Democracy or Europe? Trichet's call for a European Finance Ministry

Jean-Claude Trichet, the sitting President of the ECB, called for a European Ministry of Finance (a European Department of the Treasury) this week. This is an important proposal that needs to be looked at carefully, for there is both opportunity and danger. Even if it is unlikely to happen, by the very act of proposing it, Trichet has put Europe in a do-or-die dilemma.

What Trichet argued for was a Ministry of Finance that could do three things: put the regulation of financial markets in the hands of a politician (rather than a committee of professional technocrats); push the member states to reform their economies to make them more competitive (rather than protecting existing jobs and businesses); and most importantly of all, to control the budget policies of the member states.

No federation on earth allows full control of the second and third goals, because no self-respecting state in the union would allow its powers to be so radically cut and controlled from outside. It would end the democracy on which the federation depends. We're talking about tax policy, budget policy, economic development policy, social policy, welfare policy and regional development. Competitiveness policy sounds harmless, but in Europe, it explicitly extends to unemployment insurance benefits, training, and social welfare generally as disincentives to work in new kinds of industries.

The European Commission, which is something like a federal bureaucracy, but must constantly push to achieve that status, has never dared to make the case for a European Ministry of Finance, because it knew the member states would not support it. It tried for a short time between 2002 and 2004 to take a tough line with the member states and act like one. This was a pretty simple job in theory. Member states had entrenched rules in the treaties on which the EU is based, and had to respect those commitments. All the Commission had to do was insist that the rules be obeyed. Moving a little beyond that, the Commission tried (unsuccessfully) to get the member states to devote more than the 1% of European GDP that it gets in tax revenue.

If you read the Treaties, you'd expect the Commission to succeed. The only problem is that the Treaties only work if the (powerful) member states want them to. Germany, instead of respecting Europe's economic constitution, drove a sword through it. Together with France, it led a revolt against those rules in 2005 that other countries joined until the Commission backed down and negotiated. The only thing that saved Greece and Portugal from being attacked at that moment was that Germany and France, facing the same fate, had told the Commission that hell would freeze over before they accepted punishment and control. European law, effectively, was what it and the other member states in the Council of Ministers (of the member states) said it was. Greece and Portugal simply got lucky. France was never fanatical about forcing national governments to restrain themselves, and Germany was afraid of being exposed for exercizing a naked, all-out power play in which it flouted the rules but insisted they be applied to others. That is no way to drum up support for even a rump Ministry of Finance, a rump that could only tie the hands of the member states but not actually help anyone. And so the idea faded into the background.

What remained was the realization that there were very real limits to European integration, limits that still exist today. One of these is the clash between democratic demands and the treaty-based rules that say what goverments are allowed to do. Other limits are national pride, and the very simple fact that Europe is not a country. Europe is not a people. Europe does not share the sense of common destiny that allows citizens in other countries to put up with a government they disagree strongly with, because the majority of their fellow citizens voted for it fair and square. And none of that is likely to happen soon. There is such a thing legally as European citizenship, but there is no common citizenship in the minds of European electorates. On the contrary, Northern Europeans and Southern Europeans, regardless of how much they might like each other personally, are busy demonizing one another as if the apocalypse were already here.

Trichet's proposal is well-meant and should not be demonized. A European Ministry of Finance, if it were a fully-fledged office on par with that of the American Secretary of the Treasury, and the other Finance Ministries of China, India, Brazil, Russia and so on, would indeed be a very good thing. Money could be moved within the EU to where it is needed most. Agreements could be made with other world leaders on all the things we need so badly, from regulating financial markets to averting economic collapse when the next bubble bursts. But Europe's national governments won't allow it, and that is why he didn't propose it. It wasn't an oversight. He explicitly said he didn't want to suggest it.

So what does this mean? A European Ministry of Finance, as Trichet presents it, will do all of the smothering and none of the nurturing. It is pre-destined to say no and rarely to say yes. It will insist on the right to control member state finances without the responsibility of helping to make things better, and without the democratic representation that citizens deserve and expect. And worst of all, the clash between democracy and a European Ministry of Finance will be directed squarely at nearly all of the countries that have been democratic for only a generation. All of these countries will have traded one dictatorship for another.  That is no way to run a union. It would be better to admit that the differing wishes of the member states can't be contained within the same currency.

One day, when Europe's national leaders get over themselves, when they allow European Ministers to be elected, and when they agree that they will bow to the rule of law rather than institutionalising might makes right, and when European voters see themselves as Europeans rather than Prussians and PIIGS, a Finance Ministry would be a fine idea.

But until that day, an EU Ministry of Finance will re-introduce authoritarian rule in Europe, at least for the South, and then surely for the East. That can't be what we want.

Germany blocks the ECB

Jean-Claude Trichet, the President of the ECB, has a term of office that extends into October and cannot be renewed under the existing rules. And yet, Europe cannot agree on a replacement.

