Wednesday, 2 June 2010

For richer, for poorer

I keep reading how the Eurozone's problem is that it is a monetary union but not a fiscal one. If it were the latter, it's argued, fiscal transfers to depressed economies would even out income levels and all would be well:
The euro could easily have worked, on one condition: that the euro-zone became a country. Otherwise, it was always doomed. There is a simple explanation for this. In all countries, rich regions and rich people subsidise poorer regions and poorer people. This enables the latter to use the same currency as their prosperous neighbours. Without fiscal transfers, the poorer areas would not be able to earn enough. So the logic of the euro was that the rich countries would transfer funds to the poorer ones.

It's then argued that the Euro will struggle to survive because the Germans and other 'rich regions and rich people' won't dip into their pockets to allow the 'poorer regions and poorer people' to muddle through. But this is only a part of the story and not really the substantive part.

It's not enough that the 'richer regions' acquiesce in the transfer of funds. The 'poorer regions' have to resign themselves to the low growth and relative poverty they're locked into through their sharing of an interest rate and an exchange rate that are too high for them and a monetary policy that's too restrictive. They must also now resign themselves to not being able to restructure their excessively high debt - debt they took on when an unsustainable boom was fuelled by the common interest rate being inappropriately low for them - as this is an option that appears to have been ruled out as part of the recent deal.

Fiscal transfers are a form of mitigation, they seek to offset relative poverty by evening out income levels. However, mitigation doesn't resolve the underlying problems of excessive debt, a lack of competitiveness, an overaccumulation of now worthless assets many of which sit on the balance sheets of crippled banks. These are being addressed through policies of austerity that threaten deflation and long-term depression in these 'poorer regions'; and they have to be ever more austere as the options of devaluation and reflation are not available. But even if these policies prove successful it may take many years for their benefits to be felt.

It may be that the Euro establishment are relying on the 'poorer people' to acquiesce in their fate. And it's not as if this doesn't happen in other currency areas. However - and this is the real sticking point for the Euro project - this acquiescence always depends on a sense of shared nationhood between richer people and regions and poorer people and regions. It's the mirror image of the 'richer people' being willing to make transfer payments, and the more critical of the two as it's on this side of the equation that the real sacrifices are being made. It's an act that relies upon the mutuality and solidarity that are to be found in established communities, the sense that everyone's in it together.

For instance, people in the city of Liverpool, a place that's been economically depressed for a good part of the last forty or fifty years, have had to put up with interest and exchange rates that have been too high for it (just to be clear, I make no analogy here between the reasons for Liverpool's relative poverty and that of the Eurozone's struggling economies). North Sea oil, a booming City of London, a prosperous and more economically important South-East have periodically contributed to making British economic policy more restrictive and/or sterling higher than Liverpool might have found preferable.

Sure, transfer payments from richer to poorer people and from richer to poorer regions in the UK have gone some way to making this situation tolerable. But you wouldn't say this sorted things out for Liverpool; it's been pretty bloody for the city.

Nevertheless, at no point did Liverpudlians seek to establish their own (devalued) currency, their own (lower) interest rates and their own (looser) monetary policy. As a proposition it's close to being totally inconceivable. This is because Liverpool is irrevocably and on every level - historical, emotional, cultural, linguistic - part of England and, more broadly, Great Britain.

Such a long-standing, powerful and organic bond does not exist between any European nations, let alone between ones as diverse in almost every way as, say, Germany and Greece. On the other hand, Liverpudlians have spoken the same language (you may have to take my word for it), shared the same capital, fought in the same army, played in the same leagues, sent representatives to the same Parliament, lived under the same law, acknowledged the same sovereign and so on as the rest of the country for many generations and, in some instances, for several centuries.

These links have also facilitated a great deal of labour mobility, important in allowing regions to adjust to decline: Liverpool's population is almost half of what it was in the first part of the twentieth century. Such a level of migration from one country to another is inconceivable in the contemporary Eurozone.

So even if the Germans (and Dutch, Danes, Finns, etc.) agreed to bung the Mediterranean countries a few billion Euros on a regular basis, it's extremely difficult to see the Spanish, Greeks, etc. acquiescing in living off welfare, all for the sake of a sense of European solidarity. An entrenched, powerful and popular feeling of solidarity with the rest of the Eurozone simply doesn't exist. To pretend otherwise is fantasy - and a major reason we find ourselves in this situation.

The creation of a common European economic government - not that the rich countries look as if they're going to be willing to fund it - is one thing; the creation of the true and lasting European nation that would be needed for it to operate is altogether another.

By the way, it feels strange to argue on these lines against a project that claims to be progressive. The sort of argument that I've deployed above was used to criticise the workings of the Gold Standard in the inter-war period: the sacrifices demanded, it was argued, were incompatible with democracy and pluralism (the existence of trade unions, in particular). I'm not sure that some of the Euro-progressives would be happy to be lined up alongside the highly-conservative bankers who advocated the Gold Standard, but there you are, history always contains its ironies.


worm said...

I thought the eurozone was created so germany and france could once again live out their dreams of having a little empire? Personally I think they were mad to let the countries below the olive line in. The euro would probably work well if it was just used amongst the northern states. I know I wouldn't be so adverse to it then

Gaw said...

I think you're right that it would have worked well if it had been restricted to the core countries. But then the project was so caught up in an idea of the oneness of Europe that this more restricted approach became difficult to justify.

Brit said...

V well argued and interesting take.

Yes the Scousers are just about British, but what about the Scots, do you think?

Gaw said...

If the idea of Scotland as British can be put into question by Scots Nats - enabled by the end of a common endeavour (in empire) and post-Thatcher economic and political divergence - then what hope for a united Europe?

However, I can't imagine them opting for full independence. Apart from the sentiment, there are the practicalities. What would be the point? A more complete devolution would be sufficient to provide as much autonomy as is practicable.

The only economic reason to go fully independent I can conceive of is to have a separate currency. But I can't see them joining the Euro (!) and I don't see them wanting their own Scottish pound.

Vern said...

Re: Scotland, some of these economic themes have already come into play, without disastrous consequences. The Nats claim England is siphoning off 'our' oil; Simon Heffer and his ilk retort that Scotland is populated by welfare queens draining the English purse. Thus there are efforts to drive a wedge via issues of economic disparity, but they never get beyond the level of petty resentment.

malty said...

Yer Germans thought originally that the European trade club was a good idea, flogging the froggies and the like the stuff made in Munich, Stuttgart, Wolfsburg, Weissach, Koln, Russelsheim and Ingolstadt, then their beloved DMark was shafted, believe me when I say that the have never forgiven their government, or Klaus foreigner. There are even mutterings about reoccupation of the Rhineland, anschluss and eastwards expansion.
By DB Bahn of course.

Sean said...

The only transfer going on in euroland is that off German taxpayers Bailing out debt bondholders in the form off German Banks.

Gaw said...

Vern: I don't know Scotland but that sounds right.

Malty: To adapt Chesterton: "For they are the people of Germany, that never have spoken yet." Or at least not for seventy years or so.

Sean: Or bailing out French banks at the expense of German taxpayers (as the latest row has it - not a good sign).