Economics and politics - comment and analysis
22. April 2020 I Heiner Flassbeck I Economic Policy, Europe, General Politics

Monsieur Macron, the Germans, and Europe

Cross-posted from Makroskop and Brave New Europe

Translated and edited by BRAVE NEW EUROPE

President Macron gave other European politicians a lesson in crisis management, especially to the Germans. Anyone who does not now understand that Europe and the euro are a matter of life and death will never understand anything.

Unfortunately, it is very rare for a leading politician to frankly address crucial international economic issues in an interview, which Macron recently did with great commitment. Here is an example of how it is done: in a remarkable 20-minute interview with the Financial Times (available as a video free of charge and with English subtitles), the French President forgot diplomacy and spoke out. It is worth listening to this interview carefully.

As was to be expected, German media hardly took notice of the interview. However, it is largely addressed directly to the Germans (and Dutch and Austrians), to whom the French president asks whether they really want to be as they currently appear to most Europeans. Seldom, perhaps never before, has a French President said so clearly that the way some northern EU nations are currently conducting themselves can very quickly bring about the end of Europe. He warns strongly against “populism”, the nationalist forces that could gain the upper hand in southern Europe and in his own country. Three points seem to me to be particularly important.

Who closed the borders?

It is obvious, and anyone in a healthy state of mind would know, that the sudden unilateral action on the part of Germany to close the Franco-German border has deeply affected its neighbour. To brutally close the border to a country which was not much more affected in the number of infections and which has taken much tougher measures to limit the spread to the coronavirus than the Germans, this was a completely senseless act on the part of a German Interior Minister, who has shown on many occasions that his solution of preference for any problem is to close Germany’s borders. Macron stresses, and it is clear what he means by this, that France has kept its borders with Italy (and Spain) open, even though Italy was initially the epicentre of the crisis in Europe.

People like me who live close to the border won’t forget that. You cannot tell people for decades, especially within Europe and in the European Monetary Union, that the nation state has been overcome, that there is no alternative to opening the border and that it is completely secure for all time, and then, in a crisis reflexively and overnight fall back to old patterns of thought and action, lower the barriers and erect concrete barricades. Horst Seehofer has already done a lot of damage in his political life, and we shall all have a long time to ruminate about this event. Even Angela Merkel, who likes to sell herself as a great European, will be seen from a different perspective from now on.

Who pays how much interest?

Macron goes into the discussion about corona bonds in detail and clearly addresses the real problem here too, namely the so-called spreads. Although he states that France is not affected because the French bond interest rate has practically no spread (i.e. no difference to the comparable interest rate for German bunds), he clearly argues that it is not fair that the members of the monetary union, who are in greater difficulties, should additionally pay higher interest rates.

There is indeed no justification for this in a monetary union. As in any other country in the world that has its own currency, it is the task of the central bank to ensure that there is no speculation against its own currency or against securities issued in its own currency. The Japanese central bank, for example, has explicitly set itself the goal of “yield curve control,” that is, the control of short-term and long-term real interest rates. Although the national debt in Japan is the highest in the world and much higher than in Italy, for example, there has been no attempt on the part of the financial markets to speculatively sell Japanese bonds and thereby drive up interest rates. The Japanese central bank would put a stop to this immediately by buying the Japanese bonds itself.

Only Europe has burdened itself with an extremely bizarre monetary constitution, in which there is a common central bank, but each individual country can still become the victim of the “markets”, because this central bank is not permitted to act as the central bank of each individual member state. One should not forget that many countries joined the European Monetary Union because they no longer wanted to be the victims of the markets attacking their currencies, but now that is exactly what is happening with their government bonds. How absurd.

This monetary order could be normalised with the stroke of a pen, but the Northerners are resisting it as if their lives were at stake. They will, however, be asked in the future why they did not themselves leave the monetary union if they wished to hold on to their outdated orthodoxy. Immediately following the current crisis would be the perfect opportunity. Then they would not have to pay the huge debts of others and could indulge in new austerity measures to reduce their own debts.

The German export surplus and the transfer problem

However, as Macron also clearly stated, Northern Europe’s export bonanza would then be over. He explains that there are some nations (and it is clear that he means Germany and the Netherlands) who always effuse in their praise of the EU when it comes to exporting their goods, but who quickly forget Europe when it comes to solidarity. He is absolutely right. Germany, the Netherlands, and Austria have taken advantage of the monetary system to impose a mercantilist agenda with high export surpluses. That too is exactly the opposite of what European trading partners had expected.

The basic idea behind the euro monetary system was the expectation that European competition in the markets for goods and services would come closer to competition in an internal market, i.e. it would be only competition of companies against companies, but no longer of states against other states. But it was precisely this basic idea that was violated by German wage dumping, which was copied by the Dutch and to which Austria also subscribed. Germany’s Agenda 2010 and the Hartz IV legislation dealt the death blow to a functioning Europe and a functioning EMU. The French President is obviously now beginning to comprehend this.

And Macron clearly shows that he understands the consequences by pointing to a historical error of his own country, which is still not understood and appreciated in Germany of all countries (as explained here, among other things). He says that it was a major mistake of the Allies after the First World War to insist on German reparations in the Treaty of Versailles. With these reparations (the existence of which was later called the “transfer problem” by John Maynard Keynes), fatally misguided developments were set in motion that ended in a new war. Bravo, Monsieur le President! That is absolutely right. The analogy is indeed important for today’s situation, because Germany today, as little as France did then, wants to acknowledge that today the Southerners in European Monetary Union cannot be expected to generate surpluses in foreign trade, because that is precisely what the Northerners want to prevent. Whoever demands something from others, which they for logical reasons themselves cannot provide, are damned to fail (as shown here).

The crisis, it is fascinating to see, is pushing Europe’s unresolved problems into the centre of the discussion at tremendous speed and with the utmost clarity. The German stalling tactics, the haggling over corona bonds that the finance ministers have put up with, is ridiculous in view of the scale and urgency of the outstanding issues. Anyone who does not start now to critically reflect on their own position in and on Europe can probably save themselves the trouble altogether, because the European idea and a European future are disappearing faster than the coronavirus.