{"id":7362,"date":"2010-01-15T16:54:39","date_gmt":"2010-01-15T05:54:39","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=7362"},"modified":"2010-01-15T16:54:39","modified_gmt":"2010-01-15T05:54:39","slug":"exiting-the-euro","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=7362","title":{"rendered":"Exiting the Euro?"},"content":{"rendered":"

\t\t\t\tIn past blogs I have indicated that nations were mad entering the EMU and surrendering their fiscal sovereignty. This is especially so for the so-called peripheral nations (Spain, Portugal, Greece, Ireland, to some extent Italy) who have become basket cases in a system that prevents individual member’s from using fiscal policy to improve the circumstances of their citizens. Indeed it is a system that forces aggregate policy to act in a pro-cyclical manner for nations that are undergoing crisis – that is, the politicians have somehow managed to convince their populations that it is a credible position for them to use their policy power to make things worse rather than better. So policy which should reduce poverty and empower the youth of a nation with education and employment opportunities is now doing exactly the opposite. As I noted last week<\/a>, one statistic is enough to tell you the EMU system is a failure – 53 per cent of Spanish youth are now unemployed! So can a nation exit the EMU? What would happen if it did? I had some thoughts on this today.
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\nAs an aside, it is interesting that in most research papers considering the “costs” of the EMU at the time that nation’s were debating whether to enter or not, the loss of policy sovereignty was constructed in terms of monetary policy with fiscal policy hardly mentioned. This was consistent with the neo-liberal obsession with debasing the use of fiscal policy and promoting monetary policy as the primary counter-stabilising policy tool. Further, counter-stabilisation was also narrowed to mean inflation and unemploynment became a policy tool rather than a policy target to be used in the “inflation-first” approach to macroeconomic policy.<\/p>\n

I would recommend you read the following blogs – One hell of a juxtaposition<\/a> – Euro zone’s self-imposed meltdown – A Greek tragedy<\/a> – Espa\u00f1a se est\u00e1 muriendo<\/a> – as background material to the discussion in this blog.<\/p>\n

Recently Paul Krugman’s recent article – <\/a> – says that while at time when:<\/p>\n

\n… the single currency was being contemplated, the fundamental concern of many economists on this side of the Atlantic was, how will Europe adjust to asymmetric shocks? Suppose that some members of the euro zone are hit much harder by a downturn than others, so that they have much higher-than-average unemployment; how will they adjust?”\n<\/p><\/blockquote>\n

I have covered this issue in detail in the blogs referred to above. The point is obvious. Australia, for example, is a common monetary system across a number of states and territories. The states have separate fiscal operations but accept a common monetary policy (and currency). However, when our state economy’s are in trouble (which means our nation as a whole is in trouble), our federal government is able to use its own fiscal capacity (backed by its currency-issuing monopoly) to ensure that no communities are more disadvantaged than others although politics does get in the way.<\/p>\n

We also have a common health care and pension system and common infrastructure (telecommunications etc). A similar argument can be made for the United States which leads Krugman to say that “shocks are cushioned by the existence of a federal government: the Social Security and Medicare checks keep being sent to Florida, even after the bubble bursts. And we adjust to a large degree with labor mobility: workers move in large numbers from depressed states to those that are doing better.”<\/p>\n

The claim that the EMU would be a beneficial arrangement for member countries was based on the concept of the Optimum Currency Area (OCA) which requires that there across the monetary union there has to be flexible labour markets (wages and\/or labour mobility); highly integrated trade dependence; and exposure to similar shocks.<\/p>\n

It is clear that the EMU countries have never comprised an OCA which renders most of the mainstream “economic theory” arguments in its favour null and void. For some interesting empirical analysis you might like to read the various reports<\/a> prepared by the British Treasury at the time they were contemplating entering the monetary union.<\/p>\n

Apart from the lack of labour mobility, the major flaw in the design of the EMU system, however, relates to the absence of a fiscal adjustment mechanism. This is particularly evident in the current crisis, which is the first major cyclical downturn the system has had to react to since its inception.<\/p>\n

It is clear that the capacity of the EMU to deal with so-called asymmetric shocks (in this case, demand shocks that impact differentially across the member coutnries) is extremely impeded by the inability of the system to provide compensating income transfers to member nations that are in deeper recession than other nations.<\/p>\n

But the designers of the system were not happy with their nonsensical decision not to create an EMU fiscal capacity (which reflected both sovereign concerns and also the neo-liberal antipathy to fiscal policy in general). They wanted more. So the EMU ideologues who designed the system went one step further into absurdity.<\/p>\n

They invented the “mother” of all constraints – a pro-cyclical fiscal arrangement and had the audacity to call it the Stability and Growth Pact. Its design provided neither stability nor growth. So member nations with budget deficits arising from recession are forced to contract their stimulus support to their local economies in line with the rules first set out in the Maastricht agreement).<\/p>\n

These rules had no basis in economic theory – they were purely ideological constructs imposed on nations by mainstream economists who were blind to the way modern monetary economies actually operate.<\/p>\n

In my book with Joan Muysken (published 2008) – Full Employment abandoned<\/a> and another book we published together with Tom van Veen in 2006 – Growth And Cohesion In The European Union<\/a> – we cover these issues in some detail.<\/p>\n

