The History of the EMU – why are there always more questions than answers?

Originally, I never had the intention of researching the history of how the Euro eventually became the common currency of many European countries. My original topic of interest was the “Euro in Crisis” and what could be done to correct this. However, the more I was trying to focus on the issues of the subject, and treating these issues to be of fairly recent emergence, the more I kept finding myself being forced to go back, further and further in time, in order to understand the original concept of a common currency for Europe.

I realise now that it was naive of me to think that maybe, at some point in the past, the Euro was working fine and now it is not. In this respect, I believe that I am reflecting the “average person in the street’s” perspective. Furthermore, although I did have a basic understanding of how and where the common currency fits into the whole EU picture, the true underlying issues had been obscure to me (and maybe to many other “people in the street” as well).

Part of the problem comes from simple, innocent ignorance. Our politicians have continuously reassured the European citizens that, despite a few hiccoughs here and there, everything in the Eurozone is just hunky-dory. Of course, many experts have been warning for many years that this was and is not the case. But were the concerns of the experts conveyed to the public in a manner that could be easily understood? Definitely not in any simple and honest way. That would not be a particular clever political thing to do! And, just to further complicate things and to help to obscure the real truth, many of the issues are complex and full of technical economic concepts. How often have we been told, especially by our ‘wonderful’ mainstream media, that the problems of the past have been sorted out and the future will be better.

And what about the experts who said that everything in the Eurozone was fine? Among these are well educated economists and academics. Our “system” indoctrinates us to believe what our “experts” tell us and we do, usually without question. The emergence of the Internet as a tool for education and furthering of our knowledge has blown the lid off the “mushroom syndrome” scam that we have been subjected to in the past (keep us in the dark and feed us manure and we will grow quite happily). The exponential growth of activism on the internet is now driving our politicians crazy.

And don’t just believe what I say! Read the following:

Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. Bill is a Euro-skeptic and a proponent of Modern Monetary Theory (MMT). This is what Bill had to say in a blog post on 2 April 2012 (“The Eurozone has failed – time for an orderly retreat“):

The voice from the parallel universe announced that “The euro as a currency is a great success indeed … it is backed by remarkable fundamentals” and harsh fiscal austerity is “the best way to get sustainable growth and job creation”. The only problem is that the voice was none other than the retiring ECB boss Jean-Claude Trichet as he prepared to retire from his post in October 2011. During his term, Trichet was constantly preaching how the introduction of the Euro was a “success”. The only problem is that it is hard to reconcile that conclusion with an examination of the actual data. The Eurozone has failed and an orderly dismantling of the entire monetary system with a return to floating sovereign currencies is the only way that any semblance of prosperity will return.

Professor Paul Krugman wrote the following in an op-ed article that appeared in the New York Times on 4 January 2012. Krugman is an American economist, academic, Nobel Prize Winner and a regular op-ed columnist for the New York Times (The Conscience of a Liberal). Let’s just say that he probably knows a bit more about economics than I do.

The Nonsense Problem

…..But sometimes people with impressive credentials do talk complete nonsense — and on fiscal policy in the Lesser Depression, that has been more the rule than the exception.

So what purports to be a demand for fair-minded argument ends up, in practice, being a demand that we pretend to find a coherent position where none exists, that we basically invent a high-minded debate out of thin air.

I understand that many people find the notion of a world in which Nobel Laureates and ECB presidents declare that 2+2=5 very unappealing, and that they wish we lived in a different and better world. But we don’t — and it’s not my job to create the illusion that we do.

To repeat – the first 10 years of the Eurozone were not as glowing as the official rhetoric might have led you to believe. Sure enough there was some strong employment growth regions and sectors but the composition of that employment growth was never sustainable.

The redistribution of employment towards construction in Ireland and Spain was unsustainable.

The reliance on growth in the peripheral states which helped Germany run strong current account surpluses was unsustainable.

In general, the Eurozone was failing from day one.

In some following posts, you will be able to read the results of my latest research: “The History of the EMU”. I believe that I have managed to put together a fairly detailed, hopefully interesting, but reasonably concise, account of the history of the formation of the EU and the EMU. However, if you are looking for something with far more background detail, plus a lot of technical stuff on economic theory and so on, I can recommend the following to you:

Philipp Bagus studied economics in Germany and obtained a PhD from the Universidad Rey Juan Carlos in Madrid. He is currently an associate professor of economics at the Universidad Rey Juan Carlos and an associate scholar of the Mises Institute. In December 2010, Philipp Bagus wrote a book,”The Tragedy of the Euro“. This book is excellent, highly educational and it is free. It is worth every cent! In the book, Prof. Bagus explains why the Euro is not what the older classical liberals had hoped for but instead is a politically managed currency that is destined for failure. The book includes both a historical narrative and some economics theory with a bias towards the Austrian School of Economical thought.

Bill Mitchell has also written numerous articles on the issues that I have been discussing; well written, extensive, detailed and technical articles. Bill knows this subject far better than I do and if you want to get an expert’s view, I highly recommend that you spend a bit of time reading his posts. In addition, he has written books on the subject, if you really need to know more.

