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Surprise! Merkel Just Vetoed the Presidential Vote. She Has Other Plans In Mind.

In this post we’re going to examine a growing conflict between the electoral quirks of the European Union’s democratic system and Angela Merkel’s vision for and ‘ever closer Europe’. As we’ll see, hopes were high that this year’s EU elections would include the first ever indirect vote for European Commission President. Under the proposed plan, if a party manages to win the parliament that party’s “presidential” candidate would automatically be selected head of the EU Commission President. If implemented, this plan would be quite a departure from the weeks of backroom dealing between national leaders that has chosen the president in the past. And as we’re also going to see, Angela Merkel has BIG PLANS of her own for the European Commission: Lots of new powers and a big transference of national sovereignty to the Commission are all on the agenda. But it doesn’t look like the plan to allow voters to have even an indirect vote on the person that would be implementing this agenda will be allowed. Not if Angela has anything to say about it [1].

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If you’ve been following the upcoming EU elections scheduled for later this month, you’ve no doubt heard about the tight race [2] for EU Commission President pitting former Luxembourg prime minister Jean-Claude Juncker against outgoing EU parliament president Martin Schulz. And if you’ve been closely following that race between Juncker and Schulz, you’ve no doubt been bored out of your mind [3]:

Top EU election candidates struggle to find differences

By Paul Taylor

PARIS Wed Apr 9, 2014 10:14pm BST

(Reuters) – The top two rival candidates to lead the European Commission struggled on Wednesday to find real policy differences in the first live television debate ahead of European Parliament elections next month.

Centre-right Jean-Claude Juncker and Social Democrat Martin Schulz – whose native languages are Luxembourgish and German – argued politely in French over the appropriate balance between budget austerity and investment to promote economic growth in a 50-minute debate on France 24 television.

But they agreed far more often than they disagreed in a pro-European consensus that may be exploited by anti-EU populists of the far right and hard left, who blame policies made in Brussels for the continent’s economic crisis and mass unemployment.

Juncker, 59, the veteran former Luxembourg prime minister and chairman of euro group finance ministers, stressed the need to maintain tight control of public finances and said he could see no grounds to give France more time to reduce its deficit.

“France has already had two extensions to its period of adjustment. A priori there is no obvious reason why it should get a third one,” he said, while noting that the European authorities would study France’s budget plans before deciding.

“We cannot accept a pause in budget consolidation.”

Schulz, 58, the outgoing president of the European Parliament, hit back, saying new French Prime Minister Manuel Valls had announced a courageous and ambitious reform programme in parliament on Tuesday.

“If he needs support from the European Commission, he should get that support,” the Socialist candidate said, noting that France is the euro zone’s number two economy and was now ready to make necessary economic reforms.

France has promised to bring its budget gap, now at 4.3 percent of national income, below the EU treaty limit of 3 percent by the end of 2015. But the new government has hinted it will seek a slower pace of deficit reduction to preserve growth.

“WHAT DISTINGUISHES YOU?”

Schulz said Juncker and other mostly conservative leaders in charge of the European institutions at the outbreak of the euro zone debt crisis had misdiagnosed the problem by prescribing strict austerity, forcing millions out of work.

This theory that unilateral spending cuts would restore investors’ confidence manifestly didn’t work. We have had to change course in recent years,” he said.

Note that when Martin Schulz says “his theory that unilateral spending cuts would restore investors’ confidence manifestly didn’t work. We have had to change course in recent years”, he is completely rejecting the premise behind the “Confidence Fairy” theory of economics that has been used to justify EU austerity since 2008. So that was actually a pretty massive admission.

Continuing…


Europe needed more strategic investment in research, education and innovation to get 28 million unemployed EU citizens, including more than half of young people in some countries, back to work, he added.

Both described Germany as the most successful economic model for Europe. Both said Europe should do more to welcome legal immigrants and it was up to national government to prevent any abuse of their welfare systems by migrants.

Note that when both candidates describe Germany as the most successful economic model for Europe, it’s sort of like saying every region of the US should strive to replicate Silicon Valley’s economy [4]. It’s a nice thought, but is that really a solution for Europe? Can every country become a high-tech export-oriented powerhouse?

Skipping down…

The European Parliament insists that the leader of the political group that wins the most seats in the May 22-25 direct elections in the 28 member states should be chosen to lead the executive Commission. However, the EU treaty says it is up to the European Council of national leaders to nominate a candidate taking account of the elections and after holding consultations.

With Eurosceptical Britain and some others opposed to both Juncker and Schulz, seen as old-style European federalists, it is not clear whether either will get the nomination.

At one point, one of the presenters asked the candidates: “What distinguishes you from each other?”

There was an embarrassed pause before Schulz said: “I don’t know what distinguishes us… The EPP candidate (Juncker) is quite close to my programme, but whether the EPP is so close is another question.”

Juncker played up his own long experience of European leadership, saying twice pointedly, “when I was in the European Council, which Mr Schulz wasn’t, allow me to explain to him…”

Schulz countered by saying the European Parliament had warned EU leaders from the start of the crisis that their policy mix was wrong.

Well, at least it sounds like there are some differences between the two main candidates: Jean-Claude Juncker continues to openly embrace the discredited economic theories that tanked the EU’s economies in recent years whereas Martin Schulz doesn’t seem to eager to continue the madness. That’s actually good news for the EU because if Schulz eeks out a win we might actually see an end to the austerity madness (or, more realistically, a bit of an easing).

The above article is from a month ago and now EU the elections are just weeks away. So have any new distinctions between the two people most likely to head the EU for the next five years cropped up over the past month? Not really [5]:

Time to relax austerity? Candidates for EU’s top job divided
Social democrat Schulz would loosen rules for struggling countries, while conservative Juncker rules out softer stance

Ian Traynor
theguardian.com, Thursday 8 May 2014 08.24 EDT

The two key figures leading the European election campaign in the hope of becoming the next head of the EU executive are split on how to recover from Europe’s worst-ever crisis – the debt and currency turmoil of the past five years that almost brought the collapse of the euro.

Martin Schulz, the German president of the European parliament who leads the social democratic campaign, said struggling countries such as Italy and France should be given more time to get their public finances in order, and also called for a loosening of the single currency’s rules on debt and deficits.

Jean-Claude Juncker, the former prime minister of Luxembourg who leads Europe’s conservative Christian democrats in the contest, ruled out relaxing the rules for the centre-left governments in Rome and Paris.

In a campaign debate chaired by the Guardian and four other European newspapers, Juncker stuck to the German-led austerity prescriptions that have strangled large tracts of southern Europe and generated mass unemployment, while Schulz attacked that approach as too dogmatic and inflexible.

Schulz said: “The crisis was reinforced by the thesis that you have only to clean up budgets to win back investor confidence and economic growth. The main approach in Europe was austerity policies …

“This thesis does not work. You take draconian action to reduce debt, but there is no growth.”

