetary union.
They also aim to usher in a de facto European treasury with joint debt issuance, even though the German constitutional court has already ruled that this violates the country’s Basic Law.
Professor Daniel Gros, head of the Centre for European Policy Studies, said this Quirinale demarche was seen as a provocation by Berlin, an attempt to bounce Chancellor Olaf Scholz and his new coalition into a high-spending “transfer union”. The Draghi halo changes nothing.“Draghi will not be there in the future: the debt will remain,” he said.
Italy is the lynchpin of what unfolds over the next two years. “It is too big to be bailed out by fiscal transfers, and it cannot roll over its outstanding debts unless the ECB is there to keep the market open. The market will shut the moment that the ECB steps away,” said Professor Mayer, now at the Center for Financial Studies in Frankfurt.
Three years ago Matteo Salvini’s Lega and the Five Star Movement, the two leading parties in Italy’s parliament, were both flirting with exit from the eurozone. Neither have any further reason to do so since the ECB has been fully captured by their camp. The threat of rupture in the one-size-never-fits-somebody structure of the euro therefore rotates northwards. This new tension is likely to be the story of the early 2020s.
Inflation is highly corrosive in the particular circumstances of Germany, where the poorer half of the population rents rather than owns property, and almost none have equities or inflation hedges. They keep their life savings in bank accounts. These are currently being eroded at a real rate of over 6pc a year. It implies galloping pauperisation, even if it is not 1923.
Negative rates are also destroying the business model of the smaller cooperative and savings banks that fund 90pc of loans to the Mittelstand family firms, the stable backbone of German society and its industrial machine.
Prof Mayer said Europe should not to take German quiescence for granted, warning that it is only a matter of time before a political backlash starts to convulse the political scene. “People are waking up. The longer inflation goes on, the more it will fuel populist forces in Germany. It was the migrant crisis that revived the fortunes of the right-wing AfD party, and I fear that inflation will have the same effect,” he said.
The Christian Democrat Party and Bavaria’s Social Christians already have hardliners itching for a fight with the ECB. They are now in opposition and ideologically liberated by the departure of Angela Merkel. These parties may well tilt in a eurosceptic direction to cover their flank against the AfD.
This has a familiar feel to those who followed the series of incremental irritations that turned the UK against Brussels and ultimately led to divorce. These tensions are too long to list, but they culminated in the Lisbon Treaty, which created a European supreme court in the fullest sense, and gave euro-judges sweeping powers to rule on almost anything they wanted by making the EU rights charter legally-binding.
British opposition was swatted aside, and a supposed opt-out protocol later turned out to be meaningless. Lisbon was followed quickly by the breezy decision of the EU Council – against all precedent – to circumvent David Cameron’s veto of the Fiscal Compact in 2011. Did they have any idea that this would set off the chain of events that led to the Referendum?
At the root of Brexit was an inchoate but widely felt sense among the British people that their country was being pushed around, and that its souverainiste vision of how Europe should evolve counted for nothing. This process of disenchantment takes a long time to unfold but the early signs are already there in Germany.
It is courting fate to try to strip Europe’s dominant power – and long-suffering cash cow – of control over monetary and fiscal policy, and doubly hazardous to do so without much regard for the niceties of EU treaty law.
A debtor country cannot walk out of the euro without scorched-earth economic consequences: a rich creditor country most certainly can.
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