It's Wednesday, and today I discuss a recently published analysis that has found that Australian…
Last Tuesday (May 15, 2018), the new German Finance Minister Olaf Scholz stood up in the German Bundestag and delivered his first fiscal policy presentation. Not only was “die schwarze Null” (Black Zero) sustained but in his address, the new German Finance Minister made it clear that Germany would not entertain any expansion of the EU fiscal capacity (thus rejecting Emmanuel Macron’s proposals) and wanted to delay other ‘reforms’ that Germany had previously suggested they would support (beefing up the Single Resolution Fund and the creation of the European Monetary Union). For those Europhile progressives who have been hanging their hat on the hope that the takeover of the German Finance Ministry by the SPD would be the deal breaker that the Scholz’s presentation was nothing short of a disaster. He reiterated Germany would not be shifting in any major way and that Member States just had to buckle down and follow Germany’s fiscal example – surpluses as far as the eye can see. None of this was a surprise to me. It has been clear for some time that Scholz is just a continuation of Schäuble. Indeed some pointed statements from Bundestag politicians next day in their responses suggested just that.
I wrote about why the elevation of Olaf Scholz will be a disaster for European reform in this blog post – Forget European reform – the Germans have anyway (April 23, 2018).
His Bundestag speech (May 15, 2018) just confirmed that assessment.
On May 16, 2018, when the Bundestag President, Wolfgang Schäuble handed the floor to the spokesperson for Die Linke, Gesine Lötzsch to respond to the German fiscal statement that Finance Minister Olaf Scholz had delivered the day before, she opened by saying that Olaf Scholtz’s fiscal statement ran contrary to the “title of the coalition agreement” – “Ein neuer Aufbruch für Europa – Eine neue Dynamik für Deutschland – Ein neuer Zusammenhalt für unser Land” (“A new departure for Europe – A new dynamic for Germany – A new coheson for our country”.
She said that (Bundestag Protokoll, Wednesday, May 16, 2018, page 2898):
… none of this is true in this budget. This is not only a disgrace for Olaf Scholz, but above all is fatal for our citizens. They continue to promote the black zero. I wonder why the SPD really wanted to take over the Ministry of Finance if it only wanted to continue the policy of Wolfgang Schäuble.
The black zero is the famous “schwarze Null” or balanced fiscal state which Schäuble obsessed about.
In a similar vein, Leader of the Alliance ’90/The Greens, Katrin Göring-Eckardt asked Andrea Nahles (Leader of the Social Democratic Party (SPD) in the new German Parliament) (Bundestag Protokoll, Wednesday, May 16, 2018, page 2995):
Erst einmal habe ich mich gefragt: Warum haben Sie eigentlich 13 Stunden, glaube ich, um das Finanzressort verhandelt, damit am Schluss Wolfgang Schäuble Olaf Scholz heißt? Sonst ändert sich eigentlich nichts.
Which also asks why did the SPD bother trying to get hold of the Finance job when all that has happened is that Wolfgang Schäuble has morphed into Olaf Scholtz.
The day before, Olaf Scholz stood to the applause of the CDU/CSU and SPD members after former Finance Minister, Wolfgang Schäuble, now President of the Bundestag, invited Scholz to present the “Haushaltsgesetz 2018” (Federal Budget Act, 2018).
What followed was an almost final ‘nail in the coffin’ for any plans that the Europhile progressives might entertain to achieve meaningful reforms of the Eurozone.
But first some background.
The European Stability Mechanism
After an ad hoc approach to Member State insolvency in the early years of the GFC under the guise of the two programs – European Financial Stability Facility (EFSF) – and the – European Financial Stabilisation Mechanism (EFSM), the European Commission established the European Stability Mechanism (ESM), which was established as an intergovernmental agreement on September 27, 2012.
I emphasised its status as an Treaty Establishing the European Stability Mechanism – because it means the status of the ESM is not currently integrated into European Union law.
The ESM is an intergovernmental institution based in Luxembourg with the EMU Finance Ministers becoming the Board of Governors.
The ESMs role was to provide:
… a permanent solution for a problem that arose early in the sovereign debt crisis: the lack of a backstop for euro area countries no longer able to tap the markets.
That is, it was established as a means of helping Member States unable to fund themselves.
It was an explicit recognition that the EMU nations use a foreign currency and can easily find themselves unable to raise sufficient amounts of that currency in bond markets to cover their fiscal deficits.
The ESM has “its own capital of €80 billion” provided by the Eurozone Member States, which cannot be loaned out. Its purpose it to provide financial markets with the confidence that the ESM is widely supported within the Eurozone.
