Tick Tock

Now the Bundesbank (the German central bank) weighs in with its latest thoughts on the absolutely final Greek bailout (July edition). This is the key passage (from the bank’s monthly report for August):

The recent resolutions transfer sizeable additional risks to the countries providing assistance and their taxpayers, and go a long way towards communitising risks caused by unsound public finances and misguided macroeconomic policies in individual euro-area countries. This weakens the foundations of monetary union, which is based on the principles of national fiscal responsibility and the disciplining effect of capital markets, without noticeably increasing the influence and control over individual national fiscal policies as a quid pro quo.

Note that the (immensely respected) Bundesbank takes time out to praise the very same capital market discipline that Angela Merkel appears to resent so much. The report continues:

Overall, there is a risk that the originally agreed institutional framework of the monetary union will increasingly become eroded. While fiscal policy will continue to be determined by democratically elected parliaments at national level, the resultant risks and burdens will increasingly be borne by the Community in general and the financially sound countries in particular, without this being offset by any concrete powers to intervene in the sovereignty of national fiscal policies.

And there you have it, set out in unusually explicit terms. Democratically elected national parliaments on the one side, and a technocratic transnational project on the other, with no real fit between the two and no genuinely democratic mandate for the latter either in place now or (given the darkening mood of some key electorates) possible any time soon.. Meanwhile, this mess has grown too big to be quietly cleaned up behind the closed doors that Brussels prefers.

Here’s the Bundesbank again (my emphasis added):

No comprehensive change in the European treaties is currently envisaged that would democratically empower a central entity to exert some control over national budgetary policies. This means there is a danger that the euro-area countries’ propensity to incur debt may increase even further, and the pressure on the euro area’s single monetary policy to adopt an accommodating stance may grow. Unless and until a fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty, it is imperative that the no bail-out rule that is still enshrined in the treaties and the associated disciplining function of the capital markets be strengthened, and not fatally weakened.

It could not be more clear. Germany’s central bankers dislike anything resembling the billion-dollar band-aids that have been applied so far. If the monetary union is to work in ts current form it will, in their view, require “an extensive surrender of national fiscal sovereignty”. The Bundesbank is not in a position to force this through, but there is nothing wrong with its logic, even if  some of the words used will ring with a disturbing resonance for many older europeans. But if the Bundesbank’s logic is impeccable, the politics of what it is proposing are poisonous and, I suspect, impossible within the short period that markets will require if further severe turmoil is to be avoided.

There is no simple solution to all this, but throwing Greece out of the eurozone (even if there was a mechanism to do so) is unlikely to do the trick. The attention would merely turn to who was next to be hurled out of this uncomfortable and poorly-run club. And, yes, that brings me back (yet again) to the ’Northern Euro’. Setting it up would be no easy ride, but the destination looks a lot more comfortable than some of the alternatives.

Meanwhile, as alert to potential catastrophe as always, the Daily Telegraph’s Ambrose-Evans Pritchard notices something else interesting about the Bundesbank’s comments:

The wording is uncannily close to language used by plaintiffs challenging the legality of EU rescues at the country’s constitutional court. The judges are expected to rule in September or early October. Any finding that the bail-out fund (EFSF) breaches Germany’s Grundgesetz [constitution] could have shattering effects on creditor confidence in monetary union.

If there’s any left by then.

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