Lars P. Syll — Why a monetary union cannot work without also being a political union

Nicholas Kaldor foresaw what the would happen if the Eurocrats attempted to force a political union using an monetary economic one on top of the then existing common market.

Lars P. Syll’s Blog
Why a monetary union cannot work without also being a political union
Lars P. Syll | Professor, Malmo University

See also

The mess at the heart of the EU

Dirk Ehnts — “Those who love Europe should be able to criticize Europe”

Pertinent Wynne Godley quote. (The headline quote is Macron.)

econoblog 101
“Those who love Europe should be able to criticize Europe”
Dirk Ehnts | Lecturer at Bard College Berlin

Bill Mitchell — France has received its orders from the masters

Angela Merkel and Bundesbank's Jens Weidmann rain on Charles DeGaulle wannabe Emmanuel Macron's parade. There will be no fiscal union with the North picking up the tab for the South.

This is a long post setting forth the issues standing in the way and why they are unlikely to be overcome. The chief obstacles are cultural and political rather than economic. A federation among sovereign nation states is not possible without restrictive concessions that the German elite reject.

Conclusion

The point is clear.

Macron can say what he likes. But unless he can get it past the masters (Germany) anything he says will be hot air.

And it is clear from history that Germany will never tolerate the creation of a true federal fiscal capacity.

Which tells me the Eurozone is never going to work in the way the leaders claimed it would at the outset – it will always be prone to stagnation and crisis.

Macron destined to be another Hollande? Bill thinks so.

Bill Mitchell – billy blog
France has received its orders from the masters
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — Deepening the Economic and Monetary Union – no solution in sight

Periodically, the European Commission puts out a new report or paper on how it is going to fix the unfixable mess that the Eurozone continues to wallow in. I say unfixable because all of the proposed reforms refuse to confront the original problem, which, at inception, the monetary union builders considered to be a desirable design feature – a lack of a federal fiscal capacity. They now know that this is the major issue but cannot bring themselves to deal with it directly. The politics won’t allow that. Everyone knows that Germany will veto such a development immediately and that would be the end of it. The latest report (May 31, 2017) – Reflection paper on the deepening of the economic and monetary union – maintains the inertness that was characteristic of previous ‘grand’ statements, such as the White paper on the future of Europe and the way forward(March 1, 2017) and the The Five Presidents’ Report: Completing Europe’s Economic and Monetary Union (June 22, 2015). So not much has happened in 2 years, despite the unemployment rate still hovering around 9.5 per cent, other than many workshops, conferences, reports, speeches, meetings in salubrious surrounds where the catering is the highlight and the conclusions moribund.

The latest Report – Reflection paper on the deepening of the economic and monetary union – adds another 40 odd pages to the already high pile of talk with little meaningful action....

Macron thinks he can fix this by talking sense to Germany. Ha ha. The euro is a discounted DM without Germany being subject to external responsibilities of a fiscal union in addition to a monetary union, and the German elite like it that way.

Bill Mitchell – billy blog
Deepening the Economic and Monetary Union – no solution in sight
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

JP Koning — Leaving a monetary union is difficult, but Hawaii pulled it off

I'll bet you didn't know about this. I didn't either.

Moneyness
Leaving a monetary union is difficult, but Hawaii pulled it off
JP Koning

Bill Mitchell — The Eurozone ‘house of cards’ to collapse – doomed from the start

There was an interesting interview published in the financial market journal Central Banking this week with Otmar Issing, who was the ECBs first chief economist and a former European Central Bank executive board member. He predicted that as a result of the political corruption of the monetary union ideal, “the house of cards will collapse.” He was referring to the claim that the ECB has become captured by politicians and technocrats in the IMF and the European Commission such that it is now violating essential central banking principles, in addition, to Treaty obligations that were designed to safeguard the financial stability of the system. I have some agreement with his overall view that a federal solution to the Eurozone ills is not viable. But I do not agree that the ills of the Eurozone stem from recent political decisions – to pressure the ECB to engage in QE or other interventions. The reality is that the flawed design of the Eurozone, which reflected the ideological hold of neo-liberalism on the integration discussions in the 1980s and beyond, meant that the only effective fiscal capacity in the currency union was held by the ECB. If the ECB had not started buying up government bonds in May 2010, the monetary union would have collapsed about then. The whole problem is that neo-liberalism brought these Member States together into a monetary architecture that was doomed from the start…

Bill Mitchell – billy blog
The Eurozone ‘house of cards’ to collapse – doomed from the start
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — Chaos in Europe and the flawed monetary system

