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Analysis
Why the creditors don’t want to join the EMU debt club

Why the creditors don’t want to join the EMU debt club

by David Marsh

Mon 17 Oct 2011

At a lecture here in Prague last week [click here for details], I quoted Marx and Stalin, not the most popular names in the sturdily post-Communist Czech Republic. All this happened in the week when the euro spotlight shone fiercely on neighbouring Slovakia, and when the incoming German replacement for Jürgen Stark on the European Central Bank (ECB) board declared robustly that he was retreating from Bundesbank-style German monetary orthodoxy.

All of which means that ever-rising costs of bailing out deficit countries throughout the euro area will be borne increasingly by the people who suspected they were going to pay for it all along – German taxpayers.

To return to Prague and the lecture organized by Prague Twenty, a foundation established to commemorate the return of democracy in the Velvet Revolution of 1989. The Marx I quoted was not Karl but Groucho, who famously said: ‘I wouldn’t want to join a club that would have me as a member.’ This maxim, I reminded the audience, summed up the conditions for possible enlargement of economic and monetary union (EMU) in coming years.

Assuming EMU survives, though in slimmed-down form, as I expect, it will go through several years of messy muddle. New entrants from creditor states currently outside the single currency bloc – such as the Czech Republic, Sweden and Denmark - will be highly desirable bedfellows to help shoulder debts being taken over increasingly by the more solvent members. But appeals from the EMU membership for such countries to join will fall on deaf ears, as long as electorates in the better-run countries know that they’re being asked to join the club primarily so they can pay for the behaviour of its less well-behaved members.

Stalin came up in the context of my view that the only countries that would profit from the euro – and would stay the course over the longer-run – were the high-saving, anti-profligate, fiscally orthodox, current account surplus-running creditor states: Germany and its like-minded neighbours.

Perhaps, I ventured, the slogan popularised by Stalin during the 1920s – ‘socialism in one country’ (forged after it became clear that spreading Bolshevism beyond the Soviet Union would prove difficult – until the Second World War came along, that is) – was now making a comeback. In a new form: ‘Bundesbankism in one country’ – meaning that the successful application of the strait-laced rules and principles of the German central bank to countries outside Germany was not universally guaranteed.

But perhaps, too, Bundesbankism is on its way out? Two events last week showed the limits of traditional German monetary philosophy. The off-on rejection of Europe’s EFSF rescue fund in Slovakia – whose parliament voted in favour only after bringing down the government - demonstrated how getting bail-out mechanisms through Europe’s democratic processes is becoming fearsomely difficult. The problem will only get worse as the EFSF is replaced by a permanent funding scheme in 2012-13 - a mechanism that will end up with ever more costs and guarantees being transferred to Germany.

That doesn’t seem to bother too much Jörg Asmussen, state secretary in the German finance ministry. He will move to Frankfurt in the New Year to replace Jürgen Stark, the hawkish ECB board member and ex-Bundesbank deputy governor who resigned in spectacular fashion last month in disagreement over the ECB’s continued purchases of weaker countries’ government bonds. Appearing before selection hearings at the European parliament last week, Asmussen declared he was a ‘pragmatist’ and confirmed he had no problem with continued ECB bond purchases – apparently signalling the end of 13 years of Bundesbank influence on the ECB board.

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