Abstract
Throughout the last century European officials have been
attempting to duplicate the economic prosperity found in the United States,
which has been attributed to America’s successful monetary union. From the end
of World War II till today economic unification has been steadily advancing, from
limited trade partnerships to the current Economic and Monetary Union (EMU) of
the European Union, with its crowning achievement: the currency union, known as
the euro area. While the EMU is a powerful economic force, the inherent
imbalances in fiscal policies at the national level had been exposed during the
recent euro crisis, leading to the conclusion that the union needs to either
take more steps toward centralizing economic policy; or begin to disintegrate the
union, in whole or in part. A review of the existing literature will show that
the preferable solution is radically less integration, including the possible
disintegration of the entire euro area and a return to national currencies.
The Economic and Monetary Union (EMU) of the European Union is the
largest such union in the world. It encompasses all 28 member states of the
European Union regardless of whether they have adopted the euro as currency. The
EMU is the end product of a century of modest steps toward unification of the
EU economies, whose sheer numbers are impressive with more than 500 million
people and a combined GDP larger than that of any nation on earth. The EMU and
its single currency area are undoubtedly major advancements in globalization,
but the heightened prosperity comes at a price. The amalgamation of so many disparate
economies threatens to dissolve long-standing democratic institutions and
perhaps the very concept of the nation-state itself.
WHAT IS E.M.U.?
EMU is the economic pact that all member states of the EU must
abide by. Even the nine EU countries that continue to use their own national
currency and are therefore not part of the Eurozone (officially known as the
euro area) are fully part of the EMU, which is defined by three primary
elements. The first is customs union—an
international tariff-free zone with a common external tariff—and single market, meaning virtually all
restrictions on internal trade have been removed. These two arrangements can be
realized without political realignment, but the third and most important plank
of the EMU (while still optional for EU countries) is monetary union—the
sharing of an international currency—and this cannot be sustained without
radical changes to existing political systems.
Noticeably absent in the EMU
and the euro area is a centralized fiscal policy or common treasury (Selvaraj
2015, p. 20), both of which are needed to prevent imbalances in the common
currency. Without those two critical institutions the monetary union could
disintegrate or degenerate into a permanent vehicle for transferring wealth
from the stable economies to the ones that need relief. If the EU goes ahead
with its plans to create its own Eurozone treasury—which would invariably lead
to a centralized fiscal policy—that could mean the end of nearly 400 years of
traditional Westphalian nationhood in Europe. Legitimate concerns over the loss
of national sovereignty have made the institutionalization of the euro—a single
currency regulated by a single central bank—the most controversial aspect of
EMU. The intricacies of the monetary union will therefore be the primary focus
of this report.
MONETARY UNIONS PRIOR TO THE E.M.U.
The modern concept
of economic integration could be said to have begun with the former British
colonies in America, whose history of assimilation is remarkably similar to
that of the EU and will be explored in detail later. There have been several
other attempts at monetary union in one form or another in the last two
centuries but none was of comparable size or scope to the US or the EMU. Beginning
in the 1870s, the Scandinavian countries experimented with a mutual exchange
rate tied to gold but the agreement was merely intended to be a pact between
neighbors and not an expansionary scheme like the EMU (Tache 2013, p. 167). The
ill-fated Hapsburg Empire produced a relatively successful currency union from
1878 through World War I but disintegrated after the resurgence of national
currencies in the 1920s (Gross & Gummer 2014, p. 252). The most intriguing
case study for the EMU has to be the Latin Monetary Union, an organic
arrangement formed in 1865 between France, Belgium, Italy, and Switzerland
(Tache 2013, p. 166). Prophetically, the LMU was put in jeopardy after Greece—a
fiscally toxic nation even back then—joined in 1867 over objections that this
would pollute the other economies in the union. Despite this, the strongest LMU
nation, France, got wide-eyed about what it perceived to be an opportunity to
increase its currency area and therefore its wealth (Tache 2013, p. 166). The
LMU eventually comprised eighteen nations but had neither a central bank nor a single
currency, so it eventually succumbed to the inflationary pressures caused by
currency devaluation and the massive expenditures of World War I (Tache 2013,
pp. 166-167). Interestingly, fear of hyperinflation was a reason for starting,
not ending, the somewhat successful Benelux Union, which actually predated and
overlapped some of the primitive predecessors of the EMU.
