Options for Europe – Part 33

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014.

You can access the entire sequence of blogs in this series through the – Euro book Category.

I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).

[NEW MATERIAL TODAY]

[THIS IS THE LINKING PARAGRAPH ABOUT THE ABSENCE OF A FISCAL CAPACITY IN THE PROPOSAL THAT CAME OUT OF THE DELORS REPORT. IT PRECEDES THE DISCUSSION ABOUT ABOUT SUBSIDIARITY WHICH I COVERED ON FRIDAY]

[NEW MATERIAL TODAY]

The room in which the Committee had to move intellectually was highly constrained by the dominance of the Monetarist agenda in economics. Verdun (1999) argues that the Delors Committee constituted an ‘epistemic community’ in that it was dominated by central bankers who regularly met and held a similar world view about the primacy of monetary policy and the need for fiscal policy to be a passive support to the deflationary strategy defined by the Bundesbank. In framing the early discussions, Delors set out a structure for the agenda, which “ignored the objections voiced earlier by the British Prime Minister” (Verdun, 1999: 318) concerning the creation of European-level institutions.

The contested issues within the Commitee, which delayed the reporting timetable set by Delors, related to the “question of whether a parallel currency could be introduced” (Verdun, 1999: 318) and the mechanisms required to set up the complete economic and monetary union. The historical antagonists on the issues were in force. France and Italy wanting the ECU to be elevated as a parallel currency (see Larosière, 1989). French central bank Jacques de Larosière outlined a gradual transition emphasising the creation of a European Reserve Fund (ERF), which would aim to resolve currency fluctuations as a precursor to introducing a common currency in a “third phase”. Through these transitory phases, the “development of the ECU” would be important (Larosière. 1989: 182).

The idea of a parallel currency was opposed by Germany and the Netherlands, who wanted a tightly controlled single currency (see Pöhl, 1989). Dutch central banker, Wim Duisenberg, argued that a “parallel currency implies the absence of a monetary union” (Duisenberg, 1989: 185) and that the nations had to accept the fact that “economic convergence” was required which would require “the loss of sovereignty implicit in the abolition of the exchange rate as an adjustment mechanism” (Duisenberg, 1989: 189). The Germans and Dutch also refused to accept the idea of an ERF. The vision set out by Bundesbank boss Karl-Otto Pöhl (1989) dominated the final agreed version of the Delors Report – the Modell Deutschland – was really the only show in town (Dyson, 1994).

The Delors Report settled on a three-stage plan for achieving monetary union without tight deadlines although it stressed that “the creation of an economic and monetary union must be viewed as a single process”, by which they meant that once it was agreed to enter the first stage, there was no going back (Delors Report, 1989: 27). The “step-by-step approach” would be “principle of subsidiarity” would be a guide (Delors Report, 1989: 27). We will return to this principle presently. In the first stage, the Delors Committee determined that the “1974 Council Decision on economic convergence” (Delors Report, 1989: 30; see also Monetary Committee of the European Communities, 1986: 19-24), would be replaced by tighter coordination of fiscal policy “with precise quantitative guidelines and medium-term orientations” (Delors Report: 1989: 30). Further, all the nations would join the Exchange Rate Mechanism of the EMS and currency realignments would be discouraged in favour of using other policy options (for example, interest rate movements) to maintain the parities. This meant the Deutsche mark would remain the benchmark currency. The permissible fluctuations around the agreed parities would be narrowed. Most significantly, the Central Bank Governors would play a greater role in overseeing domestic policies chosen by each Member State and “consistency between monetary and economic policies would be facilitated” by ensuring that the Governors’ were represented at the ECOFIN meetings (Delors Report, 1989: 30).

In other words, fiscal policy settings would have to support rather than hinder the dominantion of the Bundesbank monetary discipline. The domination of the unelected and largely unaccountable central bankers was almost complete. They had openly stated that if the pursuit of price stability was consistent with strong employment growth and low unemployment, then well and good. But they would also not compromise the former, even it meant stagnant growth and rising unemployment. The Delors Report thus went along with this Monetarist vision.

