Can Europe Make It?

Towards Europia? Germany and the euro crisis

Europe is in the crucial weeks of its epic crisis. The judgment by Germany's constitutional court returns authority to politicians in shaping a solution to the eurozone's troubles. But at a deeper level the contest for Europe's future is also about its social model, cultural resources and democratic capacity, says Ulrike Guerot.

Ulrike Guerot
13 September 2012

The constitutional court of the Federal Republic of Germany has spoken. Its decision on 12 September 2012 rejected the complaints before it that the government's endorsement of the European Stability Mechanism (ESM) was incompatible with Germany's constitution, though it placed limits on any further extension of the bailout fund except by the express decision of Germany's parliament. In this sense, the judgment returns everything to where it was in the days before the verdict, with the question of further steps towards fiscal federalism again in the hands of German politics.

The Karlsruhe-based court thus respected the principle of judicial limits - in contrast to its overshooting over the Lisbon treaty, where its verdict seemed to meander without horizon on the issue of European democracy. It rightly highlighted the fact that the essential underlying question with respect to the ESM, whether an unlimited rescue umbrella (and thus any sort of ultimate debt-mutualisation) would be allowed under the rules of the current Grundgesetz (Basic Law), was not one for the court. So the court bought more time to allow a political answer to this question unfold. Once more, German politics is pivotal to the crisis of the Eurozone and the European Union.

The good news in the Karlsruhe judgment is that democracy has been strengthened - not so much through the caveat (ambigious, as some may argue) that the Bundestag now has a say in any potential increase of the German liability in the ESM beyond a limit of €190 billion ($245 bn), even though this might ultimately backfire and hinder the proper working of the ESM; but more because, in much more general terms, the legal-constitutional path has now opened the way for a German political solution to the euro-crisis. True, there are no easy choices here, although the German government does seem increasingly committed at present to reach high and sketch out bold visions for Europe.

Europe in movement 

The weekend before the court's announcement, the financier George Soros captured this German debate with an article for the New York Times whose title - "Lead it or Lose it" - pithily summarised his view of Germany's choice. The piece was republished immediately by Der Spiegel. Many others argue that the coming days and weeks will be decisive for the destiny of the euro - and that there is no certainty about the outcome. The pace of events is accelerating: among them the game-changing announcement on 6 September by Mario Draghi, head of the European Central Bank, that the ECB is committed to buying bonds without limit; the European commission proposal for next steps towards a banking union, entailing perhaps even a common European deposit scheme; and the election in the Netherlands, which saw a welcome strengthening of moderate forces (the latter two on 12 September, making it even more a momentous day).

Europe is clearly in movement now, with nearly everything seeming possible between an embrace of the idea of fully-fledged political union and a quick unravelling of the euro, the single market and the union itself. Europe is in the crucial weeks of a crucial crisis. In Berlin these days, you can hear nearly everything being whispered in Berlin’s couloirs: from those, professedly close to the chancellor Angela Merkel, who say that you cannot imagine how far she will go for Europe and the euro, and that she is totally committed to keeping Greece inside the currency; to those who talk about a "plan B", with a "Grexit" occurring shortly after the American elections. In an echo of Johann Wolfgang von Goethe, two souls are in the German breast: Germany wants the euro, but seems not ready to pay the ultimate price needed to maintain it.

Or to put it another way: it’s politics, stupid!

Germany in a dilemma 

The German euro-rescue strategy remains, after the Karlsruhe decision as before, in a deep dilemma. Merkel is leading a two-front war, while uncertain - like everyone else - of its denouement. She is squeezed between her own citizens and what the world (including her European neighbours, the United States, China, and not least the markets) expect her to do - and this means she cannot deliver an outcome that Europe and the euro might need but that German citizens oppose.

All the "good" solutions most experts favour (eurobonds, a banking-license system, or a common European deposit-scheme in a comprehensive banking union, which would eliminate speculation against the weaker euro countries) are - even after Karlsruhe - legally and politically out of reach in Germany; and the solutions so far applied (an ever bigger increase in the volume of the rescue umbrella, and in the number of Greek bailouts) have not had their effect, for interest-rates remain unacceptably high in Europe's south, which produces a pro-cyclical recessionary effect with high social costs.

At each point of the crisis so far, Merkel has done the very minimum to prevent Europe's collapse - but never the "right" thing sufficient to protect the euro-system against speculation, and to allow interest-rates in the south to decrease. The constitutional-court's judgment has not pronounced itself on this - neither to allow nor to forbid it.The "red line" of Germany's rescue-strategy has been and still is (despite Mario Draghi's bond-buying plan) debt-mutualisation. Berlin can accept restricted responses of non-permanent and conditional financial aid for the troubled Eurozone countries, but not permanently binding, irreversible and ultimately opaque fiscal federalism (i.e. Eurobonds, a redemption fund, or a banking license). In the words of Otmar Issing, the economist and former board member of the European Central Bank: "The implicit transfer of taxpayers' money would be a violation of the principle of no taxation without representation."