Public borrowing for productive investment should be made exempt from debt and deficit calculations in the eurozone, he said, in effect calling for a loosening of the debt and deficit ceilings from 60% and 3% of gross domestic product respectively. “With overall debt levels, we have to define what is actually state debt and what is really investment in the future.”

Note that when Martin Schulz says public borrowing for productive investment should be made exempt from debt and deficit calculations in the eurozone, he basically acknowledging that government stimulus spending is useful and has a role during a bad economy. While this might seem like Econ 102, this is a huge divergence from the economic thought that has been embedded into the EU’s governing structure ever since the EU member states enshrined the Fiscal Compact treaty in the constitutions. So, should Schulz win, we’ll see if his backing of stimulus spending can overcome the mandates in the Fiscal Compact. It could just be happy talk that’s too little, too late [6] but we’ll see!

Continuing…


Italy and France probably needed more time than that currently granted by the European commission to get their finances in order, he said. “If they don’t get back on their feet, we all have a common problem … If it turns out they need a year more, I would be prepared to give them an extra year.” He accused “some” EU government heads and EU commissioners of being “completely inflexible” – taking aim at his own chancellor, Angela Merkel.

Juncker, on the other hand, completely rejected being softer with Rome and Paris. “No, no extension of the deadlines,” he said in reference to the Italian and French government obligations to stick to the euro rulebook. “There’s no alternative to reasonable budget consolidation.”

Again, note how one of the two main candidates for heading the EU wants no easing up on austerity and this is part of his campaign platform! It’s a reminder that much of the EU electorate still embraces austerity (typically only for other nations) even after its disasterous results in recent years. It’s a reminder that the electoral appeal of austerity has little to do with sound economics. Amoral morality plays [7] don’t make for great economic muses.

Continuing…


Juncker called for a minimum wage across the EU. But both men, seen as federalists and advocates of much greater European integration, said there was no case for common EU social security systems, unemployment insurance schemes, or child benefits.

Aside from their differences on the merits of austerity, there were few real policy clashes between the two candidates and plenty of common ground. Schulz was more voluble, detailed and thorough in response to questions, Juncker more taciturn.

On the biggest immediate issue confronting Europe on its eastern borders – the Ukraine conflict and what to do about Russia’s Vladimir Putin – Juncker and Schulz were in broad agreement that stiffer economic sanctions against Russia would probably be needed. Representing the German consensus, Schulz was much more emphatic about not isolating Russia and keeping the door open to negotiations.

“Either you have a war – and we have enough military cemeteries in Europe – or you decide on economic sanctions and apply pressure at the same time,” said Juncker. “Pressure alone is not enough, dialogue alone does not work either. But those who find Europe laughable, they must be countered, because Europe is not a lightweight. You have to think about what the alternative would be. If you don’t want war, you have to want sanctions.

Schulz said that Europe’s credibility would be on the line if the talk of wide-ranging economic sanctions turned out to be posturing. “Economic sanctions are the logical consequence if it is proven that Russia is behind the problems in eastern Ukraine and won’t stop pressuring other parts of its neighbouring regions. But for the sake of its credibility, Europe has to implement them and not just announce them.”

However, substantive economic and trade sanctions against Russia would also hit Europe hard, Schulz warned. With a nod to opinion in Germany, he said the public had to be prepared for the impact of economic warfare.

Regarding war with Russia, note that Juncker has also said “Russia is testing Europe at the moment. Putin knows well that we do not want war. There is not a single person in Europe that wants war after what we lived through twice in the 20th century. But we cannot let him get away with it.” [8]

So when Juncker says “either you have a war – and we have enough military cemeteries in Europe – or you decide on economic sanctions and apply pressure at the same time…Pressure alone is not enough, dialogue alone does not work either. But those who find Europe laughable, they must be countered, because Europe is not a lightweight. You have to think about what the alternative would be. If you don’t want war, you have to want sanctions,” it sure sounds like Juncker is attempting to draw a rhetorical line in the sand with the threat of war behind it without actually specifying where that line exists. Let’s hope this is just about politics [9].

Still, it looks like we found another rare area of disagreement between the two top EU candidates: Juncker supports aggressive sabre-rattling towards Russia whereas Schulz prefers that the EU only make threats that it can actually back up. So there we go, a difference! Juncker seems much more willing to use the threat of war as a kind of “back up” to the economic sanctions. Assuming this isn’t just bluster on Juncker’s part that’s a potentially big difference!

Continuing…

While Schulz and Juncker contest the elections at the head of the two main political blocs on the centre-left and centre–right, for much of the EU elite, they are more of a problem than a solution in Europe’s time of troubles.

Both men insisted that if they led their bloc to victory in the elections, they should become the next president of the EU executive, the European commission, from October. Juncker said anything less would be a “mockery of democracy”. Schulz argued that the head of the commission should be elected by the people, just as in any parliamentary democracy, from city mayors to prime ministers, sidestepping the fact that the EU is not a parliamentary democracy.

A commission president has never been elected in the EU. The national leaders claim democratic primacy from their domestic general elections and have always decided between them who should head the commission. They are deeply reluctant to concede that prerogative to the European parliament, but were caught napping by a parliament power play. And the chamber has to endorse the next commission chief by an absolute majority.

The chances of an ugly, paralysing and protracted power struggle between the parliament and the national leaders in the wake of the elections are high. Both Schulz and Juncker may become collateral casualties. The impact on voters’ perception of EU democracy could then be immense, because voters have been told that one effect of their ballot is to decide who heads the commission.

Other names circulating in EU capitals for the top commission job include the Irish prime minister, Enda Kenny, the outgoing Finnish prime minister on the centre-right, Jyrki Katainen, and the Danish prime minister on the centre-left, Helle Thorning-Schmidt.

The outcome, possibly in July, will be strongly determined by the German chancellor, Angela Merkel, who has formally backed Juncker but is known to resent being forced to. “Merkel was outwitted,” said a senior EU diplomat. “But she has options and she will exercise them. Brutally. Anyway, there are very few people except a few in the parliament who believe there is a European demos.”

Schulz conceded there was nothing “automatic” about his securing the commission job even if the social democrats won the election, and admitted he would not have Merkel’s support as the German nominee. But he insisted: “What interests the voters here is whether they can influence the decision-taking through the ballot box.”

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Woohoo! An unambiguous policy disagreement has been found! Unfortunately, it’s not a disagreement between Juncker and Schulz. They’re both on exactly the same page on this matter. No, it’s a disagreement between Juncker and Schulz on one side and Angela Merkel on the other.

Angela Decides She Enjoys Being the Decider. More Europe? How About More Merkel.
And what’s the disagreement over? It’s a disagreement over who should get to decide who actually become EU Commission President. That’s right, even though Jean-Claude Juncker and Martin Schulz are campaigning to become the head of the EU the system isn’t actually set up to work that way. Voters don’t directly elect their presidents in the EU. And neither does the parliament. No, it’s the “European Council”, which consists of the elected heads of all EU member states, that gets to choose who heads the EU. It’s sort like how the US states selected their Senators before the 17th amendment [10], but instead of state legislator selecting national senators you have national leaders selecting the single head of the EU executive branch. That’s how the system works, at least for now. And Angela Merkel isn’t too keen on changing it.

