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dr Justyna Schulz  3 grudnia 2019

The European Monetary Union and V4 – in danger of being marginalised?

dr Justyna Schulz  3 grudnia 2019
przeczytanie zajmie 14 min
The European Monetary Union and V4 – in danger of being marginalised? Flickr

The German position in the EMU is discomforting. Germany is assumed to benefit the most from the eurozone and is therefore expected to do more and bear proportionate responsibility for its stability. On the one side, it is accused of misuse of power when it tries to make efforts conditional on progress in the committed areas in other Member States. On the other side, it is accused of stubbornness if it tries to stick to the rules and to reduce the space of discretion. Simultaneously, the role of Germany as the euro stabiliser is played down.

The European Union is still under pressure, including economically. Members of the European Monetary Union (EMU) in particular are confronted with low GDP growth. The long-term spill-overs of the expansionary monetary policy, especially concerning social redistribution and pension systems, are difficult to predict. In the recent reports on financial stability, the ECB as well as the Bundesbank have warned of the imbalances in the financial and wealth markets caused by the monetary policy. By contrast, the member states’ fiscal capacity to react is constrained by the high level of debts. Trade with USA and China is challenged by open rivalry and rising tariffs. The euro area economies are becoming structurally more divergent; a process that started even prior to the financial crisis. Furthermore, the societies are confronted with the costs of aging populations and technological transformation.

In this challenging environment, one of the biggest obstacles seems to be the lack of a shared common view on how to reform the system. The financial crisis in 2008 questioned the authority of the liberal narrative that has shaped the economic institutional framework for the last thirty years. As a consequence, a compromise on reforms between the existing conceptual differences between various European constituencies became difficult to achieve. After almost ten years of reforms, the euro bloc still lacks creditable instruments and budgetary mechanisms to counter future economic shocks. The differences are fundamental in nature. They can be illustrated on the opposition between the German concept of Haftung and French claims for Solidarity.

The German concept of Haftung refers to the ordo-liberal understanding of how the economic institutional framework should have been normatively created. This concept is two-sided, which translations into other languages often fail to transmit. While the English translation as “liability” focuses on the potential for debt creation, though “out of nothing”, the German concept has the additional element of backing these debts with property. From the German perspective, going into debt should or could be only possible if one can offer the backstopping of potential losses by means of one’s own property. For this reason, the strengthening of citizens’ property position in order to make them creditworthy was one of the crucial targets of the ordo-liberal policy in Germany. It is assumed that solely the conjunction of risk-taking and backing by risk-takers’ collaterals and property can systematically ensure that resources are allocated into the most economically promising investments. The concept of Solidarity misses this dimension. Risk-taking and loss-bearing are disconnected. Thus, Germans are afraid that moral hazard is encouraged.

These ideological differences hamper reforms in at least three crucial areas of the EMU: 1. Stabilisation of the Eurozone by means of joint liability; 2. Reform of fiscal rules; and 3. The completion of the Banking Union. As a result, solely marginal problems have thus far been resolved.

The Eurozone

The euro crisis divided the member states into creditor and debtor countries. Generally, creditors’ proposals focused on risk reduction, and debtors’ on risk sharing.

Reform proposals made by President Emmanuel Macron in his Sorbonne speech in 2017 followed the debtors’ perspective. He opted for the creation of common and permanent investment capacities for Monetary Union member states as well as a large budget for the Eurozone with a volume of three to four per cent of the Eurozone’s gross domestic product. A separate Eurozone parliament and a European finance minister were to be responsible for the control of spending. A joint liability for public debt in the form of Eurobonds was intended to offer a safe European asset and protect the governments under budget stress against market risk pricing and higher financial costs.

What discomforted the Germans in Macron’s proposals was the lack of a link between risk-taking and cost-bearing. The German reform strategy aims at risk reduction in order to achieve market credibility, not solely through risk sharing as the French proposal suggested but through structural reforms made by every member state individually. In order to reduce discretion, Germany insists on introducing and tightening a rule-based economic and fiscal policy monitored and enforced by technocratic authorities on the European level. Transfers should be avoided where possible, in order to maintain reform pressure and minimise moral hazard. From this perspective, financial support for countries facing crisis is only acceptable to a very limited extent and only under the strict conditionality and supervision of national fiscal policy. Compliance with the rules must therefore ideally be enforced by automatic sanctions and, if that is politically unrealistic, by the disciplining role of the financial markets. The market pricing of government bonds is viewed as being of systemic importance to the functioning of the European financial market, and should therefore not have been suspended by means of joint liability.

As a consequence of these differences a Franco-German compromise presented in the Meseberg Declaration in 2018 contains as a minimal common denominator a common budgetary instrument for crisis. But even this limited instrument was opposed by a group of twelve countries that joined together as the “Hanseatic League”. In the event of the next downturn, it leaves national fiscal policies as still essentially the only game in town.

