Wednesday, May 16, 2012

European Union, the way it was

As eurodämmerung comes our way, possibly with EU-dämmerung to follow, it's worth remembering what the original purpose of the European Union was. It was definitely not to give the German Chancellor the power to grind the economies of Ireland, Italy, Greece, Portugal and Spain into the dust.

Until the Chancellorship of Angela Merkel and the current economic depression, the purpose of the EU had always been primarily political. Crudely put, German wanted to be in the Union so other European countries wouldn't be afraid of Germany. France and other European countries wanted to be part of the Union because they were afraid of Germany.

That seems far away now. Some of Matthew Schofield's reporting on the European situation for McClatchy has been not up to the standards I had come to expect on McClatchy's international reporting. But he does a half-decent job in spite of himself describing the purpose of the EU in Experts: Euro was troubled from birth 05/10/2012:

Today, as Greece seems likely to leave the euro – and with Ireland, Italy and even France deep in debt and hampered by the single currency – Europe's bold fiscal experiment faces its gravest crisis yet. But all these problems were predictable: From its inception, the move to the euro was not as much about money as about political unity and guarding against another European conflict. The economics were always known to be, at best, difficult.

The financial crisis has erased those attempts at unity, said European political expert Richard Whitman of the University of Kent in England.

"This first cut has released all the old demons," Whitman said. "We’re back to calling the Greeks lazy, the Italians shady, the British disconnected, and the Germans bent on domination. It didn’t take long, did it?"
Schofield's article shows little understand of why the euro creates such a problem in the current situation. He seems to think the whole idea of the EU was a loser notion from the start. And that political goals were completely unworthy motivations for even considering a common currency.

Martin Feldman in "The Failure of the Euro: The Little Currency That Couldn't" Foreign Affairs Jan/Feb 2012 gives a better description of the background:

The initial impetus that led to the European Monetary Union and
the euro was political, not economic. ...

The primary political motive for increased European integration was, and may still be, to enhance Europe's role in world affairs. In 1956, just after the United States forced France and the United Kingdom to withdraw their forces from the Suez Canal, German Chancellor Konrad Adenauer told a French politician that individual European states would never be leading global powers, but "there remains to them only one way of playing a decisive role in the world; that is to unite to make Europe .... Europe will be your revenge." One year later, the Treaty of Rome launched the Common Market.

The Common Market expanded in 1967 to form the European Communities, and then, in 1992, the Maastricht Treaty gave rise to the European Union, which created a larger free-trade area, provided for the mobility of labor, and set a timetable for adopting a single currency and an integrated European market for goods and services. The European Commission cast this arrangement as a steppingstone toward greater political unity and made the specious argument that the free-trade area could succeed only if its member countries used a single currency. (There is, of course, nothing in economic logic or experience that implies that free trade requires a single currency. The North American Free Trade Agreement, for example, has stimulated increased trade without anyone thinking that the United States, Canada, and Mexico should have a single currency.) [my emphasis]
Feldstein notes that Germany initially resisted the notion. But they accepted it on the conditions that the arrangements include concessions to the chronic German preference for what they call hard money, aka, conservative central banking focused exclusively on keeping inflation low, policies particularly unsuited to the current depression, which features what economists call a liquidity trap with interest rates at the zero-bound:

Germany resisted the decision to create a single currency, reluctant to give up the deutsche mark and the price stability and prosperity it had brought to the country's postwar economy. But Germany eventually gave in, and France and others succeeded in establishing a schedule that would lead to the launching of the euro in 1999. Germany was, however, able to influence some of the characteristics of the ECB: the bank's formal independence, its single policy goal of price stability, the prohibition on purchasing bonds from member governments, a "no bailout" rule for countries that became insolvent, and its location in Frankfurt. Germany also forced the creation of a stability agreement that established financial penalties for any country that had a budget deficit of more than three percent of its GDP or a debt that exceeded 60 percent of its GDP. When France and Germany soon violated these conditions, the Council of Ministers voted not to impose penalties, and the terms of the pact were weakened so that they became meaningless. [my emphasis]
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