In reflecting on the muddled and (to many observers) disappointing outcome of last week’s European Council summit on banking union—‘yes’ to a not-insignificant Single Supervisory Mechanism (SSM) within the European Central Bank (ECB) but ‘no’ to any significant fiscal shock absorber in the form of resolution fund or common deposit-guaranty scheme—I couldn’t help but think of the late, great Alan Milward, perhaps the most influential of all historians of European integration.
As many readers will know, Milward was the author of the classic history of the origins of the integration process, The European Rescue of the Nation-State (1992; 2d. 2000). And it was Milward, perhaps more than any other observer of European integration, who consistently reminded us that integration has always been a political choice rather than an inexorable consequence of growing ‘interdependence’ or some of other functional factor. Because integration has been a political choice, its direction has also never been beyond political negotiation or even outright resistance or rejection. This insight is important to keep in mind as we reflect on the outcome of last week’s summit on banking union.
Compelling functional demands, such as managing interdependence or maintaining Europe’s geopolitical influence on the global stage, undoubtedly feed the process of European integration, Milward acknowledged. But these demands do not necessarily determine the course of integration in a linear, strongly causal sense. Explanations of the process relying primarily on such functional explanations, most importantly the growing interdependence of the European economy, were, from Milward’s historical perspective, ‘shallow and implausible’ (ERNS, p.7).
Of course, we still see such explanations advanced today, particularly when Euro-federalists argue that, in light of the underlying market fundamentals, there is simply ‘no alternative’ to full fiscal and political union. But such claims, at least in the hands of federalists, are really expressions of normative preference and not the basis for sound scholarly or lawyerly analysis. Milward always reminded us that there has never been a perfect historical congruence between economic interdependence and a subsequent political or legal process of integration. Increasing interdependence and other functional demands have certainly created pressures for integration in general. But in looking to the historical record, Milward also found that such demands can ‘be rejected by an act of political will’, although perhaps at great cost (ERNS, p.7). The American economist Barry Eichengreen recently echoed this insight in an opinion piece in the lead-up to last week’s summit: Europe’s leaders, he wrote, had ‘hoped that establishing a monetary union would generate irresistible pressure for the creation of an EU that functioned in all respects as a cohesive economic and political bloc. [They] were right about the pressure…But they were wrong about the irresistible part. There is no inevitability about what comes next’.
These thoughts bring me back to the sausage-like negotiations over banking union last week, and Germany’s negotiating position in particular. Alan Milward’s fundamental insight regarding the historical interplay between economic interdependence and political will are directly relevant to understanding not merely Germany’s acceptance of a scaled down SSM but also to its inveterate resistance to an adequately funded resolution authority, a common deposit-guarantee scheme, or anything else that might lead to open-ended budgetary commitments or transfer payments in the resolution of this crisis. Angela Merkel may well believe that ‘if the Euro fails, Europe fails’. But that doesn’t mean, when push really came to shove in negotiations over banking union, that Germany would automatically recognize what (to many) were the functionally demanded policy steps to ensure avoidance of that failure. This is particularly the case because Germany’s current political-economic interests (maintaining trade surpluses) and prevailing conceptions of political-economic morality (it’s the periphery’s fault) lead it to a very different understanding of the nature of the crisis and what must be done to solve it. That combination, as Milward rightly predicted, could give rise to quite a good deal of political resistance to the purported functional demands of economic interdependence, whether in the banking union negotiations or otherwise.
The process of institutional change associated with the process of European integration will always remain a complex brew of functional demands, political interest calculations, and ideological or moral conceptions of ‘right’—no single factor dominates. This will be as true for the resolution of the Eurozone crisis as it has been in the entire course of integration’s institutional and legal history. Indeed, just as politics may undermine what some regard as the functionally essential course for establishing a banking union, recent experience also suggests that politics can override functionally sensible choices in the opposite direction: How else to explain, one might fairly ask, the continuing Greek commitment to remaining in the Eurozone (most recently here, but also here and here) where the economic fundamentals are so clearly in tension with that course of action? A significant factor has to be the political will derived from a Greek variant of what I have previously called ‘the power of the European idea’, perhaps combined with fear of the costs that a return to the drachma would entail, or hopefulness about the (clearly questionable) success of the current policy.
But in in trying to find a successful resolution of the Eurozone crisis, all eyes must return to Germany, which holds all the main political and economic keys. Germany’s partners will be waiting a long time, it seems to me, if they think that functional considerations alone (i.e., constant invocations of ‘interdependence’) will somehow lead Germany inexorably or irresistibly to the right policy solutions. There may well be some (marginal) recent evidence that Germany’s calculation of its political interests is shifting. The scaled back SSM within the ECB provides some evidence of that, deriving perhaps from Germany’s increasing realization that, ‘given extensive trade and financial links, a disorderly Eurozone hurts not just the periphery but the core’.
But those marginal shifts are not enough to lead Germany to the sort of political and economic commitment of resources and leadership that resolving the crisis really seems to warrant. What needs to change, therefore, is not Germany’s calculation of its political-economic interests or even its understanding of the functional demands. Rather, as a threshold matter, what needs to change is Germany’s overall ‘moral’ interpretation of the nature of the crisis, as deriving from the fiscal profligacy of the periphery.
