A lack of representative governance is playing havoc with the future of the Eurozone, and its cause is a democratic initiative from the German high court whereby it placed limits on the power of the executive to give away its authority to govern without reference to the elected parliament. The constitutional court ruled that the Bundestag must be given a full vote before further power is transferred to Brussels, and further stating that ultimate sovereignty must rest with the member states.

German parliamentary sovereignty is now threatening the future of the Eurozone, and by extension the wider economic recovery of EU as a whole.

A nation-state is effectively a collective agreement that a people are a family, who have sufficient trust in each other to accept indirect governance from representatives of the prevailing will of a majority, it is also a collective agreement to work together for the benefit of the whole rather than the individual. In short it is a marriage which results in a transfer union.

Inevitably there will be richer and poorer parts of the nation-states economy, and if that economy is not to tear itself apart from the strife resulting from a polarising divergence in wealth then there must be a compact agreed by the people that national taxation will be redistributed in a manner the assists less advantaged areas. In short the rich pay for the poor.

This compact is seen in every developed country, by way of social benefits applied equally throughout the territory, by way of regional development funds to promote wealth creation in poor performing areas, and by concentrating public sector activity in areas of reduced economic potential. It is fundamental to the cohesion and harmony of the society.

This is where the federalist ideology of the EU begins to face problems.

First, there is a massive disparity in wealth between the nations that supposedly have the aim of becoming a single ‘people, far greater in fact than is true of the wealth disparity within the constituent nations themselves.

Second, there is no single ‘people’ within the EU, thus there is no collective agreement to accept governance because it is not seen to be representative, and likewise there is no collective agreement to work to the benefit of the whole because that lack of representation prevents trust that paying money to others will be both used responsibly and reciprocated in time of need.

This is where the implementation of the EU begins begins to face problems.

First, to get around the problem of a transfer union being unacceptable to the separate peoples who have no collective sense of ‘family’ the Eurozone was created as a monetary union instead of an economic union. The single currency was to apparently able maintain its perceived value purely by having agreed targets on a budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of GDP, low inflation, and interest rates close to the EU average. So regardless of the wealth disparity, regardless of the size and acceptance of the black economy, regardless of the potential for abuse from weak members exploiting the low borrowing rates of the strong, and regardless of the inability of national governments to use the economic levers available to sovereign nations to ameliorate the boom-n-bust cycle, the Eurozone was somehow supposed to work.

If the effectiveness of a system can be be judged by its response to a crisis then monetary union can be judged to be a massive failure. Germany’s massive and competitive export driven economy has priced other members out of the market, as there is only one currency value across the Eurozone. Likewise the weaker club-med economies bypassed their lack of competitiveness by massive borrowing at artificially low rates on the back of franco-german economic strength. The result is clear; the PIGS have to rollover 700bn Euros of government debt before the end of 2011 at a time when the global financial crisis has killed economic growth across the EU, and to make things worse Germany is demanding fiscal austerity in return for agreeing to bail out their beleaguered economies, an act that will further depress economic activity and thus reduce their ability to rollover debt. The PIGS cannot pay the money back because there is no growth to do so, and they cannot borrow any further because the markets realise that any further lending is very risky and are thus charging punitive rates. The potential for a debt-deflation spiral hovers over club-med.

Second, the result of the fundamental flaws of monetary union have forced the peoples of the non- Mediterranean countries to club together 700bn Euro’s of their money as surety against a sovereign debt crisis within the PIGS. Worse still, the survival of the Euro and its fixed internal exchange rate is forcing the currently uncompetitive PIGS to accommodate the crisis by shedding jobs rather than devaluing their currency.

So we have a situation where the peoples of europe are being driven further apart by distrust and ill-feeling, the German people in particular are highly reluctant to give money that can never be paid back to people they don’t trust to act responsibly, and likewise the Greeks are up in arms at the prospect of having their economy trashed by fiscal austerity imposed on them in lieu of a devaluation.

And here we come back to the German constitutional ruling on parliamentary sovereignty.

The logical actions to take in this situation are twofold:

1. Allow Greece to restructure its debt and effectively leave the Eurozone

2. Bring about economic union of the Eurozone and accept a tacit transfer union

However the first is not possible because France is ideologically attached to the political ambitions that a united Eurozone represents, and the latter is impossible to entertain because the German Chancellor will get drummed out of office if she asks the Bundestag to agree to economic union with countries deemed pathologically irresponsible.