On the surface, Germany can be viewed as being in favour of the situation. Thanks to handling through omission it prevented a transfer union. However, the current institutional framework poses high risks on monetary stability in Germany. Thanks to the Target System, an ongoing shadow transfer union is already established in the Eurozone. This is due to the fact that unlike in other payment systems the European one does not enforce the clearing of the central bank positions in due time. As a consequence, the Bundesbank – the strongest central bank in the system – hoards the central bank liabilities which are not backed by marketable and enforceable collaterals. These assets amounted in September 2019 to 0.915 trillion euros and made up 52 percent of Bundesbank assets. Their creation is unrestricted as long as clearing by means of marketable assets is not required. In this institutional environment, the Bundesbank is about to lose its economic sovereignty. It has no control over the quality of its assets, most of which are backed solely by the political commitment to the EMU. In the case of an economic crisis these assets can hardly be used to stabilise financial markets.

From the German perspective two other developments are disappointing as well. In both cases, institutions moved beyond their remits into the territory of rules-setters. In monetary policy, it was Mario Draghi publicly expressing his willingness to do everything in his power to save the euro. In fiscal policy it was the more generous interpretation of the fiscal rules by Jean-Claude Juncker in order to smooth austerity policy in the crisis states. Both institutions stretched their discretionary power and both were praised for not following rules as a precondition to solve the problems.

During the hearing in the European Parliament in September 2019, Ms Lagarde signalled that she intends to continue Mr Draghi’s expansionary monetary policy. Going even further, she offered to prioritise climate change measures through “directing” corporate asset purchases towards green bonds. Such an active monetary policy contradicts the German experiences on how successful policy should have been conducted. Opposition to such a policy was manifested in the resignation of German central bank representatives: Jürgen Stark (2011), Axel Weber (2011) and Sabine Lautenschlager (2019).

A further fundamental difference concerns the lender of last resort function. The claim that the ECB should be entitled or even obliged to purchase the state bonds because of the fact that, with the introduction of the EMU, national central banks lost their function as lender of last resort for the currency and their own government bonds, must be strange for the Germans. In the tradition of German monetary policy after 1945, the lender of last resort function has meant that every issuance, private or public, can, provided that it is of sound and marketable assets, be accepted as collaterals with central bank transactions. The quality of issuers and their collaterals was decisive for access to the central bank transactions and not the fact of whether it is a government or a private company.

Fiscal policy to prevent imbalances ex ante

The division along the concepts of Haftung and Solidarity also manifests itself in the fiscal rules. They were introduced on the initiative of Germany in order to ex ante prevent bail-outs and transfer union. The rules have not been effective in containing debt ratios below 60 per cent of GDP as they were intended to. They have been violated by a large majority of EU members since 1999. The European Commission plans to revise the EU’s fiscal rules. They have been criticised for being too complex and for having pushed struggling economies into austerity. The core issue is how to move from arbitrarily set debt and deficit ceilings to a broader concept of long-term debt sustainability; how countries with more fiscal capacity could deliver stimulus for those without one. As sanctions are politically difficult to execute, the question is about the source of discipline. Where should it come from? It is challenging to find a common answer to these questions. The differences are fundamental, as the assessment of the balanced budget in Germany and France exemplifies.

While the German government praises the policy of so called black zero budget as a virtue, the previous and current European central bank chiefs, as well as Emmanuel Macron, damn it as an expression of political passiveness or lack of solidarity. Having fiscal capacity, Germany is expected to boost the economy by an investment in infrastructure that could help other European economies under budget stress. German fiscal stimulus ranks as almost the only thing that many experts suggest when asked how to help the European economy. Germany instead insists that the macroeconomic use of fiscal policy must be an exception, limited by strict deficit or debt rules. National stabilisation should be achieved through supply-side policies. Germany underlines the importance of structural reforms having to be undertaken by each member state on its own. Fiscal support can stimulate a structural modernisation; however, risk-taking must be driven by the private sector, which has to have “something to lose”. Otherwise, it is not guaranteed that funds will be efficiently allocated; hence the German approach.

Banking Union

The Banking Union is the most advanced project to have been developed in response to the euro crisis. By means of it, European joint responsibility should be implemented in three areas: (1) Banking Supervision, (2) Banking Resolution and (3) Deposit Guarantee, of which, the first has been implemented the most, and the last the least. The project has been blocked at precisely the point where questions concerning Haftung have to be answered. The proposed solutions for further developments seem to assume that more spending can substitute the risk reduction and cleaning up of the balance sheets.

The most developed area of Supervision at the European level demonstrates how challenging it is for new institutions to solve the problems that they were created to address. It is broadly known that the banking sector must clean up bad loans and must be restructured because it is partly over-sized and under-capitalised. Non-eligible credits should have been taken from the banks’ balance sheets or have been backed by property. However, the execution of these measures concerning, for example, the Italian banking sector or even Deutsche Bank is at the moment politically hardly imaginable. Similar problems with the execution of rules can be expected concerning the backstop function of the Rescue fund. It should only be activated if the Eurogroup and the relevant European banking supervisory authorities are of the opinion that the risks in the national banking systems have been reduced beforehand and that effective national bank security funds have been set up. However, there is pressure to use common European funds before measures are consequently undertaken at the national level.