To agree to such solutions would lead to moral hazard, the loss of pro-reform leverage, and the prospect of the German taxpayer being "cheated" by profligate countries. German public opinion just about accepts temporary aid for other European Union states through the European Financial Stability Facility (EFSF) / European Stability Mechanism (ESM); it does not accept durable engagement into a process of fiscal federalism. But without that, the euro most likely won’t survive. This is the German - and European - dilemma: namely, that politics does not follow the economic rationale of the single currency!

Or to put it another way: saving Europe and the euro may be good politics in a broader historical context, but equals bad economics.

Trust in question

In making their economic arguments to defend only temporary, but not definitive solutions, German behaviour is reminiscent of the depiction of the German soul by two renowned writers in the language: Heinrich von Kleist's character Michael Kohlhaas, a guy who rides on principles that he would die for rather than renounce, and Max Frisch's Biedermann und die Brandstifter, a drama about people who desire only the best for all but also set fire to house after house in a community.

Both are worth reading amid the current crisis. The Germans today resemble von Kleist's character in their determination to stick to a paradigm of price-stability as the only goal for the ECB, a unique feature of the ECB among central-banks worldwide - instead of accepting the necessity to FEDeralise the ECB in their own interest; and they resemble Frisch's fire-raisers in their desire to force the south to reform and become competitive, while ignoring the systemic institutional flaws of the euro in their belief that they are part of the solution only and not part of the problem.

In either case, hiding behind the constitutional court won’t work any longer.

The Karlsruhe court’s modesty now becomes politics' problem. In this, the judgment was another game-changer. The "politics-economy-gap" also explains why the German discussion, in the period before the court's fateful judgment, became caught up in "number games" - where estimates are sought of up to which more or less precise figure the ESM is or would no longer be in compliance with the Grundgesetz. These calculations ignore the systemic flaws of the euro-system and the institutional fixes which could help without being trapped in this terror of numbers. After 12 September, Germany's willingness to fix the institutional flaws of the euro-system once and for all is again on the political agenda.

Radek Sikorski, Poland's foreign minister, quoted Immanuel Kant’s "categorical imperative" in a speech on 27 August 2012 in Berlin: namely, that everybody should behave in a way so that their own behaviour could become a general law. He asked his audience whether the Germans' way of looking at their court would be in compliance with this principle. He didn’t get much applause. Now, the court has helped him by refusing to provide an answer - but it has also helped democracy by not standing in the way of political responsiblity for what should happen.

It now becomes crystal clear that the German constitutional court won’t represent an obstacle in the future. All Germany's European neighbours, and probably the whole world, expected the Karlsruhe court to say "yes" to the ESM (with most experts anticipating a "yes, but...", exactly what the court produced); but equally significant is that a narrow majority of German citizens precisely - and in opposition to the international mainstream - wanted the court to to say "no" and thus, in a way, give them a degree of protection from their own government and representatives in both Bundestag and Bundesrat (who had voted to endorse the ESM).

In recent polls, only around 25% of Germans wanted the court to reject the complaints to the court (and thus find the government's backing for the ESM unconstitutional). The Left Party's voters ranked highest with 70% supporting the complaints, followed by 64% of FDP voters, 57% of SPD voters, 51% of Greens, and 44% of CDU voters. But even among CDU voters, most are on the other side. The figures for the SPD and the Greens are most surprising, as these two parties were earlier in favour of Eurobonds. The SPD has since revisited its position, but the Greens have been frontrunners of the "more Europe" argument in Germany for a long time.

This diminishing support for the ESM (or for any future banking union) points to a crucial problem in the German political landscape: the alienation between party leaders and their electorates, something that may increase during the forthcoming election campaign. This raises the question of how long the the Greens or the SPD (let alone Angela Merkel's own coalition partner, the FDP) will support the chancellor in parliament over any more "euro-rescue" votes - especially as now, the court has give Merkel a chance to further sneak into debtmutualisation without voicing it as an aim.

