The institutional setup of the EMU has been an economic
disaster. The Euro is a political project; political interests have brought the European currency forwards on its grievous way and have been clashing over it as a result. And economic arguments launched to disguise the true agenda behind the Euro have failed to convince the general population of its advantages. The Euro has succeeded in serving as a vehicle for centralization in Europe and for the French governments goal of establishing a European Empire under its controlcurbing the inuence of the German state. Monetary policy was the political means toward political union. Proponents of a socialist Europe saw the Euro as their trump against the defence of a classical liberal Europe that had been expanding in power and inuence ever since the Berlin Wall came down. The single currency was seen as a step toward political integration and centralization. The logic of interventions propelled the Eurosystem toward a political unication under a central state in Brussels. As national states are abolished, the market place of Europe becomes a new Soviet Union. Could the central state save political elites all over Europe? By merging monetarily with nancially stronger governments, they were able to retain their power and the condence of the markets. Financially stronger governments opposed to abrupt changes and recessions were forced help out. The alternative was too grim. 161 162 The TRAGEDY of the EURO
Mediterranean countries and particular the French govern-
ment had another interest in the introduction of the Euro. The Bundesbank had traditionally pursued a sounder monetary policy than other central banks, and had served as an embar- rassing standard of comparison and indirectly dictated mone- tary policy in Europe. If a central bank did not follow the Bundesbanks restrictive policy, its currency would have to devalue and realign. Some French politicians regarded the inuence of the Bundesbank as an unjustied and unacceptable power in the control of the militarily defeated Germany. French politicians wanted to create a common central bank to control the German inuence. They envisioned a central bank that would cooperate in the political goals. The purchase of Greek government bonds from French banks by an ECB led by Trichet is the outcomeand a sign of the strategys victory. The German government gave in for several reasons. The single currency was seen by many as the price for reunication. The German ruling class beneted from the stabilization of the nancial and sovereign system. The harmonization of technological and social standards that came with European integration was a benet to technologically advanced German companies and their socially cared-for workers. German ex- porters beneted from a currency that was weaker than the Deutschmark would have been. But German consumers lost out. Before the introduction of the Euro, a less inationary Deutschmark, increases in productivity, and exports had caused the Deutschmark to appreciate against other currencies after World War II. Imports and vacations became less expensive, raising the standard of living of most Germans. Sometimes it is argued that a single currency cannot work across countries with dierent institutions and cultures. It is true that the scal and industrial structures of the EMU coun- tries vary greatly. They have experienced dierent rates of price ination in the past. Productivity, competitiveness, standards of living, and market exibility dier. But these dierences must not hinder the functioning of a single currency. In fact, there are very dierent structures within countries such as Germany, as Conclusion 163
well. Rural Bavaria is quite dierent in its structure from coastal
Bremen. Even within cities or households, individuals are quite heterogeneous in their use of the same currency. Moreover, under the gold standard, countries worldwide enjoyed a single currency. Goods traded internationally between rich and poor countries. The gold standard did not break down because participating countries had dierent structures. It was destroyed by governments who wanted to get rid of binding, golden chains and increase their own spending. The Euro is not a failure because participating countries have dierent structures, but rather because it allows for redistribution in favor of countries whose banking systems and governments inate the money supply faster than others. By decit spending and printing government bonds, governments can indirectly create money. Government bonds are bought by the banking system. The ECB accepts the bonds as collateral for new loans. Governments convert bonds into new money. Countries that have higher decits than others can maintain trade decits and buy goods from exporting states with more balanced budgets. The process resembles a tragedy of the commons. A coun- try benets from the redistribution process if it inates faster than other countries do, i.e., if it has higher decits than others. The incentives create a race to the printing press. The SGP has been found impotent to completely eliminate this race; the Euro system tends toward self explosion. Government decits cause a continuous loss in compe- titiveness of the decit countries. Countries such as Greece can aord a welfare state, public employees, and unemployment at a higher standard of living than would have been possible without such high decits. The decit countries can import more goods than they export, paying the dierence partly with newly printed government bonds. Before the introduction of the Euro, these countries devalued their currencies from time to time in order to regain competi- tiveness. Now they do not need to devalue because government spending takes care of the resulting problems. Overconsumption 164 The TRAGEDY of the EURO
spurred by reduced interest rates and nominal wage increases
pushed for by labor unions increase the competitive disadvantage. The system ran into trouble when the nancial crisis accel- erated decit spending. The resulting sovereign debt crisis in Europe brings with it a centralization of power. The European Commission assumes more control over government spending and the ECB assumes powers such as the purchase of gov- ernment bonds. We have reached what may be called transfer union III. Transfer union I is direct redistribution via monetary payments managed by Brussels. Transfer union II is monetary redistribution chanelled through the ECB lending operations. Transfer union III brings out direct purchases of government bonds and bailout guarantees for over-indebted governments. What will the future bring for a system whose incentives destine it for self-destruction? 1. The system may break up. A country might exit the EMU because it becomes advantageous to devalue its currency and default on its obligations. The government may simply not be willing to reduce government spending and remain in the EMU. Other countries may levy sanctions on a decit country or stop to support it. Alternatively, a sounder government such as Germany may decide to exit the EMU and return to the Deutschmark. German trade surpluses and less inationary policy would likely lead to an appreciation of the new Deutschmark. The appreciation would allow for cheaper imports, vacations and investments abroad, and increased standard of living. The Euro might lose credibility and collapse. While this option is imaginable, the political willfor nowis still to stick by the Euro project. 2. The SGP will be reformed and nally enforced. Auster- ity measures and structural reforms in decit countries lead to real economic growth and eliminate the decit. A one-time haircut on bonds of highly indebted countries may reduce the existing debt burden.1 Harsh and automatic penalties are enacted 1 A (partial) default of a government would not necessarily imply an exit from the Eurozone. However, a partial default could trigger a European banking crisis and also the sell-o of bonds of other governments. The higher interest Conclusion 165
if the three percent limit is infringed upon. Penalties may consist
in a suspension of voting rights and EU subsidies, or in outright payments. But there are incentives for politicians to exceed the limit, making this scenario quite unlikely. The members of the EMU are still sovereign states, and the political class may not want to impose such harsh limits that diminish their power. 3. Incentives toward having higher decits than the other countries will lead to a pronounced transfer union. Richer states pay to the poorer to cover decits, and the ECB monetizes government debts. This development may lead to protests of richer countries and ultimately to their exit, as mentioned above. Another possible end of the transfer union is hyperination caused by a run on the printing press. In the current crisis, governments seem to be hovering between options two and three. Which scenario will play out in the end is anyones guess.
payments on bonds would most probably trigger these governments down-
falls. As the situation might get out of control, governments have tried to prevent such a situation and resisted haircuts so far. Moreover, a default alo- ne would not be sucient to substantially reduce the decit in most coun- tries. Interest payments on existing debts make up only the smaller part of decits. [Desmond Lachman (2010, 31) writes that had Greece and Ireland successfully managed to halve their public debts through restructuring in 2009, they would have still been left with budget decits of over 10 percent of GDP.] If governments want to get around austerity measures and struc- tural reforms, they would have to leave the Eurozone in order to be able to inate their way out of their decit problems. The implied devaluation would impoverish the population of these countries immediately.