Last month, in a unique “citizen’s challenge” to rescue measures taken by the European Central Bank (ECB), German economics professor Markus C. Kerber filed a complaint against the bank before the Court of Justice of the European Union. Professor Kerber, who teaches economics and law at the Technical University in Berlin, charges that the bank, under the leadership of outgoing director Jean-Claude Trichet, has exceeded its mandate and violated EU law by buying up government bonds from Portugal, Greece, and other financially troubled Eurozone states. He argues that the only way to save the Eurozone is to split it in two. National Review Online contributor John Rosenthal interviews him below.
JOHN ROSENTHAL: What are the grounds and the motivations for your complaint against Jean-Claude Trichet and the European Central Bank?
MARKUS KERBER: Our aim is to make clear that Jean-Claude Trichet has transformed the European Central Bank into a “bad bank.” He has done this in the context of the financial crisis by deciding upon what he called “temporary” measures: first of all, in order to save banks — which is normally part of the competence of the EU member states — and, secondly, by conducting an outrageous policy of so-called qualitative and quantitative easing. By designating all government bonds issued by Ireland, Greece, and Portugal as being eligible for ECB refinancing operations, Trichet has accepted risk that he never ought to have accepted.
These “temporary” measures have now become the steady policy of the European Central Bank. This has nasty consequences for the balance sheet of the euro system, but it also has entirely unacceptable consequences for the political independence of the ECB. The bank no longer has the power to say yes to rescheduling Greek debt, for instance, since if it did so, the writes-offs within the balance sheet of the euro system would be enormous.
We want to see if the European legal system is capable of sanctioning the bank’s behavior and the behavior of Mr. Trichet. The European Central Bank’s violation of the European treaties is obvious. Article 123 of the Treaty on the Functioning of the European Union expressly prohibits state financing through the ECB by the purchase of government bonds on the primary market. But even purchases on the secondary market are not allowed inasmuch as such measures go beyond the monetary fine-tuning known as open-market policy. The ECB is quite clearly intervening for fiscal reasons, not for monetary ones. So Trichet is out of bounds. Apart from the distortion of competition between banks that it creates, qualitative easing also breaches Article 124, because it establishes priority access to ECB financing. That is clearly prohibited.
But the so-called “privileged” plaintiffs — the European Parliament, the Commission, and the EU member states — have in fact done their utmost to circumvent the very normative pillars of the European Monetary Union. [Under EU law “privileged” plaintiffs, unlike “non-privileged” ones, may challenge measures taken by European institutions even if they are not directly affected by them.] They have organized themselves into a cartel and encouraged the ECB to do what it has done in purchasing bonds from Italy, from Spain, from Ireland, and from Portugal. If a private citizen such as myself is not admitted as a plaintiff against the bank, then the bank can do whatever it wants and there is no legal control — no checks or balances.
ROSENTHAL: What do you think would be an appropriate solution to the difficulties facing the Eurozone?
KERBER: The only way to solve the fundamental problem facing the Eurozone is to provide fundamental solutions. What is the fundamental problem? It is the growing divergence, to put it in simple terms, between north and south: on the one hand, a group of countries with a trade surplus — Germany, the Netherlands, Finland, Austria, to a certain extent Luxembourg — and, on the other, those with deficits, like Portugal and Greece, whose competitiveness has suffered as a consequence of the introduction of the euro. This problem cannot be solved with a unitary monetary policy — with “one size fits all.” The euro is too cheap for Germany, and it is too expensive for Portugal.
Early on, one could have solved the problem by allowing for flexible membership: by permitting countries like Ireland, Greece, and Portugal to make a “euro pause,” to have their own currencies for a certain number of years and then to try again later on. But today the whole building is on fire, and allowing countries to leave on a piecemeal basis is no longer a solution. The only way to put out the fire is to split the Eurozone into two separate northern and southern monetary zones. We need an orderly break-up that fully respects the countries that have not been able to achieve sustainable growth during their years of membership in the Eurozone.
ROSENTHAL: You have pointed out that submitting to common fiscal norms is the sine qua non for any monetary union, and you have charged that French authorities are simply unwilling to do so. So, even supposing there were a division of the Eurozone into a northern and southern zone, who gets France?
KERBER: This is a key question. Many commentators neglect the damage that France has done to monetary union by not abiding by the Stability and Growth Pact. As an example, from 2007 to 2008, in the midst of a period of sustained growth, France increased its debt relative to GDP by 5 percent. Five percent in just one year. There was no economic reason for that. The only reason was the Mr. Sarkozy wanted to have his hands free to conduct his reform policy by making lots of gifts to different constituencies, rather than by preaching the virtues of austerity to the French people.
The political elite in Paris wanted to have monetary union without fiscal rules — or just fiscal rules that applied to everyone else. It is totally unthinkable that France would abide by fiscal rules that were established by an international organization. This was the basic economic misunderstanding. You cannot have a monetary union of sovereign states, i.e. whose economic and fiscal policies remain sovereign, unless you have binding rules. That is why I think that no monetary union whatsoever can work with France, since France will always pursue its own interests regardless of the rules.
In May 2010, after the European Council announced the creation of the Eurozone bailout fund, [then–French finance minister] Madame Lagarde and [then French minister of European affairs] Monsieur Lellouche simply said that they had “reinvented” the European Monetary Union. But they had no mandate to do that.
ROSENTHAL: But Germany has also violated the terms of the Stability and Growth Pact, and its debt-to-GDP ratio remains far above the 60 percent stipulated by the so-called Maastricht criteria.
KERBER: Yes indeed, and the country has been punished by public opinion. If an important country like Germany strays from the virtuous path it has been preaching to others, there is a lasting negative impact on its credibility. But Germany has remained fundamentally willing to see the stability pact applied, whereas for the Parisian elite the pact does not exist.
ROSENTHAL: It seems clear that Greece would be economically better off today outside the Eurozone, and you have said that this would also be preferable for Germany and the other “surplus” countries within the Eurozone. So, why is there such resistance among the German elites simply to letting Greece go? Why does Chancellor Merkel insist that “saving the euro” in its present form is tantamount to saving Europe itself?
KERBER: It is a matter of what economists call the prisoner’s dilemma. Once you have decided on a certain course of action and then later developments prove it mistaken, you cannot admit your error of judgment. The Brussels cartel — including Barroso, Merkel, Sarkozy, and Trichet — made a gigantic error of judgment in 2010 in concluding that Greece could be put on the path to sustainable levels of debt in a very short time, and they underestimated the potential for the fire to spread from Greece to the rest of the house.
Moreover, Germany is always suspected of playing power politics — mainly by France, which diverts attention thereby from its own power plays. So, Germans always feel obliged to show that they are very good Europeans. But that approach won’t work in the current circumstances. The only approach that will work has to be based on a crystal clear analysis of the real situation.
— John Rosenthal writes on European politics and transatlantic security issues. You can follow his work at www.trans-int.com or on Facebook.