Even if Merkel delays, but then does just the right thing at each and every moment of the crisis - or allows it to happen, by handing over the emergency solution to the crisis to the ECB - this has been and will be even more a big failure of both political communication and crisis-management. Covertly adopting solutions (i.e. banking union) may become Merkel's great vulnerability when the moment of truth - for example, German willingness to accept a common European assurance scheme for deposits - arrives. The lack of trust is the biggest problem of this approach. Germans have been systematically told that measures such as the monetarisation of state debt will not happen - and then these have happened. It’s not such a big problem to lose money, the German industrialist Robert Bosch once said - but you should never lose trust.

75% of Germans have unfettered trust in the Karlsruhe court, but only 39% in parliament and 38% in government. This is due to the authority the constitutional court had in post-war Germany, which created a sort of "constitutional patriotism". But this very quality now shadows Germany's political decision over where its European future should lie. After all, Germany is not an "Ayatollah Republic", as one deputy recently put it. The court has now assembled its rearguard.

But until the issue of what is politically desirable is ultimately answered (perhaps even by a referendum) the German debate is structurally stuck in a setting where, after exhausting legal grey areas and the stretching of public opinion to breaking-point, the government is de facto leaving rescue actions to the ECB, thus allowing the ECB to move towards monetarisation of debt in default of a clear political commitment and solutions.

Most Germans think that this is precisely what happened on 6 September, when Mario Draghi announced that the ECB would extend indefinitely its capacity to buy bonds. 42% of Germans have no or little trust in Mario Draghi, while 39% stand behind Jörg Weidmann, the president of the Bundesbank (who opposed the decision), seeing him as the only defender of German monetary principles. Germans are also upset that Draghi did not even wait for the German court to rule on the ESM und thus, by creating a precedent, in a way disempowered the court. It feels like institutional defeat.

It is easy for non-Germans to argue that all the legal quarrels around Karlsruhe or the defensive actions by the Bundesbank (an institutional minority in the ECB) are somehow vain; but emotionally, it is very important to understand that a great majority of a Germans feel simply trapped: they are losing control of their money and cannot do anything about it.

Political union in the frame 

In German eyes, the question of political union needs to be resolved prior to any debt mutualisation - even though as a notion, political union remains vague and undefined. But at heart, for Germans, it means two things. First, since any kind of fiscal federalism or debt-mutualisation would erode the sovereign budget-rights of the Bundestag, this requires - in order to compensate for this erosion - a proper collective decision-making system on the European level. This means a reformed electoral system for the European parliament, based on the principle of "one-person-one-vote" instead of a proportionally digressive system (as the constitutional court considers only a "general and equal election" as being democratic).

Second, the European parliament must be redesigned, either by creating a sort of "Eurobond-parliament" sub-entity, or in the form of a second chamber composed of national parliaments. Some German lawyers have introduced to the debate the notion of a "Parliamentsverbund" - a network of national parliaments which would constitute such a European second chamber.

In this light, the most important thing to understand about the German debate on "political union" is its essentially parliamentary character. Hence, raising the concept of political union also carries the risk of raising the political and constitutional bar so high (as, again, did Radek Sikorski's Berlin speech) as effectively to torpedo any Euro-rescue strategies or pragmatic next steps, such as the launch of a banking union, including a common European assurance-scheme for deposits.

The key German message here is that Eurobonds (or a banking license for the ESM) do not come free. The other EU countries need to bring a dowry to the marriage. The catch-22 is that while Germany seems ready to give up budgetary sovereignty if in exchange it could secure control by a reformed European parliament (or a broader redesigned European political system with a comprehensive division of powers), the EU's southern countries - especially France - are not.

France in focus

So as the world looks to Germany, and continues to worry about Greece, it is France that may be the real tipping-point country for the euro’s survival in the weeks to come. There are two reasons for this. First, the French - who lack a strong sense of parliamentarian tradition in their democratic culture - find it hard to grasp the essence of the German concept of political union (a misunderstanding already apparent in 1994, when the Germans offered it on a silver plate in the famous Schäuble-Lamers paper); this might itself be enough for the German "Europia" of political union to fail on the left side of the Rhine. Second, there are serious concerns that the French economy will not be able to adapt consistently to the German path of competitiveness and growth, leading to serious trouble as and when the markets make this judgment.

Thus, it is time to admit that the Franco-German axis - based as it is on a real symmetry - is broken, at least on the economic side and perhaps even beyond. Francois Hollande's economic strategy remains vague. It is unclear whether he is truly committed to the necessity for deep reforms; and even if so whether he can deliver; and even if so, how quickly. The wake-up call France is getting through the "casus Peugeot" is a harsh reminder that France has largely deindustrialised and would need many years to reverse this; it also has no robust industrial fabrics in the form of SMEs, beyond CAC 40.

