Schauble’s gath­er­ing storm

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Europe’s cri­sis is poised to en­ter its most dan­ger­ous phase. Af­ter forc­ing Greece to ac­cept an­other “ex­tend-and-pre­tend” bailout agree­ment, fresh bat­tle lines are be­ing drawn. And, with the refugee in­flux ex­pos­ing the dam­age caused by di­ver­gent eco­nomic prospects and sky-high youth un­em­ploy­ment in Europe’s pe­riph­ery, the ram­i­fi­ca­tions are omi­nous, as re­cent state­ments by three Euro­pean politi­cians – Ital­ian Prime Min­is­ter Mat­teo Renzi, French Econ­omy Min­is­ter Em­manuel Macron, and Ger­man Fi­nance Min­is­ter Wolf­gang Schauble – have made clear.

Renzi has come close to de­mol­ish­ing, at least rhetor­i­cally, the fis­cal rules that Ger­many has de­fended for so long. In a re­mark­able act of de­fi­ance, he threat­ened that if the Euro­pean Com­mis­sion re­jected Italy’s na­tional bud­get, he would re-sub­mit it with­out change.

This was not the first time Renzi had alien­ated Ger­many’s lead­ers. And it was no ac­ci­dent that his state­ment fol­lowed a months-long ef­fort by his own fi­nance min­is­ter, Pier Carlo Padoan, to demon­strate Italy’s com­mit­ment to the eu­ro­zone’s Ger­man-backed “rules.” Renzi un­der­stands that ad­her­ence to Ger­man-in­spired par­si­mony is lead­ing Italy’s econ­omy and pub­lic fi­nances into deeper stag­na­tion, ac­com­pa­nied by fur­ther de­te­ri­o­ra­tion of the debt-to-GDP ra­tio. A con­sum­mate politi­cian, Renzi knows that this is a short path to elec­toral dis­as­ter.

Macron is very dif­fer­ent from Renzi in both style and sub­stance. A banker-turned-politi­cian, he is Pres­i­dent Fran­cois Hol­lande’s only min­is­ter who com­bines a se­ri­ous un­der­stand­ing of France’s and Europe’s macroe­co­nomic chal­lenges with a rep­u­ta­tion in Ger­many as a re­former and skill­ful in­ter­locu­tor. So when he speaks of an im­pend­ing reli­gious war in Europe, be­tween the Calvin­ist Ger­man­dom­i­nated north­east and the largely Catholic pe­riph­ery, it is time to take no­tice.

Schauble’s re­cent

state­ments

about

the

Euro­pean econ­omy’s cur­rent tra­jec­tory sim­i­larly high­light Europe’s cul-de-sac. For years, Schauble has played a long game to re­alise his vi­sion of the op­ti­mal ar­chi­tec­ture Europe can achieve within the po­lit­i­cal and cul­tural con­straints that he takes as given.

The “Schauble plan,” as I have dubbed it, calls for a lim­ited po­lit­i­cal union to sup­port the euro. In brief, Schauble favours a for­malised Eurogroup (com­posed of the eu­ro­zone’s fi­nance min­is­ters), presided over by a pres­i­dent who wields veto power – le­git­imised by a Euro Cham­ber com­pris­ing par­lia­men­tar­i­ans from the eu­ro­zone mem­ber states – over na­tional bud­gets. In ex­change for for­feit­ing con­trol over their bud­gets, Schauble of­fers France and Italy – the pri­mary tar­gets of his plan – the prom­ise of a small eu­ro­zone-wide com­mon bud­get that would partly fund un­em­ploy­ment and de­posit-in­sur­ance schemes.

Such a dis­ci­plinar­ian, min­i­mal­ist po­lit­i­cal union does not go down well in France, where elites have al­ways re­sisted for­feit­ing sovereignty. While politi­cians like Macron have moved a long way to­ward ac­cept­ing the need to trans­fer pow­ers over na­tional bud­gets to the “cen­ter,” they fear that Schauble’s plan asks too much and of­fers too lit­tle: se­vere lim­its on France’s fis­cal space and a macroe­co­nom­i­cally in­signif­i­cant com­mon bud­get.

