Germany must make its mark in any euro crisis

Mon, Dec 6, 2010, 00:00

OPINION:Solidarity only goes so far when leaders are accountable to domestic electorates, writes BRIGID LAFFAN

THE IRISH people have been through two traumatic years and two particularly distressing weeks as the State had to resort to a bailout from the EU-IMF. There is considerable and justified anger with the EU at the terms of the bailout, particularly the interest rate that is being applied to the loans. There is also a sense that Ireland was bounced into taking a bailout when it did not need to because of pressure from European institutions and other member states.

German chancellor Angela Merkel helped precipitate this phase of the Irish crisis by stating that taxpayers could not shoulder the entire burden of support for countries in fiscal difficulty. The European Central Bank also played a role when it decided its short-term lending for liquidity purposes to the Irish banking system was unsustainable.

However, the underlying problem in Ireland caused by the nature and extent of the banking guarantee was too big for Ireland to handle on its own. Outside help would have been necessary at some stage and given Ireland’s euro membership, the EU was always going to be central.

Crises have played a significant role in the dynamic of European integration from the outset as the system built up capacity to deal with new problems as they emerged. There are, however, a number of systemic problems in the character of the EU that have severely limited its capacity to deal with the banking and sovereign debt crises that threaten to engulf the euro and the union. The first is political. Ireland’s partners in the EU did not sit down and decide that Ireland needed to be taught a lesson. Rather, democratic politics in Europe remains predominantly national.

Europe’s leaders are first and foremost accountable to their domestic parliaments and electorates. All electorates including the Irish electorate are attentive to demands on the public purse. Underwriting the mistakes of politicians and bankers in other member states is deeply unpopular. Solidarity is one of the values underpinning the EU but in financial terms, solidarity is represented by the structural funds which are designed to enable peripheral states catch up. Solidarity does not extend to inter-regional transfers on a permanent basis.

The structural problems are not just limited to the political sphere but are embedded in the design of the euro. The growth and stability pact and the no-bailout clause did not guard against the emergence of unsustainable fiscal deficits in a number of member states when the financial crisis struck. The ECB was ineffective in monitoring and guarding against excessive credit over the last decade. Working together with national central banks, it could have prevented the excess, which has proved so damaging.

More importantly, the euro is not accompanied by automatic budgetary stabilisers that kick in when a member state is in fiscal trouble. That would require a European budget that is larger than the current one of less than 1 per cent of gross national income in Europe. The limits of political cohesion ensure that the net contributors to the EU budget contain and constrain it.

In any event, the crisis that now threatens the euro and the contagion that is spreading from one country to another cannot wait for the design of a new budgetary system in the EU, even if that were politically feasible. The speed of the contagion means the EU will have to face up to serious issues associated with the survival of the euro in the short rather than the long term. The emerging framework for economic governance and treaty change due to be discussed at the Brussels summit in December will not address the immediate and evolving crisis of the euro.

There are very challenging decisions ahead for the euro member states, particularly Germany. The collapse of the currency would lead to the re-emergence of the Deutschmark in some form. German public opinion would welcome the return of the mark even if this would not be in their economic interest. It would be a strong currency that would act as a serious brake on German exports. No German government will lightly let the euro go. Saving it will require Germany and the other euro states to deal with the sovereign debt crisis as a European crisis rather than as a crisis in a number of states.


Brigid Laffan is principal of the College of Human Sciences at University College Dublin and a member of the executive committee of the Institute of International and European Affairs