For weeks I have been trying to find a good way to review Joseph Stiglitz’s book, The Euro and its threat to the future of Europe. Allen Lane, Penguin Random House, 2016. Now I think I am ready, though I am not sure I am happy with it. We will see. What I know is that I want to talk about the relationship between Europe and the Euro having Stiglitz always present in my mind. I want to write about the relationship between the two because they are different things not simply because there are 28 countries making up the Union and only 19 of them adopt the Euro: they are different entities because the European Union precedes the Euro logically and historically. Thus, my basic question will be: what function does the Euro fulfil within Europe? What its role in the process of Union building –that ‘ever greater Europe that so distress our British friends lately? These are questions that, I believe, raise THE issue: why did we want the Union? And then why, in the process of building and strengthening the Union, we thought the Euro would be a good step forward, a leap, perhaps, in the right direction?
I am perfectly aware that these are very divisive issues in Europe today. Still, I hope that what I am about to write will stimulate rational thinking within a sensible debate among the people I am addressing these thoughts to, those who live the idea of Europe passionately. Not interested hearing from others, thank you.
The most beautiful words, and the best insight in Stiglitz’s book are to be found on p. p. xxix, Stiglitz thanks his wife for constantly reminding him of “the importance of the European project”, and that “the key question was [is, fs] the impact of the euro on that.” Mrs. Stiglitz is obviously very clear minded, and I would like to join her husband when he thanks her: because that which we will never doubt, never discuss is that what ‘comes first’ historically, logically and politically, is the Union. The Euro comes second, and later.
This is a crucial point in my argument. I can envisage readers jumping to the conclusion that, if the Euro comes in second logically, historically and politically, then one could ‘save’ the Union by sacrificing the smaller thing, the Euro. I understand that what I am saying so far might be leading to saying that, if the Euro is the impediment, well, let us just remove it, and the Union will thrive. I shall argue that such understanding of my putting the Union above the Euro along all three dimensions of logic, history, and politics, would be really too simplistic. To follow the easy path: the death of the Euro will be the death of Europe. It is not by chance that a ‘liberation from the Euro’ is vociferously invoked by anti-Europe elements, nationalists, separatists forever afraid of everything that is different and larger. Whose arguments, one has to add, are usually informed by a fair degree of mental confusion. I am obviously not referring to Stiglitz, of course. But have you by chance heard anybody uttering that “well did the English to get out of the Euro”? [The informed reader will forgive me if I add that here ‘English’ should have been ‘British’; ‘Euro’ should be replaced by ‘European Union’; and anyway, when it comes right down to it, the British have not left anything at all as of now, nor will they for a long time to come].
And here comes the painful part, painful for two reasons. The first is that, despite his distinguo and careful analyses, Stiglitz is amply and happily used by the above-mentioned characters, to the point that some of them, newspapers included, write that “even Nobel prizes say it!” [that abandoning the Euro is the right choice, fs.] The second reason why this is a painful moment is that I must submit an analysis, and a vision, that is radically different from Stiglitz’s. whom I regard as one of the true masters in the field, a fact that my students of generations may testify to. Today I will state my thesis in general terms; over the next weeks I will get to more detailed and analytical posts.
The transition from nation states to European Union
Historians generally agree that the 1648 Treaty of Westfalia represents a good starting point for the process of conceiving first and gradually adopt then the model of Nation-State. And then most will remember that high-school history textbooks would define the nineteenth century the century of Nation-States (think of Italy and Germany). So, two centuries for a ‘complete’ form of nation-State to be fully established. In Europe.
Now the interesting question is: what is a modern Nation-State for an economist? Looking at the Nation-State from the point of view of the economic policy authorities, that is, those parts of the State that regulate, or attempt to regulate, productive and commercial activities, the Nation-State is an artifact rotating around four crucial sets of rules that we call commercial policy, fiscal policy, monetary policy, and exchange rate policy. The Europe-building process basically consisted of gradual transfers of nation-state privileges over policies to a large ‘Nation-State’ of a continental size: commercial policy in 1968, monetary policy, and exchange rate policy along with it in 1999 [It is true that exchange rate policy was not entrusted to the ECB, but that does not imply that such policy is still under the jurisdiction of individual nation-state member…since they do not have their own currency.]
Why do I use inverted commas when referring to the EU as a continental size ‘Nation-State’? I do it because evidently the EU is no such thing, it being deprived of the right to spend and tax: it cannot exercise fiscal authority.
The EU is, therefore, a nation-state missing a government. This is its problem, not the common currency! Member states cannot run growth policies, nor anti-cyclical policies, if such policies exceed the limits of the balanced budget (current discussions about whether a 2.4% deficit relative to GDP, ought to be regarded as activities put up by national member governments to make believe they are ‘governing’). It is perhaps worth reminding the reader that this ‘principle’ was defined by George Soros “the German interpretation of the Stability Pact,” an interpretation according to which the government of each member state is the only one responsible for the consequences of its own fiscal policy. Responsible to whom, one may want to ask? Well, having chosen not to have higher authority than the national government in matters fiscal, the only possible answer is: the financial markets. Such is the implication of the having a Union that is a nation-state minus the government: financial markets will be free to maul sovereign governments one by one and push them to the point that they will be considered for expulsion by other governments: see Greece, the thinnest market for government bonds and thus the most suitable to make an example out of.
On the other hand, imagine: what bank, what mutual fund, what pension fund would even think of attacking the Economic and Monetary Union, also known as Euro Area, if the governments of the 19 member states were to adopt a centralized fiscal policy, run by an EMU fiscal authority Nobody would, and that not just because the bond market would be nowhere thin enough to represent an easy prey. More substantially, nobody would because such fiscal authority would have a Central Bank standing by it. A Central Bank that could punish those attacking the EMU by shorting its bonds at a time when such actions were not to suit the EMU itself. A Central Bank that Greece did not have, and still does not: not everybody knows that to this date the ECB is not accepting Greek debt into its Quantitative Easing program, at a time when its acceptance would alleviate substantially the Greek plight and help normalize the European financial markets….
From all of which, my thesis: it is not by returning monetary policy authority to the member nation-states that the project of an ever more solid and strong Union progresses. This goal can only be achieved by transferring to the Union the currently state-held control over fiscal policies.