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At present, the argument for German leadership boils down to a plea that it should put more and more money on the European table. Yet the principle that there should be no bailouts is fundamental in a union of countries that share a currency but remain sovereign when it comes to public finances. A democratic European monetary union could not have been built without respecting this principle. It will be a long time before a fully fledged political union is established. Fiscal transfers will remain a matter for national parliaments.
Jointly issued eurozone bonds would violate this principle and undermine democracy. They would send a message to highly indebted countries that they can enjoy modest borrowing costs without making efforts to bring public finances under control. This would reward bad policies and punish sound economic management. Who could call this an act of solidarity?
Misguided ideas also dominate discussions about a Banking Union. There are good arguments for creating a single supervisory authority and a unified bank resolution mechanism. But it is hard to justify forcing one country’s taxpayers to pay for the irresponsible practices of another country’s bank’s. What would have been the reaction of Italian or Spanish taxpayers if they had been asked to pay for the irresponsible behaviour of IKB or Hypo Real Estate, German banks that had to be rescued by the state? Yet when the situation is reversed, such transfers are presented as an act of solidarity. Legacy problems in national banking systems should be solved before Banking Union goes any further. If they are not, it would be better to stop the whole project.
The countries now in trouble have caused their own problems through their own policy mistakes. You could argue that Spain was fiscally well behaved. But its fiscal mess was the result of an uncontrolled construction boom, fuelled by tax incentives, which ended in inevitable bust. Or take Italy. Who remembers its commitment in 1998 to run a primary budget surplus continuously at a level guaranteeing a decline in its ratio of debt to gross domestic product? When Italian interest rates fell to German levels as a result of monetary union, it reaped a dividend of tens of billions of euros. These savings were wasted. Increasingly, Germany is blamed for Italy’s miserable situation. Italian entrepreneurs can tell you where responsibility really lies.
The future of the eurozone – and that of Germany – will rest on sound economics. As well as stable money and solid public finances, that means competition, flexible labour markets and sustainable pension systems. This was the philosophy on which Europe’s monetary union was built.
Walter Hallstein, the first president of the European Commission, stressed repeatedly that the EU was based on the principle of law. Credibility in the eurozone can be restored only if treaties and rules are respected again. Those who violate rules should face sanctions. Those who wilfully continue to violate the rules should not be allowed to blackmail the others – and should consider leaving. The eurozone did not fall into a crisis because the initial rules were flawed – but because countries have constantly violated its rules.
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