Europe tries its luck by giving free rein to German inflation

Frenchman Emmanuel Macron and Italian Mario Draghi are now trying to push the boundaries even further, signing the Quirinal bilateral treaty in Rome last month with the aim of taking control of the European tax system as well.

They aim to dismantle the legal architecture of fiscal discipline, allowing states to run much larger deficits by excluding public “investments” from normal figures. They are right in a sense: the austerity bias in the deficit rules led to frightening economic mistakes during the EMU debt crisis. But while their proposal sounds like a variation on Gordon Brown’s Golden Rule, the implications are radically different in the creditor-debtor context of monetary union.

They also aim to inaugurate a de facto European treasury with a joint debt issue, even though the German Constitutional Court has already ruled that this violates the country’s basic law.

Professor Daniel Gros, director of the Center for European Policy Studies, said the Quirinal’s move was seen as a provocation by Berlin, an attempt to tip Chancellor Olaf Scholz and his new coalition into a costly “transfer union”. Draghi’s halo doesn’t change a thing. “Draghi will no longer be there in the future: the debt will remain,” he said.

Italy is the linchpin of what will unfold over the next two years. “It’s too big to bail out with fiscal transfers, and it can’t renew its outstanding debts unless the ECB is there to keep the market open. The market will close when the ECB pulls out, ”said Professor Mayer, currently at the Center for Financial Studies in Frankfurt.

Three years ago Matteo Salvini’s Lega and the Five Star Movement, the two main parties in Italy’s parliament, were both flirting with leaving the euro zone. Neither have more reason to do so since the ECB has been completely captured by their camp. The threat of rupture of the single structure of the euro therefore turns to the north. This new tension risks being the story of the early 2020s.

Inflation is highly corrosive in the special circumstances of Germany, where the poorest half of the population rents rather than owns property, and hardly any have stocks or inflation hedges. . They keep their savings in bank accounts. These are currently being eroded at an actual rate of over 6pc per year. It implies a galloping pauperization, even if it is not 1923.

The negative rates are also destroying the business model of the smaller cooperatives and savings banks which finance 90% of loans to Mittelstand family businesses, the stable backbone of German society and its industrial machine.

Prof Mayer said Europe should not take German silence for granted, warning that it was only a matter of time before a political backlash began to rock the political scene. “People are waking up. The longer inflation continues, the more it will fuel populist forces in Germany. It is the migrant crisis that has revived the fortunes of the right-wing AfD party, and I fear that inflation will have the same effect, ”he said.

The Christian Democratic Party and Social Christians in Bavaria already have hard-line supporters eager to fight with the ECB. They are now in the opposition and ideologically liberated by the departure of Angela Merkel. These parties may well lean in a Eurosceptic direction to cover their flank against the AfD.

It has a familiar feel to those who have followed the series of progressive irritations that turned the UK against Brussels and ultimately led to a divorce. These tensions take too long to list, but they culminated with the Treaty of Lisbon, which created a European Supreme Court in the fullest sense, and gave European judges sweeping powers to rule on almost anything they wanted. making the EU Bill of Rights legally binding. .

British opposition was ruled out and an alleged opt-out protocol later turned out to be meaningless. Lisbon was quickly followed by the EU Council’s bold move – against all precedent – to bypass David Cameron’s veto on the fiscal compact in 2011. Did they have any idea this would trigger the chain of events that led to the referendum?

At the origin of Brexit, there was a rudimentary but widely felt feeling among the British people that their country was being shaken up and that their sovereignist vision of how Europe should evolve was irrelevant. This process of disenchantment takes a long time to unfold, but the first signs are already there in Germany.

It’s courting fate of trying to strip Europe’s ruling power – and the long-suffering cash cow – of monetary and fiscal policy control, and doubly dangerous to do so without caring too much for the intricacies. of EU treaty law.

A debtor country cannot get out of the euro without economic consequences of scorched earth: a rich creditor country certainly can.

James R. Rhodes