The Bundes of the Bank

In my last eurocrisis rant I argued three changes were necessary for the EU to begin crawling its way out of the hole it has dug itself into. These were viewing debt as an economic instead of a moral problem, considering the situation a political instead of an economic crisis, and ending Germany’s obsession with inflation. Sounds ambitious, but a change in German leadership would basically do the trick. By this I mean a government willing to challenge the Bundesbank (Germany’s influential central bank) and its rigid mandate to keep a low inflation rate. The ECB under Mario Draghi is moving in the right direction by issuing conditional Eurobonds, but the long-term viability of this policy requires German support.

This is not an easy sell in Germany. The ECB runs the euro on a tight monetary policy, much like the Bundesbank used to run the Deutschemark. Having a strong and stable currency worked extremely well for Germany, a powerhouse in price inelastic exports (i.e. the average Porsche owner can afford to pay ten or twelve thousand extra dollars for his Cayenne. You can imagine this does not apply to Portuguese cork or chorizo, but that’s another story.). It was also Bonn’s sine qua non when France pressed for monetary union to lock a unified Germany into European institutions.

Why would Germans give up on this? Essentially, because the alternatives are worse. The eurozone still accounts for Germany’s largest export market. If each country goes back to its relatively devalued currency, it will import even fewer BMWs than under austerity programs.

It would be unrealistic to expect such a policy shift from Angela Merkel. “Over my dead body” summarizes her current stand regarding Eurobonds. This means all hopes are placed on SPD, Germany’s historical center-left party. Just as Germany plays a leading role in Europe, SPD has exerted a great influence in the European left. It is among Europe’s oldest social democratic parties. Under Willy Brandt it played an important role moderating Spanish and Portuguese Socialism as both countries transitioned to democracy; under Gerhard Schröder it became a driving force for Third Way politics.

In this context, and in light of the 2013 general elections, much has been made of SPD’s embrace of Eurobonds. Whether the SPD is willing to depart from Germany’s current agenda is, however, an entirely different question.

To begin with, SPD must win the elections. As of today this is still unlikely. Another great coalition seems possible, given the sorry state of Merkel’s current coalition partners. Whether SPD can make such a huge difference as CDU’s junior partner is questionable.

Also questionable is whether SPD’s commitment to Eurobonds is as daring as it sounds. The designation of Peer Steinbrück as the party’s candidate for 2013 suggests the opposite. Steinbrück has argued for Eurobonds, but wants them to go hand in hand with  “far reaching reforms”. What this means is more austerity. Spain has already made deficit spending unconstitutional, so it is hard to imagine how much further it can go down this road without regressing to the 19^th Century.

More interesting is Financial Times’ description of Steinbrück, who served as Finance Minister during the 2005-2009 great coalition, as Merkel’s bad cop:

In a more recent, deeply sarcastic interview, he accused other European leaders of acting like “lemmings” – a species of rodents with an undeserved reputation for committing mass suicide – by following the UK in raising their deficits to battle the crisis.

That the German finance minister does not take outside advice graciously is a gross understatement. Indeed, European counterparts have long grown wary of his lengthy lectures at European meetings about the alleged superiority of German economic management and its three-pillar banking system.

…And here I was thinking all that social democrats do today is implement “austerity with a human face.” It turns out they can be also patronize and suggest Keynesians are retarded. Give them a few more years and they might even become Republicans.

My guess is in spite of Steinbrück’s rhetoric an SPD-led Germany would be more accommodating than Merkel when it comes to Eurobonds. Then again, I am a well-informed optimist and don’t expect them to deliver the drastic change Europe urgently needs. The problem is by no means restricted to SPD. It is mostly about European institutions and the failure of the European left to provide any credible alternatives to austerity. More on this next week.