I am not arguing, in the manner suggested, say, by Paul De Grauwe, Dani Rodrik, or Harold James, that it is wrong at all to interject moral considerations of blame or fault into the discussion. To the contrary, I am in fact arguing that it is time to join issue with Germany precisely on the terrain of morality, blame, and fault (and indeed democracy, as I’ll elaborate more below). That was the upshot of my post this past July, ‘Fault, Not Solidarity: A Normative Argument to Save the Eurozone?’ Germany’s moral certitudes regarding the causes of the crisis be must be challenged and German domestic political discourse must acquire a new element. To wit: that Germany’s democratic system of government, as a willing participant in the construction of a deeply flawed monetary union, bears a significant degree of ‘fault’ (and therefore ‘responsibility’) for the current crisis.
I will not recapitulate the argument here, aside from citing two brief passages from other commentators whose subsequent analyses that are in line with the gravamen. First, ‘[t]he Spanish bubble was after all a joint venture’, as Ambrose Evans-Pritchard has written. ‘Spain was flooded with cheap capital from Germany and Holland that it could not prevent or control under the EMU system. Did the German and Dutch regulators recognise the danger, or try to stop the excesses? Not really. They were complicit’. Second, even though Dani Rodrik claims ‘this has nothing to do with morality’ and that ‘[t]his is a crisis of economic interdependence, not of morality’, he still gets the essential moral point and states it in ultimately moral terms: ‘The economic fact is that the assumptions on which German lenders and the Southern borrowers acted have proved to be wrong and now both are in trouble. Neither Greek and Spanish borrowers, nor German and Dutch lenders can be absolved’ (my emphasis on Rodrik’s moral language).
The key point is that the (highly imperfect) ‘economic interdependence’ that allowed German and Dutch banks to lend to the periphery so extensively were the consequence of policy choices in the construction of the EMU that Germany’s own elected governments knowingly undertook. This is precisely the terrain of moral (and, frankly, legal) responsibility on which advocates for the Eurozone periphery must now engage Germany. Most importantly, this engagement must address, in moral terms, the problem of ‘legacy assets’ that Germany has, to this point at least, steadfastly refused to recognize as a shared responsibility. This was apparently a key point of contention in the banking union negotiations last week, at least according to published reports. As Charlemagne put it, ‘Germany and the creditors resist any suggestion that they should be made to pay for the problems of others’. And according to Wolfgang Münchau: ‘Angela Merkel has made it clear that Berlin is not ready to pay for the resolution of other people’s banks’.
And yet there can be no solution to the crisis if commonly-funded resolution authority is not part of the mix. Germany’s position loses its ‘moral’ veneer once it is recognized, as Paul De Grauwe has maintained, that responsibility for the crisis is ultimately ‘shared by the North and the South’. The legacy assets are not ‘the problems of others’. They belong to Germany too.
But defenders of the German position might at this point note that this is not the sort of monetary union to which Germany thought it had agreed—indeed Germany arguably sought to protect itself against such open-ended liabilities, inter alia, through the ‘no bailout clause’ and similar contractual protections. And thus to impose these costs would violate the democratic consent of the German people and parliament.
Anyone who has read my prior posts on this crisis (see, e.g., here and here) knows that I’ve generally been sympathetic to such arguments. But it must be recognized that this sort of ‘democratic’ argument in fact cuts both ways, particularly when the perspective on the crisis shifts from ‘contract’ to ‘tort’; that is, from the negotiated legal protections in the treaties to the scope of responsibility necessarily flowing from the mistaken design of the EMU itself.
In an exchange following ‘Fault, Not Solidarity’, I made the point this way:
It is difficult to deny that, via the institutions of representative government (yes, those count as “democracy”), Germany did in fact make a democratic decision in the 1990s in favor of the EMU, with all its attendant risks…But [the legal protections Germany demanded in the treaties (the no-bailout clause, the ban on monetary financing, the prohibition against excessive deficits)] have proven illusory or misdirected primarily because the problem with the EMU was in its very design, not in its implementation.
And further in the same exchange, I elaborated:
In entering into the treaties, Germany told itself that the ban on monetary financing or strictures against fiscal indiscipline, if complied with, would make the EMU work. But this ignored a myriad of other risks associated with EMU, inter alia the differences in competitiveness, unit labor costs, and the resulting balance of payments problems, which proved to be much greater threats to the stability of the project. Germany took no precautions against those risks (which frankly might have led a “reasonable government” not to enter the EMU in the first place). In that respect, Germany and all the other EMU participating states acted “negligently” by breaching the fundamental duty of reasonable precaution in the structuring of the monetary union as a whole.
The problem is that the periphery is now bearing all the economic dislocation resulting from this flawed design, while Germany gets the benefit of an undervalued currency feeding its export economy and trade surpluses, thus keeping its unemployment rate low while the rate in the periphery skyrockets. This is the ‘economic interdependence’ that political choice in favor of the EMU has wrought. It has worked overwhelmingly in Germany’s favor. Hence the crucial importance of engaging Germany on moral grounds. Germany must recognize unfair distribution of dislocations as an aspect of its ‘democratic’ responsibility for the Eurozone crisis.
I have no illusions that German public opinion or political class is going to shift away from its conveniently exculpatory narrative any time soon. But there is no chance for moving the policy in a more sensible direction—i.e., overcoming Germany’s political resistance—without joining issue precisely on the grounds of shared ‘moral’, and indeed ‘legal’, responsibility for the crisis to date. Only then will you get the needed resolution authority and common deposit-guaranty scheme that will make the banking union more than just a ‘euphemism for exactly the opposite’.