But even if Macron could per­suade Hol­lande to ac­cept Schauble’s plan, it is not clear whether Ger­man Chan­cel­lor An­gela Merkel would con­sent to it. Schauble’s ideas have so far failed to per­suade her or, in­deed, the Bun­des­bank (which, through its pres­i­dent, Jens Wei­d­mann, has been hugely neg­a­tive to­ward any de­gree of fis­cal mu­tu­al­i­sa­tion, even the lim­ited ver­sion that Schauble is will­ing to trade for con­trol over the French and Ital­ian bud­gets).

Caught be­tween a re­luc­tant Ger­man chan­cel­lor and an in­dis­posed France, Schauble imag­ined that the tur­bu­lence caused by a Greek exit from the eu­ro­zone would help per­suade the French, as well as his cabi­net col­leagues, of his plan’s ne­ces­sity. Now, while wait­ing for the cur­rent Greek “pro­gramme” to col­lapse un­der the weight of its in­her­ent con­tra­dic­tions, Ger­many’s fi­nance min­istry is pre­par­ing for the bat­tles ahead.

In Septem­ber, Schauble dis­trib­uted to his Eurogroup col­leagues an out­line of three pro­pos­als for pre­vent­ing a new euro cri­sis. First, eu­ro­zone gov­ern­ment bonds should in­clude clauses that make it easy to “bail in” bond­hold­ers. Sec­ond, the Euro­pean Cen­tral Bank’s rules ought to be al­tered to pre­vent com­mer­cial banks from count­ing such bonds as ul­tra-safe, liq­uid as­sets. And, third, Europe should ditch the idea of com­mon de­posit in­sur­ance, re­plac­ing it with a com­mit­ment to let banks fail when they no longer ful­fill the ECB’s col­lat­eral rules.

Im­ple­ment­ing th­ese pro­pos­als in, say, 1999, might have lim­ited the gush of cap­i­tal to the pe­riph­ery im­me­di­ately fol­low­ing the sin­gle cur­rency’s in­tro­duc­tion. Alas, in 2015, given the eu­ro­zone mem­bers’ legacy pub­lic debts and bank­ing losses, such a scheme would cause a deeper re­ces­sion in the pe­riph­ery and al­most cer­tainly lead to the mone­tary union’s breakup.

Ex­as­per­ated by Schauble’s back­track­ing from his own plan for po­lit­i­cal union, Macron re­cently vented his frus­tra­tion: “The Calvin­ists want to make oth­ers pay un­til the end of their life,” he com­plained. “They want re­forms with no con­tri­bu­tions to­ward any sol­i­dar­ity.”

The most trou­bling as­pect of Renzi’s and Macron’s state­ments is the hope­less­ness they con­vey. Renzi’s de­fi­ance of fis­cal rules that push Italy fur­ther into an avoid­able debt­de­fla­tion­ary spiral is un­der­stand­able; but, in the ab­sence of pro­pos­als for al­ter­na­tive rules, it leads nowhere. Macron’s dif­fi­culty is that there seems to be no set of painful re­forms that he can of­fer Schauble to per­suade the Ger­man gov­ern­ment to ac­cept the de­gree of sur­plus re­cy­cling nec­es­sary to sta­bi­lize France and the eu­ro­zone.

Mean­while, Ger­many’s com­mit­ment to “rules” that are in­com­pat­i­ble with the eu­ro­zone’s sur­vival un­der­mines those French and Ital­ian politi­cians who were, un­til re­cently, hop­ing for an al­liance with Europe’s largest econ­omy. Some, like Renzi, re­spond with acts of blind re­bel­lion. Oth­ers, like Macron, are be­gin­ning gloomily to ac­cept that the eu­ro­zone’s cur­rent in­sti­tu­tional frame­work and pol­icy mix will ul­ti­mately lead either to a for­mal breakup or to a death by a thou­sand cuts, in the form of con­tin­ued eco­nomic di­ver­gence.

The sil­ver lin­ing in the gath­er­ing storm cloud is that min­i­mal­ist pro­pos­als for po­lit­i­cal union, like Schauble’s plan, are los­ing ground. Noth­ing short of macroe­co­nom­i­cally sig­nif­i­cant in­sti­tu­tional re­forms will sta­bi­lize Europe. And only a pan-Euro­pean demo­cratic al­liance of cit­i­zens can gen­er­ate the groundswell needed for such re­forms to take root.

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