EARLY ATTEMPTS AT UNIFYING EUROPE
The idea of integrating the continent had been around for ages, but
it took the devastation of two World Wars and everything that accompanied them
for European leaders to talk seriously about exploring the possibility of
unification (Marshall 2012, p. 16). Preliminary plans for economic union had
broad appeal. In 1945, Churchill reportedly encouraged the nations of Europe to
emulate the American example of unification to promote, among other virtues,
“economic cooperation” (Mauter 1998, p. 67). Significant figures in the
government of the United States, motivated by a desire to prevent war and thus
avoid future costly interventions in Europe, shared the same federalist vision
(Gavin 2010, p. 35). In 1948 European luminaries of every stripe attended the
Congress of Europe and produced a proposal for a unified continent with its own
parliament (Marshall 2012, p. 16). In 1950 French premier René Pleven’s
proposal for military union ultimately went nowhere, but in that same year his
foreign minister Robert Schuman proposed the creation of the seminal European
Coal and Steel Community (ECSC), which became the first step on the road to the
modern EMU.
THE ROAD TO E.M.U.
The ECSC began in 1952 with only France, Belgium, Italy, West
Germany, Luxembourg, and the Netherlands, but the idea of further economic
integration was already gaining steam. In 1957 the same six countries signed
the Treaty of Rome that established the European Economic Community (EEC),
which later became the European Union.
The unofficially connected
monetary system of the EEC enjoyed relative stability until the world’s currency
markets became unhinged in the late 1960s. In 1970, the Werner Report was the
first expression of the nations of Europe to establish an official monetary
union (Fichtner & König 2015, p. 376). The Werner Report outlined three
stages in the ten-year plan to realize EMU by the year 1980. Unfortunately, the
gold standard—which is itself a type of monetary union (Tache 2013, p. 162)—was
thrown out in 1971 and this unleashed a global pandemic of currency destabilization
which, combined with the energy shocks of the 1970s, made the idea of monetary
union less attractive (Fichtner &
König 2015, p. 377).
The next decade nevertheless
saw major advancements toward European economic unification. In 1979 the
European Monetary System (EMS) was created to keep exchange rate volatility
within certain limits (Fichtner &
König 2015, p. 377). By 1986, the single market had been established (Fichtner & König 2015, p. 377). In 1988, European central
bankers and European Commission President Jacques Delors finalized yet another
three-stage plan for economic and monetary union known as the Delors Report
(Fichtner & König 2015, p. 376).
Not everyone was enthusiastic about the idea, however. An
ideologically eclectic assemblage of skeptics—led by some prominent politicians
and economists such as Margaret Thatcher and Milton Friedman, as well as
various media outlets and think tanks in Europe and America—openly doubted the survivability
of European monetary union (Perpelea, M., Duţă & Perpelea,
O. 2013, p. 139).
THE BEGINNINGS OF E.M.U. AND PREPARATIONS FOR THE EURO
The EMS was retired in 1991 by the Treaty of Maastricht which
formally established the EMU. This new economic structure for the EU was to be
supervised by a menagerie of the EU member state governments, a handful of EU
bureaucracies, and the European Parliament. In keeping with the evolutionary
trend, the process was to be accomplished through the stages specified in the
Delors Report (Schwartz 1996, p. 30).
The first stage (1991-1994)
involved completing the single market through the removal of internal barriers
to the flow of capital. The second stage (1994-1999) set up the European
Central Bank (ECB) and the European System of Central Banks (ESCB) to
co-ordinate central banking at the national level (Schwartz 1996, p. 30). Note
that all EU members’ national central banks are part of the ESCB, but only the
ones from euro area nations comprise—in conjunction with the ECB—the Eurosystem
that is tasked with regulating the euro.
The ECB has a notably high
degree of independence. An elite Governing Council of the ECB, composed of high
officials from the Eurosystem, has control over monetary policy for the entire
euro area. The edicts from the Governing Council are expected to filter down to
the non-euro countries through the ESCB. The third and final stage (1999 and
after) sought to fix exchange rates and begin the era of the euro. Additionally,
an informal body known as the Eurogroup, composed of administrators from the
euro area member states, holds regular meetings to discuss and co-ordinate
policies affecting the euro.
