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| Image credit. Continued from What's Wrong with the Euro? (1) |
Absence of the Fiscal Dimension
... and to establish an economic and monetary union, including ... a single and stable currency.
This is the declared goal of the Maastricht treaty.
What is signally missing in the first part of the sentence, is the term "fiscal." If unification is desired, there is also a need for a shared treasury, the capacity for a uniform fiscal policy regime; in other worlds: something akin to the unified tax and fiscal system in a sovereign state.
Basis of Maastricht Treaty - An Anti-Fiscal Economic Philosophy
With a preponderant desire to keep government deficits as low as possible, the Maastricht treaty expresses a clear preference in terms of economic philosophy. This is reflected in the rules of the EU that aim at reducing the discretion and extent to which individual member states could engage in fiscal policy. Government deficits are viewed as the major source of economic problems.
Hence, the prominent position of the 3% (of GDP) ceiling for government deficits enshrined in the treaty.
Hence, the prominent position of the 60% (of GDP) ceiling for cumulative government debt in the Maastricht treaty.
Steve Keen summarises in his words what he considers the ideological core of the EU's anti-fiscal economic ideology codified in the Maastricht treaty:
On the basis of these key restrictions, Brussels imposes controls and fines on national governments so that these will adhere to the preferred economic philosophy of the Maastricht treaty. In the case of Greece, this regime has led to a situation where the country entirely lost its sovereignty, having to submit virtually all important government decisions for approval by the EU.
An Economic Scheme Imposing Ideological Uniformity on Europe
Apart from the non-trivial economic consequences of enforcing this philosophy, it is remarkable in its own right that we find at the core of the EU the desire to subject the entire continent to one school of thought.
Political Motive for the Euro - Pacifying the Pacified
The EU was a political project intended to make impossible any chances of wars among European countries, especially between France and Germany, by tying the respective countries so close to one another that military conflict would be entirely out of the question.
It is odd that a region as fully pacified as postwar Europe would still be considered in need of a pacification process of the scale established by the Maastricht treaty.
Also, it is ironic that the redundant pacification project would actually abet a return of palpable reasons for serious animosities among its member states.
A country whose regions are differentially affected by an external shock (like the oil crises) has three possibilities to react to it by (1) migration of people and goods, (2) by fiscal transfers, and by (3) adjusting wages and prices. Take Texas during the oil crises of the 1970s. The upheaval benefited Texas tremendously, like other oil producing Sunbelt states, while other parts of the US where negatively affected by the surging oil price. People and goods would move from the afflicted areas to the booming ones. Or else, offsetting financial flows from the national to the state and local level would help cope with the differential. Finally, wages and prices would readjust, for instance, so as to attract industry to the lower cost areas (or to boost tourism in Greece owing to lower wages for people working in Greek tourism, resulting in lower cost of holiday in Greece).
However, compared to the US,
It is quite telling just how small the fiscal centre of the EU is. The debt of the EU authorities ("Brussels") as a percentage of European GDP is about 1%, which contrasts with levels of government debt in sovereign countries like the USA of between 50% to 90%.
The budgets of the states in the USA are very small, while the national budget is enormous. In Europe, we have the converse with the "national" budget being minute compared to the national budgets.
With a fiscal sovereign in place, regional shocks can be offset by redirecting resources from the better off regions, so that rising taxes and falling welfare spending in one part of the country can be used to compensate lower taxes and ensure higher welfare spending in another. There is no fiscal sovereign in Europe that could accomplish such balancing.
Setting Up Endogenous Shocks
Obviously, with in Euroland there are free flows of goods as well as private finance between countries. If an imbalance builds up, like Greece importing far more goods from germany than it exports to that country, the government is unable to
Prior to the introduction of the Euro, building up a trade deficit would have triggered countervailing forces, sooner or later. The currency of the country running a trade deficit was liable to devaluation, induced either politically or by markets; a devalued currency would make it more expensive to buy the preferred exports (cars, capital equipment etc.). In the absence of such exchange rate adjustments, people could keep on building up a trade deficit to unprecedented levels.
