Summary

But why was this package held up at all? Germany is the last country to ratify the ESM. Those petitioning the court ranged from the political right to the left, and a record 37,000 Germans signed on. This resistance added to a growing perception outside Germany that the country is increasingly reluctant to preserve the euro, and certainly not the leading defender it should be. That view is not entirely wrong—many Germans are against the latest plan by the European Central Bank (ECB) to buy government bonds of crisis countries in tandem with the ESM. But it misses a larger point. Germans see the euro crisis, and the process of European integration, differently from others.

Post-war Germany’s two strongest commitments have been to democracy and European integration. It was always assumed that these ideals could be pursued in harmony. Of late, however, concern has grown that the euro crisis demands measures that bring democracy and “Europe” into conflict. As Andreas Vosskuhle, the court’s president, read the verdict, Germans hung on his every word precisely because he appeared to be giving guidance not just about the ESM, but about how European integration might proceed more generally without a loss of liberty.

Germany’s constitution is unusual in that it contains what lawyers have dubbed an “eternity clause”. This was written in remembrance of the Weimar Republic, which died because its parliament in effect voted itself out of existence under Hitler’s bullying. Article 79 of the 1949 constitution thus says that certain changes, including anything that detracts from human dignity or democracy, are “inadmissible,” even if willed by parliament. The plaintiffs argued that the ESM, even though it cleared both houses of parliament with the two-thirds majorities necessary to amend the constitution, cannot stand because it is fundamentally undemocratic and therefore violates the eternity clause.

Their case alleged that Angela Merkel’s government had rammed the legislation through parliament in such haste that the Bundestag, the only federal organ of state directly elected, was in effect reduced to a rubber stamp. They further argued that the ESM would rob the Bundestag of its most important power, control over Germany’s budget, because of hidden liabilities.

Supporters of the ESM, such as Christian Calliess at the Free University of Berlin, who advised the court, countered that the ESM was designed so that its board, to be based in Luxembourg, needs approval for its decisions from the parliaments of member states. Most decisions require unanimity, so that any member country’s parliament can block a rescue. All other decisions require an 80% majority, weighted by the capital contribution of each country. Since Germany’s vote counts for about 27%, the Bundestag will retain veto power over anything the ESM might do.

Democracy über alles

The court, in the end, was sanguine enough about the role of the Bundestag to let the ESM go ahead. But it was also concerned enough to demand that Germany’s government first get “clarification in the ratification procedure” on two points. First, Germany’s liability must indeed be capped at €190 billion, unless the Bundestag explicitly votes to increase that limit. Second, the ESM’s language about “secrecy of all persons working for the ESM” (which was meant to inhibit leaks to bankers) must “not stand in the way of the comprehensive information” of parliament.

Exactly how such clarification can be inserted into which documents signed by whom and how fast is now the main remaining question-mark over the ESM. Europe is in a hurry. But if treaties must be changed (and the court said that the clarification must be binding in international law), this could take time.

It is also unclear how the ECB’s plan to buy bonds of crisis countries in the secondary market might affect the constitutionality of the ESM. The German court rejected a fresh petition this week to delay its ESM verdict over this question, but hinted that it may revisit it in future.

Technocrats or the people?

Nonetheless, the verdict has removed most of the uncertainty about the ESM. By explicitly grappling with the issue of democracy, it has also prepared the way for the next phase of German, and possibly European, thinking about the euro zone.

Many German politicians are frustrated that the rest of Europe misunderstands their starting point in that debate. As one senior official explains, Germany envisions a more integrated Europe, with more national powers passed to the European level. But the resulting Europe must retain the democratic legitimacy that its member states currently have. Demands that Germany and other creditor countries pledge their money without their taxpayers retaining any say, he asserts, sound suspiciously like demands for “taxation without representation”.

Deliberately sticking with this American analogy, he says that Germany opposes Eurobonds, which France and others want, and which would be issued by individual euro countries but guaranteed by all, just as America would refuse explicitly to guarantee Californian bonds. Eurobonds issued by a newly created European treasury and legitimated by a properly elected European Parliament—similar to US government bonds issued by the US treasury and legitimated by Congress—are another matter. But that, he implies, requires letting go of national sovereignty to a degree that many of Germany’s European partners are not willing to contemplate, even if Germany is.