Maastricht
also spelled out the convergence criteria for countries that want to enter the
monetary union: a deficit-to-GDP ratio of no more than 3% and a debt-to-GDP
ratio of no more than 60%, along with fairly stable rates of exchange,
interest, and inflation (Schwartz 1996, p. 30). In 1997 the Stability and
Growth Pact intended to enforce good fiscal behavior in potential euro area
member nations, as well as create new exchange-rate guidelines for those in the
second stage (ERM II) of the transition process to the euro.
Eleven countries comprised
the euro area at the start (said to have reached the third and final stage of
EMU) and seven more were added from 2001-2015, beginning with Greece. The
fateful decision to let Greece into the euro area would have profound
repercussions for the monetary union.
THE CURRENT E.M.U. AND THE EUROZONE
While there is no way to determine if the EMU is anything more
than the sum of its parts, it is collectively a global powerhouse. The EMU has
been a success at facilitating free trade within the member states and perhaps
outside of them—a dynamic that not only increases prosperity but also decreases
the likelihood of conflict (Alves 2011, p. 51). The EU nations have experienced a refreshing era of peace—at
least in terms of major military actions between member nations—but just how
much of this is because of EMU is uncertain.
In the early days of the euro area, the idea of pegging some
African currencies to the euro was already being entertained, as was the notion
of forming other monetary unions in Southeast Asia, Latin America, or North
America (Mundell 2000, p. 225). Even the idea of a global monetary union had a
degree of support (Mundell 2000, pp. 255-256), but a worldwide single currency is not feasible. There would
be no benchmarks to compare it with, so it could never be corrected except by
inflating it or manipulating it monetarily (Mundell 2000, p. 231). Nevertheless,
the plausibility of other potential projects in monetary union, and
globalization in general, would hinge on the performance of the European
monetary union.
THE PROBLEMS OF GLOBALIZATION
Problems with the EMU were apparent—or should have been—from the
very beginning. The conventional economic mentality that guided the EMU’s key
institutions, namely, the European Commission and the ECB, rendered them
inadequate to govern such an unconventional project so the system was destined
to grow out of control (Flassbeck
& Spiecker 2011, p. 180). There is evidence to support the claim that the
architects of the EMU were willing to accept economic crises and social strife
as part of their experiment because they believed these maladies could make
further unification appear desirable (Fichtner
& König 2015, p. 376). On the contrary, some of the euro area governments
have taken advantage of the deficiencies of the euro to advance their own selfish
ambitions at the expense of the other member states, while the impotent EU
institutions find themselves unable to do anything meaningful about the lack of
co-operation (Orphaides 2014, p. 262).
The
hope was that the monetary union would serve as a vehicle to transmit
salubrious economic practices throughout all of its member states, but instead
it became a way for the less responsible economies to free-ride on their more
circumspect neighbors (Alves 2011, p. 48). Because of its institutional
structure, the euro area can serve as an enabler for the member states obsessed
with the counterproductive economic habits of profligate spending and heavy
regulation, because there is an expectation that the debt incurred as a
consequence of these policies will be shifted to the rest of the monetary union
(Alves 2011, p. 50). Not only are the bad fiscal policies of the PIIGS
(Portugal, Italy, Ireland, Greece, and Spain) countries offset by the
protections afforded by the single currency, they are actually incentivized
(Alves 2011, p. 47). It did not take long for a severe debt crisis to develop.
THE EUROZONE CRISIS
The worldwide panic of 2008 set off a chain of events that
ultimately exposed serious underlying structural problems in the monetary union.
The root cause of the Eurozone crisis was
actually not the currency, but numerous other issues stemming from a pervasive
lack of growth and unwieldy public debt (Weber 2015, p. 247), much of which is
a direct result of the excessive social welfare spending throughout the EU
(Lemieux 2013, p. 227). The currency union comprises strong
economies that implement pro-growth measures such as Germany as well as
sluggish Southern European economies whose populations nonetheless continue to
receive increased nominal wages (Flassbeck & Spiecker 2011, p. 182). There had long been evidence
that Greece acted unscrupulously by not disclosing its shaky financial
situation in the early 2000s in order to meet the convergence criteria
necessary for entrance into the monetary union, but after the crisis it was
revealed that Greece also concealed its budget deficit during the financial
crisis (İmre 2011, p. 74).