It would be easy to see France as the idealist in contrast to Germany’s pragmatism, but in reality France occupies both those positions by holding to the ambitions of ever-deeper-union and holding the solution to a flawed monetary union, Germany is merely a country trapped between those two positions.

The scale of the problem Germany is posing is aptly illustrated by comments from George Soros:

Legendary investor George Soros has called on Germany to leave the euro unless it willing to embrace a growth strategy, describing Berlin’s austerity doctrine as a threat to democracy and political stability in Europe. “German policy is becoming a danger that could destroy the European Project. A collapse of the euro cannot be excluded,” “Unless Germany changes policy, its withdrawal from the currency union would be helpful for the rest of Europe. At the moment Germany is pushing its neighbours into deflation: this threatens a long phase of stagnation, leading to nationalism, social unrest, and zenophobia. It endangers democracy,” Mr Soros said Germany was treating the deeply-flawed Maastricht Treaty as it were a “sacred text”, warning that monetary union cannot endure for long as a narrow construct based on debt and deficit ceilings. He said wage rises in Germany are imperative to help lift the whole eurozone, allowing peripheral economies to claw their way out of trouble without fighting the extra headwinds of deflation. “The truth is that what we have in Europe is not a currency or sovereign debt crisis as many people think, but a banking crisis,” he said. Mr Soros argued that the weaker states cannot easily fund their deficits any longer because some banks are purchasing fewer bonds as a result of damaged balance-sheets.

Are the German people to be blamed for being unwilling to bail-out the club-med nations? Possibly, it is after all their job to inform their elected representatives about their willingness to join as one with another people, they should have considered the consequences beforehand rather than complain about them now.

Is the German parliament to be blamed for its reluctance to rubber-stamp the economic union that might save the political ambitions implicit in the Euro? Patently not, it is their job to represent their electorate, and if their electorate won’t wear it then they should not agree to it.

Is the German constitutional court to be blamed for introducing a ruling that makes it difficult for the executive to overrule the will of the people and their elected representatives? Patently not, an executive that is not accountable to, and acts against the wishes of, the people is plainly a tyranny.

Is Chancellor Merkel to blame for being unable to force Germany to accept the loss of sovereignty necessary to save political union within the EU? Yes, absolutely, she sits in the top-spot and must carry ultimate responsibility for presiding over a government that has acted in a way perceived to be inimical to the interests of the people she is supposed to represent.

What can Germany do to remove itself from this bind? Well, it could follow Soros’s advice and exit the Euro, but it might be a good idea to first consult the people on that most fundamental of questions; “Who governs me?” If the answer is “my” government then clearly Germany should exit a what is a political project, if not then it is time to admit that the Bundestag cannot be sovereign, because to quote Gladstone:

The finance of the country is intimately associated with the liberties of the country. It is a powerful leverage by which English Liberty has been gradually acquired … It lies at the root of English Liberty, and if the House of Commons can by any possibility lose the power of the control of the grants of public money, depend upon it, your very liberty will be worth very little in comparison …That power can never be wrenched out of your hands… That powerful leverage has been what is commonly known as the power of the purse – the control of the House of Commons over public expenditure – your main guarantee for purity – the root of English liberty. No violence, no tyranny, whether of experiments or of such methods as are likely to be made in this country, could ever for a moment have a chance of prevailing against the energies of that great assembly. No, if these powers of the House of Commons come to be encroached upon, it will be by tacit and insidious methods, and therefore I say that public attention should be called to this.

So what will it be, a shrunken post-crisis Eurozone with economic union, or a return to a softer monetary union based on the Ecu ‘basket of currencies’ held by sovereign nation states?

Update – 25/06/10

Interesting UKDF blogspot article on how the Eurozone crisis is causing Germany to build a partnership with Russia, to the unease of both France & Poland:

The Germans have been developing economic relations with Russia since before the Soviet collapse, but the Greek crisis forced them to reconsider their relationship with Russia. If the European Union was becoming a trap in which Germany was going to consistently subsidize the rest of Europe, and a self-contained economy is impossible, then another strategy would be needed. This consisted of two parts. The first was insisting on a restructuring of the European Union to protect Germany from the domestic policies of other countries. Second, if Europe was heading toward a long period of stagnation, then Germany, heavily dependent on exports and needing labor, needed to find an additional partner — if not a new one.