Keep in mind that this isn’t a new debate and also keep in mind that Angela Merkel does not have the backing of her party on this matter (at least not officially). Merkel’s finance minister, Wolgang Schauble, was advocating a directly elected EU president back in 2012 [11]. This was just months after the signing of radical new ‘Fiscal Compact’ that bound all EU member states to nearly-balanced budgets indefinitely [12].

And, until last summer, it seemed to many observers that Angela Merkel was fully onboard this vision of a more united Europe. But last summer, Merkel make a strong about face. Brussels has become part of ‘the problem’ in Merkel’s mind, where ‘the problem’ is a wavering will to impose austerity indefinitely [13]:

Der Spiegel
About Face: Chancellor Merkel Cools on European Integration

German conservatives have long been passionate supporters of increased European integration. But lately, Chancellor Angela Merkel has applied the brakes to the process. Brussels, she believes, has become part of the problem.

June 25, 2013 – 11:10 AM
BY MELANIE AMANN, PETER MÜLLER, RENÉ PFISTER and CHRISTOPH SCHULT

A party needs two things to win elections: a top candidate and a campaign platform. The European People’s Party (EPP), a collection of conservatives and Christian Democrats in Europe, has neither at the moment. And that has a lot to do with CDU leader Angela Merkel [14].

Just one year ago, the German chancellor was calling for “more Europe, not less.” But now she has completed a radical about-face. At the EPP summit in the Vienna Kursalon concert hall last Thursday, Merkel showed that she had transformed herself into an EU-skeptic. Her conservative colleagues were left with the impression that the German chancellor now believes that there is too much Europe.

Merkel spoke with notable frequency about the problems associated with choosing a candidate to represent the party on a European level. And in the end, the group made no progress on its platform or on the issue of a candidate.

What is wrong with the CDU leader? The meeting in Vienna coincides with the image of a chancellor who is deviating more and more openly from her party’s traditional positions on European policy. She is increasingly distancing herself from the foreign policy tradition that the CDU, more than any other party, has maintained and upheld since the postwar period.

The contrast between Merkel and Finance Minister Wolfgang Schäuble, who embodies this tradition of Christian Democratic European policy, is also becoming more noticeable. Whether it is the pace of integration, the necessity for changes to European treaties or the direct election of the European Commission president, there are no major issues on which the chancellor and her finance minister are of the same mind.

Never a Passionate Supporter

Merkel, now in her 14th year as party leader, has learned that she must inject a little pathos into her voice when the discussion turns to Europe. She will no doubt do so when she delivers her statement to German parliament prior to the European Union summit this Thursday. And because she is aware of the mood in her party, she did not intervene when the CDU, at its party convention in Leipzig two years ago, approved a position paper that advocated providing Brussels with significantly more power.

But she was never a passionate supporter of such a path. More recently, she has been standing firm against expanding the power of Brussels institutions. And she has been particularly vehement when it comes to anything that might limit the powers held by national leaders such as herself.

Many of her fellow conservatives, of course — particularly those who grew up in West Germany — still believe that Germany must be merged as completely as possible into the European entity. They see it as a natural consequence of the wrongs Germany committed during the Nazi era. Finance Minister Schäuble enthusiastically invokes the “vision of a continent growing more and more strongly together.” He believes that the crisis offers an opportunity to pursue this path more quickly.

Officially, at least, this is the position of the party as a whole. The CDU continues to celebrate itself as champions of European unification and their position papers read as if they had been written by former Chancellor Helmut Kohl, who became teary-eyed when he spoke of the “House of Europe.” “The commitment to Europe is for us both a matter of reason and a matter of the heart,” reads the CDU campaign platform [15], which was approved on Sunday.

Top party officials have been instrumental in keeping such passion alive. Deputy party leader Ursula von der Leyen, who is Germany’s labor minister, dreams of the continent growing together into a “United States of Europe.” Schäuble came up with the idea of a European finance minister, who would have the power to dictate to the individual countries how much debt they could take on. And if recent CDU resolutions are to be taken seriously, the European Commission president, who is currently appointed by European leaders, will soon be elected directly by the people.

Notice how Wolfang Schauble wasn’t just an advocate of a directly elected EU president, something that could be seen as a move towards greater democracy compared to the current system of national leaders privately negotiating who gets to be president. Schauble was also floating ideas like creating a European finance minister who would have the power to dictate to the individual countries how much debt they could take on. So, basically, the opposite of democratic empowerment. And this would be in addition to the Fiscal Compact. More on that later.

Continuing..

Individual Countries

For Merkel, however, reason trumps emotion, and her reason has led her for some time now to do everything she can to prevent further steps toward integration and prevent Brussels from gaining more power. She believes that it was precisely the unrealistic passion for a united Europe that led to the establishment of a common European currency which lacked a solid foundation. Vision? In an interview with SPIEGEL [16] three weeks ago, Merkel warned against spending time “on theoretical discussions of how the European structures will look like in 10 or 15 years.” She believes that it makes more sense to tackle the urgent problems of the euro crisis before engaging in complex debates over restructuring the bloc.

Furthermore, Merkel has no intention of taking her party’s resolutions seriously. She wants the EU to work. But when there is trouble, she believes that the individual countries should take the reins, most notably Germany and France [17]. This attitude leads Ruprecht Polenz, one of the CDU’s most respected foreign policy experts, to conclude “that disillusionment is spreading within the party over the issue of Europe.”

Take a moment to review the description of Merkel’s vision for how the EU should work: When there is trouble, she believed that the individual countries should take the reins, most notably Germany and France?! How is that supposed to be interpretted? Does is suggest that Merkel envisions an EU where the motto is “we’re all in this together, until there’s trouble, and then its every country for itself, so the bigger the better at that point“? Or is it more like “we’re all in this together, until there’s trouble, and then Germany (and France to a much lesser degree) ‘take the reins’ and imposes anti-solidarity austerity“? Or how about a bit of both?

Continuing…

It has gotten to the point that Merkel feels strong enough to openly confront pro-European elements both in the German CDU and abroad. European Council President Herman Van Rompuy, for example, was supposed to prepare a strategy paper on the future of the EU and present it at the summit this Thursday. But Merkel made it clear to Van Rompuy in January that he could forget about his paper.

Indeed, she has made sure that there will be no groundbreaking resolutions at all when EU leaders meet this week. Van Rompuy’s efforts have been replaced by a document Merkel wrote together with French President François Hollande. Instead of strengthening the existing institutions, Merkel and Hollande merely propose a full-time president for the Euro Group, the group of euro-zone finance ministers that oversee the common currency. Officials in Brussels are outraged. “You can’t be constantly sending Mr. Van Rompuy on trips to address the issue of Europe’s continued development and then suddenly introduce your own paper,” says European Parliament President Martin Schulz, who will likely be the top candidate for the Social Democrats in next year’s European elections.