The countries that had
already been running huge deficits in a desperate attempt to keep their
economies afloat finally sank during the crisis, causing all kinds of financial
problems related to public debt that are still unresolved (Fichtner & König 2015, pp. 381-382). With
the stronger EMU nations having to bail out the fiscally troubled members of
the union such as Greece, Ireland, and Portugal, the inherent imbalances of the
flimsy system could no longer be dismissed (İmre 2011, p. 74).
CONSEQUENCES OF THE CRISIS
Throughout the 25 years of its
existence, EMU planners have over-relied on manipulating the common currency as
a means to achieve further integration and accustom the populations to the
inherent disruptions caused by monetarily combining unequally yoked economies (Fichtner & König 2015, p. 383). This has not only
led to economic crises, but severe social and political upheaval as citizens
rebel against the policies of a system that seems to be perpetually advancing
away from the constraints of democracy (Fichtner
& König 2015, p. 383). No country has exemplified this outrage more than
Greece, whose people—having recently elected a government stridently opposed to
the status quo—are strongly considering leaving the euro area (Fichtner &
König 2015, p. 383). Conversely, the populations who are shouldering most of
the load in the EMU are undoubtedly pressuring their officials toward
re-thinking the whole idea of monetary union.
The conventional approach to
the European crisis has been to think of it solely in economic terms, but at
the core of the crisis is the issue of the viability of the European Union
itself (Lehmann 2014, p. 33). The economic crisis has exacerbated a great deal
of pre-existent animosity toward the EU that its leaders had been ignoring, but
they must now acknowledge the opposition’s frustration and make the needed
reforms or risk jeopardizing the plans they have for further integration
(Lehmann 2014, p. 33). The currency union that was
supposed to unite Europe has instead produced seismic rifts in the EU, and the
flaws in the euro are threatening the future of the entire experiment in
European unification (Orphaides 2014, p. 262).
POSSIBLE SOLUTIONS
The competitiveness gap between the stronger economies such as
Germany that keep wages closer to the market level, and the weaker Southern
European economies where wages have experienced artificial inflation, has led
some to conclude that the only answer is the EU-wide regulation of wage policy (Flassbeck & Spiecker 2011, 180). To mitigate the
consequences of a financial crisis that affects each country differently, one
recommendation is to have a centralized insurance framework in place (İmre
2011, p. 74).
The official plan to correct
some of the flaws in the EMU has already been outlined. The unending evolution
of the EMU is apparently set to continue in at least two more stages. The first
stage (2015-2017) consists of using the mechanisms currently in place to better
co-ordinate national and system-wide economic policies; and the second stage (to be completed by 2025)
is a more aggressive vision that includes the establishment of a single
treasury for the euro area.
The creation of a single
treasury would have profound implications for the monetary union. This would
potentially place all decisions regarding the member nations’ fiscal policies
in the hands of EU officials. The Eurozone crisis could lead to the EU taking
complete control over economic policy, but unless changes are made to the
existing order this could prove disastrous (Alves 2011, p. 51). The euro—and
the entire EMU—could be put in serious jeopardy if a fully centralized
supergovernment were ever given the power to use the common currency as a tool
to reallocate wealth through currency manipulation (Alves 2011, p. 51).
THE FUTURE OF THE E.M.U.
The success or failure of the monetary union is dependent on
whether the euro area is an optimal
currency union—a collection of territories in which a single currency would
maximize economic potential. While the European Commission still believes the
Eurozone will eventually become an optimal currency area (İmre
2011, p. 74), this
was a question that should have been answered before the monetary union was created. It should be noted that the
decision to form the Economic and Monetary Union was entirely voluntary, and
support for the idea came almost exclusively from the elites and not the people
(Perpelea et al 2013, pp. 137-138). EMU is a solution in search of a problem, and now
the biggest problem in Europe is the EMU itself.
