Some prominent Germans have publicly expressed their doubts about the future of the euro. A few politicians have tried to jam anti-euro sound bites edgewise into the evening news. And an anti-euro party, the Alternative for Germany, is forming just in time for the September elections, hoping to garner enough votes to move into parliament.
But those close to the epicenter of power, those near Chancellor Angela Merkel, have to toe the line. And the line is that the euro is far more than just a currency, that it’s a sacred concept, a sort of religion worth saving no matter what the costs. Even much of the opposition toes that line. While the possibility that a small country might exit the euro has been accepted more or less, the euro itself has been inviolable in those circles. Until now.
“I give the euro medium-term only a limited chance of survival,” said Prof. Dr. Kai A. Konrad, Chairman of the Council of Scientific Advisors to the Ministry of Finance, an advisory body to that epicenter of power. In his day job, he is Director at the Max Planck Institute for Tax Law and Public Finance. In an interview published in the Welt, he floated a trial balloon, an alternative, a heresy for Germans, a grand compromise of sorts, an exit strategy if you will, a way out of the crisis for every country in the Eurozone, a Plan B whose very existence the government has strenuously denied.
European “austerity” policies – the prescription for keeping the monetary union together – have come under blistering attack. But Konrad was no softie on that issue: “No country can pile on debt arbitrarily without exposing itself to the risk that investors will someday pull the plug,” he said. That’s what had happened to countries at the core of the debt crisis.
So it should be in the self-interest of each country to keep “the mountain of debt as small as possible,” he said. But there wasn’t a single number, like the 60% of GDP inscribed into the Maastricht Treaty – now de facto abandoned. The boundary at which point a country gets into trouble varies, he said, depending on growth dynamics and demographic developments.
When the Maastricht treaty was being negotiated, there’d been some justification for that 60%, based on the growth assumptions for each country. With hindsight, it was too high because “the European growth expectations have not been fulfilled in the past 20 years,” he said. “But countries whose growth is too weak can borrow even less.”
He saw another problem with strict debt and deficit limits. “When you try to impose such conditions on member states, it only creates resentments, and in the end, it puts the European project at risk.” A reference to the relationship between a bailed-out country, like Greece, and Germany that culminated with images of Merkel in Nazi uniform. Instead, Eurozone countries should be free “to borrow as much as they want to, with the stipulation that they alone are responsible for their debts.”
A radical thought in Germany, that each country should be able to borrow as much as it wants to! The second part, that each country would be exclusively responsible for its own debts, and not the debts of other countries, was of course one of the tenets of the Maastricht Treaty, and one of the ironclad promises proffered by German politicians to bamboozle the people into giving up their Deutsche mark. A promise that turned into a lie with the first bailout [read…. Ten Big Fat Lies To Keep The Euro Dream Alive].
But for Konrad, it was the grand compromise, the Plan B: forget the limits on debts and deficits in the Maastricht Treaty. Let each country splurge on borrowed money as it sees fit. But when investors pull the plug, there would be no bailout, no Troika, no ECB to buy bonds, and no German inspectors crawling around the ministry of finance. It would be up to the country to deal with its investors and fund its deficits with thin air.
To allow a country to go bankrupt in a monetary union, you have to render the banking sector “immune to crisis,” he said. He wasn’t talking about core capital ratios or derivatives, but about a very basic concept: “Banks should withdraw completely from funding governments. Then, if the state becomes insolvent, the bondholders of that state could be presented with the bill without immediately risking a systemic crisis.”
A sea change. European banks buy massive amounts of debt from their own governments, and from other governments. Under his proposal, banks could not own any sovereign debt and thus would be immune to a sovereign debt crisis. But that might not work either, given just how dependent governments are on their banks for funding. And so he closed on a somber note – and a trial balloon for the new government line.
“Let’s put it this way, Europe is important to me,” he said. “Not the euro. I give the euro medium-term only a limited chance of survival.” When pushed to define “medium-term,” he cautioned that identifying exact periods would be difficult, that it would depend on a lot of factors, “but five years sounds realistic,” said the Chairman of the Council of Scientific Advisors to the Ministry of Finance.
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.