The European deposit guarantee for banks is the most striking project. Germany insists on the creation of joint liability for European deposits on the basis of a sound banking sector, i.e. after the risks in the banking sector are reduced. Opponents seem to see the deposit guarantee as being instead of the restructuring policy. Risk sharing would loosen the pressure on the structural reforms in the banking sector, as joint liability would strengthen the credibility of the entire system.

Summing up, the German position in the EMU is discomforting. The demands on Germany ignore partly the danger of fiscally and financially overstretching the German economy. Germany is assumed to benefit the most from the eurozone and is therefore expected to do more and bear proportionate responsibility for its stability. On the one side, it is accused of misuse of power when it tries to make efforts conditional on progress in the committed areas in other Member States. On the other side, it is accused of stubbornness if it tries to stick to the rules and to reduce the space of discretion. Simultaneously, the role of Germany as the euro stabiliser is played down. Little recognition is given to the fact that Germany holds big risks on its balance sheets keeping the Eurozone together and giving the euro the status of safe haven. Among the German public, the costs of the common monetary policy are broadly discussed. It is stressed that a zero-interest-rates policy destabilises the banking system, threatens the stability of the pension security system and “robs” savers. Therefore, for politicians, little space for manoeuvre exists to follow the claim that risk-taking and cost-bearing should be relaxed for the sake of European Solidarity.

V4 Perspective

For no-euro members like Czech Republic, Hungary and Poland, the question arises of whether staying outside the euro-area will marginalise those countries within the European Union. This seems hardly to be the case, for at least three reasons:

Firstly, viewing the differences between France and Germany concerning the necessary institutional changes, a closer EMU seems unlikely in the near future. Secondly, as long as clearing in the Eurozone is not enforced and the amounting of liabilities on the balance sheets of a third party possible, the construction of the euro remains unstable and is thus a source of tensions between member states. Thirdly, without a pan-EMU budgetary mechanism, which is at the moment politically unrealistic, the euro area remains uncompleted and vulnerable. For these reasons real membership of the Eurozone should not be the priority of politics. However, the countries should participate actively in the intellectual search for institutional solutions that could help make the euro areas sustainable and therefore worth joining. For this reason, the V4 should take ownership of euro reform. The health of the Eurozone, and especially of the German economy, is critical also to the V4’s prosperity.

Paradoxically, the conceptual differences between France and Germany concerning the reform of the EMU may strengthen the connectivity between the V4 and Germany. The V4 and Germany have in common what at the moment is missing in the German–French partnership; a shared common view on the importance of fiscal rules, the treatment of losses in the banking sector and the conducting of monetary policy.

Their strong affinity for the concept of sovereignty makes the V4 reluctant towards ideas which aim to substitute fiscal and financial investment capacities at the national level with joint European funds transfers. The structural struggles for fiscal capacity are a part of the V4 economic policy’s DNA after 1989.

The V4 countries are closer to German ideas than to French, including concerning monetary policy. The claim that the purchase of government bonds by a central bank in times of stress makes the system automatically sustainable contradicts their policy practice of the past thirty years. They follow a very restricted monetary policy based solely on foreign currency assets.

Furthermore, the V4 share the German fears about losing competitiveness in the auto sector as they build together a very successful production-supply chain.

The Achilles’ heel of the V4 economies is their self-imposed dependency on foreign capital inflows. They failed to develop deep financial markets with their own financial instruments to be used as collaterals in monetary and financial transactions. As this obstacle has ideological reasons, it can be relatively easily overcome. Active participation in debates about how to reform the Eurozone could be instrumental in this respect. It could help to address the still existing restrictions on the acceptance of domestic collateral in monetary transactions which contradicts obviously the praxis in the Eurozone. Adequate legal reforms concerning the safe transformation of assets into collateral would strengthen the financial sovereignty of the V4 economies. The question of marginalisation would then be obsolete.


The marginalisation of the V4 is not a question of membership in the Monetary Union. It depends on the intellectual ownership of the search for the necessary reforms of the EMU. The biggest challenge for the V4 is to overcome their passivity towards the financial issues. They still live with the conviction that investment capital or assets for currency backing must be imported. Changing this opinion would increase the weight of the V4 as they could independently create financial instruments for capital investment. This political change could inspire the breaking of the deadlock on reforms in the Eurozone.

The project covering publication of this article is co-financed by the Governments of Czechia, Hungary, Poland and Slovakia through Visegrad Grants from International Visegrad Fund. The mission of the fund is to advance ideas for sustainable regional cooperation in Central Europe.