The EMU is anomalous in the
history of monetary unions because it has heretofore functioned without a
binding political arrangement for fiscal decision-making; in nearly every other
case, political union has preceded monetary union (Tache 2013, p. 166). The
Latin Monetary Union exemplified how monetary unions among large, independent
nation-states will fail sooner or later if they do not unify politically (Tache
2013, p. 167).
WHAT WOULD FURTHER INTEGRATION
MEAN?
The comparison between the United States and the euro area
deserves further evaluation, as both unions are economically alike despite
obvious differences in organizational structure (Orphanides 2014, p. 244). The
dramatic story of the United States is, at heart, an account of the vicissitudes
and perturbations of a monetary union. It should not be assumed that the
formation of the United States was inevitable, nor should anyone forget that
unification was a long process, not a single event. There had been attempts to
unify the colonies going back to Ben Franklin’s Albany Plan of Union in 1754.
From the Articles of Association up till the present day, the union continues to
evolve in ways that Europe should take note of because not all of the
developments have been positive.
Europeans who believe that
further integration can be accomplished without giving over national
sovereignty to a continental government should know that present-day America is
far removed from what the Founders intended to create. The United States was not
a nation (and still is not); the
United States were thirteen sovereign
nations (Young 1977, p. 1572). The people considered themselves citizens of
their respective states, as federalism was never intended to eviscerate state
(national) sovereignty (Young 1977, p. 1575).
“A MORE PERFECT UNION”
Aside from a
disastrous experiment with the Continental currency during the Revolutionary
War, the road to the American version of monetary union began in earnest with the
Articles of Confederation, which have been unfairly charged with setting up a
failed form of union (Young 1977, p. 1975). The Articles gave Congress the
power to borrow money, issue currency, and regulate foreign trade (Young 1977,
p. 1574). The centralization of monetary policy was furthered by the
Constitution, whose framework to create “a more perfect Union” included giving
Congress exclusive authority to issue fiat money and regulate its value. It was
not until after the Civil War, however, that the federal government took
complete control over monetary policy (Tache 2013, p. 164). Subsequent Progressive Era corruptions
of the Constitution such as the Sixteenth and Seventeenth Amendments greatly
tilted the balance of power away from the states toward what looks suspiciously
like the type of national government the Founders feared would eventually eviscerate
the federalist system. More than two centuries of sustained efforts to
concentrate more power in the hands of federal officials rendered the state
governments an afterthought, just as the procession of Treaties, from Rome to
Maastricht to Lisbon, has groomed the heterogeneous peoples of Europe into
forsaking their national pride and accepting complete consolidation.
It is not easy to ascertain precisely which stage in the
development of the American monetary union most accurately reflects its European
counterpart at this moment, or exactly which incarnation of the United States
most closely resembles the ideal that the grand designers of the EU are trying
to emulate, but the paths the two unions have taken thus far are strikingly
similar and the result in both cases is a substantial loss of sovereignty.
THE UNITED STATES OF EUROPE?
Even during
the heyday of federalism in the post-World War II years, it is still uncertain
just how far Churchill and his peers wanted to go toward European unification,
and the evidence suggests the great British leader would never have been in
favor of unification if it came at the expense of political sovereignty (Mauter
1998, p. 83).
The idea of monetary union is inherently antithetical to state
sovereignty. One of the reasons why the federal government of the US took
control of the currency was to disempower rogue states after the Civil War
(Tache 2013, p. 164). Coincidentally, one of the goals of the architects of the
European monetary union was to prevent wars between the countries (Tache 2013,
p. 164), but soon there may be no more countries. It is unlikely that the EU
can continue on its current trajectory much longer without federalizing the
Eurozone nations under a single government, which, as the American experiment
has demonstrated, will eventually result in nationhood. This would obviously be
a colossal disruption, as the Eurozone does not have the same natural
conduciveness to nationhood that early America had. The former colonies had a
population of perhaps 3 million, not 300 million-plus; were bound by a common
language and culture, not dozens of these; and their borders were newly minted,
not hundreds of years old. Even in those fortuitous circumstances, the greatest
assemblage of statesmen the world has ever produced in its history could not
reconcile fundamental differences between the states at the time of union, and
many of these were economic in nature. There were northern states that had
transitioned to a burgeoning form of capitalism and southern states whose
economies were still heavily reliant on a system of plantation slavery that
would later be called communism, but the Eurozone contains nations that have
differences rivaling even these infamous quandaries. Americans from different
states have a fraternal bond that makes union possible (Buccola 2014, p. 262),
but it will take an extreme effort to get Greeks and Germans—to name just one
example of an awkward pairing—to identify as countrymen. Perhaps the Europeans
can resolve their economic discrepancies diplomatically, but the consequence
for the United States was Civil War, and even that did not resolve all of the
internecine disputes.