I spend a fair bit of time in various airports each month and hate the onerous security checks, which at times seem petty in the extreme. It always amused (not the right word) me that a passenger could just walk straight on with a bag full of duty free whisky which would make a lethal weapon if smashed, yet characters like me with pins in my legs (old bike crashes) have to nearly strip each time we have to fly. Now I suppose they will have security screening outside the terminal entrance just to enter. The authorities would have been better ensuring that their youth had access to employment rather than allowing them to wallow in unemployment and the resulting social exclusion. It is too simplistic to attribute the growing dangers in Europe and elsewhere to concentrations of high unemployment. But if a society deliberately denies a particular generation of the chance to gain employment and, instead, vilifies them as lazy, wanton individuals then it is easy to see why those characters will conclude that society has nothing to offer. In Europe where these manifestations are becoming increasingly obvious, the flawed monetary system is at the heart of the problem. It has failed categorically and the fall out of that failure is multi-dimensional.…

Bill Mitchell – billy blog
Chaos in Europe and the flawed monetary system
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — The Eurozone – being ‘trapped in a dysfunctional monetary system’

On November 6, 2000, the Financial Times correspondent Wolfgang Münchau wrote in his article ‘Weak euro reflects uncertainty of euro-zone’ that “structural reforms alone will not determine whether the Emu is viable … The Europeans have no system of transfer payments and the EU budget is too small for this purpose … the euro-zone countries cannot remain as they are: they must move towards full economic union”. He also observed that the “current is clearly flowing in the opposite direction: EU governments increasingly emphasise inter-governmental co-operation as opposed to a wider role for supra-national institution”. I examined that ‘current’ extensively in my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – as it was (and is) a major reason the monetary union has failed. And, further, the cultural and national barriers which prevented the creation of a system-wide fiscal union are still insurmountable. Münchau is one of several journalists and commentators who have shifted their positions on the desirability of the common currency yet remains wedded to the idea of retaining it – as if returning to national currency sovereignty would be a disaster. I opposed the Maastricht proposal when it was made public and remain opposed. Restoring national currencies, while initially disruptive will not in the long-term prove to be worse than what Münchau admits is a state where nations are “trapped in a dysfunctional monetary system”.….

Bill Mitchell – billy blog
The Eurozone – being ‘trapped in a dysfunctional monetary system’
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Yanis Varoufakis — A New Approach to Eurozone Sovereign Debt – op-ed in Project Syndicate

The eurozone is unique among currency areas: Its central bank lacks a state to support its decisions, while its member states lack a central bank to support them in difficult times. Europe’s leaders have tried to fill this institutional lacuna with complex, non-credible rules that often fail to bind, and that, despite this failure, end up suffocating member states in need. One such rule is the Maastricht Treaty’s cap on member states’ public debt at 60% of GDP. Another is the treaty’s “no bailout” clause. Most member states, including Germany, have violated the first rule, surreptitiously or not, while for several the second rule has been overwhelmed by expensive financing packages.

The problem with debt restructuring in the eurozone is that it is essential and, at the same time, inconsistent with the implicit constitution underpinning the monetary union. When economics clashes with an institution’s rules, policymakers must either find creative ways to amend the rules or watch their creation collapse.…

Yanis Varoufakis
A New Approach to Eurozone Sovereign Debt – op-ed in Project Syndicate

Also

My question to Christine Lagarde, Eurogroup 25th June 2015 – as narrated by Landon Thomas in the NYT

Greece’s Third MoU (Memorandum of Understading) annotated by Yanis Varoufakis

Matias Vernengo — Greece on the verge

I discussed to a great extent the debate between Sergio Cesaratto and Marc Lavoie on the nature of the European crisis, that is, whether it is a balance of payments crisis or a monetary sovereignty one.

Cesaratto argues that a balance-of-payment crisis is possible in a currency union, and that the financial crisis of the Eurozone is indeed such a balance-of-payment crisis....

Yet, as noted by Lavoie, the Eurozone crisis seems to have been caused instead mainly as the result of an initial banking problem, which transformed itself into a public debt problem. In other words, the currency issue, and the functioning of the monetary union seem to be at the core of the crisis, not a balance of payments one....

My argument, discussed briefly here before, is that the Cesaratto and Lavoie hypotheses are one and the same. The balance of payments and the monetary sovereignty views of the European crisis are two sides of the same coin.....

Naked Keynesianism
Greece on the verge
Matias Vernengo | Associate Professor of Economics, Bucknell University

Lars P. Syll — Greece and the true purpose of the euro

Robert Mundell devised it that way. It was anti-democratic out of the gate and bound to be disruptive of social democracy in Europe. As Wynne Godley pointed out in Maastricht and All That.

Lars P. Syll’s Blog
Greece and the true purpose of the euro
Lars P. Syll | Professor, Malmo University

Warren Mosler on Grexit

Warren comments at billy blog.

