This EU Won't Work

This post focuses on a single issue; the ideology underlying the demands for progress towards Economic and Monetary Union (EMU).

The evidence is drawn from the Five Presidents Report (5PR); its roadmap remains the basis for maintaining progress towards completing the Union.

At no point in the 5PR can we find any rationale for EMU; everything else appears to be rationalised on the basis that EMU is the objective. This is the core of our criticism of EMU – that it has no theoretical, experiential or experimental justification. It’s purpose is to ratchet forward the EU towards federal governance.

Throughout the 5PR outcomes that have potential value in their own right are justified as needed to progress EMU. At no point do the presidents attempt to justify EMU in terms of its ability to deliver, for example, jobs, growth or productivity. Of course it can’t, either in practice or in theory, which is why the five peas find themselves spinning in absurd circles on occasion.

“[C]ompleting and fully exploiting the Single Market in goods and services, digital, energy and capital markets should be part of a stronger boost towards economic union, as well as more jobs and higher growth.” (p.2)

They make the priority clear, the purpose of the single market is to boost progress towards economic union, which is one dimension of progress towards completing the Union – i.e. federal governance. 

“The euro is more than just a currency. It is a political and economic project. All members of our Monetary Union have given up their previous national currencies once and for all and permanently share monetary sovereignty with the other euro area countries. In return, countries gain the benefits of using a credible and stable currency within a large, competitive and powerful single market. This common destiny requires solidarity in times of crisis and respect for commonly agreed rules from all members.”

This is the sales pitch, with the price hinted at in the final sentence (more on the price below).

“The success of Monetary Union anywhere depends on its success everywhere.” (p.4)

We will meet such idiotic circularity again later. But some ideological sense can be made of this if we interpret it as follows: ‘Once overall monetary union is successfully completed then every corner of our Union will have successful monetary union’. 

“For the euro area to gradually evolve towards a genuine Economic and Monetary Union, it will need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions, most 
of which already exist and can progressively fulfil this task.”

Or, we are well on the way with EMU through our rules; now we need some more common institutions.

“Such a stage-based approach is necessary as some of the more ambitious measures require changes to our current EU legal framework – some more profound than others – as well as significant progress in terms of economic convergence and regulatory harmonisation across euro area Member States. (p.5)

It hardly needs a comment, but – ‘what we need are more laws, regulations, convergence and harmonization’. We repeat it in case anyone wants to think that this is not the goal.

“For convergence to happen between euro area members, further progress is required. First, in the short term (Stage 1), we need to set in motion a renewed effort for all to converge towards the best performance and practices in Europe, building upon and further strengthening the current governance framework.” (p.7)

There is an obvious case for every state to converge “…towards the best performance and practices…” but even if this were practical – which it isn’t – it’s not the purpose, according to the 5Ps, which is “…further strengthening the current governance framework…” 

“In Stage 2, this convergence process would be formalised and would be based on a set of commonly agreed standards with a legal character. Significant progress towards the latter would be regularly monitored and would be a condition for members to benefit from further instruments, such as a shock absorption mechanism to be set up for the euro area as a whole.” (p.7)

So we will be watching you and if you don’t perform you won’t get to share the goodies.

“A renewed impetus for reform is in the spirit of the 2011 Euro Plus Pact on Stronger Economic Policy Coordination for Competitiveness and Convergence, which, however, largely failed to deliver the expected results in view of its intergovernmental, non-binding nature. Instead of further ‘pacts’, concrete progress
 on the basis of EU law is needed to move towards an Economic Union of convergence, growth and jobs.” (p.7) 

The Pact didn’t work because it was left to the voluntary activities of member states. We don’t believe that national governments failed to do their best to achieve growth and jobs, after all their own jobs depend on this as much as anything. However, they clearly fell short on delivering convergence and “Stronger Economic Policy Coordination”, which must therefore be made a legal requirement.

“The procedure [Macroeconomic Imbalance Procedure (MIP)] should also better capture imbalances for the euro area as a whole, not just for each individual country. For this, it needs to continue to focus on correcting harmful external deficits, given the risk they pose to the smooth functioning of the euro area …. At the same time, the [MIP] should also foster adequate reforms in countries accumulating large and sustained current account surpluses…as this is also relevant for ensuring effective rebalancing within the Monetary Union.” (p.8)

Neither a deficit nor a surplus shall anyone have. Tell that to the Greeks and Germans. And then tell them that EU law instructs them to reduce their deficit/surplus. This clearly doesn’t work; how could they possibly believe that it would? The only plausible answer is our usual one, it’s the ideology, stupid.

To be fair (it’s getting harder) the presidents do want to legislate away “harmful” deficits and “sustained” surpluses so perhaps the law will allow harmless deficits and temporary surpluses. But these may be get-out adjectives since in practice the long-standing German surplus is tolerated and no Greek deficit is harmless. Would the Germans put up with their surpluses being curtailed by EU law? Could the Greeks offer the EU a harmless deficit? 

     

“For EMU to succeed, labour markets and welfare systems need to function well and in a fair manner in all euro area Member States. (p.8)

To emphasise the awful ‘ideologic’, we’ll reverse the order of the final sentence: ‘labour markets and welfare systems need to function well… for EMU to succeed’ (this has the same meaning but makes the ideology clearer). If EMU had any purpose beyond promoting central governance then that purpose would surely be to enable and support sound labour markets and welfare systems (among others). But there is no reason to believe that economic and monetary union could achieve these. And there are many reasons to believe that it cannot do so. Evidence from EU experience is among them. Also, no rational person could believe that setting uniformity (convergence) as a pre-condition for complete EMU makes any sense. In the real world, the Germans are not going to give up their hard-earned surpluses and the Greeks are not going to be able to match these.

For those who had little reason to trust their own currency, the lira and drachma for example, the EMU did seem like a good idea – initially. Now they can see (if they dare look) the advantages to Germany, the disadvantages to themselves and the perils of surrendering power over their money to external interests.

Extract the ideology – the only plausible explanation for EMU – and the argument looks bizarre: ‘if you all achieve uniform, well-functioning systems then we will be able to complete EMU and so achieve uniform, well-functioning systems’. EMU has been a disaster for Greece and is being ignored by Germany (except as it applies to Greece). And that’s only two out of 28. The more we examine the ‘reasoning’ behind EMU, the more fragile it seems.

“Hold Member States accountable for the delivery
of their commitments. Periodic reporting on implementation, regular peer reviews or a ‘comply-or-explain’ approach should be used more systematically. The Eurogroup could already in Stage 1 play a coordinating role in cross-examining performance, with increased focus on benchmarking and pursuing best practices.”
(p.9)

Now that is real governance. And there’s more:

“In the medium term (Stage 2), the convergence process towards more
resilient economic structures…should become more binding. This would be achieved by agreeing on a set of common high-level standards that would be defined in EU legislation, as sovereignty over policies of common concern would be shared and strong decision-making at euro area level would be established. In some areas, this will need to involve further harmonisation.”

Do they truly believe that resilient economies can be achieved through legislation? They probably don’t, but the point is the control, not the resilience.

“The common standards should focus primarily on labour markets, competitiveness, business environment and public administrations, as well as certain aspects of tax policy (e.g. corporate tax base). Progress towards these standards would be monitored regularly. Country-Specific Recommendations would continue to be used in this context. Furthermore, the Macroeconomic Imbalance Procedure (MIP) could 
be utilised as a tool not only to prevent and correct imbalances but also to foster reforms and monitor progress in each euro area Member State towards these common standards.” (p.9)

Is it still possible to believe that the welfare of member states and their citizens is the goal of EMU?