THE EURO FATHERS: Stupid or cunning?

The Slog

The evidence for wilful disregard of advice among the euro’s founders is there for anyone to see

I’m indebted to Greek friends for pointing out a persuasive article in the Swiss paper TagesAnzeiger , which I’d commend to all those who can read German.

In a nutshell, it accuses the multivariate euro parents of knowing exactly what they were doing when they formed and shaped the monetary union; they knew exactly what the dangers were and….they ignored the findings of the technocrats at the time. The most shocking realization is that the authors of the Delors-report did not think that a monetary union would come into existence in the foreseeable future: at the time – in 1989 – the economists wrote, under the auspices of Jacques Delors, that “The economic prerequisites for a monetary union that is characterized by immutably fixed exchange rates between the participating countries will probably not exist for the foreseeable future”.

If you want to know why they took this essentially pessimistic view, then the answers (in terms of extracts from the Paper) are as follows:

“If sufficient consideration were not given to regional imbalances, the economic union would be faced with grave economic and political risks”.

“This is especially important because the adoption of permanently fixed exchange rates would eliminate an important indicator of policy inconsistencies among Community countries and remove the exchange rate as an instrument of adjustment from the member countries’ set of economic tools”.

“A particular role would have to be assigned to common policies aimed at developing a more balanced economic structure throughout the Community. This would help to prevent the emergence or aggravation of regional and sectoral imbalances which could threaten the viability of an economic and monetary union”.

“Wage flexibility and labour mobility are necessary to eliminate differences in competitiveness in different regions and countries of the Community. Otherwise there could be relatively large declines in output and employment in areas with lower productivity. In order to reduce adjustment burdens temporarily, it might be necessary in certain circumstances to provide financing flows through official channels. Such financial support would be additional to what might come from spontaneous capital flows or external borrowing and should be granted on terms and conditions that would prompt the recipient to intensify its adjustment efforts”.

“…..the task of setting a Community-wide fiscal policy stance will have to be performed through the coordination of national budgetary policies. Without such coordination it would be impossible for the Community as a whole to establish a fiscal/monetary policy mix appropriate for the preservation of internal balance, or for the Community to play its part in the international adjustment process. Monetary policy alone cannot be expected to perform these functions. Moreover, strong divergences in wage levels and developments, not justified by different trends in productivity, would produce economic tensions and pressures for monetary expansion”.

“Rather than leading to a gradual adaptation of borrowing costs, market views about the creditworthiness of official borrowers tend to change abruptly and result in the closure of access to market financing. The constraints imposed by market forces might either be too slow and weak or too sudden and disruptive. Hence countries would have to accept that sharing a common market and a single currency area imposed policy constraints”.

“The economic prerequisites for a monetary union that is characterized by immutably fixed exchange rates between the participating countries will probably not exist for the foreseeable future. Even among the members who form the nucleus of the exchange rate system, tensions must repeatedly be expected for the foreseeable future owing to differing economic policy preference and constraints as well as the resultant divergences in their economic development, which will make realignments in the central rates of their currencies necessary.”

“…..monetary integration cannot move ahead of general economic integration, since otherwise the whole process of integration would be burdened with considerable economic and social tensions. Moreover, examples from history demonstrate that new nations did not confer a uniform monetary order on themselves until after the process of unification was concluded. Any durable attempt to fix exchange rates within the Community and finally to replace national currencies by a European currency would be doomed to failure so long as a minimum of policy-shaping and decision-making in the field of economic and fiscal policy does not take place at Community level. Without this prerequisite being met, a common European monetary policy cannot ensure monetary stability on its own. Above all, it cannot paper over the problems in the Community arising from differing economic and fiscal policies”.

“Isolated steps in the monetary field would overburden monetary policy in political terms and jeopardize the credibility of the process of unification in the longer run”.

Call me a wonk if you like, but I find this incredibly fascinating stuff – almost like reading Nostradamus, and suddenly finding a stanza that declares:

In 1999, 18 lunatics ignored the will / banks from West and East fanned the flames / A Trichet arose in Gaul / Disunity and disaster were the obvious outcomes

Is there any merit in assigning blame in this manner? Yes, I think there is. On liberating a Nazi concentration camp, Eisenhower declared that his staff should “get every goddamned photographer within a radius of a hundred miles, and film this obscenity…because sure as eggs are eggs, in forty years time people are gonna deny this ever happened”. And if truth be told, this isn’t assigning blame: it’s merely ensuring that Orwell’s Ministry of Truth has no wriggle-room when it comes to responsibility.

The eurozone launch was folly on a global scale. As such, it is having global consequences. Let no person step forward now and call these consequences ‘unforeseen’.