Thursday, May 20, 2010

Niall Ferguson and David Marsh on the Uncertain Euro

European Central Bank
(Image from Wikipedia)

Niall Ferguson and David Marsh have topical articles in Newsweek ("The End of the Euro") and the New York Times ("The Euro's Lost Promise"), respectively, that are both worth reading on the current uncertainty about the euro and what it might portend for the European Union.

They both agree on the factor responsible for the euro's instability. According to Ferguson, the European Monetary Union (EMU) had a fatal flaw from the outset:
[T]he worst defect in the design of the EMU . . . was that it was uniting Europe's currencies but leaving its fiscal policies completely uncoordinated. There were, to be sure, "convergence criteria," which specified that a country could join only if its deficit was less than 3 percent of gross domestic product and its public debt was less than 60 percent. But even when these were turned into a permanent set of fiscal rules in the Stability and Growth Pact, there was no obvious way they could be enforced.
Why couldn't they be enforced? In referring to Europe's monetary union of December 1991 in Maastricht (southern Netherlands), Marsh explains:
[J]ust before the Maastricht meeting, Chancellor Kohl noted that a monetary union without a corresponding political union would be "a castle in the air." His remark echoed the concerns of the Bundesbank, his country's statutorily independent central bank, that unless it involved greater political and economic anti-inflationary discipline and solidarity among weaker and stronger states, a monetary union would be doomed.
Why, then, did the European nations seek monetary union? Ferguson tells us one crucial reason:
Monetary union had geopolitical appeal . . . . In the wake of German reunification, the French worried that Europe was heading for a new kind of domination by its biggest member state. Getting the Germans to pool monetary sovereignty would increase the power of the other members over a potential Fourth Reich.
Marsh again gives details:
In the vanguard of the effort [toward monetary union] was none other than Chancellor Helmut Kohl, the man who had driven German reunification with miraculous speed. He knew he had to enshrine the larger Germany in a new European order to ease its neighbors' fears. The euro would be the monetary equivalent of the ugly yet necessary military compact between NATO and the Warsaw Pact that supervised East and West Germany after World War II.
The analogy between a recently reunified Germany bound monetarily to the EU and a recently defeated German divided between Nato and the Warsaw Pact sounds rather strained now, but I lived in Germany from 1989 to 1995 and can vividly recall the fears expressed by various other European nations in 1990 to 1991 about a unified, powerful Germany.

In other words, fear drove the Europeans' monetary union, much as fear drove European unification itself, fear of Germany. In short, the EU was based on fear, not trust, and suspicion continues to pervade the union, only now more generalized and not solely fixed upon Germany. But if the euro is to work, then the EU's central political power must grow and assert itself over fiscal policy. According to Marsh, this is one side-effect of the recent financial intervention, which poured nearly one trillion dollars into the effort to rescue Greece's economy, stabilize the euro, and ultimately save the European Union:
The huge amount of money aside, the significance of the rescue package was that, for the first time, power over the European Central Bank started to move to the politicians. President Nicolas Sarkozy of France, a longtime critic of the bank's sway, joined forces with another Frenchman, Dominique Strauss-Kahn, managing director of the International Monetary Fund, to impose political supremacy over the euro zone.
The next year or two will determine whether the EU grows more unified through more centralized political power that can set fiscal policy . . . or not.

But if political centralization does succeed, there's still -- and even more so -- the so-called "democratic deficit" to deal with.

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At 10:42 AM, Blogger Jeremiah said...

Sorry to use the comment space for this, but could I have your email. I am interested in having contact about Girard. Thanks. Jeremiah Alberg

At 11:07 AM, Blogger Horace Jeffery Hodges said...

Okay, but I know little.

Jeffery Hodges

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At 2:17 AM, Anonymous David Duff said...

My own, admittedly somewhat paranoid, suspicion is that many of the Euro-fanatics knew perfectly well that there was an inherent weakness in the single currency and that they positively looked forward to an eventual catastrophe as a chance to move in fast with 'emergency' measures in the form of a new quasi-federal government which would be impossible to resist.

Much the same type of thinking drives many in the current Obama 'pol-bureau'!

At 8:47 AM, Blogger Horace Jeffery Hodges said...

On the other hand, David, incompetence can explain a lot.

Still, it's an intriguing suggestion.

It reminds me of an old Doonesbury strip. President Reagan is told that some liberals argue that because he lacked the political power to push through spending cuts, he cut taxes to create a fiscal deficit that would force the federal government to cut spending anyway.

There was a moment of silence . . . and then Reagan asked, "Am I that smart?"

Jeffery Hodges

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At 4:51 PM, Anonymous David Duff said...

Love the Reagan story!

And you are right to remind me, in effect, that the 'cock up' theory of history is nearly always a better explanation than the conspiracy theory.

At 5:01 PM, Blogger Horace Jeffery Hodges said...

Most consequences are unanticipated.

My life is proof . . . and I'm not entirely stupid.

Jeffery Hodges

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