By Steven Kelly, University of Wisconsin-Madison Alumni and Member of the European Horizons Alumni Network
PHOTO: Reuters UK
After the landslide French presidential election victory of the moderate, pro-European Emmanuel Macron, Germany has begun to shift its tone on European economic reform. Macron campaigned on the ideas of a common Eurozone budget and finance minister, things usually anathema to Germany and its perennial concerns about footing the bill for the rest of the Eurozone. Since Macron’s victory, German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have begun offering tentative support for such ideas. While this may, on its surface, seem to call for a moment of rejoice for the economically-battered Eurozone, proponents of Macron’s policies for further integration should be wary of Germany’s sudden change in tone if they want the new institutions to effect real change across Europe.
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In the mid-twentieth century, following a second world war that was again blamed on Germany, reformers sought to build a Europe that would prevent any future instance in which Germany would hold excess influence over Europe’s fate. This vision initially took the form of the European Coal and Steel Community—the seminal form of what became the European Union. The ECSC—which consisted of Germany, France, Italy, Belgium, Luxembourg, and the Netherlands—delegated control over industrial production of the necessary war materials to a central authority. In the words of its principal designer, the ECSC was designed to “make war not only unthinkable but materially impossible,” particularly between Germany and France. Additionally, the United Nations was created to prevent future breakdowns of international peace, and Germany was deliberately not given a permanent seat on the UN Security Council pursuant to its size and influence.
As time passed and Germany regained economic and political legitimacy, it essentially became a veto player over further European integration. Its central bank, the Bundesbank, kept inflation low and was primarily focused on price stability—somewhat understandable in light of Germany’s hyperinflation in the inter-war era that wiped out its middle class (in December 1923, one unit of the German currency was worth one trillionth of its 1914 gold value). Thus, in order to pursue monetary integration (creation of the euro) with legitimacy—which required German participation—individual European currencies were initially forced to peg themselves to the German deutschmark, effectively adopting its restrictive, low-inflation regime. This integration ultimately led to the creation of the European Central Bank which has no employment mandate—in contrast to its international counterparts—but instead focuses solely on maintaining price stability, strictly defined as inflation “below, but close to, 2%.”
An inflation target that is effectively an inflation ceiling limits the accountability and effectiveness of the central bank and is unduly restrictive on European growth. Insufficient concern over growth and employment led the ECB to raise borrowing costs in response to oil-price-induced inflation in 2008, at the height of the global financial crisis, and twice in 2011—which, at the least, exacerbated the effects of the original recession and contributed to a second recession in the Eurozone. While the U.S. began its quantitative easing program in 2008, the ECB’s did not begin until 2015 for fear of being inconsistent with its strict, Germany-driven mandate—delaying Eurozone recovery and inflicting significant hardship on its citizens, particularly those outside of Germany.
Also in the spirit of economic conservatism and frugality, despite significant capacity (and need) for such, the German government has rejected significant fiscal investment of any kind, dragging on actual and potential Eurozone (and global) growth. Its resistance to such spending and its Lannister-like desire for Eurozone-wide debt redemption has also set the tone for a Eurozone recovery effort that is solely dependent upon monetary policy—the very monetary policy also constrained by German politics.
As German politics have been imposed upon the wider European Union and hindered its economic recovery, we’ve seen a rise in populism and anti-integration sentiment, manifested most obviously in the near exit of Greece from the Eurozone (or, as Germany would have preferred, a “time-out”). Perhaps fearing that the popular sentiment in Europe in favor of Macron’s ideas for fiscal integration is now wide enough to instigate significant political disruption if Germany resists completely, German leaders have shifted their tone on such policies, while still offering their usual reservations—ruling out risk-sharing, debt-pooling, etc. Europe should be careful to welcome Germany’s newfound backing of fiscal cooperation as it will likely come with desire for considerable influence over the shape of the reforms—influence that would no doubt lead to less impactful fiscal cooperation. The future of European cohesion may not be able to survive another ineffectual European economic institution. Any move toward fiscal cooperation will need to allow the new institution to have significant authority and bring about a stimulative impact if it is to capitalize on the enthusiasm that remains for the European project.
That any major reform in practice still requires German support or German conditions means that the postwar vision for a European community that wouldn’t be captive to a single member’s influence is failing. While the postwar reformers perhaps should have gone further with their efforts to limit individual country influence, Macron currently has a unique opportunity to wield his election mandate to push for pro-European reforms without significant political backing from Germany’s politicians. Macron and other policymakers should resist any German support that comes with its usual excess conditionality.