Troubles, it seems, never come alone, I thought, reading about the German Constitutional Court ruling challenging the European Central Bank’s mass purchase of national bond debt following the 2008-10 financial crisis.
Here we were in the middle of the greatest economic and social crisis of the postwar era, where the EU’s complex and all-too limited powers would be severely tested, and these German judges – lobbied, it appeared, by the far-right AfD (Alternative für Deutschland) – seemed hell-bent on sabotaging a solution, on bringing the system down. If anyone could help make sense of this, it was Prof. Ewald Nowotny, back at the Wirtschafts Universität after a decade as governor of the Austrian National Bank.
We will long remember this strange spring of 2020, the season of COVID-19, when a pandemic shut down our lives in Vienna.
As April turned into May, none of us had seen each other in real places in real time, in
a long time.So it was a special pleasure to head across town to Rotenhausgasse behind the Altes AKH to talk to Nowotny at his other job as president of the ÖGfE, the Austrian Society for European Politics. He has returned to his first love, he says, which is Europe. It couldn’t come at a more
A Certain Mood in Germany
The day we met, the joint proposal of French President Emanuel Macron and German Chancellor Angela Merkel for shared European debt was still days in the future. But the topic was fraught. Criticized for doing too little, the EU had, in fact, already pumped a total of €1,300 billion – 10% of GDP – into the European economy, including €750 billion in bond purchases, €100 billion in labor market support, €200 billion in corona loans and €245 billion in loans to member states. Still, everyone acknowledged that this was not enough. The current plan was to double the EU budget to 2% of European GDP, and funnel that into the standard Structural Funds that were a routine mechanism of transfers to member states.
But many recognized that if Europe – particularly the Mediterranean countries, but not only – was ever to recover, a significant portion of relief needed to be given as grants rather than loans: A kind of Marshall Plan for European recovery – only this time, generated from within.
Out of the daily grind at the National Bank, Nowotny appears to be relishing his return to private life. Among other things, he could speak more freely… “That is a certain privilege I enjoy,” he admitted, laughing. Especially now, with the ruling of the German court, which he sees as “very dangerous.” It’s “a populist decision” that reflects “a certain mood in Germany that’s new,” he said. The far-right AfD had tried repeatedly to use the Constitutional Court “to fight against the basic elements of Europe.” Until now, the Court had always rejected this. This time they gave in – “with arguments that are in line with this right wing group.”
If Europe was ever to recover, a significant portion of relief would need to be grants rather than loans: A kind of Marshall Plan for European recovery.
Winning Over Austrians
Nowotny’s fascination with Europe began as a young Maturant in the early 1960s, when he entered an essay competition on human rights for the Council of Europe, which Austria joined in 1956. He won his national prize, and joined other winners for a sixweek tour of the continent that brought lasting friendships and a life-long commitment to the European idea.
In 1994, in the Austrian Referendum on European Union membership, he had a chance to do something about it. A preliminary vote revealed a majority against joining, leaving Austrian leadership – Chancellor Franz Vranitzky (SPÖ) and Wolfgang Schüssel (ÖVP) badly shaken. Nowotny, now a member of parliament, was part of a small team of SPÖ politicians who set out to win over the rank and file.
“At first, many were very skeptical,” he remembered. In part, it was the principle of neutrality, the “foundation stone of Austrian independence.” But it was also fear – not unfounded – that the EU would be guided by business interests and neo- liberal thinking. “But for a small country, it is still better to be inside than outside,” to be part of the decision-making process, he told voters. For older Austrians, the EU was also a guarantor of peace.
The final vote was a resounding 2/3 majority in favor. Since then, Nowotny has been asked to advise on other accession campaigns, where arguments can be very different. “Swedish social democrats saw the EU as very Catholic, which is ironic, because the Polish nationalists see it as agnostic.”
Financing a War for Survival
Just days earlier, Nowotny had published an “economic letter” on these issues: “Euro- Bonds, Corona und ‘Kriegsfinanzierung’” – the latter referring to former ECB head Mario Draghi’s remark on March 25 that “We must mobilize as if for war.”
