A recent, seemingly minor criticism of the European Central Bank (ECB) reveals much about the European Union’s future. Central banks, of course, often come in for criticism. People worry over a policy’s adverse economic and financial consequences. Groups push policy to favor their narrow interests. This latest criticism looks like the latter sort, but it carries something more. A group of smaller German banks, called Sparkasse, complained that the ECB’s easy monetary policy will help Europe’s beleaguered periphery only at the expense of German savers. German media picked up the story and, knowing the popularity of the message, broadcast it widely. What the group says is true, of course, at least in a narrow economic and financial sense. Every central-bank policy burdens some for the benefit of others. What makes this criticism significant is how its nationalist tone at once points out: 1) the fundamental lack of integration in the eurozone, and 2) the increase of German influence.
The complaint, as indicated, is technically correct. Easy monetary policies, and the low interest rates that accompany them, help debtors, in this case Europe’s troubled “Club Med,” at the expense of creditors, in this case relatively prosperous Germany and its avid savers. The policy allows the periphery nations to borrow and refinance more cheaply than they might otherwise be able to, while low rates force lenders to accept poorer returns on their assets than what they might otherwise get, a major hardship to retirees living on their savings. Redoubling this sense of inequity are recent ECB statements, especially by its president, Mario Draghi, that designate monetary easing and low-interest rates as an effort to push up inflation. (Recently, the EU’s statistical agency, Eurostat, put the euro area’s overall annual inflation rate at only 0.9 percent.) Efforts to keep up inflation just make low rates more attractive to the debtor by reducing the ongoing real cost of debt service. And they increase the burden on savers by reducing the purchasing power of the already paltry returns on their assets.
Of course, interest groups everywhere try to twist central bank policies to their benefit. Typically, the push and pull divides along class lines. The wealthy want higher rates, to heighten the return on their assets, as well as less expansive monetary policies, to hold back inflation risks and protect the real value of their wealth. Poorer people, because they have fewer assets, see a less clear threat from inflation, and since they tend to be net debtors, they enjoy a benefit from lower interest rates. Sometimes, the interests divide along regional lines. In late-nineteenth and early-twentieth century America, for instance, the predominantly agricultural Midwest and South battled the monied interests in the Northeast over monetary policy. The farmers, mostly debtors, preferred what they called “easy money.” The wealthy urban lenders preferred more monetary restraint and higher rates, which they described as “sound money.” If, in an economic and financial sense, the nationalist twist we’re seeing in Europe is completely analogous to past class and the American regional differences, the politics are radically different.
Draghi, unsurprisingly, chose to ignore the economic and financial components of the Sparkasse complaint and instead chided his critics with the standard line used by EU leadership. Taking exception to the “nationalistic undertone,” he reminded all that people on the Continent are “not German, neither French nor Spaniards nor Italian.” Instead, he told his critics: “We are Europeans, and we are acting for the eurozone as a whole.” But his defense did less to dispel the matter than to focus attention on what has been happening. However much EU officials pretend otherwise, the burdens of this crisis have made it plain that there are still Germans, Spaniards, et cetera, and precious few “Europeans,” in President Draghi’s sense of the term. It has become ever clearer that the EU simply does not speak for a coherent group. The best it has ever been able to do, the best it can do today, is to ask its stronger members to accept disadvantages for the sake of the union, which they will do only to the extent that it suits their longer-term national interests. In this crisis, that has effectively meant German support for the weaker nations of Europe’s periphery.
Until—or if—Europe becomes a coherent whole, those asked to carry the burden will push their national government to demand something in return for their cooperation. Such pressure will grow in proportion to the weight of that burden. German demands have grown accordingly, as this crisis has lingered and increased in severity. German chancellor Angela Merkel has proceeded diplomatically and respectfully, but Berlin has nonetheless increasingly taken control. It has dictated the rules for the use of the zone’s stabilization fund. It has insisted on German-style bank supervision before it will allow European (that is, German) funds to be used to help troubled financial institutions in Spain and elsewhere in Europe’s periphery. It has blocked the issue of pan-European bonds, insisting on ways to guard German wealth before even considering them. Now elements in Germany are trying to influence ECB policy. Merkel has had to make many of these demands on behalf of her constituents even while playing the role of the good European. She really has little choice. The obligations of her office bind her to protect her citizens. She will have to continue in this way as she forms her coalition government and pursues further European diplomacy. It is the only way she can get Germany to cooperate, though it is an open question whether she will try to influence the ECB.
Given how tipped toward German economic power Europe currently is, this pattern seems bound to continue taking the EU in a Germanic direction. In return for German wealth and income to help the weaker members of the union, Berlin and German interests will get an increasingly larger say in the direction of the eurozone and the EU. The old, more evenly balanced forms will remain. Berlin will make no official statements for Europe; these will continue to emanate from the bureaucracy in Brussels and ECB headquarters in Frankfurt. Rising German influence will occur as it has to date: behind a screen, albeit a thin one. But the reality of this inevitable shift is already clear, at least until the zone achieves a fuller integration or the rest of Europe no longer needs German help, neither of which seem likely to occur any time soon.
Milton Ezrati is senior economist and market strategist for Lord, Abbett & Co. and an affiliate of the Center for the Study of Human Capital and Economic Growth at the State University of New York at Buffalo. He is the author of Kawari, a book about Japan’s economic and financial challenges. His new book, Thirty Tomorrows, linking globalization to aging demographics, is forthcoming from Thomas Donne Books of Saint Martin’s Press.
Image: Flickr/MPD01605. CC BY-SA 2.0.