German endgame for EMU draws ever nearer
by Ambrose Evans-Pritchard
Telegraph International Business Editor
Posted September 4, 2011
For fifty years Germany has invariably stumped up the money required to keep Europe’s Project on track, responding to unreasonable demands with grace and generosity. We will find out to what extent Germany’s constitutional court (pictured) shares these views when it rules this Wednesday on the legality of the EU rescue machinery. Photo: AP
It bankrolled French farmers through the Common Agricultural Policy, that disguised tithe for war reparations. It then bankrolled Spanish farmers as well. It funded each new wave of EU expansion, though reeling itself from the €60bn annual cost of its own reunification. It gave up the cherished D-Mark, the anchor of German economic stability.
We are so used to German self-abnegation for the sake of Europe that we can hardly imagine any other state of affairs. But the escalating protest against EMU bail-outs by Germany’s key insistutions go beyond the banalities of money. The fight is over German democracy itself.
Those who talk of a Fourth Reich or believe that EMU is a “German racket to take over the whole of Europe” – as Nicholas Ridley famously put it – have the matter backwards.
Germans allowed their country to be tied down with “silken cords”. They are the most reliable defenders of freedom and parliamentary prerogative in Europe, precisely because they know their history. Finance minister Wolfgang Schäuble could hardly have chosen a more toxic term than “Bevollmächtigung” or general enabling power when he requested blanket authority from the Bundestag for EU rescues, as if Weimar were so soon forgotten. He was roundly rebuffed.
You can feel the storm brewing in Germany. Within days of each other, President Christian Wulff accused the European Central Bank of going “far beyond” its mandate and subverting Article 123 of the Lisbon Treaty by shoring up insolvent states, and Bundesbank chief Jens Weidmann said bail-out policies had “completely gutted” the EU law.
Both believe the EU Project has taken a dangerous turn. Fiscal powers are slipping away to a supra-national body beyond sovereign control. “This strikes at the very core of our democracies. Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies,” said Mr Wulff.
Otmar Issing, the ECB’s founding guru, fears that the current course must ultimately provoke the “resistance of the people”. Instead of evolving into an authentic union with a “European government controlled by a European Parliament” on democratic principles, it has become deformed halfway house.
In its rush to save EMU, he said, Europe has forgotten that legislative primacy over tax and spending is the crucible of our democracies. It was monarchical assault on the power of the purse that led to England’s Civil War, and America’s Revolution.
We will find out to what extent Germany’s constitutional court shares these fears when it rules this Wednesday on the legality of the EU rescue machinery, and delivers its verdict of life or death for monetary union.
The opinion will be drafted by Udo di Fabio, a Wilhelmine nostalagic and declared enemy of “libertarian nihilism”. The judge has an odd outlook perhaps for the grandson of an impoverished nobleman from the Abruzzi who found work in Duisburg steel mills. He is quintessentially German now.
His remarkable 2005 book “The Culture of Freedom” decries the “enfeebled” societies of the West, and judges multiculturalism and the welfare state to have failed miserably. He calls for a “renaissance of marriage and family” and a return to “the nation as common destiny”. One awaits his Nieztschean verdict on Europe with curiosity.
The court is a formidable body, the last defender of sovereignty against EU overreach in a Europe of pliant judges. “European integration may not result in the system of democratic rule in Germany being undermined,” was its verdict on the Lisbon Treaty. In a defiant warning to the European Court and the plotters and usurpers of Brussels, it ruled that the nation states are “masters of the Treaties” and not the other way round. Core areas of policy – especially budgets – “must forever remain German”.
“The principle of democracy may not be balanced against other legal interests; it is inviolable.”
“A blanket empowerment for the exercise of public authority may not be granted by the German constitutional bodies.”
If democratic legitimacy is violated “in the course of the European integration”, Germany must be prepared “in the worst case, even to refuse further participation in the European Union.”
Even to refuse. Yet the court – or Verfassungsgericht – did not actually block the Lisbon Treaty. It barked, but did not bite. The assumption this time is that the eight judges will insist on beefed up powers for the Bundestag, but will not disturb the existing nexus of bail-outs and bond purchases. That is the most likely outcome.
Whether they go any further is the existential question for EMU. If they rule that the permanent bail-out fund (ESM) after 2013 breaches treaty law, they will queer the pitch greatly since the viability of the current fund (EFSF) depends on a hand-over.
If they rule in any significant way that the EFSF itself breaches Lisbon’s `no bail-out’ clause, or even that Germany cannot participate until the Treaty is changed, market confidence in monetary union will collapse instantly.
Whatever the court does, the simmering revolt in the Bundestag over recent weeks lays bare the salient strategic fact that Germany is not about to embrace fiscal union or quadruple the EFSF to €2 trillion, as deemed necessary by City analysts and EU officials to stabilize Italy and Spain. Nor will it pay for a third Greek rescue.
The implication of this may become clear very soon since the Greek rescue programme is disintegrating. As the Greek parliament’s watchdog admitted, the debt dynamic is “out of control”. Public debt will reach 172pc of GDP next year. Draconian austerity has crushed the economy, leaving the budget deficit stuck near 9pc. Barclays expects a 5.7pc contraction of GDP this year.
The EU-IMF Troika left Athens abruptly on Friday, blaming Greece for failure to comply. The equal failure is the scorched-earth austerity policies imposed by the EU itself. Fiscal deflation cannot work in a rigid economy with a large trade deficit and a high debt stock. It ensures a Fisherite debt deflation spiral.
The IMF must know from its errors in Argentina a decade ago that Greece needs a 40pc devaluation and 50pc debt forgiveness to claw back to viability. Yet the EU has blocked both, and the Fund has until now acquiesced.
Perhaps there was no choice. Argentina was an isolated case in 2001. Greece is the detonating pin for EMU. Going to the root of Greece’s problem risks trauma and instant contagion to Portugal, and from there a systemic chain reaction through Spain and Italy to France.
Yet this is where we no find ourselves as the Bundestag draws its line in the sand. Greece will be pushed into default, with ever larger haircuts for bondholders.
Needless to say, battered banks, insurance companies, and pension fund will not wait for further rounds of punishment. They know that Italy must redeem €14.6bn of debt this week and €62bn by the end of September, the highest ever in a single month. It must roll over €170bn by December.
The ECB can in theory hold the line by soaking up the entire public debt of Italy, the world’s third largest at €1.84 trillion. The question is whether it can plausibly act on such a theory when the president of EMU’s dominant power deems this to be illegal.
Germany is not a banana republic. It is a sovereign democracy under the rule of law. Europe is belatedly discovering why this matters.