Part of the Problem

Merkel’s stalling tactics are reigniting the old basic conflict that has accompanied Europe since its founding. For those on the one side, Europe will only make progress if integration and the transfer of power continues to progress. This is the bicycle theory espoused by long-serving European Commission President Jacques Delors: Those who don’t keep moving ultimately fall over. Within the German government, Schäuble is a supporter of this theory.

Merkel, though, believes that Brussels has become part of the problem rather than part of the solution, especially in the euro crisis. The chancellor would like to see European Commission President José Manuel Barroso, in particular, lean more strongly on heavily indebted Southern European countries to tackle domestic reform and get their budgets under control. Instead, he is now saying that the policy of austerity has reached its limits.

Keep in mind that when Merkel calls for the European Commsision President to lean more strongly on heavily indebted Southern Euopean countries to “tackle domestic reform” (e.g. gut their safety-net and gut government spending), she’s referring to countries that have alread had their governments taken over by a Troika that imposed brutal austerity, so it’s not exactly clear what more Merkel wants from these nations. Love? [18]

Continuing…

But Merkel’s Europe-skepticism is also driven by self-interest. As a result of the crisis the German chancellor has seen her power increase considerably. When she travels to Brussels for meetings of European leaders, her voice tends to hold the most sway — if only because Germany is the strongest economy in the euro zone. She sees little reason to share her power with, for example, Barroso, a man who she helped maneuver into his current position in 2004.

This also helps explain why she opposes the direct election of the Commission president — a model supported by Finance Minister Schäuble. If European voters were to decide, heads of state and government would have less of a say, a scenario which Merkel would like to prevent. “I’m cautious in this regard,” she said in the SPIEGEL interview. She argues that it is good for equilibrium among the institutions if European leaders are also involved in the decision.

So it sounds like the core of Merkel’s argument against directly electing the head of the EU’s executive branch is that it’s good for equilibrium amongst EU institutions. What exactly does that mean? Well, the answer she gave Der Spiegel was, “Because I want the Commission president to be given a coordinating function over the policies of the national governments, I think it’s essential that the national heads of state and government have a voice in his or her appointment. [19]” In other words, since Merkel wants to see an EU Commission president with the powers to “coordinate” national policies, perhaps she might want to keep that informal veto power over who gets the spot.

Continuing…


‘A Real Breakthrough’

While the chancellor is applying the brakes, Schäuble raves about a “historic moment of European unification.” The direct election, he says, would be “a real breakthrough for a true European public.”

And he’s not the only one. Indeed, increasing numbers of German conservatives are vexed that Merkel no longer wants to discuss the long-term future of the European Union. “Europe will only emerge from the crisis if we know where we want to go,” says Norbert Röttgen, a CDU member of German parliament and former environment minister. Europe, he adds, needs a new political architecture.

Spreading Discontent

“We need an answer to the question of where we want to go with Europe,” says European Energy Commissioner Günther Oettinger, who is a long-time CDU member. Oettinger isn’t willing to simply go along with Merkel’s about-face. “The direct election of the Commission president is the goal of the national CDU,” he adds. Deputy CDU Chairman Armin Laschet agrees, saying: “The crisis has shown that we must strengthen European institutions.”

The discontent could soon spread. A rare act of resistance was on display last Friday evening in Arnsberg, a small town near Dortmund. At a meeting of state, federal and European lawmakers from the state of North Rhine-Westphalia, Laschet, the head of the CDU in the state, made no secret of his dissatisfaction with the part of the campaign platform dealing with European policy.

Laschet wants his party to express more concrete prospects for Europe and said that the North Rhine-Westphalia state chapter of the CDU would adopt its own European policy guidelines before September general elections. Laschet seeks to strengthen Brussels on issues such as fighting international terrorism and organized crime, as well as energy policy. He also wants to see the Commission president be elected directly by European voters.

It is a demand that Merkel abandoned long ago.

Now that’s a disagreement, and rather profound one when you look at all the changes that have taken place in recent years and all the potentially fundamental changes that could take place going forward. Angela Merkel appears to be basically rejecting her party’s long term vision for creating a “United States of Europe”. At least that what it sounds like in the above article.

When the Decider Votes, Others Listen
But is she really rejecting the idea of transferring more power to Brussels, or is she merely rejecting transferring additional powers to resist the existing austerity-mandates? If you already managed to get EU members to agree to put a cap on their budgets (the Fiscal Compact [20]), why run the allowing for a popularly elected EU President that has the powers to campaign on an anti-austerity platform and win? Why take that risk when the current system effectively gives Germany’s leader a kind of veto power over who becomes president. If guaranteeing far right economic policies is a top priority for your agenda, why risk that agenda to the whims of democracy?

These are the questions Merkel appears to be grappling with over the past year. And with the elections looming, it’s only a matter of time before we get answers. Well, maybe. It sort of depends on which candidate wins the popular vote. Popular will could definitely prevail, but only if Juncker wins [21]:

Juncker says Merkel assured him of Commission presidency if EPP wins
Reuters

May 12, 2014, 12:09 am

By Erik Kirschbaum

BERLIN (Reuters) – Jean-Claude Juncker said on Sunday he had won assurances from German Chancellor Angela Merkel that he would become the next European Commission president if their centre-right bloc wins the European parliamentary elections on May 22-25.

Juncker’s comments, made in an interview with Bild am Sonntag newspaper, contrasted with Merkel’s own suggestion on Saturday that the real choice might be made – as in the past – only after prolonged horse-trading between national governments.

Juncker, a former prime minister of Luxembourg, said he expected leaders of the 28 European Union governments to respect the will of the voters after the election.

“(If they did not) the voters would then know there was no need next time for them to bother voting because the parties would have broken their promises from before the election,” said Juncker, leading candidate of the European People’s Party (EPP).

“That’s why it won’t come to that. The EU government heads will respect the vote,” said Juncker, 59, a long-standing believer in a more federal Europe.

Asked if Merkel, whose Christian Democrats belong to the EPP, had given him a “firm commitment” that he would head the Commission if their bloc wins the election, Juncker said: “Yes, I’ve got that.”

Under the EU’s Lisbon Treaty, the 28 governments must take into account the results of the European elections in choosing a new head of the Commission, the Brussels-based EU executive that proposes laws and polices existing rules and policies.

“MOCKERY” OF VOTERS

However, there is no automatic guarantee that either Juncker or Martin Schulz of Germany, whose centre-left bloc is marginally ahead in opinion polls, will finally get the top job – something Merkel hinted at in her remarks on Saturday.

“It will certainly take a period of several weeks (after the election) before one can come to the necessary decisions,” Merkel said, stressing the complexity of negotiations needed to satisfy both voters and national governments around Europe.

