Is the Euro Compatible With Democracy?

“New elections change nothing,” asserted Germany’s finance minister, Wolfgang Schäuble, ahead of the Greek vote in January that swept into office a radical-left government pledging an end to austerity and demanding debt relief from its eurozone creditors. The new Greek administration, Schäuble insisted, must accept the terms struck by its predecessor. By and large, Greece’s new government has done so, despite its electoral pledges. How, then, can the destructive policies imposed by the likes of Schäuble really be changed? Is membership in the eurozone compatible with democracy?

This is more than just a Greek issue. Elections are due in Spain at some point later this year, and the radical leftists of Podemos are leading in the polls. Indeed, in almost every election since the crisis, voters have thrown out their government, only to be told by Schäuble and his eurozone minions that the new administration must stick to the failed policies that the voters have just rejected. In 2012, for instance, François Hollande won the presidency of France on a pledge to end austerity, but was soon forced to back down by Berlin. Last year, with a mandate from his resounding victory in May’s European elections, Italy’s reformist prime minister, Matteo Renzi, demanded changes to the eurozone’s fiscal rules that would enable the Italian government to invest more. He was rebuffed.

Of course, politicians often junk loose election promises when confronted with the hard facts of governing. That is a (regrettable) feature of democracy, rather than proof of a lack of it. But the constraints on democracy in the eurozone are very real. In 2011, eurozone authorities even forced out of office the elected prime ministers of Italy and Greece — the latter for having the temerity to offer Greeks a referendum on the unjust conditions imposed on them by Germany — and replaced them with pliable, unelected technocrats.

As for France, it’s not markets that are preventing the government from engaging in a fiscal stimulus — on the contrary, investors are falling over themselves to lend to Paris for free — it’s Berlin and Brussels. And it’s Angela Merkel’s chancellery, not economic “reality,” that is preventing Italy and others from sensibly borrowing to invest, which would strengthen current demand and future supply as well as public finances.

When challenged, Schäuble’s response is that agreements must be respected: Rules are rules. But the claim that eurozone rules are set in stone is not only undemocratic; it’s untrue. Berlin has repeatedly abused its clout in EU institutions to rewrite the eurozone’s rules, and it continues to violate them with impunity.

German banks lent too much to an insolvent Greece? No problem! We’ll breach the legal basis on which the eurozone was formed — the Maastricht Treaty’s “no-bailout” rule, which bans member government from bailing out their peers — and covertly bail out those banks by lending European taxpayers’ money to Athens. German banks also lend too much to insolvent Irish, Portuguese, and Spanish ones? Kein Problem! In collusion with corrupt national elites, we’ll lend to those countries’ governments so they can bail out local banks and thus their German creditors. German taxpayers start worrying that they may end up on the hook for all of Southern Europe’s debts? Then let’s rewrite the fiscal rules, under duress of a financial panic that Merkel’s mistakes have created, and impose a new fiscal straitjacket that gives Berlin and Brussels greater control over other countries’ budgets.

Germany’s vast current account surplus — the excess savings generated by its beggar-thy-neighbor policy of suppressing wages to subsidize exports — was the fuel for German banks’ bad lending that caused the crisis in the eurozone. Now it’s the vehicle through which Germany is exporting deflation. In short, it’s the biggest, most destabilizing imbalance in the monetary union. And it falls afoul of the eurozone’s rules on macroeconomic imbalances. But is that a problem for Brussels? Of course not. The Germans lean on eurozone authorities to get off the hook, and the European Commission bows to Berlin. But voters elsewhere want to change things, even just in their own countries? Nein, nein, nein: There is no alternative.

In the Greek case, the German government has come up with an even more disingenuous argument. There is nothing undemocratic about forcing the Greek government to bend to Berlin’s will, Schäuble asserts: On the contrary, Athens must also respect the wishes of voters in other eurozone countries. And it is true that taxpayers in Germany and across the eurozone would — unfairly — lose out if Greece obtained the debt relief it needs to recover. But why is that? Because Merkel violated the no-bailout rule in the first place, putting the interests of German banks ahead of those of European citizens — including Germans — and setting Europeans against each other. If only German voters realized that Merkel and Schäuble have lied to them and sold them out, they wouldn’t fall into the nationalist trap of blaming the Greeks for their own banks’ and government’s misdeeds!

To obtain debt relief, Greece will need to call Germany’s bluff, as I argued two weeks ago — and be prepared to issue a parallel currency. The four-month bailout extension Athens accepted from its EU creditors last month gives the new Greek government time to think through its strategy. But more broadly, how could fiscal democracy be restored? Such is the anger and mistrust created by the crisis mismanagement that steps toward democratic federalism are politically inconceivable for now. A better option would be to restore the “no-bailout” rule and with it governments’ freedom to respond to changing economic circumstances and political priorities — constrained by markets’ willingness to lend and ultimately by the risk of default. (The European Central Bank would also be mandated to be a proper lender of last resort to illiquid governments.) Or the euro might break up.

Stripping voters of the right to make legitimate economic and political choices is unsustainable. And as Weimar Germany’s tragic history shows, the imposition of unbearable payments to hated foreign creditors leads to political extremism. Martin Wolf of the Financial Times has observed that the eurozone is meant to be a union of democracies, not an empire. Merkel and Schäuble should remember that.

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