17 June 2013

Hans-Helmut Kotz: Europe's Economic Groupthink

An overwhelming majority of German (and possibly Dutch and Finnish) economists seem to favour keeping the ECB on the sidelines in the eurozone crisis. But the crisis has revealed the eurozone's institutional flaws. Remedying them calls for a greater openness to institutional adaptation.

Of course, everyone would prefer it if the line between monetary and fiscal policy had not become blurred as a result of the euro crisis. But blindly sticking to principle would have been a highly risky option for the ECB. It would have meant accepting in 2012 what has been called “redenomination risk” – economic newspeak for a eurozone breakup.

By launching its OMT scheme, the ECB has committed German (and other northern European) taxpayers, without their parliaments’ approval, to a potential obligation to bail out – well, whom, exactly? Indeed, it appears that the typical northern European taxpayer supports the typical stakeholder in northern European banks that are over-exposed to southern European debtors.

The ECB is right that it is faced with very different monetary conditions in different Member States; indeed, the eurozone is akin to a badly-working fixed-exchange-rate system, with all of the attendant risks. Ultimately, limiting the ECB to its conventional tool kit amounts to accepting the risk of a eurozone collapse.

In terms of substance – which the German Constitutional Court explicitly and intentionally avoids – the case for OMT has always been about preventing a liquidity crisis from morphing into a solvency problem, especially on the eurozone’s periphery. The OMT scheme’s success depends on an unlimited capacity to intervene – to do “whatever it takes”, as Draghi famously put it. Legally constraining this capacity would be self-defeating. So, if the OMT scheme is not feasible under current treaty provisions, these provisions – which after all are of human, not divine, origin – must be amended.

If the eurozone is to be a sensible long-term proposition, mere survival is not enough. The main justification for a monetary union cannot be the possibly disastrous consequences of its falling apart. Originally, Europe’s monetary union was supposed to provide a stable framework for its deeply integrated economies to enhance living standards sustainably. It still can. But this requires acknowledging what the crisis has revealed: the eurozone’s institutional flaws. Remedying them calls for a minimum of federalism and commensurate democratic legitimacy – and thus for greater openness to institutional adaptation.

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© Project Syndicate