Echoing Juncker, Germany’s Schulz also warned of consequences if EU government leaders ignored the voters and picked a candidate not on the ballots.

“If the government leaders fiddle and pick another candidate, they would badly damage democracy in Europe,” Schulz told Bild am Sonntag. “It would be a mockery of the voters and then there would be no reason to bother with such elections.”

Sorry EU voters, you got mocked! When you have two candidates- one that’s VERY pro-austerity (Juncker) and one less so (Schulz) – and Merkel says “It will certainly take a period of several weeks (after the election) before one can come to the necessary decisions,” while “stressing the complexity of negotiations needed to satisfy both voters and national governments around Europe”, it sounds like she’s telling you to get ready for “EU President Juncker”. Sure, Juncker is sounding rather war-monger-y these days (but how bad could it be [22], right?)

Now, take a moment and let this soak in: There are two candidates currently jockeying to become not only the EU Commission President but the first EU Commission President that the EU voters actually voted for(abeit indirectly). So this is a rather historic election. And Angela Merkel completed dissed that entire plan just weeks before the election and everyone knows she did it because the only vote that really matters in the election of the EU Commission President is Merkel’s vote. That’s pretty amazing!

Might Merkel still approve the less austerity-friendly Martin Schulz should he come out on top? Well sure, it could happen. That’s up to Angela.

But if she does end up choosing Schulz, she’s already told us that it will “certainly” be after weeks of negotiations and that raises the question of what kind of promises might have to be made in order to see a “President Schulz”? If winning the popular vote isn’t enough, what other commitments will have to be made to secure Merkel’s blessing? Keep in mind that the reason given in 2013 [13] for Merkel’s sudden opposition to directly electing an EU president were concerns that Brussels wouldn’t be adamant enough about continuing the austerity policies and permanently shrinking social safety-nets. And also keep in mind that Juncker is the only major candidate making this exact pledge right now. So what’s it going to take for Merkel to turn down Juncker and select Schulz, especially if the vote is close? These are rather significant (and somewhat terrifying) questions facing the EU.

Less “More Europe?”
But perhaps an even bigger question facing the EU is whether not this latest poo-pooing of direct democracy indicates that Merkel and the CDU could be planning on turning its back on the entire “United States of Europe” plan, because an “ever closer Europe” has been the vague guiding vision justifying radical changes like the “Fiscal Compact” throughout the financial crisis. Not only has it been the vision guiding the evolution of the EU in recent years, it’s also been the promise. First, the promise goes, comes the banking and fiscal union. And THEN comes the political union. That was the vision back in 2012, before Merkel changed her mind [23]:

Eurozone crisis: United States of Europe may be the only way to save euro
With France and Germany at odds, and events moving quickly, a strategy for fiscal and political union is being drawn up

Ian Traynor, Europe editor
The Guardian, Monday 4 June 2012 14.22 EDT

It is a measure of the speed at which the politics of the euro crisis is changing. Only a fortnight ago all the attention was being lavished on France’s new president, François Hollande, being sworn in in Paris as Monsieur Growth and rushing off on his first assignment to challenge Europe’s Frau Austerity, Chancellor Angela Merkel.

“We need new solutions. Everything’s on the table,” Hollande pledged, meaning he would force Merkel to remove the noseclip and consider things that give off a foul odour in Berlin, foremost among them eurobonds – Germany solving the crisis at a stroke by agreeing to underwrite the debt of Spain, Greece, Italy and all the rest. Fat chance.

By Saturday the growth versus austerity contest had receded as Merkel turned the tables on Hollande.

It was her turn to declare there should be no taboos in grappling with the hard options facing Europe’s leaders as they wait to see what will happen in Greece and Spain, and plot their next moves at what is shaping up to be a momentous summit at the end of the month.

Merkel appeared to be calling not only Hollande’s but France’s bluff. By announcing there could be no censorship of the eurozone to-do list, she meant tabling radical, federalist steps involving gradual loss of national sovereignty over budgetary, fiscal, social, pensions, and labour market policies with the aim of forging a new European political union over five to 10 years.

The USE – United States of Europe – is back. For the eurozone, at least. Such “political union”, surrendering fundamental powers to Brussels, Luxembourg and Strasbourg, has always been several steps too far for the French to consider.

But Berlin is signalling that if it is to carry the can for what it sees as the failures of others there will need to be incremental but major integrationist moves towards a banking, fiscal, and ultimately political union in the eurozone.

Recall that the banking “union” has recently become a reality [24].

Continuing…


It is a divisive and contested notion which Merkel did not always favour. In the heat of the crisis, however, she now appears to see no alternative.

The next three weeks will bring frantic activity to this end as a quartet of senior EU fixers race from capital to capital sounding out the scope of the possible.

Herman Van Rompuy, president of the European council, Mario Draghi, head of the European Central Bank, Jean-Claude Juncker, Luxembourg leader and longstanding head of the eurogroup of single currency countries, and José Manuel Barroso, chief of the European commission, are to deliver a eurozone integration plan to an EU summit on 28-29 June.

All four are committed European federalists.

Notice how Jean-Claude Juncker was part of the “quartet of senior EU fixers” that was tasked back in 2012 to flesh out the “United States of Europe” plan that Merkel was suddenly so keen on promoting back in 2012. While he may not be on the same page with Merkel on the electoral rules for the EU Commssion President, Juncker is strong proponent of “More Europe”.

Also note that Herman Van Rompuy, the current president of the European Council [25], opposed the plan to have actual candidates for the European Commission (instead of having the Council decide) back in 2012, arguing that it would only “organise the disappointment in advance” unless the president was granted substantially more powers [26] (inspiring language, isn’t it?). He continues to oppose the new proposed system [27].

Continuing…

Before the summit there is a fateful Greek election and French parliamentary polls, while time appears to be running out for the Spanish banking sector. The finance minister in Madrid, Luis de Guindos, says that the fate of the euro will be decided over these weeks in Spain and Italy.

The quantum leap in integration being mulled will not save Greece, rescue Spain’s banks, sort out Italy, or fix the euro crisis in the short term.

The leaders may even run out of time, exhausting the reserves of brinkmanship and last-minute calls that have characterised the “crisis management” of the past 30 months.

But they hope that by unveiling a medium-term strategy for a fiscal and political union in the eurozone they will convince the financial markets of their resolve to save the euro, that the currency is irreversible, and that the heat will be off.

Notice how the motive behind Merkel’s sudden 2012 plunge into “United States of Europe” territory was driven by an urgent need to convince financial markets that the euro wasn’t completely doomed. In other words, the intended audience for all the talk about a “United States of Europe” was the financial markets.

