Why Only a 'German-Built' Euro Will Survive
The euro area leaders have done nothing to strengthen the monetary union and to prevent another debilitating, and maybe terminal, crisis in the future. The market turbulence unleashed by the imminent fall of Italy's "technical" government, and a possible return of Silvio Berlusconi, shows that the ultimate backstop to whatever remains of this crisis, and to what may be any future crisis, are still the printing presses of the European Central Bank (ECB).
These lines are not written by a British "euroskeptic" who wants to stop his country's 16 billion euros net payments to Brussels, and who firmly believes that nearly 5 billion euros "disappear" from EU budgets year in and year out. And neither are they written by an angry, lederhosen-clad Bavarian.
The Brit is leading the fight for his country to leave the EU. The outraged Bavarian wants to go much further: he wants Bavaria out of the German union and Greece out of the euro zone; he wants no taxpayers' money wasted on euro area countries living beyond their means, tolerating massive tax frauds and bailing out their wayward banks.
This reminds me of a real-life Bavarian - a gas station attendant on the highway between Munich and Salzburg -- who looked at me with utter contempt and disgust when, coming from France in the late 1990s, I gave him French francs to settle my gas bill.
"Was ist das?" he barked at me. And, without waiting for my answer, he went on "Das ist nur Papier." To him, those French francs were just worthless pieces of paper. He wanted his trusted D-mark, despite the fact that since 1987 the exchange rate was stable at 3.35 francs for one mark, the rate at which the franc entered the euro in 1999.
Fortunately, it all ended well when, realizing my deep embarrassment and looking at my French license plates, he gave me a friendly grin and wished me a good trip.
Unenforceable Budget and Public Debt Rules
The Bavarian probably had another grin last November when Germany shoved down the throats of most of its reluctant euro partners a "new" budget agreement. But if he did, he was misled because he did not realize that this was just a toothless replica of earlier treaty obligations setting out unenforceable rules for budget deficits (3 percent of GDP) and gross public debt (60 percent of GDP).
Unenforceable? Yes, because the EU Commission's enhanced supervision of national budgets, stipulated by that agreement, still leaves the ultimate spending and revenue decisions in the realm of sovereign states. Consequently, any disagreements are a matter of what they call "political consultations" in various euro area inter-governmental forums.
Example? Yes, Spain's original commitment to cut this year's budget deficit to 4.4 percent of GDP was abandoned almost as soon as it was agreed. And now the country's prime minister told the world last week that it would be "very complicated" to meet an upward revised deficit target of 6.3 percent of GDP for 2012. There is nothing the EU, or anybody else, can do to force Madrid to respect the agreed path of deficit cuts. The budget process is fully within Spain's sovereign rights.
Can Spain, Greece or other offenders of their fiscal treaty obligations be run out of the monetary union? That might be possible, but the political fallout of such procedures would be disastrous; they would most probably also spell the end of the common currency.
Germans wanted to enforce the deficit and public debt rules through the European Court of Justice. No kidding, said the French, who considered the German idea of a judge lording over the Palais Bourbon (the French parliament) utterly ridiculous. France, the Finance Minister Pierre Moscovici said, did not want a "disciplinary union."
So, where does this leave the euro zone's new budget agreement? The answer is: where it has always been - in the maelstrom of intergovernmental political fixes without any sanctions for fiscal miscreants.
Banking Union – Another Channel for ECB's Budget Financing?
And the miscreants could well get a helping hand from the euro zone's banking union, whose urgent implementation is strongly pushed by France and Spain. Reading their game, Germany is resisting the project unless safeguards are introduced to guarantee the ECB's independence, and unless there is a clear separation between the bank's regulatory function and its monetary policy.
Germany is not disputing the need for the banking union. The ECB must have a regulatory and supervisory authority over the financial system it is supposed to control. But Berlin wants no undue rush on this crucially important missing piece of the monetary union. Germans are also wielding a big stick: the threat that their parliament will not approve the project unless it is satisfied that the monetary union will not open a new channel of direct government financing under the guise of ECB provisions of unlimited funds to euro zone banks to keep them solvent and viable.
Germans are still smarting from having been outmaneuvered by an Italian job at the ECB. They believe that the bank's president, Mario Draghi, used an elastic interpretation of the ECB's authority to (a) continue buying the bonds of heavily indebted euro zone countries, (b) provide unlimited funding to the banking system and (c) offer to member states conditional lending facilities in conjunction with the euro zone bailout funds.
Many Opportunities Missed Since Charlemagne
Germany will probably prevail because its idea of the monetary union is the right one. In fact, I am convinced that only a "German built" euro can survive and prosper as a global transactions currency, a widely held reserve asset and a reliable store of value.
The German Chancellor Angela Merkel's call for "more Europe" is a correct and forceful advocacy of a confederate state structure requiring substantial sovereignty transfers. That is a condition for an effective fiscal union and an economic government that must go pari passu (hand-in-hand) with the single currency.
In the absence of that, most people now realize that the euro area will be stumbling from crisis to crisis, inflicting huge damage on member countries' economies with social unrest and dangerous political divisions. Even the staunchest defenders of national sovereignty are finally accepting that the true monetary union cannot be operated as a credible institution without a leap to some form of the political union.
The irony is that there is nothing new about all this. The French President Francois Mitterrand understood that when he proposed the fiscal union (i.e., the "economic government") to Germany at the time the monetary union treaty (The Maastricht Treaty) was negotiated in the early 1990s. As incredible as that now seems, Germany refused, according to Hubert Vedrine, Mitterrand's chief of staff and subsequently the French foreign minister.
Germany was not ready. After the country's reunification in October 1990, time was needed to digest some 1.3 trillion euros spent on absorbing dilapidated and impoverished eastern provinces. But having done that, a plan for the political union was presented to France in 1994 by Wolfgang Schauble, the country's current finance minister and a man who was widely expected to succeed the long-serving Chancellor Helmut Kohl.
Now, however, it was France's turn to balk. Schuble's idea of a political union was dismissed as "romantic" and "utopian" by the stern guardians of the French sovereignty. That led Vedrine to muse in a recent interview that "many opportunities were missed" to unite Europe since the Frankish king Charlemagne did that by sword in the 9th century.
There is no need to despair, though. Some form of political union may still be possible by peaceful means. Basking in a record, eight-minute standing ovation in Hanover last week, a tearful Angela Merkel got the endorsement of her party – and apparently of an overwhelming majority of German people – to run for the third term of office in general elections on September 22. She looks set to emerge later next year with a strong mandate, and, most probably, as a leader of a grand German coalition of her Christian Democratic Party (CDU) and the current opposition party of Social Democrats (SPD).
That will give her an opportunity to nudge the euro area toward political union - some form of an original confederation of nation states. Chancellor Merkel called that project "the challenge of our generation" at her party's congress in Leipzig last November.
Investors can rest assured that nothing of any substance will happen in the euro zone until after the German elections. In the meantime, and despite the brewing political turmoil in Italy, you can bet on Mario Draghi's pledge that he will do "whatever it takes" to protect the euro.
Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.