My good friend Marshall Auerback analyzes the currency/debt crisis in in EU, and explains why this creates a situation fundamentally different from that facing nations with sovereign currencies. like Britain, Japan, and United States. It is a distinction that needs to be kept in mind, if the US is have a constructive fiscal policy.
Marshall also concludes that the crisis in the Euro will not be fixed by the recently approved bailout to Greece, because there is a fundamental flaw at the heart of the EU design. His analysis leads to the following conclusion: By establishing a common currency, the individual countries have sacrificed independent monetary policy to a supranational monetary authority. This obviously sacrificed monetary autonomy, but it also paralyzed each country’s ability to run counter-cyclical fiscal policies. The only way out of the trap would be (1) to set up a supranational fiscal agency (in effect, with each member giving up de jure fiscal autonomy and placing each country’s counter cyclical policy powers under the supreme power of a supranational fiscal agency — in effect reducing each nation’s economic sovereignty to a level similar to that held by a state in the United States, or (2) or by getting out of the euro and going back to some arrangement like that of the EU prior to the adoption of the Euro — an arrangement which, readers should remember, led to enormous progress.
Auerback does not examine the political implications of Option 1 (hopefully he devote his prodigious analytical talents to this question in future), but it seems to me that, given the history of nationalism and cultural differences in Europe, Option 1 might lead to political situation somewhat similar to, if not as extreme as, that of Yugoslavia, before it disintegrated in the 1980s. The relatively rich republics of Yugoslavia (Slovenia and Croatia) resented policies that transferred of wealth to the relatively poorer republics, like Serbia, Macedonia, Montenegro, or the autonomous region of Kosovo. Once Tito’s organizing genius disappeared, the linkages stitching the country together became frayed and eventually snapped as old grievances manifested themselves in newer forms. The same type of evolution could happen to the Europe Union if it underwent a supranational fiscal union, where the rich countries feel they are being unfairly burdened — the beginnings of which are already in evidence.
The great achievement of the EU has been to reduce the probability of violent nationalist conflict among some of its members to a vanishingly small probability while improving the economic lot of its members. Most of this reduction in the propensity toward violence and economic growth took place before the adoption of the Euro. It may be that giving up the Euro is the wiser alternative in the long run, unless someone can synthesize some kind of third option.
Repeat After Me: the USA Does Not Have a ‘Greece Problem’
Friday, 05/14/2010 – 11:13 am by