Every (economically literate) social democrat should have been able to foresee trouble of the kind described below by Wynne Godley long before the EU could have been instituted. The social democratic left ought to have enlightened the public about the danger posed by the envisioned EU-construction. The old social democracy should have offered itself as a major political force capable of averting the disastrous adventure engulfing Europe since the turn of the millennium.
If a government stops having its own currency, it doesn’t just give up “control over monetary policy” as normally understood; its spending powers also become constrained in an entirely new way. If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under “conditions of extreme emergency.”
If Europe is not to have a full-scale budget of its own under the new arrangements it will still have, by default, a fiscal stance of its own made up of the individual budgets of component states. The danger, then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.
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