In addition, it raises funds on financial markets which it then loans out under strict (neoliberal) conditionality to Member States in trouble.
Of the six tools available to it the ESM has used just two – loans to Ireland, Portugal, Greece, and Cyprus and some indirect bank recapitalisation in Spain.
The ESM thus currently provides a bailout mechanism, albeit one that enforces the austerity bias. Its purpose is to “keep the euro together” rather than provide any progressive policy space.
On December 6, 2017, the European Commission released its – Further Steps towards completing Europe’s Economic and Monetary Union – (the ‘Roadmap’) which offered two ‘concrete’ proposals:
1. “A proposal to establish a European Monetary Fund”.
2. “A proposal to integrate the Treaty on Stability, Coordination and Governance into the EU legal framework”.
I say ‘concrete’ because these were the only two proposals that have any sense of an action plan attached to them.
This document was really just a follow up on the – Five Presidents’ Report: Completing Europe’s Economic and Monetary Union (June 22, 2015).
That meant that the European Commission intended that these two developments would constitute its major ‘reform’ agenda for the EMU.
Which at the time indicated that very little meaningful reform was going to be countenanced.
The agenda set out was really about tidying up the developments noted above that were introduced on a sort-of piecemeal basis during the crisis and consolidating them under European Commission control and Treaty law.
It doesn’t mean that will be administered as the term “law” is taken to mean. As we know, the European Commission and related institutions such as the European Central Bank, regularly and systematically break the Treaty laws for political gain.
But the proposal was about further centralising control in the technocracy and taking away discretion from the Member States.
In other words, it constitutes the anathema of democratic reform and will increase the democratic ‘deficit’, that has become apparent with Europe over the last decades.
In fact, the ‘Roadmap’ proposed only one substantial change – the proposal to establish the European Monetary Fund.
That proposal is clearly about further centralising control of European matters within the European Commission.
That is the intent of converting an ‘intergovernmental agreement’ into EU law.
The document set out time schedule to operationalise the proposal:
1. Euro Summit (December 15, 2017) – while this meeting was dominated by Brexit considerations, the Summit did discuss “the future of the economic and monetary union (EMU) and banking union”.
The President of the European Council, Donald Tusk released a – Letter – ahead of the Summit, which “outlined a number of ideas on which there is a broad convergence” among the Council members.
These were listed as:
- putting into operation a common backstop for the Single Resolution Fund, possibly in the form of a credit line from the European Stability Mechanism (ESM);
- further developing the ESM, possibly to become a so-called European Monetary Fund
- further developing the Ecofin Council Roadmap of June 2016 on completing the banking union, including the gradual introduction of a European Deposit Insurance Scheme
Note the ‘slippage’ in terminology – the proposal to create a European Monetary Fund, by the time the Summit arrived (one year after the ‘Road Map’ was released) was now being expressed as a “possibility”.
2. European Council (June 28-29, 2018).
3. European Council (March 21-22, 2019).
4. Sibiu Meeting (May 9, 2019) – Under the revolving Presidency of the Council of the EU, Romania will host this meeting which is expected to finalise the introduction of the European Monetary Fund.
Notwithstanding the uncertainty, the plan has some clear aspirations:
1. Integrate the ESM into the European Union Treaty – to give the European Commission more control. No reforms here.
2. A desire to kill the Troika – that is, keep the IMF out of any future bailouts in Europe.
3. Create a funding source for the – Single Resolution Fund – to buttress the “orderly resolution of failing banks with minimal costs to taxpayers and to the real economy” – nothing much new in that.
I considered the proposal in more detail in this blog post – The latest scam from the European Commission – the ‘roadmap’ – Part 2 (December 20, 2017).
The European Monetary Fund proposal clearly already reflected Germany’s aversion to any intra-Eurozone transfers. It states that its operations would be “fiscally neutral”, which means there would be no permanent intra-Member State transfers, which are common in functioning federations (such as Australia, Canada etc).
This had Wolfgang Schäuble written all over it as I outlined in this blog post (October 16, 2017) – Wolfgang Schäuble is gone but his disastrous legacy will continue.
That blog post analysed Schäuble’s parting 3-page offering as German Finance Minister – Non-paper for paving the way towards a Stability Union – which argued that “there is little willingness” among Member States to move towards a true federation.
The creation of the European Monetary Fund (EMF), which would just extend the existing European Stability Mechanism, “to provide temporary financial support under strict reform conditionality”, was as far as he was prepared to go.
