A few weeks ago, I interviewed Philipp Bagus, author of The Tragedy of the Euro. In his book he explains the inherent flaws in the euro system using an established economic theory called “the tragedy of the commons”. It’s quite simple really. When you share something, you don’t take care of it. And the common currency of the euro is an example of this.
That’s why some countries run up absurd deficits and debts. Because they share the euro with other countries that are more responsible. And those responsible countries face a choice when a crisis breaks out. They can either bail out the irresponsible spenders, or they can abandon the euro.
Financial markets are betting that the Germans will simply bail everyone out in the end, so there is no need to fear a major crisis in the eurozone. But this just allows the problem to grow over time.
But Philipp also mentioned something extraordinary in his interview.
The case against the euro
Just before the interview, Philipp had signed on to a German court case which called into question the EU economic recovery budget. The claimants argued it was a violation of the EU treaties.
I knew it would be extraordinary news if the case succeeded. It would undermine the EU, the EU’s economic recovery, and finally establish a red line which the EU cannot cross on its path to the United States of Europe. A German constitutional hurdle – they’re tough to get over.
Because of the extraordinarily high stakes, which weren’t being mentioned anywhere else, I asked Philipp to explain the court case to you. You can read that edition of Fortune & Freedom here.
Well, a few weeks ago, Philipp sent me an email. The subject line simply said “success” and linked to a German newspaper story. That story explained the German constitutional court had prevented the German president from signing off on the law which would’ve created a debt union.
Here’s the English-speaking version from Reuters:
Germany’s constitutional court said on Friday that the president may not sign off on legislation ratifying the European Union’s Recovery Fund as long as it was looking into an emergency appeal against the debt-financed investment plan.
The statement by Germany’s highest court, after both chambers of parliament ratified legislation this week.
Here’s what the court wrote:
We are aware that the Recovery Fund is a political project already decided upon. However, given the considerable risks involved, the federal government should ensure that borrowing at the EU level and a circumvention of the fiscal rules does not become a permanent solution.
It’s not clear when the court will actually rule on the case. But over the last few weeks, reality has slowly dawned on all sorts of people that the implications of all this could be immense. It could end the presumption that the Germans will be willing to bail out other nations.
An end to eurozone bailouts, or just a dangerous delay?
Here’s how the media covered the news two weeks ago.
The Financial Times: “German court challenge to EU recovery fund could last months. Analysts fear hold-up may unsettle investors and undermine confidence in weaker countries.”
Bloomberg: “EU Recovery Logjam Publicly Slammed by [French Finance Minister] Le Maire as G-20 Meets”.
Holger Schmieding, chief European economist at Berenberg: “Unless the issue is resolved fast and in favour of the law which both houses of the German parliament had approved with broad majorities beforehand, pay-outs from the fund could thus be delayed or even be at risk.”
Bloomberg also mentioned the context of all this: “Recovery-fund spending plans also face convoluted bureaucracy from the EU, whose botched vaccine rollout already led to extended virus restrictions.”
And get a load of this from Ambrose Evans-Pritchard in the Telegraph:
A legal sword of Damocles hangs over Europe’s vast bond market
With the €750bn Recovery Fund, Europe’s leaders have unwittingly created a device to explode their own project
The German constitutional court has struck again. The fund that was supposed to save Europe is in suspended animation.
If the European project ever unravels it will probably because of a ruling by the venerable Verfassungsgericht.
Each time its interventions become a greater threat. You can stretch the EU treaties and Germany’s Basic Law only so far.
The normal etiquette is for the judges to issue polite requests to the German president whenever required. This time they time issued an order. Their hackles are up.
Now long-time Fortune & Freedom readers were of course not surprised by any of this. They understood the coming court case, the flaws in the euro and what’s at stake. About a week before it all hit the news.
But what happens next?
Well, this legal mess is just another drama in… the tragedy of the euro. But is it… how the euro dies?
If the markets panic about a missing German bailout and eurozone bond yields spike again, it may well be. Keep one eye on that court case!
Editor, Fortune & Freedom