Warren Mosler says: 

Friday, May 1, 2015 at 16:52 

Seems to me history tells the populations of the EU loud and clear to leave things as they are rather than risk going back to local control of monetary and fiscal policy.

It's not clear whether Warren is expressing his view that Greece should remain in the EZ or explaining why the Greeks are reluctant to leave the EZ as a solution to the crisis they face.

Lars P. Syll — Nicholas Kaldor on putting the cart before the horse fallacy

Also called the "wagging the dog's tail" fallacy.

Keeper quote that turning out to be true in spades.

Lars P. Syll’s Blog

Nicholas Kaldor on putting the cart before the horse fallacy

Lars P. Syll | Professor, Malmo University

JW Mason — German Unification as Proto-Europe?

What this passage makes me wonder is: Has anyone ever written about European integration in the light of German unification in the late 19th century? The claim in the Reichsbank pamphlet that customs union was the easy first step, and that monetary union followed only later and with difficulty, certainly suggests some parallels. So does the suggestion that monetary union was the biggest economic benefit of political union. It would be interesting to ask, what were the concrete problems that monetary union was understood to be solving? And how did it fit into the larger political agenda of German unification? 

Of course there are fundamental differences -- most importantly that German unification took place under the aegis of a sovereign political authority, whereas the central political-economic fact about Europe is that the monetary authority stands above the various national governments. But it still seems like the comparison could be illuminating. 

The US faced a similar situation in the process of going from colonies, to a confederation, to a federation, which was then organized financially under the aegis of Alexander Hamilton as the first Secretary of the Treasury of the United States.

There were controversies during those times that are long forgotten by most other than scholars of the period. But had it not been for acceptance of Hamilton's plan for centralization, things might have gone differently, and in different periods the US operated sometimes under a central bank and at other  times under free banking, at times under a gold standard and at times under a fait system. The US was even operated under a money-financed system at the time of the Civil War instead of the debt-financed system that Hamilton has established initially, even through there was no specific provision for a particular financial system and arguing for which Hamilton proposed the doctrine of implied powers that became accepted instead of enumerated powers based on the necessary and proper clause.

So what the EZ is going through now is not uncharacteristic. But they seem to be having difficulty from learning from the past. The eurocrats need to get more creative before their experiment implodes with potentially dire results not only for Europe but the world.

The Slack Wire

German Unification as Proto-Europe?
JW Mason

Ambrose Evans-Pritchard — Germany's Ukip threatens to paralyse eurozone rescue efforts

Trouble in Deutschland. Trouble in France. And trouble for the EZ.

The political climate in the eurozone’s two core states is now extraordinary. A D-Mark party is running at 10pc in the latest polls in Germany, while the Front National’s Marine Le Pen is in the lead in France on 26pc with calls for a return to the franc. One more shock would test EMU cohesion to its limits.

It may be the rising right that bring down the monetary union.

Telegraph
Germany's Ukip threatens to paralyse eurozone rescue efforts
Ambrose Evans-Pritchard

Since the EMU Was Such A Successful Disaster: East African Trade Bloc Approves Monetary Union Deal

(commentary posted by Roger Erickson)

(hat tip Pedro da Costa ‏@pdacosta)

"The leaders of five East African countries signed a protocol on Saturday laying the groundwork for a monetary union within 10 years that they expect will expand regional trade."

"In a monetary union, the absence of currency risk provides a greater incentive to trade"  [they claim*]

"Adjusting to a single monetary and exchange rate policy is an inescapable feature of monetary union ... but this will take time and may be painful for some," [a rube, ... er 'spokesman'] said, referring to the fact that some countries may struggle to meet agreed benchmarks.

***

Deja vu? Corrupt Neo-Liberals in corrupt countries perceive familiarity as a positive? Does pegging allowable looting levels to "banking stability" constitute a felony yet?

*Standard disclaimers apply. Euro experiences may diverge from the claims made in advance. See your local 1% for protection racket access.

Currency Choices for an Independent Scotland: Response to the Fiscal Commission Working Group

Another monetary union in the works?

Currency Choices for an Independent Scotland: Response to the Fiscal Commission Working Group — April 2013
(h/t Alex Little via Twitter)

Here's the call for austerity already.

The Guardian (UK)
An independent Scotland could endanger sterling, Treasury warns
Severin Carrell | Scotland correspondent, The Guardian

Ramanan — Nicholas Kaldor On The Common Market

Ramanan provides a very short explanation by Kaldor of why a European monetary and fiscal union will break down if not preceded by a federal political union similar to the US.

The Case For Concerted Action
Nicholas Kaldor On The Common Market
by Ramanan