The operational significance was that under this vision, the EMF would entrench the practice of pro-cyclical fiscal policy (cutting public net spending when non-government spending is declining), which is the anathema of sound fiscal practice.
Wolfgang Schäuble’s non-paper told us exactly why the Eurozone will never become a functioning federation.
Further, Schäuble outlined the German requirement that the ESM would become a monitoring institutions over Member State policies and be allowed to discipline nations that were seen to be in violation of the Stability and Growth Pact.
In other words, technocrats working within the ESM would be empowered to delve into Member State finances and impose conditionality where it thought the State was likely to (or was) violating the fiscal rules (Fiscal Compact).
Enter Olaf Scholz’s first fiscal statement – May 15, 2018
Scholz told the Bundestag that (translating in paraphrase form from the German):
1. “The debate about the correct management of government debt and financial markets has dominated European policy over recent years. Taxpayers should never again have to bail out the mistakes of banks through state budgets.”
2. “Europe is the most important national concern for Germany. A strong Europe is of primary interest to Germany.”
3. “As the most populous country with a strongly performing, export-oriented economy in the middle of the continent, we are dependent on a successful European Union. Everything that happens in Europe is important to us, and everything we do in Germany or what we do not do has an impact on our European partners. With this responsibility, we have to be smart and reasonable.”
4. “But the challenges for Europe are getting bigger … wars nearby, millions of people displaced … terrorism … the rise of nationalism … climate change … the list of challenges is long.”
5. “The problem is not that Europe is too dominant, rather it is that the EU seems to be too weak … the big politicial issue is about the sovereignty of Europe, as the French President Macron correctly notes.”
6. “Macron is correct in saying that confidence in Europe is not gained through back room collusion but by making it clear what we are doing.”
So all these statements are of the motherhood variety. The nuance is that the way Germany appear to be handling France under Macron is a little different to the way they short-changed François Hollande directly after he was elected on a ‘reform agenda’.
During his election campaign, Hollande had criticised Germany’s obsession with austerity, but when he made his trip to Germany, he was attacked for not proposing a major neoliberal reform agenda in France.
As a result of the delicate structure of the current GroKo in Germany, they have to treat their disdain over Macron’s European ambitions a little less directly.
After making all the usual ‘Germany loves Europe’ type messages, Scholz went on articulate what he thought should happen at the European level.
7. “There are very concrete steps to be taken in the area of Economic and Monetary Union and the regulation of banks. The one thing we will do now is to expand the European Stability Mechanism. We (as the government) have stated that we want to develop it further towards a European Monetary Fund. This is important for the future stability of the euro area. Perhaps the ESM may also be the anchorage for the last hedge behind the single European bank resolution mechanism, to be introduced by 2024 at the latest.”
8. “This mechanism avoids taxpayers having to bailout a bank in trouble”.
9. “This should be done in two steps – first, shape the new ESM, and then, embody this new ESM into EU law”. (the AfD members were recorded as laughing at this stage).
10 “the decision of Great Britain to leave the European Union is unfortunate. We do not yet know what withdrawal means for us in the EU. However, it is clear that if the exit is sealed and completed, we will lose a net contributor to the EU budget. We have stated in the coalition agreement that Germany is ready to spend more on the EU budget after Brexit”.
11. How much more? “I have the impression that we can also make a difference with 1 percent of the economic output of the world’s largest trading bloc.”
Even with the paraphrased German translation, it is pretty easy to pick up the further uncertainty that Scholz was intending to introduce into the upcoming European Council meeting on June 28-29, 2018 in Brussels and beyond.
Remember that Wolfgang Schäuble had already indicated Germany would accept the incorporation of the ESM within EU law under the strict conditions noted above.
Let me emphasise Scholz’ intent, starting in reverse order of the issues he discussed above.
First, how much more? Well clearly Scholz recognises that while Britain will no longer be contributing billions to the EU fiscal capacity, he agreed that Germany would be “ready to spend more”.
But don’t be seduced by that promise. The 1 per cent of GDP should be the focus.
On January 8, 2018, the European Commission issued a discussion paper – A new, modern Multiannual Financial Framework for a European Union that delivers efficiently on its priorities post-2020 – which aimed to condition the upcoming EU ‘budget’ considerations in the context of Brexit.
The paper said that this “is a time for Leaders to commit financially to the kind of Union they want” and that the Commission considered the next seven-year financial agreement “will be a litmus test for the European Union”.