To be continued in What's Wrong with the Euro? (3)
Basis of Maastricht Treaty - An Anti-Fiscal Economic Philosophy
With a preponderant desire to keep government deficits as low as possible, the Maastricht treaty expresses a clear preference in terms of economic philosophy. This is reflected in the rules of the EU that aim at reducing the discretion and extent to which individual member states could engage in fiscal policy. Government deficits are viewed as the major source of economic problems.
Hence, the prominent position of the 3% (of GDP) ceiling for government deficits enshrined in the treaty.
Hence, the prominent position of the 60% (of GDP) ceiling for cumulative government debt in the Maastricht treaty.
Steve Keen summarises in his words what he considers the ideological core of the EU's anti-fiscal economic ideology codified in the Maastricht treaty:
If government spending is constrained and price stability is achieved, then economic stability will be assured.Repressive Implications
Source, time-mark 15:04
On the basis of these key restrictions, Brussels imposes controls and fines on national governments so that these will adhere to the preferred economic philosophy of the Maastricht treaty. In the case of Greece, this regime has led to a situation where the country entirely lost its sovereignty, having to submit virtually all important government decisions for approval by the EU.
An Economic Scheme Imposing Ideological Uniformity on Europe
Apart from the non-trivial economic consequences of enforcing this philosophy, it is remarkable in its own right that we find at the core of the EU the desire to subject the entire continent to one school of thought.
Political Motive for the Euro - Pacifying the Pacified
The EU was a political project intended to make impossible any chances of wars among European countries, especially between France and Germany, by tying the respective countries so close to one another that military conflict would be entirely out of the question.
It is odd that a region as fully pacified as postwar Europe would still be considered in need of a pacification process of the scale established by the Maastricht treaty.
Also, it is ironic that the redundant pacification project would actually abet a return of palpable reasons for serious animosities among its member states.
It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.
Milton Friedman quoted by Steven Keen at time mark 17:19Insufficient Adjustment Mechanisms
A country whose regions are differentially affected by an external shock (like the oil crises) has three possibilities to react to it by (1) migration of people and goods, (2) by fiscal transfers, and by (3) adjusting wages and prices. Take Texas during the oil crises of the 1970s. The upheaval benefited Texas tremendously, like other oil producing Sunbelt states, while other parts of the US where negatively affected by the surging oil price. People and goods would move from the afflicted areas to the booming ones. Or else, offsetting financial flows from the national to the state and local level would help cope with the differential. Finally, wages and prices would readjust, for instance, so as to attract industry to the lower cost areas (or to boost tourism in Greece owing to lower wages for people working in Greek tourism, resulting in lower cost of holiday in Greece).
However, compared to the US,
wages and prices in Europe are more rigid, and labour less mobile. In those circumstances, flexible exchange rates provide an extremely useful adjustment mechanism.Yet, no such "extremely useful adjustment mechanism" is available to the member states of the EU.
Time mark 22:34
It is quite telling just how small the fiscal centre of the EU is. The debt of the EU authorities ("Brussels") as a percentage of European GDP is about 1%, which contrasts with levels of government debt in sovereign countries like the USA of between 50% to 90%.
The budgets of the states in the USA are very small, while the national budget is enormous. In Europe, we have the converse with the "national" budget being minute compared to the national budgets.
With a fiscal sovereign in place, regional shocks can be offset by redirecting resources from the better off regions, so that rising taxes and falling welfare spending in one part of the country can be used to compensate lower taxes and ensure higher welfare spending in another. There is no fiscal sovereign in Europe that could accomplish such balancing.
Setting Up Endogenous Shocks
Obviously, with in Euroland there are free flows of goods as well as private finance between countries. If an imbalance builds up, like Greece importing far more goods from germany than it exports to that country, the government is unable to
- devalue - it is no longer the currency-issuing sovereign of the money used in its country,
- raise interest rates - it has no authority to determine interest/monetary policy which is a prerogative of the central monetary authority (ECB),
- run government deficits to compensate for the trade deficit.
Prior to the introduction of the Euro, building up a trade deficit would have triggered countervailing forces, sooner or later. The currency of the country running a trade deficit was liable to devaluation, induced either politically or by markets; a devalued currency would make it more expensive to buy the preferred exports (cars, capital equipment etc.). In the absence of such exchange rate adjustments, people could keep on building up a trade deficit to unprecedented levels.
To be continued in What's Wrong with the Euro? (3)
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