The most instructive American history lesson for modern Europeans
is that homogenization has not solved the kinds of economic imbalances
currently afflicting both the United States and the euro area. The debt crises
in America and the EU are strikingly similar (Gokhale & Partin 2013, p.
193). Europeans should know that even in the United States, wages and consumer
prices are not uniform either, and attempts to federalize wage floors and price
ceilings would only further distort local markets. Europe would have an
exceedingly difficult time trying to overcome fully federalized economic
regulations because the Old World does not have the labor mobility found in the
United States. Largely for economic reasons, Americans routinely migrate across
state lines, to the tune of approximately 8 million people, or 3% of the
population, annually (Perpelea et al 2013, p. 141).
BAIL OUT OR FORCE-OUT?
In the EMU, or any other type of economic union, there is always
the inherent problem of risk externalization: The tacit understanding that at
least some of the consequences of any one state’s irresponsible fiscal policy
will be borne by the other member states (Buccola 2014, p. 262). If a bailout
is given to the financially troubled state, this only heightens moral hazard
and therefore the likelihood of future reckless spending for all the states in
the economic union (Buccola 2014, p. 262). This economic law is more applicable
now in the United States than ever before, even though the fiscal policies of
the states have been placed in the hands of the federal government to a
considerable extent. The largest state in the union—California—and some
mid-size ones such as Illinois, Michigan, and New Jersey are riddled with overwhelming
public debt to the point where they may never be able to meet their obligations
(Buccola 2014, p. 237).
No state has ever been kicked
out of the United States and, although some have infamously tried to escape,
none successfully has. No EU country has left the euro area thus far, but since
reliance on perpetual bailouts is unsustainable there are only two long-term
options for the stronger Eurozone nations: either impose radical fiscal
restraints on the troubled member states or force them out of the currency
union. If neither of these reforms is made, the net givers—the states for whom monetary union is a losing proposition, such
as Texas or Germany—may have no choice but to uncouple their economic locomotives
from the dead weight they are pulling and leave the currency union. Since the
remaining member states in that case would be net takers—the ones that receive more than they give—the result would
be a monetary union with no money, which would of course disintegrate.
THE FUTURE OF GLOBALIZATION
The monetary
union in the United States has undoubtedly contributed to the unmatched prosperity
of that great nation, but it is not the reason for the success. The font of
American prosperity is capitalism, and if Europeans wish to emulate anything
about the United States it should be this. The most well-designed economic
union in the world will never make up for bad macroeconomic policy, and
Americans—who had long taken their free-market blessings for granted—are beginning
to learn this the hard way.
Monetary union is the economic application of the old adage that
postulates there is safety in numbers. The smaller members in the union believe
they can piggyback on the larger economies, and the giants view the smaller
states as places where they can impose economic hegemony and advance their own
national interests. History has shown that in the long run neither situation is
tenable for all parties involved.
Disintegration is not something to be feared. EU member states can
rediscover their sovereignty while still having beneficial economic
partnerships and retaining many of the advantages they have now. Switzerland
and Norway, for example, are not even EU members but are part of its more
intelligently designed trade agreements such as the single market.
The future lies not in further globalization but in separation.
This will take place either voluntarily or as the result of a monstrous crisis
that de-integration might have prevented. The benefits of monetary union in
terms of increased efficiency are simply not worth a suicide pact. In both
America and Europe, centralized policymaking has led to central planning on a
level that Westerners should be uncomfortable with. For these nations, some of
which once ranked among the greatest the world had ever known, the solutions
will come not from Washington or Brussels, but from within.
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