Keep in mind that the above article was published just keeks before European Central Bank chief Mario Draghi’s famed “we will do ‘whatever it takes’ speech” [28] to calm the financial markets and buy the eurozone some financial breathing room. Also keep in mind that the pledge to “do whatever it takes” has turned out to be a false [29], yet useful [30] pledge thus far.
So what about the “United States of Europe” vision? Was that a false pledge too? It’s a big question because the “United States of Europe” relies on three main components:
1. A banking union, which is already here.
2. A political union, which would presumably involve transferring substantially more national sovereignty to a central government [31]. And presumaby there would be direct elections of union-wide officials (like EU Commission president).
3. And a fiscal union.

So what about that fiscal union? What would that involve? There’s already the “Fiscal Compact” and so many other treaty-based budgetary constraints in place. So how different would a full fiscal union be from what exists today? More of the same, perhaps? [32]

mainly macro
Friday, 2 May 2014
The Eurozone: out of the ashes?
Simon Wren-Lewis

I was at a gathering a year or so back in which sensible economists were thinking about the transition path for the Eurozone to full fiscal (and banking) union. They viewed recent events as confirming that monetary union alone was not tenable, and that fiscal union was the way forward. Many share [33] that view. I remember asking whether there was any likelihood that the treaty changes required for fiscal union would find democratic support, given recent events. To say that this interjection was regarded as unwelcome was an understatement.

In one sense this reaction was understandable. Democracy within the Eurozone is a strange thing. On occasions [34] it has been of the ‘last time you voted you got the answer wrong, but don’t worry, we are going to give you a second chance by having another vote’ variety. On others [35] it has been ‘if you vote the wrong way you will have to leave’ type. In these circumstances worrying about democratic opinion and fiscal union may seem beside the point.

But in a way, that is the point. My interjection at that meeting could have been far blunter. How can you be planning to move towards fiscal union when the governance structures of the Eurozone have clearly failed with a more limited set of tasks? That would be a classic economist’s mistake: of designing a set-up which works well in the hands of a benevolent social planner, but falls apart when run by actual politicians.

Take, for example, the ECB. Compared to the US Fed or the UK Bank of England, it comes a poor third. It actually raised interest rates in 2011, making its own contribution to the subsequent recession. It has consistently gone well beyond its remit in promoting [36] certain fiscal policies or structural reforms. It took two years before coming up with OMT [37], giving us two years of continual crisis. It is only now thinking about QE. A basic problem is that it is not accountable for its actions, which is a serious deficiency for an unelected institution with such power.

The other reason [38] for the 2012 recession was fiscal contraction. If you regard some fiscal contraction in the periphery countries as necessary to correct a lack of competitiveness, then the problem has been the lack of offsetting fiscal expansion elsewhere (not just Germany, but countries like the Netherlands). This has not happened in Germany in part because there is no compelling need within Germany for fiscal expansion: it has been benefiting from the lack of competitiveness of other countries, as its current account surplus shows.

In a fiscal union, fiscal policy is decided at the centre, so these national obstacles to fiscal expansion could be brushed aside. (This, of course, is one good reason why Germans might be rather reluctant to vote for such a union.) But in practice what would aggregate fiscal policy determined in Brussels look like? All the indications are that it would look much like the fiscal policy we currently have: obsessed with debt, and completely ignorant of any significant multiplier effects. The fundamental misunderstandings [39] about fiscal policy that are embedded in German thinking are now deeply ingrained elsewhere [40].

To make the more general point, if a core problem is with the governance structures of the Eurozone, then handing those structures more power through fiscal union could be a huge mistake. But this realisation seems to leave us in a horrible position: we do not like the place we are in, we cannot and/or should not ‘go forward’ to fiscal union, yet ‘going back’ by leaving the Euro seems too traumatic. (See, for example, Kevin O’Rourke [41].)

Note the important point Simon Wren-Lewis just made about the consequences of having a fiscal union in the middle of recession: One of the key problems the EU (and especially the eurozone with its monetary inflexibility) has faced ever since austerity became the default policy solution is that austerity in one part of the EU requires more spending in other countries if you want to avoid a general downward spiral. It’s just math. Currently, there’s no way to force Germany to spend more but that could change under a fiscal union. So it isn’t just a lack a resolve for imposing austerity that folks like Merkel potentially have to fear from a fiscal union. Forced stimulus spending intended to help Germany’s neighbors might also be put on the table. Horror of horrors.

So, as we can see, there are some significant reasons why Merkel may not be so keen the fiscal union, at least not a full blown fiscal union within the context of a “United States of Europe” that includes a directly elected central government. After all, what happens if a European central government is elected on a pro-stimulus platform. *gasp* Wouldn’t that be a complete nightmare for the economically confused [39]? Now you can see why Merkel had such an about face last year on this whole “More Europe” plan [13].

No, the Plans Haven’t Been Cancelled. But They Have Been Defined
So did Angela Merkel also sour on the vision for a fiscal union last year too? And did she even reject the political union or was it just a rejection of the idea that the person running the new political union (the European Commission President) would be elected by a vote?. Well, if you look at the signals she was sending last fall after winning reelection, Angela Merkel hasn’t ruling out a political union or a fiscal union. She still had big plans for both and an ever closer Europe. An ever closer Europe on austerity autopilot [42]:

Der Spiegel
Angela’s Agenda: A Grand, Controversial Plan for Europe

By SPIEGEL Staff
Angela Merkel’s domestic policy in her third term will likely be confined to higher spending. But she has grand plans for Europe. SPIEGEL has learned she wants Brussels to have far more power over national budgets. It’s a risky move that EU partners and the Social Democrats are likely to oppose.
October 21, 2013 – 04:29 PM

In the end, the atmosphere became downright festive in the Berlin Hall of the Parliamentary Society, a building next to the Reichstag. Chancellor Angela Merkel’s conservatives and the center-left Social Democratic Party (SPD) had met there three times in the last three weeks to sound out whether they could form a coalition government. The decision was still up in the air.

Merkel gave SDP Chairman Sigmar Gabriel a questioning look, and said: “Would you like to say something?” But Gabriel beckoned to her to speak. “I have my delegation’s support for what we discussed,” she said. “So do I,” Gabriel replied.

The grand coalition took shape shortly before 3 p.m. last Thursday. For the third time in postwar German history, Merkel’s Christian Democratic Union, together with its Bavarian sister party, the Christian Social Union (CSU), and the SPD are preparing to form a coalition government [43]. The talks are expected to begin this Wednesday. The chancellor is in a hurry because she wants to have a new government by Christmas at the latest. “Christmas will be here sooner than you think,” she told fellow members of the CDU executive board on Friday afternoon.

At the beginning of her third term, Merkel has more power in Germany and Europe than any chancellor before her. There hasn’t been such a strong majority behind a government in Germany’s parliament, the Bundestag, since the first grand coalition half a century ago. In the midst of the European crisis, Germany has become the undisputed dominant power in Europe.

The grand coalition will hand Merkel a majority she could use to shape Germany and Europe and address major issues, including constitutional reforms in Germany and the reform of European Union institutions.