This is one reason why, even as the Germans continue to revere their post-war constitution, talk is growing of amending it to allow for deeper European integration. Today’s constitution makes allowances for its own replacement, but only after a national plebiscite. Post-war Germany has so far shied away from federal referendums as tools for potential demagogues. But what better than a referendum to reunite those two commitments, to Europe and democracy? The time may come to ask the people directly.

Summary

A small group of developing countries are transforming the global economic landscape. Led by China, India, and Brazil, these rising economic powers pose varied challenges and opportunities for U.S. economic interests and leadership of the global economy. They also raise significant policy issues for Congress, including the future direction of U.S. trade policy and negotiations, as well as for the multilateral economic institutions that have historically served as the foundation of an open and rules-based global economy.

This report addresses ongoing shifts in global trade and finance and projected future trends resulting from the emergence of these economies. It is the first of a three-part CRS series that focuses on how the Rising Economic Powers are affecting U.S. interests and raising challenges for congressional oversight of U.S. international trade and financial policies.

The major trends in the global economy identified and discussed in this report are:

• The balance of global economic power is shifting from the United States and Europe to a number of fast-growing and large developing countries. These economies account for rising shares of global GDP, manufacturing, and trade, including a significant expansion of trade among the developing countries

(South-South trade). These shifts are driven by growing economic integration and interdependence among economies, particularly through new global production

and supply chains that incorporate inputs from many different countries.

• Rising economic powers are becoming more important players in international finance. They have increased holdings of foreign exchange reserves, established sovereign wealth funds, borrowed capital from international capital markets, and attracted substantial foreign investment. Their multinational corporations, many state-owned, are investing assets globally and are competing with U.S. firms for natural resources and access to other developing-country markets.

• The long-standing distinction between advanced and developing countries, particularly for rising economic powers, is blurring. The advanced countries may still be the richest countries in terms of per capita income, but their economies may no longer be the largest, the fastest-growing, or the most dynamic. Rising economic powers are exerting greater influence in global trade and financial policies and in the multilateral institutions that have underpinned the global economy since World War II. These developments, in turn, have implications for U.S. global leadership that are subject to debate.

• While the impact of the rising economic powers is considered by most

economists to be strongly positive for the U.S. economy overall, not all groups of

Americans have benefitted equally. Highly educated workers are seen gaining more job opportunities and higher wages than workers with less education.

Issues for Congress on the international trade and finance policies raised by the changing global landscape could include:

• Seizing full advantage of growing markets for U.S. manufacturers, service providers, agricultural producers, and their workers, including preparing for increased competition.

• The future direction of U.S. trade negotiations and the global trading system, as well as specific policies and issues raised by the global economy. These might include the increasing role of state-owned enterprises, access to developing country markets for services and government procurement, the future role of the dollar as the primary reserve currency, and U.S. participation in global supply chains, among other issues.

• The evolution of international frameworks for financial integration, as well as multilateral and bilateral frameworks for foreign direct investment and sovereign wealth funds.

This report will be updated as events warrant.

Introduction

The global economy has undergone dramatic changes over the past 60 years. In the early 1950s, the world economy was essentially divided between developed or industrialized countries in the “North” and developing or non-industrialized countries in the “South.” Developed countries, excluding Japan, at that time accounted for 90% of world manufacturing output and 90% of world exports of manufactured goods. Production remained largely enclosed within national boundaries and trade patterns reflected the respective country specializations. Inputs for most products were sourced within national borders. In addition to a large imbalance in the structure of production

and exports, there was a dramatic imbalance in living standards and political power as well.1

From the 1950s to the mid-1990s, these imbalances began to reverse gradually. By 1995, for example, the advanced countries’ share of manufacturing output had fallen to 80%. But the narrowing of the great 20th century divide between advanced and developing countries accelerated rapidly over the past two decades with traditional production, trade, and finance patterns being replaced by new and more balanced configurations.

Spurred by the information technology (IT) revolution, trade liberalization and other economic reforms, the entry of an estimated 2 billion people into the labor force as a result of the breakdown of the Soviet bloc and the opening of China, and the freer movement of capital and technology from developed countries to developing countries, the size of the global economy doubled over the decade preceding the 2008-2009 global financial crisis, increasing from $31 trillion in 1999 to $62 trillion in 2008. While the growth reached practically every region of the world and encompassed dozens of developing countries, a handful of large developing countries—led by China, India, and Brazil—accounted for a major share of the global growth. Other emerging economies with large populations, such as Indonesia, Mexico, Russia, Turkey, and Vietnam, also grew at a rapid pace.

Date: 2015-01-02; view: 992