David Marsh: I understand that both of you have enjoyed your friendship disputes for decades. Alright, let’s find out if your disagreement about the decision of the German constitutional court is more substantial or nuanced.
Marco, you feel that countries, like your native Italy, have failed to implement structural reforms, thus increasing Germany’s understanding of moving unions.
Marco Annunziata: Correct. Last year, Italy’s real per capita income was the same as in 1999. Growth stalled, instead of structural reforms they launched a universal basic income, and calls for EU assistance were louder. Germany is right to care.
Mark Sobel: Marco is fully justified in pointing to the lack of Italian structural reform. It did hamper an increase in GDP and reduce Italy’s high debt to GDP ratio, despite a major surplus. Germany is really concerned. But that is only part of the story.
DM: What do you mean by ‘part’ of the story?
MS: Germany benefits a lot from the euro. The real German Euro is very undervalued. German austerity is high, reinforced by the fiscal stance of the pre-corona virus pro-cycle crisis. Germany’s large current account surplus reflects the absorption of demand from the entire euro area, which is compressed through internal devaluation. Without the euro, the growth model of export-led growth dependence on German exports and Mittlestand (small and medium-sized companies) will suffer greatly.
MA: I agree the euro is weaker than the Deutsche Mark; but I think the productivity and competitiveness of German industry plays a greater role, and the performance of German exports will remain strong. Of course, there is only one way to find out.
DM: So what should the German political class do?
MA: Hold an open discussion about the benefits and risks of euro membership. There is a clear risk that the euro area will eventually turn into union transfers to avoid another crisis. Perhaps a broader European political project and some benefits for German exports are worth the price. But German citizens and institutions must explicitly consider the costs and benefits and then decide.
MS: Germany’s entry into the euro reflects Germany’s integration into Europe and the West. The public was told the European Central Bank would be a copycat of the Bundesbank – an independent central bank focused on price stability – and the Maastricht agreement and the stability and growth pact would make others behave like Germans. It doesn’t work like that. With public doubts and new political parties and attitudes, the German leaders used the time until the abyss appeared and then weighed enough on the European side. They must align with the public about the great benefits of the euro for Germany.
DM: Is the German constitutional court justified?
MS: The reason for the court seems astonishing. ECB monetary policy is clearly under the scope of the ECJ. I am not a lawyer, but the reason the court is very selective, seems to aim to question the balance of power between member states and supranational. Meanwhile, the Polish and Hungarian governments rejoiced, and German courts were attacked throughout Europe’s financial circles and by most German political classes. I wondered if the verdict did not backfire for Germany.
MA: I am also not a lawyer, but someone must take institutional responsibility to ask a difficult question: do we buy bonds in large quantities by the ECB? In every emergency we are told that we have no choice and that the ECB must do anything. Then monetary policy is formed by a series of emergencies. There needs to be more accountability. I think the German constitutional court is right.
DM: What happens next?
MS: They will find diplomatic fudge. The ECB cannot officially let Germany’s constitutional court be seen as on par with the ECJ. European Commission President Ursula Von der Leyen has the right to threaten Germany. The German political class must work on the fudge and the German court must step down. Bundesbank President Jens Weidman must defend the ECB.
MA: That’s Europe, so fudge is always the preferred solution. Maybe the German court will buy the arguments that will be submitted by ECB lawyers. But even if that happens, I don’t think that’s the end of the story. We will see more tension and new legal challenges, especially if the ECB continues to have to make new steps.
DM: Is it far-fetched to think Germany might leave the euro?
MA: Just a little more far-fetched than to think that Britain can leave the EU. As Mark noted, the euro area that we have is not a registered German public. If he enters a transfer union, the costs for Germany will be large and open. Germany needs to consider the enormous and uncertain economic costs and benefits that stretch far into the future. And greater political integration that should have followed the euro emerged from the table; in fact the global trend has returned to nationalism. I would call this the risk of a ‘fat tail’.
MS: I have no crystal ball. But I think this is further than Marco. German leaders know that Germany has benefited greatly from the euro and that the cost of leaving will be very painful – for Germany, Europe and the world. The extraordinary speech by German President Frank-Walter Steinmeier on the 75th anniversary of Victory Day in Europe which shows the importance of Germany anchored in Europe and the West. Euro is the symbol of the peak.
David Marsh is the Chair of OMFIF. Marco Annunziata is Co-Founder of Annunziata + Desai Advisors and former Chief Economist at General Electric and Unicredit. Mark Sobel is the Chair of US OMFIF.
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