Merkel, unlike SPD Chairman Gabriel, has been unchallenged in her own party since her election victory. Little is left of the accusations that critics had leveled at Merkel, except one: That she is a chancellor without an agenda, plan or vision; that her style of government is reactive rather than proactive; and that she doesn’t know where she wants to take her government and Germany.

Big Plans for Europe

In the past, Merkel has treated governing primarily as repair work. The major issues of her first two terms in office, the financial crisis and the fight to save the euro, were suitable for that approach. Will that change, now that she has the necessary power and means? Hardly at all, when it comes to Germany. There are no major reforms in the works at government ministries, and the grand coalition will focus on increasing spending to fulfil some of the parties’ campaign promises.

Keep in mind that the statement “In the past, Merkel has treated governing primarily as repair work,” isn’t [44] really [23] accurate [13]. Still, it’s a journalistic tone that suggests the “I have big plans” vibe Merkel was exuding following her reelection was more noticeable to reporters than normal.

Continuing…


In contrast, officials at the Chancellery are forging plans for Europe that are practically visionary for someone like Merkel. If she prevails, they will fundamentally change the European Union. The goal is to achieve extensive, communal control of national budgets, of public borrowing in the 28 EU capitals and of national plans to boost competitiveness and implement social reforms. The hope is that these measures will ensure the long-term stability of the euro and steer member states onto a common economic and fiscal path. This would be the oft-invoked and ambitious political completion of Europe’s monetary union — a huge achievement.

Notice how “oft-invoked and ambitious political completion of Europe’s monetary union” didn’t seem to involve a political dimension. Lot’s of new powers for the EU (and especially eurozone) central government, but not too many new ways to create more direct democratic accountability. Funny how that works.

Continuing…


It isn’t a new goal, but what is new is the thumbscrews Brussels will be allowed to apply if Merkel has her way, including sooner and sharper controls and veto rights, as well as contractually binding agreements and requirements. In short, this would amount to a true reconstruction of the euro zone and a major step in the direction of an “economic government” of the sort the SPD too would like to see put in place.

Yikes! Merkel wants austerity “thumbscrews” for a newly empowered EU Commission! That’s not good. And the fact that the SPD is apparently also onboard with this ‘thumbscrews’ plan isn’t a good sign either although, as we’ll see below, Martin Schulz (an SPD member) is NOT on board with this plan. At least not the plan to rapidly and radically implement the changes Merkel wants to see.

Continuing…


Germany’s current economic strength helps to explain these visions for Europe, since stricter budget controls wouldn’t pose a threat to Berlin at the moment. Jobless levels are so low that the country has almost reached full employment, and the budget is in good shape, at least at the national government level. In fact, public coffers are so full that the government can afford to boost domestic spending.

More Money to Spend

And that’s precisely what the members of that coalition intend to do. The first item on their agenda is to hand out benefits and spend money. Thanks to the strong economy, this won’t even require raising taxes. In his financial planning for the medium term, Finance Minister Wolfgang Schäuble anticipates growing national budget surpluses from the year after next: €200 million ($274 million) in 2015, €5.2 billion in 2016 and €9.6 billion in 2017.

More Powers For European Commission

During the negotiations, CSU Chairman Horst Seehofer presented a plan for how the toll could become a reality. It calls for drivers to pay an “infrastructure fee” in the future. Germans would be able claim the fee as a credit against the motor vehicle tax, so that the cost could ultimately be imposed on foreign drivers. According to the document, prepared by Transportation Minister Peter Ramsauer, this would be possible under European law.

The new coalition won’t face serious resistance to its spending policies, not even from the opposition. With the elimination of the pro-business Free Democratic Party (FDP) from the Bundestag, the voice of moderation in budget policy has disappeared. Only the economic wing of the CDU/CSU is likely to put up weak resistance.

So Seehofer will get his toll, the states will be kept happy with financial gifts and the social security offices will hand out benefits. This doesn’t exactly sound like an ambitious program for Merkel’s second coalition government with the Social Democrats. Instead, it feels like more of the same, or a program of minor improvements, at least on the home front.

But regarding Europe, Merkel is heading for strategic decisions — and is likely to show more courage to take political risks than usual.

Schäuble, the last dyed-in-the-wool European among Germany’s top policymakers, can be pleased. Merkel wants tangible amendments to the European Union treaties: more power for Brussels, and even more power for the much-criticized European Commission. “Unfortunately, there is no other option,” say government officials.

Carrot-And-Stick Approach

Last Thursday, after the final round of exploratory talks with the SPD, Merkel brought European Council President Herman Van Rompuy into the loop in a private conversation at the Chancellery. It was a back-door initiative of the kind so typical in EU policymaking. Documents are already being put together at the German Finance Ministry over how “Protocol 14” of the EU Treaty could be beefed up. It currently contains a few general statements on cooperation in and control of the euro zone. But now, if Berlin is able to implement its carrot-and-stick approach, tangible powers for the European Commission will be added to the protocol.

For instance, the Commission could be given the right to conclude, with each euro country, an agreement of sorts to improve competitiveness, investments and budgetary discipline. Such “contractual arrangements” would be riddled with figures and deadlines, so that they could be monitored and possibly even contested at any time. In return, a new, long-discussed Brussels budget will become available to individual countries, an additional euro-zone budget with sums in the double-digit billions for obedient member states.

Protocol 14 could also be used to install the full-time head of the Euro Group. The influential job is now held by one the member states’ finance ministers, currently Dutch Finance Minister Jeroen Dijsselbloem. Devoted Europeans like Schäuble have long dreamed of installing a “euro finance minister.”

Note the reference to Wolfgang Schaeble’s presumed pleasure over Merkel’s declared plans last fall to implement “more power for Brussels, and even more power for the much-criticized European Commission,” and how he has long dreamed for a “euro zone finance minister”. We’re going to turn to this topic below (hint: he’s still dreaming the dream).

Continuing…


Resistance Against Merkel’s European Plans

If Chancellor Merkel is focusing on an amendment of this central part of the EU treaties, it is a remarkable about-face. Still, the new course is risky, and it has many detractors and an uncertain outcome. None of this is to the chancellor’s taste, at least not the chancellor we know. But Merkel has already deployed her key European strategist. The relevant department head in the Chancellery, Nikolaus Meyer-Landrut, outlined the German plan at a Brussels meeting in early October. It didn’t go down very well.

The president of the European Parliament, German Social Democrat Martin Schulz, has already warned Merkel privately that he won’t back any change in EU treaties. He wants national governments to make the euro zone resilient to future crises by using the instruments created step-by-step over the last three years — without treaty changes. Schulz fears that a treaty change would take too long and that referendums necessary in some countries couldn’t be won given current poor public sentiment regarding the EU. “We will check all the chancellor’s proposals to see whether they can be implemented in all EU states,” says Schulz, who will be part of the SPD’s negotiating team in the coalition talks, responsible for all issues pertaining to Europe.

