Tuesday, October 11, 2011

Germany Calling

Ambrose Evans-Pritchard, always trenchant, always in the Daily Telegraph says the signs aren't good that Germany will keep digging into it's deep pockets to bail out the European Union experiment gone awry.

Judging by the commentary, there has been a colossal misunderstanding around the world of what has happened in Germany. The significance of last week's vote by the Bundestag to make the EU’s €440bn rescue fund (EFSF) more flexible is not that the outcome was a "Yes".

This assent was a foregone conclusion, given the backing of the opposition Social Democrats and Greens. In any case, the vote merely ratifies the EU deal reached more than two months ago – itself too little, too late, rendered largely worthless by very fast-moving events.

The significance is entirely the opposite. The furious debate over the erosion of German fiscal sovereignty and democracy – as well as the escalating costs of the EU rescue machinery – has made it absolutely clear that the Bundestag will not prop up the ruins of monetary union for much longer.

Horst Seehofer, the leader of Bavaria’s Social Christians, said his party would go "this far, and no further".

There can be no question of beefing up the EFSF to €2 trillion or any other sum, whether by leverage or other forms of structured trickery. "The financial markets are beginning to ask whether Germans can afford all this help. We must not risk the creditworthiness of the German state," he said.

The best-read story in the Handelsblatt newspaper after the vote was the mounting rebellion against the EFSF in the Bundesrat, the German senate representing the interests of the regions. While this chamber does not have the power to block budget deals, it has begun to express deep alarm about the drift of events.

Marcel Huber, Bavaria’s Staatskanzleichef, gave an explicit warning that the Free State of Bavaria will not take one step further towards an EMU fiscal union or debt pool.

“A collectivisation of debts will under no circumstances be accepted. We oppose credit lines for the EFSF or leveraging through the ECB. Our message is simple and clear.”

Since the existing EFSF is too small to make any material difference to the EMU debt crisis, this means that nothing has in fact been resolved. We are where we started, almost entirely reliant on the ECB to play the role of lender-of-last resort.

Can it realistically play this role after the double resignation of Axel Weber at the Bundesbank and Jurgen Stark at the ECB itself over bond purchases? Can it defy Europe’s paymaster state for long? You decide.

This great eruption of feeling in Germany has been the transforming political and strategic fact of Europe over the summer. Finance Minister Wolfgang Schäuble is no doubt scrambling around trying to find some formula to breach his pledge that there is no secret plan to leverage the EFSF into the stratosphere.

He will try to pretend that this is not a flagrant double-cross. But his scheming with the French is largely irrelevant at this point. Bigger events are rolling over him. If he really thinks he can dupe the Bundestag yet again, he is out of his mind. And will soon be out of office.

As Bundestag president Norbert Lammert said yesterday, lawmakers had a nasty feeling that they had been "bounced" into backing far-reaching demands. This can never be allowed to happen again. He warned too that Germany's legislature would not give up its fiscal sovereignty to any EU body.

In a sense, the Bundestag vote was much like the ruling by the Constitutional Court earlier this month. It too said "Yes" to the bail-out machinery, but that was not relevant fact. What mattered was the Court’s implicit warning that Germany had reached the outer boundaries of EU integration, that German democracy is under threat, and its explicit warning that the Bundestag’s fiscal powers could not be alienated to Brussels.

Something profound has changed. Germans have begun to sense that the preservation of their own democracy and rule of law is in conflict with demands from Europe. They must choose one or the other.

Yet Europe and the world are so used to German self-abnegation for the EU Project – so used to the teleological destiny of ever-closer Union – that they cannot seem to grasp the fact. It reminds me of 1989 and the establishment failure to understand the Soviet game was up.

Our own Chancellor George Osborne has fallen into this trap. I can entirely understand why he is calling for quick moves towards EMU fiscal union, but such an outcome is not on the table.

Repeat after me:







Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.

It has certainly been an electrifying few weeks.

I happened to be in the room with a group of Nobel economists in Lindau last month when German President Christian Wulff lashed out at Europe, accusing the ECB of violating its mandate and subverting the Lisbon Treaty.

“I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said.

“This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said.

Mr Wulff said Germany itself risks being engulfed by escalating debts. Who will “rescue the rescuers?” as the dominoes keep falling, he asked.

"Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts.

"With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult."

More distant relations?

“All I heard was Germany, Germany, Germany. There was nothing about Europe. It was astonishing,” said Myron Scholes, the winner of the 1997 Nobel Prize.

Indeed it was. Fellow laureate Joe Stiglitz said that if President Wulff’s views reflected the outlook of the German government, monetary union would have collapsed already.

Well yes. Quite.

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