The existence of a common currency is only one aspect of an economic and monetary union. So the real issue is not really the Euro itself. The problem lies within the design and application of the Economic and Monetary Union (EMU). And, in turn, the EMU is only a part of the construct of the entire European Union (EU). Of course, I have always known this to be the case, but what I have not really appreciated until recently is what detrimental effect a poorly designed economic and monetary union can have on the economies of the countries that have the Euro as their currency.

As can be expected, the whole EU issue is amazingly complex. Seemingly, one issue always impacts upon another, and sometimes many others. No single issue can be analysed or dealt with in isolation. Nevertheless, I choose not to examine the construction of the European Union as a whole. In any event, this would be such a mammoth task for an amateur like me to accomplish, that I consider it to be practically impossible to do. So I am just going to concentrate on the EMU part only.

At the moment, I am not trying to present a case of why the EMU is failing from an economics point of view. This is partly because I do not consider myself qualified enough to do so, although I could just repeat what the experts are saying as my thesis. But that would be a waste of my time and yours. If you want the monetary & fiscal details of why the EMU is a failure, I suggest that you rather read what the experts have got to say. I have included many such articles written by experts in various posts on this subject on my blog.

Rather, I am trying to extract and define the context of the events that led to the various decisions and actions that were taken. What and why did the key politicians and officials of the time do what they did? In attempting to do this, I must also confess that I am not a history or politics scholar either. However, I do not see my lack of formal education in these fields as an obstacle in trying to understand how we have ended up where we are today. I welcome disagreement and correction if you find my conclusions or facts to be wrong.

To date, my thoughts have progressed like this.

During the recent economic crisis in Greece, I developed my point of view about the EMU in general and the Euro in particular, in connection with the pros and cons of a Grexit (ie. the exit of Greece from the EMU).

Recently, I have expanded on my views in much more detail. I am fully in agreement with many other experts is the economics field that the EMU with the Euro as the common currency, has some fundamental flaws in its design and implementation.

Even more recently, during my research into the history of the evolution of the EMU and the Euro, I have come to realise that the problem is not really with the common currency as such. The problems of the Euro are just symptoms of the deeper problems in the design of the EMU. In some ways, this distinction is not really that important. In many articles that I have read on the subject, the term Euro seems to a more commonly used and more easily understood way to actually mean the EMU, without having to go into long complicated explanations for the average non-expert reader.

In the case of the EMU, events during the period 1950 to 1990 certainly gave plenty of impetus and motivation for many Europeans to believe that an EMU was the only solution for a better future in this region. And for those whose vision was a European federal union, the need for an EMU would be self-evident. So, if we wind back the clock, can we see whether the following two fundamental questions were asked, and if they were, what were the answers:

Question1  – Do we really require an economic and monetary union in the first place?

  • What will be the benefits?
  • What will be the disadvantages?
  • Do the benefits outweigh the disadvantages?

Question 2 – If the answer to question 1 is yes, then what are the requirements for a successful and prosperous economic and monetary union?

Evidence exists and studies show that a successful and prosperous economic and monetary union is going to require the countries in the union to agree to and implement four key general policies:

  • Economic Union
  • Monetary Union
  • Fiscal Union
  • Political Union

Within the second question, some sub-questions arise:

  1. How were these policy requirements met, within the EMU that was designed for Europe?
  2. And, if these requirements were only partly met or worse, not at all, why was this the case?
  3. Can we find the real reasons why we have ended up with an imperfect EMU?

My logic is this. The economic reasons, or call them technical reasons if you like, for the poor functioning or failure of the EMU to operate correctly or optimally seem to be pretty obvious, at least to the experts. However, implementing changes or correcting the short-comings is proving to be impossible to achieve. So I am looking at the issue from a different perspective. If we are able to reverse-engineer the EMU, would any solutions present themselves to correct the mistakes. If we can identify the compromises that were made, would the situation in the EU today dictate a different course of action to be more preferable. What political motivations over-ruled sound economic decisions?

It is widely acknowledged that, in the end as things turned out, the EMU/Euro was more of a political project than an economic and monetary project. I would like to see if I can find more evidence for this contention. And if this was the case, maybe we will have to consider and accept that the remedies for the short-comings of the EMU will have to be political rather than economic.

Is it possible to look back into history to see if we can find different answers, in the light of current knowledge that we have today, for questions that were posed in the past?

There is a mountain of research available these days that is used to support the historical narrative of the origins of the Economic and Monetary Union (EMU) within the European Union (EU) and the Euro (the common currency). For those interested in the detailed wheeling and dealing that took place in the corridors of power between the politicians of the day, enough material can now be easily obtained to back up whatever theory you choose to follow and to support any particular line of thought.

See here and here and here and here for some good detailed background material.

For my purpose, I intend to just skim briefly (or as brief as I can be without rendering the the story meaningless) through the history, without getting too caught up in every single nitty-gritty detail and nuance.

As you will come to realise, in the case of the the EMU and the Euro this is a bit difficult because the process to the final adoption of the common currency was long and tortuous, and full of endless complications and compromises.


About Peter Smith

A "foot-soldier" in the wider Post Capitalism Movement. First task - keep spreading the words of change, hope & inspiration.
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