Why Berlin is now betting on the end of the euro

The Legitimacy of the German Constitutional Court’s Ruling

The ruling by the German Constitutional Court is both lawful and anticipated: the ECB must clarify why it is acting beyond its mandate and why it has been purchasing government bonds from struggling countries since 2015. In Karlsruhe, where the Court convenes, a crucial question was posed: if the central bank’s role is limited to managing the common currency and keeping inflation low, why should it engage in political matters?

Karlsruhe’s decision is not an apocalypse: legally, it reveals that the euro, as currently structured, is fundamentally flawed. Without true European political representation, there is no body capable of making responsible decisions for the common good. A common monetary area cannot stand without fiscal harmonization and stable resource transfers to poorer regions.

I will never tire of repeating that a monetary area lacking these two elements—political representation and fiscal transfers—cannot function. This is a fundamental principle of monetary economics. The ECB’s purchase of government bonds is a necessary anomaly to address this euro flaw. European development funds are inadequate and poorly managed compared to the real industrial, infrastructural, and employment policies that should be implemented.

Although this is a judicial and not a political ruling—and thankfully we still have separation of powers—the impact on the German electorate will be significant. The ECB’s bond purchases are ultimately paid for with inflation, which acts as a hidden tax. The complex mechanism by which bond purchases lead to price increases is too intricate for the simplistic understanding of xenophobic voters, who tolerate it: Bild cannot make it a headline. Germans pay without knowing and without voting the Chancellor out of Berlin.

If instead there were fiscal transfers, perhaps with a structured and integrated investment plan, the money would be better spent, but new right-wing voters would never forgive the government.

Without ECB money injections, the euro project would face severe difficulties, and the only option would be to move to a structured fiscal coordination plan. But this will not be possible: Germans would never accept it.

We are talking about a continent that, even in the face of a health tragedy like COVID-19, expressed more opportunism than solidarity. It is a formally integrated continent where a Berlin business received €15,000 in immediate non-repayable aid, while Italy received only a few hundred euros amidst monstrous bureaucracy. It is a system where social and economic disparities increase year after year, rather than converging as initially planned for Europe and the euro.

It is a so-called Union that, by name alone, seems ridiculous compared to other unions like the American or British. Imagine if New York were devastated by COVID-19 and the federal government provided financial aid, then charged New York for the debt. Other states that lent the money—say California or Florida—might propose a conditional aid fund with strict repayment rules. It would be absurd—but in Europe, this is the unquestioned norm.

From this perspective, we cannot say that all Germans are anti-European: there are elites or Greens who recognize Germany’s benefits in the euro system and understand that history cannot continue this way. But the general public does not want to hear about giving money to Italians. They should suffer from coronavirus and unemployment: those who overspend must pay. The benefits of the euro? Nonsense, lies, excuses.

The euro circulates in Italy much like the offshore dollar in Lebanon in the 1980s: a stable currency, but one that we do not control and use for transactions. It will not last long. Perhaps it’s time to change, beyond German constitutional decisions.

Credit: www.milanofinanza.it