So not a very sound basis at all for dragging quite disparate economies together into a monetary union. But if you don’t like it can you leave? That is a question I have been examining lately. For example, the Greek, Spanish and Irish governments should in my opinion show some leadership – which I define as being looking out for your own citizens – and exit the EMU.<\/p>\n

But what is involved in that?<\/p>\n

Krugman, doesn’t agree with me:<\/p>\n

\nWas the euro a mistake? There were benefits – but the costs are proving much higher than the optimists claimed. On balance, I still consider it the wrong move, but in a way that’s irrelevant: it happened, it’s not reversible, so Europe now has to find a way to make it work.\n<\/p><\/blockquote>\n

I disagree – it is reversible and countries should explore the ways that they can minimise the exit costs and start using their fiscal capacities to advance public purpose in their own nations.<\/p>\n

Krugman’s opinion is also held by Willem Buiter who told the Irish Independent<\/a> on January 11, 2010 that it “would be “suicidal” for a “weaker country” to exit the euro region as they would also have to leave the European Union”. He said that there was no “chance of Ireland defaulting … because they have taken the right measures” and claimed that “Greece isn’t there yet.”<\/p>\n

His assessment of current risks to the EMU:<\/p>\n

\n… is not from our weaker brothers and sisters — it’s the stronger countries, Germany, saying, ‘I am fed up having to face the risk of bailing out the weaker’\n<\/p><\/blockquote>\n

So according to Buiter the system will remain intact as long as member countries, who are facing 53 per cent teenage unemployment rates like Spain and other social pathologies including serious spikes in poverty rates, scorch their own economies so that the mandarins in Bonn are happy.<\/p>\n

That is a totally self-imposed and ridiculous economic system when other nations enjoy the fiscal sovereignty which enables them to reduce the consequences of recession.<\/p>\n

How do we assess Buiter’s claim that exiting the Euro would be equivalent to leaving the European Union (EU)? Is this rhetoric only given that the EU comprises 27 member states whereas the EMU (those nations that have adopted the common currency) comprises 16 member states?<\/p>\n

There was nothing explicitly said in the setting up of the EMU about the right to exiting. It was considered that including such a clause would encourage withdrawals and undermine the basis of the system. However, it seems that the EU nations that did sign up would be forced to leave the EU if they exited the EMU.<\/p>\n

A recent ECB paper – Withdrawal and expulsion from the EU and EMU: some reflections<\/a> (published December, 2009) has considered this issue. It says:<\/p>\n

\n… the exit clause’s silence is problematic because it leaves room for speculation on the extent to which there is also a right of withdrawal from EMU and whether such withdrawal would necessarily be linked to a Member State’s withdrawal from the EU or could be independent from it.\n<\/p><\/blockquote>\n

The ECB paper considers the “two alternative approaches to the absence of any guidance in the exit clause on the existence of a separate right of withdrawal from EMU” -that leaving one requires a state leaves both (Buiter’s claim) and that leaving both is impossible per se<\/em> – as being “so unsatisfactory that it would be unwise to attempt to choose between them on the basis of deductionsbeing legally questionable.”<\/p>\n

The paper concludes that:<\/p>\n

\nMember States could not, pre-Lisbon Treaty, withdraw unilaterally either from the EU or, a fortiori, from EMU, and that the only way for them to do so legally would be by means of a negotiated agreement with their fellow Member States.\n<\/p><\/blockquote>\n

So it looks like those who signed up are legally obligated to exit both the EU and the EMU. <\/p>\n

But that is not impossible – remember that in 1985, Greenland left the European Economic Community (EEC) after strong domestic opposition that arose once they achieved self-rule from Denmark. Nothing obviously bad has happened to them as a consequence.<\/p>\n

In an article in the Irish Sunday Post – Should we divorce the euro?<\/a> (January 10, 2010) – David McWilliams likens the Irish decision to enter the EMU as the “economic equivalent of a marriage”:<\/p>\n

\nIf a country decides to give up its currency and get into bed with another currency, it would seem ludicrous to entertain this move without being sure that the union was suitable. As we all know, there is a difference between fancying someone and making the thing last … In general, for a currency union to work, there should also be a single fiscal policy … This is how the currency unions in the US, Canada and Australia work … Guess what? None of these attributes was in place when Ireland joined the EU economic and monetary union (EMU) and the euro. So it is clear that we didn’t join for economic reasons. So why did we join? It seems that we were too insecure to behave logically and this national insecurity – particularly among our senior mandarins – prevented us from having a debate.\n<\/p><\/blockquote>\n

He concludes that the “euro has been a disaster for Ireland, and will ensure our slump lasts considerably longer than it has to” and concludes that:<\/p>\n

\nAre we expected to remain in this loveless marriage? As we saw in the past decades, divorces are now part of life. Ireland is, today, in a bad marriage – with no divorce. Like those Catholic fundamentalists who suggested that divorce would threaten the fabric of our society, the euro fundamentalists who run policy in Ireland suggest that, to leave the euro, would undermine the fabric of our economy. Like all fundamentalists, the thing they hate most is a sceptic. Lets hear it for the sceptics.\n<\/p><\/blockquote>\n

What would be entailed if a nation did exit?<\/p>\n

From a monetary perspective, to exit the EMU a nation and regain currency sovereignty, the following changes would occur (see also ECB paper<\/a>):<\/p>\n