The Reckoning

Watch on the Rhine: A German Decision on the Euro

Business as usual on the Rhine - for now.

This week brings another inconvenient intervention by “national institutions” in the workings of the multinational Eurozone, that portion of the even larger European Union that uses the euro as its currency. On Thursday, Germany’s constitutional court will rule on whether the creation of a EUR 700 billion “rescue fund” to bail out tottering member states like Ireland and Greece is a violation of Germany’s own national constitution, known as the Basic Law.

More than 12,000 Germans signed a petition asking to high court to rule the bailout fund – the European Stability Mechanism (ECM) – which they argue violates a constitutional clause requiring Germany’s parliament – and not an outside body – to decide whether to expose the country to long term debts.

 This has the potential to cause an enormous legal train wreck – in essence, a restart moment for the European debt crisis that would be a major shock to already jittery global markets. Many legal experts expect a fudge, assuming the justices know an outright ruling against the ECM would cause havoc. Markets would tumble, the euro with it, and it could just be the straw that breaks the Eurozone’s back.

But these experts have no way of knowing how much tolerance is left in German minds for the endless bailouts already undertaken, nor how that may be weighing on judges.

Such surprises have become commonplace in recent years.  The French rejected in a referendum a proposed EU constitution in 2005 that would have created a much more powerful European government. Then Irish voters rejected its successor, the so-called Lisbon Treaty) in 2008. Since unanimity was required, those votes scrapped the initiatives.

What is striking, looking back at these two referendum campaigns, is that none of the reforms proposed in either of those documents would have addressed what has turned out to be the EU’s true shortcoming: the lack of a common fiscal policy.

The EU Constitution, which was never ratified, contained clauses providing greater powers for European versus national law, provisions for a common foreign policy and lofty words about shared European values.

Like the later Lisbon Treaty, the constitution said nothing about sharing the pain of a national bankruptcy, or issuing common “Eurobonds” to fund deficits, or enforcement or ejection provisions to be used if a country flouted the limits on government spending meant to keep the bloc solvent.  

So what is a German constitutional justice to do? Unlike US Supreme Court justices, Germany’s highest court has regularly backed the notion that international laws and treaties can override constitutional concerns in some cases. The principles laid down at Nuremberg after World War II – the idea that just because it’s the law doesn’t mean it is right - still weigh heavily on the country’s legal code, and German law bends to international will at times.

But Germany is reaching a tipping point. Whatever is wrong or right about its decision to force radical austerity on its weaker EZ partners – and much is wrong, to my mind – Germans themselves are asking when they get a vote in how their tax money is spent.

Early in the Eurozone crisis, the German electorate was in a more generous mood: the German economy was defying gravity and exports booming. But German GDP has barely budged since the start of 2011 – not a recession, but certainly a fall back to Earth. While the jobless rate is 5.5 percent – not bad, compared to 25 percent Spain, but exports and order books look slack.

Politically, there is no doubt that the bailouts of Greece and other countries are viewed by most Germans as an unfair handout to less hard working cultures. This is not entirely fair, as I’ve frequently written. The fact is, like the US and its Chinese creditor, there is a co-dependency here. German banks would not have overextended themselves in the “periphery” if German industry wasn’t making a killing there. The enlarged euro currency zone turned parochial German manufacturing companies into regional and then global powerhouses, pushing national favourites into bankruptcy. So there’s plenty of blame to go around.

Still, the ugly mood and German exasperation makes Thursday’s ruling a crucial, potentially critical moment. While the ESM rescue pool is jointly funded, Germany’s share is much larger than others at 27 percent. Since the bailouts of weaker EU states began in 2010, according to the German think tank Ifo, Germany has exposed itself to some $831 billion worth of liabilities to prevent Eurozone members Greece, Ireland and Portugal from bankruptcy – and this doesn’t include the many billions in dicey loans to these countries made by Germany’s leading banks, which would have to be bailed out, too, if a default were to occur.

No end is in sight, either. Last week, the cost of financing Spain’s much larger debts rose once again toward 7 percent – levels that are unsustainable. The Eurozone’s central bank, the ECB, intervened with soothing words about supporting Spain and other troubled EZ countries by buying their sovereign bonds – in effect, lending them money.

But the long-term solution has to involve reforms that give the central bank more authority to discipline member states that overspend (or lie about it, as Greece regularly did). Otherwise, Spain will eventually need a bailout, and the Germans know they will again be asked to pay.

Back at the constitutional court, located near the Rhine in Karlsruhe – far from Berlin as a symbol of post-war Germans’ determination to prevent over-centralization of their government ever again – over-centralization is again at issue. Political issues are supposed to be irrelevant, of course. Jurists will argue that Germany’s constitutional judges will decide the ESM case on legal merits. And so they might. Indeed, you can argue yourself in circles trying to figure out how applying a more nationalist filter might affect a judge’s thinking: Is it more dangerous to blow up the ESM and risk the quick, sharp pain of default that would follow, or is death by a thousand cuts, with Germany doling out rescue funds for decade or more – the darker scenario?

The absurdity of this dilemma illustrates another point: the EU, or at least the EZ (Eurozone), suffers not only from a “democratic deficit,” but an acute lack of leadership, too. The debate right now should not just be about cutting more spending in Greece, Portugal, Spain and Ireland, which have already cut severely. Yes, flabby labor laws and tax codes need reforming, but these economies cannot cut their way to health while remaining tied to a currency as powerful as the euro. Who’s going to buy a Greek anchovy when the Tunisian ones are just as salty and cost half the price?

Greece, and possibly others, need selective reintroductions of their old national currencies, giving them the ability to  devalue, cheapen their exports, lower labor costs and regain competitiveness – all with a path back to rejoin the larger bloc if they meet certain goals. At very least, this gives them ownership of their own problems, a first step to incentivizing real solutions.

This penalty box approach (which I wrote about back in June) has complications, of course, that make it only a bit less painful than doing nothing. But so far, doing nothing – the Eurozone’s current policy – is only putting off the day of reckoning.