FPA National Opinion Poll: German Discipline for Euro Deadbeats!

The recent release of the FPA’s National Opinion Ballot Report once again provided valuable insights into the thoughts and opinions of informed Americans on the important foreign policy issues of the day. Among other items, the poll returned an overwhelmingly positive response to Germany’s insistence on austerity measures for the crisis stricken euro countries. By a margin of 91.5% to 8.5%, poll participants responded that Germany’s tough stance was rational and conducive to a more responsible global economy.

The basic German view, so clearly supported by poll respondents, is that handouts will be counterproductive, and simply encourage further fiscal irresponsibility. After all, when the choice is between draconian cut-backs or loans, the latter is indeed quite enticing.            

In support of their position, the fiscally conservative Germans point to the success of their country’s economic system in post-war Europe. The bedrock of this system was the maintenance, above all else, of a stable currency, the D-Mark.

The guarantor of a stable D-Mark was the German central bank, the Bundesbank. The Bundesbank was in its conception an independent institution, to a great extent excluded from the influence of a Federal government who otherwise might be tempted to run the printing press when time were hard. For the Bundesbank, low inflation rate is key, even at the expense of the unemployment rate. By comparison, the French central bank is a politicized institution, invested in maintaining a low unemployment rate by easing monetary policy.

From the onset of the euro crisis, Germany has sought a line that on the one hand maintained the restrictive monetary policy of the Bundesbank, while on the other side ensuring the survival of the euro. Of course, the German electorate, weary of further handouts, also must be factored into this equation.

Thus Germany has sought to instill fiscal discipline by strengthen the rules governing the fiscal policies of the eurozone, while simultaneously fighting measures such as turning the European Central Bank into a lender of last resort for ailing eurozone members. Such measures run against the German belief in a strict division between fiscal and monetary policy.      

As the disagreements in the string of euro crisis summits have made blatantly obvious, not all countries share the German vision of a sound economic policy. For example, the French have made their preference for turning the bailout fund, the EFSF, into a bank, thus enabling it to tap into the European Central Bank’s limitless money supply.

However, Germany seems to have trounced the French suggestion, and have instead secured a deal turning the ESFS into an insurer of government bonds, thus making these bonds more attractive for investors, and, hopefully, lowering borrowing costs for cash-strapped governments.

In spite of the insurance plan for the EFSF being adopted, the Germans have not gotten a European monetary system entirely to their liking. In particular, the ECB buying government bonds has not been to in tune with traditional German monetary policies. After considerable political pressure, the ECB has been filling its portfolio with dubious government bonds, which will, say the Germans, jeopardize faith in the euro as a currency.

While the German case almost makes itself, considering the economic success of this country, it is dangerous to over-simplify the issue; comparing the efficient and fiscally disciplined Germans with southern European deadbeats. This narrative makes no mention of the benefits Germany’s export orientated economy has gained from being in a currency union with less developed economic systems. These economies can no longer improve competiveness through devaluation, giving Germany and edge, while forcing already faltering economies to contract public expenditure.   

Regardless of the pros and cons of the German system, the euro crisis has demonstrated that you can’t have your cake and eat it too. Perhaps a German style get-your-house-in- order solution would work, or perhaps the ECB should throw its entire weight behind the resurrection of eurozone economies. Perhaps both strategies could work. The main issue seems to be the lack of political will to reach a coherent solution. Instead, national preference, mentalities, and interests gets in the way of a coherent solution.