EU Expansion — Or Western Socialism?

At issue are the state guarantees that Germany’s so-called Landesbanks receive from federal and state governments. Germany’s state-owned Landesbanks are odd hybrids. Their official function is to finance the infrastructure of their local region.

On the side, they have long ventured far away from their home base, establishing operations in exotic foreign markets, often with mixed results. As co-owners of the banks, state governments guarantee that they would protect a bank’s solvency should liquidity problems occur.

This government backing allows the Landesbanks to borrow money on much cheaper terms than their private sector competitors could ever hope for. The European Commission considers this an anti-competitive subsidy — and has long threatened punitive action. But Germany’s state governments are loath to give in, as they regard the Landesbanks as crucial to setting and implementing industrial policy.

What a number of German politicians, especially at the state level, regard as the core of the German economy is a straightforward infringement of EU competition regulations, according to Mario Monti, the EU’s Competition Commissioner.

Faced with determined opposition to the guarantee from the EU Commission in Brussels, the state governments mobilized a campaign to force the EU to give in. Yet, there is a certain irony in Germany’s public banks reacting so indignantly. While politicians of all stripes have defended the Landesbanks, it is in particular conservative politicians who have come up with harsh threats in preserving the system of state-controlled banks.

You wonder where the irony lies? Well, just remember that state ownership was the organizing principle of Communist countries all over the world. Now that the former foe in eastern Europe has mostly abandoned that failed idea, it seems peculiar that German state banks are clinging on to it.

At one point in the debate, Bavaria’s finance minister, Kurt Falthauser, even threatened that, if Brussels continued with its campaign to end the state guarantees for the Landesbanks, the German states would block the EU’s planned expansion to Central and Eastern European countries.

His argument is that, under Germany’s federal system, the German constitution gives the states a say whenever important legislation is pending in Brussels. EU expansion certainly is such a matter. So, legally speaking, the state governments may have the power to block the EU’s expansion. But it seems outright ridiculous that they would want to use this power to get their way on the Landesbank issue.

After all, as part of their efforts to join the EU in the next round of expansion, Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia, among others, all had to make commitments designed to set hopeful applicants for EU membership on the right way to the market economy. Progress is monitored by the EU to ensure that certain standards are met along the way.

That involves reforming the economic system so that legacies of the old communist regimes — such as state ownership — are shed to support the new market orientation. Yet, it seems that Bavaria’s Mr. Falthauser, usually a proponent of free markets, would have the EU back off its advocacy of privatization to the extent that German states can retain their stakes in the Landesbanks.

The supreme irony then is that while eastern Europe has given up state ownership, prominent interests in western Europe want to be allowed to preserve it for their benefit.