The second stage would begin once the Treaty was revised and the nations had agreed on the design of the economic and monetary union. The new institutional structure would initially provide macroeconomic monitoring and analysis to facilitate common decision making. While, Delors saw stage two as an irrevocable step towards union with convergence of policies across the membership being “strenghtened”, the “ultimate responsibility for policy decisions would remain at this stage with national authorities” (Delors Report, 1989: 33). The second state would also set up the “European System of Central Banks would be set up and would absorb the previously existing institutional monetary arrangements” (Delors Report, 1989: 34), which would the precursor to the final institutioanl innovation, the creation of the European Central Bank. During stage two, the central banks of the Member States would move towards a position of greater indepedendence from the political processes, as in the case of the Bundesbank, and participate in the formulation of “general monetary orientations” for the overall Community, which the individual central banks would have to implement. Once stage two began, national sovereignty and democratic oversight would be further reduced although that was not emphasised in the Delors rhetoric.

The third stage would see the introduction of the single currency issued by the European central bank. At that point, the Member States would cede sovereignty and adopt the use of a foreign currency, with all the limitations that that status embodies. We will return to that in later chapters. As part of that submission, the “rules and procedures of the Community in the macroeconomic and budgetary field would become binding” (Delors Report, 1989: 35), which meant, but was not specified, that national governments elected through democratic means, could no longer defend the well-being of its citizenry in the event of a major collapse in total spending of the sort we saw in 2008. It was very explicitly stated that the European institutions (in this case ECOFIN) would “have the authority” to “to impose constraints on national budgets to the extent to which this was necessary to prevent imbalances that might threaten monetary stability” (Delors Report, 1989: 36).

In other words, fiscal policy was to be a compliant partner to ‘Modell Deutschland’, which would be dominated by the Bundesbank culture, and, as a result, lose any correspondence with the underlying capacity and purpose of fiscal policy – to act as a strong counter-stabilising policy tool to maintain low unemployment and strong economic growth. The Delors Committee was proposing a Europe that would be united in the sense that it had adopted the Bundesbank culture, but, which would soon be demonstrating very disparate outcomes in terms of economic growth and unemployment – and, later, poverty rates.

The Delors Committee thus eschewed any notion of a central fiscal authority, which could ensure asymmetric economic outcomes could be addressed at the central level by appropriate injections of government spending. This capacity, which other federal systems (such as the US, Australia, Canada) had deemed an essential part of an effective federal framework, was explicitly excluded in favour of tight rules on Member State budgets overseen by Brussels. The proposal that would go to Maastricht as part of the Treaty revision was thus deeply flawed from the start. Interestingly, this decision was not driven by the historical Franco-German disputes about the role of Europe vis-a-vis the national states, but, was rather a reflection of the dominance of Monetarism (neo-liberalism) preference to limit the fiscal capacity of the elected state in the false belief that a self-regulating private market place would deliver the best outcomes and be resilient enough to withstand cyclical events. How blind this ideological choice was.

[TO BE CONTINUED]

[TOMORROW WE MOVE ONTO TREATY OF MAASTRICHT]

Additional references

This list will be progressively compiled.

Duisenberg, W.F. (1989) ‘The ECU as a parallel currency’, in Committee for the Study of Economic and Monetary Union (Delors Report), Collection of papers submitted to the Committee for the Study of Economic and Monetary Union, 185-189.

Dyson, K. (1994) Elusive Union. The Process of Economic and Monetary Union in Europe, London, Longman.

Larosière, J. de (1989) ‘First stages towards the creation of a European Reserve Bank The creation of a European Reserve Fund (October- December 1988’, in Committee for the Study of Economic and Monetary Union (Delors Report), Collection of papers submitted to the Committee for the Study of Economic and Monetary Union, 177-84.

Monetary Committee of the European Communities (1986) Compendium of Community Monetary Text.

That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.