Nowotny outlined a plan that included “precautionary lines of credit” through the European Stability Mechanism (ESM) but also direct grants that didn’t require repayment, something he considered essential to refinancing the economy. To fund this, shared debt – community-backed “corona bonds” – would be necessary. This could realistically only be done as new debt, given the vast differences in member’s existing debt burdens. However, for a “symmetrical shock” like the pandemic, he argued, substantial sums – the equivalent of war financing in peacetime – can legitimately be raised.
The obstacles were many, he admitted in the paper: legal, structural, economic, and most intractably, political. So far, proposals to issue “eurobonds” backed by the full faith and credit of the pooled assets of EU member states – equivalent to U.S. Treasuries – had never won EU-wide support. High-debt countries, like Italy and Greece, supported it, while the more prudent northern members, led by Germany, opposed it, fearing it would reward mismanagement and lead to higher interest rates. Arguments for a euro-based “safe asset” to serve as a counterweight to the U.S. Treasuries (“the largest, most liquid and differentiated capital market in the world”), have fallen on deaf ears. Opponents pointed to the “no bailout” clause in Article 125 of the European Treaty; the move would set a precedent for burden shifting that could stir resentment in member states.
Though the World Perish
The actions of the German Court have left Nowotny very frustrated: The questions raised make some economic sense. Whatever you do, you need a cost benefit analysis. “But this has already been done,” he fumed – as part of the routine due diligence of the ECB. It is “totally unacceptable” for the Central Bank to have to justify its decisions to a national court – hardly “the number one economic experts in Europe.”
He conceded there is some legalistic truth in the court’s decision, “but it is necessary to be pragmatic.” It all reminds him of the Latin saying: Fiat iustitia et pereat mundus, (Let justice be done, though the world perish.) “This is a very cynical approach.” It also requires a response. Some have suggested suing Germany for breach of the Treaty. “I am not sure if that is a good idea,” he said. They could also just ignore it.
“My hope is that the very clever and very pro-European Mrs. Merkel will find a solution that is acceptable in Germany,” he said. Perhaps direct talks between the German Central Bank and the European Court, or some other “face-saving operation.”
Which is exactly what happened a few days later, with a joint proposal by Chancellor Merkel and French President Macron for a €500 billion Reconstruction Fund was announced, intended for “the sectors and regions most severely affected,” given as grants, not loans.
“What she was looking for was a compromise,” Nowotny commented by phone afterwards, clearly very pleased. “Additional money given as bonds – but not normal bonds, not the “corona bonds” as previously described. Here the volume and time are both limited, which makes them compatible with EU law.” He pointed to Article 122, allowing intervention in case of “natural disasters or extraordinary occurrences” that are “beyond the control of the member state,” for which a pandemic surely qualifies.
Another face that may need saving is that of Austrian Chancellor Sebastian Kurz, who has placed Austria alongside the Netherlands, Sweden and Denmark – the “frugal four” – and made a big show of resistance to shared debt under the Merkel-Macron plan. Could this be a bargaining chip for a lower share of the debt? “That would be the rational approach!” Nowotny laughed. His real fear is that Kurz has dug himself in too deep. (“Any change may be seen as a lost battle.”) His partners may also back down: the Netherlands is already facing resistance at home. As in fact, is Kurz: “Helping Italy also helps Austria,” said Vice Chancellor Werner Kogler on May 23. “He may end up standing out there alone.”
A Pro-European Public
It is easy to get bogged down in discussions of the European Union – a set of agreements among so many makes decision-making cumbersome and leaves the system vulnerable to veto. Still, the benefits of size, cooperation and mutual support have generally won the day – something that has been made only clearer by the pandemic. In this sense, the crisis could turn out to be the making of the EU rather than its undoing.
“Yes, certainly,” Nowotny agreed, pointing to the push to reopen the borders: “To not reopen has been seen as unnatural or dangerous.” Psychologically, the public has proved itself “strongly pro European.” What he cannot predict is if this energy will translate into political action. In the bigger countries, pro EU parties have strong support. “But you always have to be very careful when the economic situation is deteriorating,” he said, “that it is not exploited by the populists.”
Still, he is optimistic: “What has become very obvious is how closely interconnected Europe really is. Even a big country like Germany is not an island; the internal market is crucial for European wellbeing. This has been an eye-opening experience for the political parties,” he said. “In the long run, that is the positive part.”
And the €500 billion Reconstruction Fund? “If this happens, it will be a major step toward European integration. If not, it’s the other way around.”