The proponents of fiscal transfers within the euro zone have a clear vision for the currency bloc. Germany, on the other hand, does not. So it’s not surprising that Berlin has mostly been on the defensive in discussions about the future of the 19-country monetary union. Now, in order to prevent the euro zone from permanently becoming a transfer union as Italy works to establish a new government, things need to change fast. It’s time for Germany to develop its own vision for the euro zone — and to promote it.
Back in the days when the Maastricht Treaty was adopted in 1992, most Western European countries had a clear vision. They wanted to break the dominance of the Bundesbank, which in those pre-euro days determined, de facto, the monetary policy for all of Western Europe. But at the same time they wanted to benefit from the low interest rates Germany enjoyed on capital markets, without giving up their fiscal autonomy.
To square that circle, they first accepted the rules of the Maastricht Treaty — and then softened them up later on. For example, in 1996 they agreed that countries with excessive public deficits would not automatically be punished, overruling opposition from Germany’s then finance minister, Theo Waigel. Later, a majority of fellow member countries made sure that Italy became a founding member of the currency union, even though it was far too indebted already.
Shareholders and lenders should be primarily liable for bank losses — with no exceptions.
When these contradictions became apparent after the outset of the sovereign debt crisis, the bloc’s southern countries and France developed the vision of a transfer union. Greece was bailed out and the ECB started its bond-buying program. A year ago, France’s newly-elected president, Emmanuel Macron, went as far as proposing a common budget and a finance minister for the currency bloc.
Germany and the northern members of the euro zone have not been able to prevent the original Maastricht deal from morphing into a transfer union. They did insist that the treaty’s rules be respected, understandably so. But compared with the southern countries’ vision of a fiscally solid union, Germany’s position appeared as fixated on accounting, moralizing and patronizing. Berlin became defensive and only put up tentative resistance — especially as then chancellor Gerhard Schröder damaged the euro-zone’s Stability Pact in 2003 by demanding flexible interpretation of the bloc’s strict deficit rules in favor of Germany.
What was missing was an openly and broadly communicated vision to counter plans of a transfer union. Such visions are necessary to mobilize support, win over allies and strengthen one’s position in negotiations. Also, with a vision, you have a compass to stay the course in times of crisis and make risky decisions when necessary.
Germany urgently needs a vision for the euro zone — one which is not only based on the Maastricht Treaty but also takes into account the lessons learned from the sovereign debt crisis. One such alternative to the transfer union would be a responsibility union. Only when governments and banks are accountable and liable for the consequences of their actions do they make good decisions and not destabilize each other.
Here’s what it would look like. Firstly, member states should be solely responsible for their own debts. This liability should not be carried by fellow euro-zone countries, a European bailout fund or even the ECB. In addition, governments should not finance themselves simply by foisting their own bonds on the banks or insurance companies they supervise. This way the public debt falls back on the states themselves, and voters would pay more attention to sound fiscal policies as it’s in their own interest. The member states would thus become more stable and would no longer interfere with the banks and jeopardize the monetary system, which is crucially important to the real economy.
Secondly, both shareholders and lenders should be primarily liable for bank losses — with no exceptions for individual countries. Therefore they will push for lower-risk business models so that governments no longer bust their finances to bail out banks, as was the case in Spain after its real-estate bubble burst.
Of course, Germany and the northern countries can’t just enforce this vision of a responsiblility union in a culturally diverse euro zone. But at least it would provide them with a level playing field to discuss with the other countries on the future of the currency bloc. And this may stop a transfer union from coming into being as if by fate.
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