It outlined a host of challenges facing Europe and concluded that if “the Union decides to do less, a smaller budget will suffice” but:
Europeans expect a strong Union able to face the challenges of the future and a budget that can deliver for them. Leaders must play their part in meeting these expectations.
Well, Scholz’s speech in the Bundestag last week clearly indicated that Germany was only going to support the “less” option,
Do the sums!
The nominal GDP for the EU (28) was 15,326,468 million euro.
1 per cent of that GDP would represent 153,264.68 million euro.
The EU buget for 2017 allocated:
The EU budget for 2017 sets the total level of commitments at €157.86 billion and of payments at € 134.49 billion
Conclusion: Germany is proposing a smaller EU ‘budget’ going forward, which makes all his concilitory statements about Emmanuel Macron look pretty false, given the latter clearly wants to expand the EU allocation.
So Germany does not intend to support any changes that might create a federal fiscal capacity for Europe.
Second, the ‘Roadmap’ saw the European Monetary Fund as providing “the common backstop to the Single Resolution Fund as part of the Banking Union”.
The – Single Resolution Mechanism – was introduced on August 19, 2014 and provides a formal process through which failing banks can be either restructured or closed without requiring massive bailouts from the fiscal resources of specific Member States.
The Single Resolution Fund was the fiscal support to that process – in other words, it provides a fiscal indemnity to Member States facing bank failures.
Its operations began on January 1, 2016 and its fund was to be built up, over 8 years, to be in excess of one per cent of the deposits of all banks in the EU (noting that Britain and Sweden opted out).
Germany was a reluctant participant in the process and rejected the EU’s further plan to incorporate a EU-wide bank deposit insurance scheme, which the European Commission had considered to be the “third pillar” of the European banking union.
One might say, the most crucial pillar.
Germany considered that if such an insurance scheme was introduced it could use its funds to guarantee deposits of citizens across Europe. Germany already has its own deposit insurance scheme and resented having to provide funds to allow other Member State governments, who had not taken a decision to introduce their own scheme, to benefit.
Scholz’s speech indicates that he wanting to play for time in relation to the Single Resolution Fund and its incorporation into EU law.
As he said, Germany does not want the matter resolved until 2024, which by then, will mean Germany is in the next political cycle and no responsibility would be taken by the current government for decisions that might be made by a new German government.
Third and related, Scholz now wants to separate the ESM proposal – the move to create the European Monetary Fund and incorporate it into EU law into two steps (“zwei Schritten”), whereas the European Commission wanted the whole package to be done and dusted by May 2019.
According to Scholz, the first debate would concern the conditions under which the European Monetary Fund would be structured and operated.
The second debate would then concern whether the European Monetary Fund would transcend its current intergovernmental agreement status and become EU law, which would take it out of Germany’s direct control – given it can veto intergovernmental agreements.
There is no way those debates can be finalised by May 2019.
French response rather swift
On May 10, 2018, a few days before Olaf Scholz stood up in the Bundestag and effectively ruled out any serious reform in the Eurozone, French President Emmanuel Macron told an audience in Aachen (Germany) while he was receiving the Charlemagne Prize for European Unity, that (Source):
Germany can no longer remain attached to maintaining budget and trade surpluses, as they are always achieved at someone else’s expense.
Well they can and they will.
After Scholz’s devastating speech to the Bundestag, the French Minister of Economic Affairs Bruno Le Maire responded by saying that “The eurozone cannot withstand economic divergences among its member states … It is now or never”.
Well Olaf Scholz thinks ‘now’ is 2014!
As an aside, the ‘Charlemagne Prize’ is very discriminating. Its past recipients include Martin Schulz, Herman Van Rompuy, Wolfgang Schäuble, Jean-Claude Trichet, Donald Tusk, Angela Merkel, and to cap it all off – The euro was awarded the Prize in 2002.
Given it is awarded for promoting European Unity, you would have to think that the famous quote by Groucho Marx – “Please accept my resignation. I don’t care to belong to any club that will have me as a member”.
So it is on to the European Council summit in Brussels at the end of June for more talk. The Germans will wax lyrical about the importance of Europe to them and how Germany is a European citizen bar none.
But they will not concede ground on the things that matter.
And as the French economy minister said – “without reform the euro area won’t survive”.
And that doesn’t mean making a few changes around the edge.
Germany has to give up control and allow a full fiscal union to develop. That is the scale of the reforms that are required.
It won’t agree to do that.
Nor, for that matter will France.
That has been clear for decades and is why Europe is in the state (mess) it is in.
The clock is ticking!
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.