But Merkel seems undaunted by these obstacles. And she already has a timetable. First she wants to wait and see what happens in the May 2014 European parliamentary election. Then the new president of the European Commission [45] will have to be chosen once the second term of the current incumbent, José Manuel Barroso, ends in 2014. Merkel got him the job and ensured he got a second term. But these days, she doesn’t even bother disguising her contempt for Barroso.

Once the new European Commission is in office, the political window for Merkel’s European vision is expected to open. It doesn’t seem to bother her that she will be in a clear minority when she embarks on her reform plans. She is familiar with this position from the first days of the euro debt crisis, when she wanted to include the International Monetary Fund as a key authority in distributing aid packages, and almost all other euro countries were against the idea. At the time, she said privately: “I’m pretty much alone here. But I don’t care. I’m right.”

Well, well, well, that is quite an agenda that Angela Merkel had in mind back in October: “Thumbscrew” powers and a “carrot and stick” approach to individual states involving contractual agreements to improve “competitiveness”. So, basically, Angela Merkel wants to turn the EU into a far right economic DREAM LAND where individual nations cede sovereignty over their budget to a central EU power in exchange for the “carrots” that come with being an obedient member state. A poorhouse [46] for nations.

Wolgang Approves of the Plan, ASAP
This was Merkel’s plan back in October. Has anything changed, especially since Martin Schulz was pledging not to advance any new treaty changes? Well, back in March there was one requested amendment to the plan, but it wasn’t made by Merkel. Recall the “euro finance minister” dream of Wolfgang Schaeble’s and the presumed pleasure he must have had over Merkel’s sudden “more Europe” agenda. Schaeble still wants the dream to come alive. Soon. Specifically, “as soon as possible” following the upcoming elections [47]:

Financial Times
March 27, 2014 6:37 pm
Schäuble revives push for eurozone integration

By Stefan Wagstyl in Berlin and Alex Barker in Bruges

Germany is pushing for changes to EU treaties “as soon as possible” after the May European elections, in an overhaul to fuse eurozone economic governance [48] behind a budget chief and euro area parliament.

In interviews, speeches and articles, Wolfgang Schäuble, Germany’s finance minister, has given urgency and political impetus to Berlin’s longstanding ideas for a refashioned and more centralised eurozone.

Speaking at the College of Europe in Bruges, Mr Schäuble outlined a vision for a changing EU treaties to establish a “budget commissioner” empowered to use common funds and reject national fiscal plans if they “don’t correspond to the rules”.

Asked when he envisaged agreeing the treaties, he said “today is better than tomorrow” and called for negotiations to start straight after the European parliament elections in May.

These reforms to integrate the eurozone, he added, must be paired with measures to ensure those countries outside are not “systematically disadvantaged” – an approach that will be welcomed by Britain.

In a joint Financial Times article with George Osborne [49], the UK chancellor, he wrote that future treaty change “must include reform of the governance framework to put euro area integration on a sound legal basis, and guarantee fairness for those EU countries inside the single market but outside the single currency”.

Mr Schäuble’s intervention to restart the reform debate highlights Berlin’s determination that the EU should build on the eurozone’s fragile economic recovery from the financial crisis by creating institutions strong enough to withstand future turmoil.

The veteran finance minister’s pledge to fight for reform comes after the joint declaration in January from German chancellor Angela Merkel and French president François Hollande, pledging to work for closer economic and monetary union.

But the German government has now gone a step further, arguing in the FT that treaty change must also address one of key negotiating demands of Mr Cameron, the UK prime minister, before his planned 2017 referendum: the protection of the interests of euro “outs”.

Mr Schäuble, a long-term advocate of reform, wants to establish an institutional architecture for a common fiscal and economic policy, with a parliament, finance minister and budget to support countries in crisis and encourage reform.

He said it was “nonsense” to suggest the power for a eurozone commissioner to reject national budgets would impinge on sovereignty. “To stick to the rules is not a violation of budget sovereignty…of national sovereignty. We have moved sovereignty to the European level,” he said.

Germany’s renewed appetite for treaty reform will rattle some eurozone member states, which fear the centralisation of budget power would potentially trigger national plebiscites that could not be won.

To stick to the rules is not a violation of budget sovereignty…of national sovereignty. We have moved sovereignty to the European level,” says Wolfgang Schaeble. And it’s a sentiment clearly shared by Merkel too. As long as the European Commission is overseeing national budgets, it’s not really a loss of sovereignty. It’s just a transference and concentration of sovereignty into a single institution. At least that seems to be the argument.

But it’s an argument that ignores the fact that the person heading the European Commission – the role Jean-Claude Juncker and Martin Schulz are currently in a neck and neck race for – is still to be ‘elected’ by Angela Merkel or a future German chancellor in a backroom deal. This is why Merkel’s recent refusal [1] to simply back the candidate from the party that wins the elections was so jaw dropping [50]. Anyone paying attention can see what she’s promising: A massive transference of national sovereignty to a central EU-wide institution that Germany would have unofficial veto-power over.

Can this possibly be the long-term plan? It doesn’t look very sustainable. Could we really have one election after another where backroom deals dominated by Germany select a single individual with incredible powers over national policies? Indefinitely? Is that at all realistic? Maybe not. But keep in mind that, should Merkel’s agenda be fully implemented, she might not care if the EU Commission president is directly elected or not. Why? Because the more we learn about Merkel’s plans, the more apparent it’s becoming that the new “United States of Euorope” will play a role alarmingly similar to the economic policies of the European Central Bank: High deficits will result in the “stick” of forced austerity. But what about high unemployment? Have we heard anything in Merkel’s plan about addressing the chronically high unemployment? How about a guaranteed “stimulus” plan that kicks in during a recession, have heard anything about that? Of course not. The “carrot and stick” approach that Angela had in mind [51] is solely focused on debt and deficits. It’s the political/fiscal analog to the ECB’s single-minded focus on inflation [52]. Recall Simon Wren-Lewis’s observation above [32]:


In a fiscal union, fiscal policy is decided at the centre, so these national obstacles to fiscal expansion could be brushed aside. (This, of course, is one good reason why Germans might be rather reluctant to vote for such a union.) But in practice what would aggregate fiscal policy determined in Brussels look like? All the indications are that it would look much like the fiscal policy we currently have: obsessed with debt, and completely ignorant of any significant multiplier effects. The fundamental misunderstandings [39] about fiscal policy that are embedded in German thinking are now deeply ingrained elsewhere [40]

Yep! And if Merkel’s plans come to fruition, that obsession with debt, driven by a fundamental misunderstanding about fiscal policies, won’t simply be a contemporary institutional preference. It will be embedded into layers and layers of law at the national and supranational level. Who knows, maybe once the “fiscal union” is in place, and elected officials are powerless to turn off the austerity-engine, a more democratic “political union” will be allowed to emerge too. At that point, why not? Even if there’s a landslide victory of an anti-austerity agenda the implementation of that agenda may not be a realistic option in the future.

So, with all that in mind [53]happy voting EU [54]!