You have probably seen me banging on about the Eurozone with words such as ‘toxicity’, ‘failed experiment’, and ‘f*cking stupid idea’. I previously wrote about why I voted out (because the EZ is failed and we need to be as far away from its alcoholic, abusive father as possible) but I want to go a bit further and break down why I feel the Eurozone is failed. A lot of excerpts will be taken from Rosa’s book, Euro Error, written in April 1999 (he almost predicts what would happen over the next decade).
The root cause of the toxicity is the currency union. Using the same currency for 19 different varied economies cannot work. It would be akin to treating someone with a bruised leg and someone with a gunshot wound with the same dose of painkiller. It can’t work because monetary policy is adopted as a tool to accommodate and constrict to complement fiscal policy. In this way, you have to start asking why it was implemented, and from what I feel, it is to have Europe as a statist entity.
The State’s expenditure is, in a way, the national economy’s overhead cost. We are reaching the point where these overheads prove to be excessive and drag down businesses’ potential to create wealth. Which is to say, in the final analysis, that the responsibility for Europe’s malaise falls on the policy that was chosen and the people who were responsible for implementing it. Contrary to the litany of governments that hide from any criticism behind the “tyranny of the financial markets” and the “constraints of globalization,” supposed to deprive them of any room for maneuver, it should be clearly recognized that the financial policy of the State, the “macroeconomic” policy, is not dictated by the international environment. It results, in fact, from a choice that is basically political and not economic: that of the construction of a European State, intended to superimpose itself on the national states.
Dr Jean-Jacques Rose, Euro Error.
This currency union forces governments to adopt very restricted fiscal policy which in turn forces them to adopt low productivity, low wages, low growth, high unemployment in certain states, while governments have to force more and more spending.
As a key current theme in the wake of Brexit, Trump, Italy and Austria, I feel the next excerpt from Rosa is key:
The rise of xenophobia in France and Germany, for example, is a particularly worrisome consequence of the loss of jobs and the declining growth. It now constitutes a political risk that cannot be overlooked. This political backsliding, traditional in difficult times, is explicitly tied to growing unemployment, as the foreigner is accused of stealing jobs from the nationals. Let us not forget that a similar phenomenon developed in Great Britain at the time of economic stagnation under the impetus of Enoch Powell, and in the United States in the years of uncertainty, when Governor Wallace and other politicians of the extreme right mobilized a considerable fraction of the votes. All this undercurrent was rendered inconsequential by the return of prosperity. This shows that moralizing speeches on their own have little chance of reversing the trend toward political extremism if the economy continues to drag, thereby destroying jobs.
I tweeted this last night:
Yes, people are using racism as anti-immigration rhetoric to support their so called ‘arguments’. But look at the reasons why people do this. I see a lot of words explaining how these people are hugely uneducated, which is why they voted out – then how do you expect them, if they are so uneducated, to be able to explain European stagnation? So they go to the thing that seems alien, and which must be the cause. Don’t get me wrong, I have absolutely no sympathy for these people when they are spewing hateful bullshit. But it’s absolutely brain dead not to recognise the reasons why, when the rise of populism has occurred in various different countries. I also wrote about the rise of Trump, and the same findings of rising unemployment amongst the working and middle classes were found.
Note that unemployment rates in Greece, Italy and Spain are 23.4%, 11.6% and 18.1% respectively. Note further what Rosa says re mass unemployment:
If the situation of the unemployed had remained that of the interwar years, today’s unemployment would be politically insupportable. At the time, the one who lost his job was often the only financial support of his family. The standard of living was low. Compensation was limited and offered neither systematic protection in old age nor health insurance. Under such conditions, unemployment that strikes more than 10 percent of the working population must cause an intense social mobilization and instigate a speedy revision of economic policies. One hears, particularly on the left, that well-compensated unemployment is better, after all, than poorly paid work. Better to be an unemployed person in Europe than a hamburger-flipper in the United States. This thesis is caricatured in the recently popularized idea suggesting that our time might see the advent of the “end of work.” Companies and markets would like that. This proposition suggests that there is no way to avoid it. The search for high productivity which international competition imposes on us will reduce the demand for low skilled labor. We should look to a new era of leisure.
In essence, the availability of welfare payments to the unemployed (which combined with a fixed monetary policy increases fiscal spending) has put governments into a sense of security whereby a higher level of unemployment is socially sustainable, when in fact, it isn’t in the eyes of those it is hitting.
E.L. Jones said that the reason why Europe has come so far in the last 60 years is that there is competition between states. Yet the introduction of the Euro has taken this competition away whereby again, fiscal spending cannot be complemented by changing monetary policy dependent on specific conditions.
Having said all of this, I am not going to say that countries have been entirely fiscally responsible alongside the rigid monetary policy. Greece, for example, has a ‘rules are meant to be broken‘ mentality, almost. You notice that with many houses in the country, some are part finished. This is so they aren’t classed as a legal dwelling, and so do not have to pay as much tax as a finished dwelling. EUR 285bn remained unpaid in taxes in 2012 in Italy (18% of GDP). This fiscal irresponsibility had a huge part to play in why Greece required a bailout, with massive structural deficits and accounting measures which had hidden the levels of debt that they had (the Maastricht Treaty meant they could only have 3% of GDP as a budget deficit when Greece had upward of 10%). Troika then had to bail them out in order to allow for liquidity and spending so that they wouldn’t totally collapse, which has then caused further fiscal conservatism.
But Greece could have been able to ease the impact of the financial crisis and a reduction in demand alongside the changing economic cycle – but this couldn’t happen because the ECB sets the rate of interest on the Euro. In essence automatic stabilisers require both flexible monetary AND fiscal policy to be able to work with changing economic cycles.
Rosa also says something on macroeconomic responsibility:
For the end of growth and the advent of permanent unemployment in Europe are, in fact, explained by this disinflationary policy implemented at the beginning of the Eighties and then reactivated, after a brief interlude of recovery at the end of the decade, by the Bundesbank’s restrictive policy. Conservative monetary policies have a secondary effect of driving up the currency exchange rate and penalizing exporters as well as domestic producers, who are then faced with increased competition from imports whose prices have gone down. That generates fear, an unfounded fear of “globalization.” Actually, competition from the poor countries is irresistible not because of their low wages. More to the point is that our products are too expensive, and our wages also, insofar as their domestic price does not change, or in any case not instantaneously, with the increase in the exchange rate. It is our currencies’ rates of exchange that penalize export, bolster imports particularly from emerging countries, and make our wages prohibitive compared to those of foreign countries.
The fear of globalisation does sound quite familiar…
This was very brief and there are more topics involved, but I just wanted to provide an explanation of why a currency union doesn’t work.