Finance: Research, Policy and Anecdotes

One reaction to the Brexit win in June 2016 was that this was the result of two decades of anti-EU propaganda in the British yellow press, with everything bad in the UK (including the weather) blamed on the EU.  This was exacerbated by six years of Tories blaming immigrants for declining public services (in reality the results of austerity). As the saying goes… the rest is history.

My co-author Isabel Schnabel has pointed to a dangerous parallel in the German debate on the euro, with the media constantly criticising the ECB. There are justified concerns on whether reducing interest rates further has been the right move by the ECB (I will NOT comment on this!), but declaring the ECB as enemy of German savers seems quite far-fetched.  We had references to Mario Draghi as Count Draghila and repeated references that the ECB is acting against German savers! There is the idea that having an Italian head of the Single Supervisory Mechanism will open the door to Germans bailing out Italian banks (Never mind that Andrea Enria is rather unpopular with Italian bankers as he had been rather robust with them during his tenure at the European Banking Authority).  As I have argued before (and I hope in due course someone will put numbers on this), Germany has benefitted from the Euro being the anchor country of the currency union; there is a clear interest rate advantage for German sovereign bonds – the fact that the German government is not using the advantage is a different story (see below).

There has always been Euro scepticism among German economists; initially healthy, more recently rather shrill if not hysterical.  The debate on Target 2 balances (which many observers wrongly interpret as claims of Germany on other Euro area countries, coming with credit risk) is just one example (as clearly shown here and here: they are NOT). The idea that all the Euro area crisis countries have to do to get out of the crisis is to follow Germany and get as quickly as possible to a balanced government budget ignores the fallacy of composition (a concept any well-trained economist should be aware of).  Last year, Hans-Helmut Kotz and I edited a VoxEU book on ordo-liberalism, noting that there is a lot of merit in the microeconomic insistence on market forces in Ordoliberalism, but less so in the rather outdated macroeconomic thinking.  This is a legitimate debate that contrasts an economic philosophy that reflects the isolation of German economics for several decades after 1945 with the development of modern economics over the past decades in the Anglo-American world.   This discussion has turned even shriller recently, with one of the leading German economists using dog-whistle populism to go against any easing of fiscal policy during a possible recession. Using anti-Semitic references to shut down a debate on the federal government’s debt brake is rather unfortunate, but helps to fuel further Euro-scepticism in Germany.

There is no risk of Dexit any time soon – German policy makers are certainly aware of the enormous economic and political benefits of the Euro for Germany. The question is whether Germany is willing to share the benefits of being the anchor country of the Euro area.  And given that negative or zero interest rates are here to stay for quite some time, the question is whether a prolonged attack by media, politicians and economists against the ECB will result in unwelcome political developments in Germany down the road – again, no immediate concerns, but Brexit also took several decades to develop from a fringe idea to a populist movement.

So to pick up on something I said before I am less worried about the rise of the AfD on the basis of xenophobia in spite of its recent electoral successes in Eastern Germany, I am more worried about the long-term damage the media campaign against the ECB and other Euro area institutions has for Germans’ relationship with Europe and the Euro.

22. Sep, 2019