There is indeed a tension out there in euroland. On the one side the Federasts are insisting that anything and everything should be done to preserve the project and that’s that. What are mere rules and laws when the survival of the euro, or even the project, are at stake?
On the other hand are those who, sticks in the mud as they are, try to insist that the law’s the law and it’s there for a reason. Many reasons in fact, one of them being to curb the actions of those who rule us. They get to go only as far as we’ve already agreed they can.
More specifically there is the long held wish of said federasts that the European Union move to full fiscal union. Some lovely slice of the economy, some flood of taxation, flows to Brussels there to be divvied up and sent out again by those in power in Brussels. Sure, we can argue about the desirability or not of such a scene but it’s out there in the open that this is what some do in fact want.
The stick in the muds keep saying that this isn’t something we’ve all agreed to as yet. Therefore it shouldn’t happen – as yet.
This then interacts with the European Central Bank’s work on quantitative easing. There’s something of a spectrum here. Inventing new money to buy government bonds can be seen as merely lowering long term interest rates, the risk free rate, and ain’t that great? It’s monetary policy pure and simple. At the other end of the spectrum is that exactly the same action, in greater volume, becomes funding government spending by the issuance of new money. That’s fiscal, not monetary, policy and under the current dispensation that’s not allowed. Hey, as above, maybe it should be allowed, maybe it’s desirable that the common fiscal policy should arrive – as the ECB is a common body then yes, actions by the ECB are a common policy.
Exactly where that dividing line is between monetary and fiscal policy with new money printing and bond buying is difficult. A Sorites even – but it’s obviously one at one end of the spectrum and another at the other.
The German Constitutional Court is worrying away at the point that the monetary policy already done has overstepped the line into fiscal policy and thus isn’t legal. The federasts are now arguing that sure, the next stage is fiscal but that’s what we’re a’gonna do anyway. At which point, clearly, obviously, the next stage is illegal:
The betting is that Lagarde and the rest of the ECB board will use this week’s meeting to expand its €750bn Pandemic Emergency Purchase Programme (PEPP). For many ECB-watchers, this will show how important the PEPP has been during lockdown and offer proof, if that were needed, that states are struggling to revive their economies.
The programme, which lets the ECB fund private companies and government budgets by purchasing corporate debt and sovereign bonds, will probably increase to €1 trillion and could eventually reach €1.5tn.
QE to solely and only lower long term interest rates is legal. QE to fund governments and companies is clearly fiscal policy and thus illegal – it’s the monetisation of fiscal policy.
The Germans are right here. This is before we get to whether they ought to be – I think yes, I think a common fiscal policy is going to be a disaster – and is true of things as they are. The ECB is not to do fiscal policy, it is about to, therefore it shouldn’t.