Many argue that France will therefore not be able to sustainably follow a rapid reform path, for both the tempo of productivity adaption to global markets and a comprehensive political or societal consensus to do so is missing. If the no-austerity French left, the hard right around Marine Le Pen, and the sceptical half (at least) of the UMP centre-right are taken together, roughly half of France's population are against the drastic treatment the French economy needs; the question is whether the political consensus will hold and whether Francois Hollande can be a "Mitterrand II" (referring to the u-turn of 1983, when Francois Mitterrand enforced the most right-wing economic policy France had seen since 1945, guaranteeing along the way France's equality with Germany on the ECB council).

Hollande has no such "sausage" on offer, only pain and a place on the side-table next to Germany for years to come. Whether France is able to make a rational policy choice on tough reforms, where its emotions definitely "go south", remains to be seen. With a generation of suburban youth that has never had a job and thus nothing to lose if the euro cracks, his room for manoeuvre seems not much bigger than that of Merkel.

Merkel and Hollande are each acting in a very fragile environment amid a critical, emotional, and even (in tendency) irrational public opinion, where facts and figures do not necessarily count any longer. 28% of 18-25 year-olds voted for Marine Le Pen in the presidential elections, 8% more than the average. It would be naïve to assume that there is a whole young generation in France which is eager for "more Europe", just because the European Union has provided them with Erasmus and Easyjet - and this generational reality exists in most European countries.

The famous German historian, Jacob Burckhardt once said: "Each generation goes directly to god", meaning that each wants to determine its own life-path for itself. Big political projects need many backers in civil society. The data point to a 50-50% split on Europe's future: France may be more inclined to defy the Germans on economic choices, than even the Greeks or Spaniards have dared. Whether European young people, or people in general, still support the "ever-closer union" idea of Maastricht in 1992 is moot.

Or to put it another way, and beyond politics: it’s culture, stupid! 

Europia in the lens

Even assuming that politics will get it right in the coming period - after the Karlsruhe judgment, with the refinancing of Spain and Italy, the launch of the banking union - the real crux may well be that Euroland has not yet written a narrative of the crisis that works in all countries, based on the mutual acceptance of errors (especially not from the German side) and some generosity from there too, on some forgiveness from the southern side, and on a clear commitment that all countries in Europe exit this crisis together. The alternative may be rapid disintegration. If the neurologists are right in saying that fear drives politics much more than motivation or big visions, then Europia may actually be already in real danger.

Rebuilding trust may matter most in times when policy seems more about damage limitation than about bold visions. Europe today, this is no secret, is disaggregating: the renationalisation of bond purchases and the transnational credit-crunch are visible signs. Precisely because trust is broken, the German debate especially is all about control and guarantees.

Beyond this, Europe and the euro cannot deliver on emotions and sentiments, passion and patriotism, even though these are crucial as glue for a common "we-sentiment" - the foundation of a unique selling-point, but one which Europe still needs to find for itself. A positive notion of the state and a balanced state-market relationship - something that distinguishes Europe from the US, China or Russia - could still be that precious, elusive quality. The current crisis is in this view about more than the technicalities of the ESM: it concerns the very project of a social Europe and a new European-wide contrat social, which is also able to put the Gini-coefficient (the measure of social inequality) back into the bottle. Europe is, in this lens, suffering less a euro crisis than a social crisis.

When Germany changed the former GDR currency into the D-Mark in 1990, a decision which most German economists regarded as economically more than questionable, it was the connective tissue of patriotism which sealed this political (but economically irrational) choice. The biggest hurdle to Europia seems to be that the notion of solidarity cannot yet be attached to the European scale, but remains largely national; despite the fact that Euroland has a single market, a single currency and a common industrial value-chain.

It is interesting to note, though, that economic self-interest simply does not appear to be the main prism through which German citizens assess the country's contribution to the financial-rescue fund. Rather, there seems empirical evidence of sociotropic concern about the cost of the bailout to the German economy as a whole. The strongest predictors of voters' stance on the bailouts are measures of key social dispositions, such as the degree of altruism or cosmopolitanism. Thus, characteristics that reflect individuals' levels of generosity, empathy, and perhaps a broader conception of cultural affinity, seem better to explain voters' positions on international financial burden-sharing.

If this is so, then ultimately cultural openness or language skills may be far more important to build Europia than the technical fixes of the ESM. Yes, it’s all about culture - but at this level, culture needs a political and economic channel. The moment it becomes clear that Germany wants not just to determine the economic direction of Euroland, but also its political dimension - by requiring a political union modeled after its own democracy - then everybody in Europe will be confronted with the same question: what price are we ready to pay for the value of Europe? Then the real discussion about Europia, its culture and it contrat social starts. The outcome is - still - pretty open!  



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