Is the Euro Compatible With Democracy?Berlin doesn't seem to think so.

MARCH 6, 2015BY PHILIPPE LEGRAIN

New elections change nothing, asserted Germanys finance minister, Wolfgang Schuble, ahead of the

Greek vote in January that swept into office a radical-left government pledging an end to austerity and

demanding debt relief from its eurozone creditors. The new Greek administration, Schuble insisted, must

accept the terms struck by its predecessor. By and large, Greeces new government has done so, despite its

electoral pledges. How, then, can the destructive policies imposed by the likes of Schuble really be

changed? Is membership in the eurozone compatible with democracy?

This is more than just a Greek issue. Elections are due in Spain at some point later this year, and the

radical leftists of Podemos are leading in the polls. Indeed, in almost every election since the crisis, voters

have thrown out their government, only to be told by Schuble and his eurozone minions that the new

administration must stick to the failed policies that the voters have just rejected. In 2012, for instance,

Franois Hollande won the presidency of France on a pledge to end austerity, but was soon forced to back

down by Berlin. Last year, with a mandate from his resounding victory in Mays European elections, Italys

reformist prime minister, Matteo Renzi, demanded changes to the eurozones fiscal rules that would

enable the Italian government to invest more. He was rebuffed.

Of course, politicians often junk loose election promises when confronted with the hard facts of governing.

That is a (regrettable) feature of democracy, rather than proof of a lack of it. But the constraints on

democracy in the eurozone are very real. In 2011, eurozone authorities even forced out of office the elected

prime ministers of Italy and Greece the latter for having the temerity to offer Greeks a referendum on

the unjust conditions imposed on them by Germany and replaced them with pliable, unelected

technocrats.

As for France, its not markets that are preventing the government from engaging in a fiscal stimulus on

the contrary, investors are falling over themselves to lend to Paris for free its Berlin and Brussels. And

its Angela Merkels chancellery, not economic reality, that is preventing Italy and others from sensibly

borrowing to invest, which would strengthen current demand and future supply as well as public finances.

When challenged, Schubles response is that agreements must be respected: Rules are rules. But the claim

that eurozone rules are set in stone is not only undemocratic; its untrue. Berlin has repeatedly abused its

clout in EU institutions to rewrite the eurozones rules, and it continues to violate them with impunity.

German banks lent too much to an insolvent Greece? No problem! Well breach the legal basis on which

the eurozone was formed the Maastricht Treatys no-bailout rule, which bans member government

from bailing out their peers and covertly bail out those banks by lending European taxpayers money to

Athens. German banks also lend too much to insolvent Irish, Portuguese, and Spanish ones? Kein

Problem! In collusion with corrupt national elites, well lend to those countries governments so they can

bail out local banks and thus their German creditors. German taxpayers start worrying that they may end

up on the hook for all of Southern Europes debts? Then lets rewrite the fiscal rules, under duress of a

financial panic that Merkels mistakes have created, and impose a new fiscal straitjacket that gives Berlin

and Brussels greater control over other countries budgets.

Germanys vast current account surplus the excess savings generated by its beggar-thy-neighbor policy

of suppressing wages to subsidize exports was the fuel for German banks bad lending that caused the

crisis in the eurozone. Now its the vehicle through which Germany is exporting deflation. In short, its the

biggest, most destabilizing imbalance in the monetary union. And it falls afoul of the eurozones rules on

macroeconomic imbalances. But is that a problem for Brussels? Of course not. The Germans lean on

eurozone authorities to get off the hook, and the European Commission bows to Berlin. But voters

elsewhere want to change things, even just in their own countries? Nein, nein, nein: There is no

alternative.

In the Greek case, the German government has come up with an even more disingenuous argument. There

is nothing undemocratic about forcing the Greek government to bend to Berlins will, Schuble asserts: On

the contrary, Athens must also respect the wishes of voters in other eurozone countries. And it is true that

taxpayers in Germany and across the eurozone would unfairly lose out if Greece obtained the debt

relief it needs to recover. But why is that? Because Merkel violated the no-bailout rule in the first place,

putting the interests of German banks ahead of those of European citizens including Germans and

setting Europeans against each other. If only German voters realized that Merkel and Schuble have lied to

them and sold them out, they wouldnt fall into the nationalist trap of blaming the Greeks for their own

banks and governments misdeeds!

To obtain debt relief, Greece will need to call Germanys bluff, as I argued two weeks ago and be

prepared to issue a parallel currency. The four-month bailout extension Athens accepted from its EU

creditors last month gives the new Greek government time to think through its strategy. But more broadly,

how could fiscal democracy be restored? Such is the anger and mistrust created by the crisis

mismanagement that steps toward democratic federalism are politically inconceivable for now. A better

option would be to restore the no-bailout rule and with it governments freedom to respond to changing

economic circumstances and political priorities constrained by markets willingness to lend and

ultimately by the risk of default. (The European Central Bank would also be mandated to be a proper

lender of last resort to illiquid governments.) Or the euro might break up.

Stripping voters of the right to make legitimate economic and political choices is unsustainable. And as

Weimar Germanys tragic history shows, the imposition of unbearable payments to hated foreign creditors

leads to political extremism. Martin Wolf of the Financial Times has observed that the eurozone is meant

to be a union of democracies, not an empire. Merkel and Schuble should remember that.

Photo credit: Sean Gallup/Getty Images