Let me rephrase that. Germany cannot bring itself to support the candidate that everyone else seems to have agreed on. This is despite the fact that the Chancellor herself has praised the candidate, his policies and his credentials. Mario Draghi is the current Chair of the Financial Stability Board, the global body responsible for ensuring that there will not be another financial crisis. In terms of policy, Draghi brings everything to the table the Germans want. He is clear on the question of whether the ECB should continue to purchase bonds from bankrupt eurozone governments as Trichet has reluctantly done. He says the ECB wouldn't do that on his watch. He would be tough on inflation. What more can Germany want?

That is the question. Germany seems to want to teach Europe a lesson. Not just the 'deficit sinners' who will be cast into the fire, but France and Italy as well. The level of hysteria in the German press and in German politics against foreigners is breathtaking. They're not only mad at the so-called PIIGS, they're mad at the ECB as well. And that is run by a Frenchman.  Chancellor Merkel wanted a German candidate, Bundesbank President Axel Weber, to be the next head of the ECB. He withdrew from the running after citing opposition from Europe and from within the Bank itself to his intent to run a tight ship. And it seems in her eyes, the German chanting for European blood could only be appeased by a Teutonic captain at the helm of the ECB.

There is a saying coined by Carl Jung that what you resist persists. In the context of German hysteria, the Weber Affair blew up because it had to. Weber came across outside Germany as arrogant and contemptful of his European colleagues, echoing what Europe hates about Germany most. Only 10 years ago, Germany was an economic basket case. It flouted the rules that it demanded be applied to others. It defied the application of economic penalties in the mid-2000s when it passed one emergency budget after another. Now that it is back on track, it is screaming for obedience and punishment according to terms it would never accept for itself. 

Germany has been rightly criticised for a lack of sensibility in how it deals with its European neighbours. One might argue that there is little the German government could do in the face of such domestic revulsion for Europe. Except for one thing. Merkel forgets that Germany has been here before and chose European cooperation rather than an all-out War of the Roses. In 1991, Merkel's mentor, Chancellor Helmut Kohl, conceded minor points to the hysterical politicians who wanted to torpedo EMU. But he insisted that you had to compromise in Europe, that Germany actually had to get on with its neighbours. Germany's past, he argued, demanded that. 

Germany is at the verge of destroying Europe. It may not in the end, but it is making it weaker every day.

The Rise of General Trichet

The writing is on the wall for Europe's political leaders this week, and so far they have done nothing. The consequence of this is that the ECB is taking over areas of policy out of necessity.

It is not as if the warnings have not been made. One after the other this week and last, the key economists who played a role in establishing the euro have warned that the Stability Facility is woefully inadequate and in need of support. Willem Buiter warned last Friday that the war to defend the euro was running out of ammunition because the Facility was too small. Today, on Wednesday, European Commission President Manuel Barroso, made the plea for member state governments to funnel more resources into the fund. Ottmar Issing underlined yesterday, in contrast, that no solution would ever be sufficient unless euro zone member states addressed the need to impose budget discipline on all of its members. Meanwhile, Jean-Claude Trichet, President of the ECB, confirms that the European Central Bank will continue to purchase government bonds for the foreseeable future from countries that cannot place them on the market to avert even greater catastrophe. 

In the meantime, Germany is denying that it needs to do anything, bondholders are denying they will have to take a haircut, Portugal is pretending that markets have confidence in its bonds, and Greece is pretending it will not default on its debt this year. This is reckless denial on a catastrophic scale. Economists may not always be right, they may not agree, and they are rarely popular, but in this case, Europe's political leaders would do well to listen to the list of choices they have at their disposal. 

An ominous warning in Buiter's statement to the press was that if the governments of the euro zone could not sufficiently fund the Facility, the ammunition to fight the war would have to come from elsewhere. For unless the euro zone admits defeat and ejects its weakest member states, or admits that they are bankrupt, someone will have to fight the war that the politicians haven't been willing to wage on their own behalfs.

Enter Trichet. Under his leadership, the ECB is purchasing government bonds from the euro zone's weakest member states. The Bank is far from happy about doing this, but sees no alternative for the time being. As the politicians fight one another and refuse to face the enemy, it is up to the bank to save Europe.

Trichet's position today resonates with the historical development of his own country of origin. The French Fifth Republic was the creation of General De Gaulle, a necessity for a country that lay in political shambles in the 1950s and could not govern itself. It required strong, centralised political authority that ordinary politicians were incapable of providing. That was not so much a statement of De Gaulle's authoritarian character as of France's polarised, fragmented political class that was allowing the country to collapse without his intervention.

Trichet's position is not the same as De Gaulle's, but his potential importance is at least as great, and arguably, immensely greater. In a world where the greatest challenges to public welfare are economic, and where decisions have to be made to harden and mobilise the country to keep it strong, the ECB is the only institution with the overview and the means to act where politicians have failed. And Trichet is the General.


There has been some speculation about what will happen when Trichet's existing term of office ends in late 2011. His term cannot be renewed under the terms of EU law. There await blistering divisions within Europe about what candidate should replace him. Nothing less will be at stake than what kind of single currency survives 2012.

But. The member states of the EU are busy negotiating changes to the Treaties to allow the Stability Facility to be funded. They could, and should amend it as well to allow Trichet's reappointment if he were prepared to serve on, at least until the crisis is over and calmer political temperaments prevail. In a highly polarised environment, that is probably the best thing that could happen to Europe.