09 February 2012

Quentin Peel: Germany and Europe - a very federal formula

[Merkel suggested] that this political union... would be organised around the existing bodies of the soon to be 28-nation bloc. The European Commission, the Brussels-based executive arm, would – with competences transferred to it by nation states – act as a government reporting to a strong European parliament. The European Council of national heads of state and government would function as a second legislative chamber; the European Court of Justice would be the highest authority. “We believe that we will stand better together if we are ready to transfer competences step by step to Europe”, she said.

“That is just about as federalist as you can get”, says Henrik Enderlein of the Hertie School of Government in Berlin. “Is she serious? That is the real question. She is very good at the rhetoric. But I do take it seriously that she wants to move towards political union.”

But what does “political union”, a term abandoned in recent years by most EU leaders for fear of alarming their increasingly eurosceptic electorates, really mean? The detailed vision of Ms Merkel – the continent’s dominant political leader, widely seen as having the future of the euro in her thrall – remains unclear. She talks of a “fiscal union” but her definition sounds like fiscal discipline. She insists there should not be a “transfer union” in which Germany guarantees the borrowings of its partners.

From Washington to Westminster, political leaders complain that they understand neither the tactics nor the strategy of the German government and its chancellor in the crisis. They see conflicting signals, ranging from a rigid insistence on budget discipline to a willingness to turn a blind eye to the unorthodox monetary policies of the European Central Bank. Ms Merkel says she will “do what it takes” to save the euro, but then constantly seems to block the view of most partners on the need for a bigger “firewall” to prevent contagion.

Conversations with senior officials and political analysts in Berlin reveal a lot more detailed thinking than Ms Merkel has demonstrated publicly. The “fiscal compact” is seen as just a first step to make the rules of budget discipline genuinely binding on all eurozone members: they must put a commitment to balanced budgets into their national constitutions, or equivalent legislation. In exchange, Germany proposed and is the principal financier of the permanent European Stability Mechanism, due to start operating in July. It is in effect a €500 billion European Monetary Fund to deal with debt crises in the 17-member monetary union.

The rules agreed would set ceilings for national spending and borrowing but would not interfere with tax and spending choices. But the next phase contemplated in Berlin would be more intrusive: coordinating or even harmonising taxes, with budgets supervised by the Commission and all eurozone finance ministers. They would be able to insist on certain spending priorities, to ensure competitiveness and growth targets were met and that adequate funds were devoted to areas such as education. It would mean a big transfer of sovereignty away from national capitals and parliaments.

At that stage, many leading German officials and politicians privately concede, the introduction of jointly guaranteed eurobonds might be possible, even irresistible. The concept would provide cheaper financing for the most indebted eurozone states. It is still fiercely resisted in Ms Merkel’s CDU and by the liberal Free Democrats, junior partner in the coalition. The chancellor herself sounds sceptical. But Wolfgang Schäuble, her passionately pro-European finance minister, has always said “not yet” rather than “never” to the bonds. (Both the main opposition parties, the centre-left Social Democrats and the environmentalist Greens, are in favour.)

Yet eurobonds and a loss of budgetary autonomy would be likely to fall foul of the constitutional court. “Any loss of sovereignty would be problematic” for the court, says Ms Schwarzer [SWP, the German institute for international and security affairs]. “It would probably mean having a referendum. But the big problem for Germany isn’t just the constitutional court: it’s also Paris.”

Confrontation with France could come in a third phase of EU reforms, in which the Commission would become the real European economic government and the European Council would become a legislature alongside the European parliament. “The reality is that Germany is starting this reflection and other countries are not”, says Ms Guérot [ECFR]. “France has to have the debate. They are not ready to give up the Fifth Republic.”

For Ms Merkel it is a question of the democratic legitimacy of the entire integration process. She sees a dangerous disconnection between national politics, and national parliaments, and the European parliament. Her party wants to see the Commission president directly elected.

The chancellor knows perfectly well that these are profoundly important political issues, and hugely controversial. But she has decided that only with such fundamental reforms can European monetary union survive.

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