By Anthony de Jasay
However, embedded in all this prosaic sobriety and practical sense is a minority of opinion-makers, jurists, civil servants and other elements of the elite who persist in believing in a tightly-knit federal Europe as an ideal for which they will strive at any reasonable cost and that the present opportunity to create such a Europe is a chance which must not be missed. Though in a minority, they are highly influential and have very little opposition from the mostly passive majority. It is they who spread the belief that allowing Greece to default, France to be humiliated, and deficit countries to be squeezed beyond the politically tolerable would be fundamentally mistaken. At times, their arguments seem to lack any reference to reality and resemble delirious fantasies of the sectarian. A somewhat similar clinging to a delirious dream also characterizes the non-German federalists who make the running in their respective countries, though their motives are dissimilar and much less idealistic.
The European Union is, of course, a larger and looser entity than the Eurozone. Three of its important members, Great Britain, Poland and Sweden have stayed outside the zone and so far they can only rejoice in having escaped it. The rest of the membership is, at least officially, unwilling to admit that joining may have been a great foolishness. This is a refusal to confess that one has bought a pig in a poke and may perhaps be pardonable, but it further insulates the debate from reality and keeps it at the level of wishful dreams.
Two fundamental motives had led to the creation of the Eurozone. One was the credulity accorded to the statistics put forward in support of Robert Mundell’s thesis about optimum currency areas.1 These purported to show astronomical benefits from trade between separate countries being transacted in the same currency and escaping the costs of currency exchange. Believing these numbers was grossly naive and betrayed a lack of feel and flair for judging orders of magnitude. The other motive, very much the opposite of naive, was the calculation that since a common currency is not viable without the pooling of a good deal of fiscal sovereignty, ensuring the viability of the Eurozone will force the member states to allow their taxing and spending powers to slip out of their hands and gravitate to a federal body. It is this necessity that is behind the turmoil of the last few years, the submission to a dose of “austerity” by Greece, Ireland, Portugal, Spain, and Italy, and the strange assurances by France that she will meet the norms of fiscal rectitude tomorrow or the day after without yielding an ounce of fiscal sovereignty to Brussels or Berlin.
One thoroughly puzzling aspect of these hardly credible assurances is that the financial markets do not punish the country that trumpets them; the French state can still borrow for ten years at a rate of only a mere 0.9 per cent dearer than the rate the German state has to pay for the same maturity and actually less than the rate on ten-year U.S. Treasury bonds. A country in large chronic deficit in its budget and, more pertinently, in its current balance of payments, may either quit the Eurozone, devalue its currency, and thus accept worse terms of trade and reduced consumption; or allow itself to be “rescued” by Berlin through the various salvage mechanisms set up in recent years. This involves a partial loss of budgetary sovereignty and painful “austerity” for an uncertain number of years.
The only immediate remedy is inflation. However, inflation has the unpleasant habit of taking off when one would want price stability, and refusing to raise its head when one could do with more of it. Japan’s two decades of deflation, and the total lack of incipient inflation in response to the orgies of “quantitative easing” by the world’s major central banks in recent years, is an example of how inflation may be as hard to start as it is to stop once it has got going.
There is an intrinsic obstacle to the Eurozone becoming viable without first-aid mechanisms being kept at the ready and salvage actions having to be mounted by Germany to bail out some delinquent member state from time to time. The obstacle, which may well be insurmountable, is that unlike the United States, where the Civil War has settled the question of sovereignty once and for all in favour of Washington, Eurozone countries are sovereign and no civil war is in prospect to deprive them of it. The power to tax and spend, and also to borrow from domestic sources (in the last analysis, from the young generation) is the milk and honey of the political classes. Without these powers, their very existence is emptied of purpose and they are forcibly retired to obscurity. They will hold out to the last.
The federalist dream does not reckon with this obstacle. Having drunk the heady brew of a future United Europe, they see a fairy tale castle where treasure awaits those who call. Overcoming the opposition of dismal bean counters and economists, Eurobonds will have been created. Member states will borrow according to their needs by issuing Eurobonds that will be jointly guaranteed by all member states. This ultimately means a guarantee of everybody else’s borrowing and hence potentially the bankrupting of the German state. This is a contingency that dreaming about the beautiful European fantasy-land will not acknowledge.
Much of the construction and the future design of a United Europe dreamt of by the elites is too absurd to take at face value. The future seen by the federalists will not happen. The sole safe prediction is that permanent muddle will happen and we will all permanently muddle through it.
Robert Mundell is Professor of Economics at Columbia University in New York. In 1970, he was a consultant to the Monetary Committee of the European Economic Commission, and in 1972-73 a member of its Study Group on Economic and Monetary Union in Europe. His writings on optimal currency areas include “A Theory of Optimum Currency Areas,” The American Economic Review, November 1961; “A Plan for a European Currency” in The Economics of Common Currencies (London: George Allen & Unwin, 1973).
The State is also available online on this website.
For more articles by Anthony de Jasay, see the Archive.