Monetary union was attempted by a different union of nations but in a very similar way to the eurozone; can the latter succeed where the former failed?
It was Christmas 1991 when the Soviet Union was formally ended by the Russian Parliament. A month later the Maastricht Treaty was signed which mandated the creation of the euro currency, a remarkably similar monetary union (MU) to the Soviet one. The Rouble Zone (RZ) staggered on for 18 months until the other republics had introduced their cupons, drams, hryvnias, laris, manats, somonis, tenges and assorted own-brand roubles.
The RZ was strikingly similar to the Eurozone (EZ). It had a central bank responsible for the money but not for the fiscal policy of the countries using it (their tax and spending); and it had a transfer mechanism for trading-debts but no way of limiting their use – the ‘transfer rouble’ (TR). The way the TR mechanism worked was the same as the EU’s Target2 which we described in [2]. Not all republics were in a hurry to abandon the RZ because they could load up with TRs by buying stuff that the Moscow central bank (CBRF) finally paid for when the other state banks effectively defaulted. For a period Russia tried to limit the number of TRs but some republics introduced coupons of their own, just like Italy has threatened with its mini-BOTS [2].
Successful MUs require a ‘lender of last resort’ but the EZ has been a further drag on EU growth, including its leading economies which even Britain has outperformed since the euro began [3]. We also explained in [4] how previous European MUs have failed and how a collapse of the EZ would hit German savers and taxpayers via the Bundesbank’s hidden (and illegal) bailouts.
Continuation of the RZ was supported by the EU and hence the IMF (by convention led by French ex-politicians). European officials did not want to see the failure of a similarly constituted MU on Europe’s doorstep. Neither had the IMF learned much by the time of the Greek bailout: “A…striking feature was the failure of the IMF to foresee the outcome in 1992.” [5].
Despite the dire warning signal from the RZ the EU’s geniuses went ahead. Some now accept that this was a mistake, some are trying to dodge their own culpability and some are insouciant:
On 3 Dec 2011 the (pro-EU) Guardian reported, “One of the architects of the euro, Jacques Delors, has said the eurozone was flawed from the start and that efforts to tackle its problems have been ‘too little, too late.’ … He admitted that when ‘Anglo Saxons’, referring to Britain, had warned that a single central bank and currency without a single state would be inherently unstable ‘they had a point’.“
The ECB President, Mario Draghi, said on the 20th anniversary of the euro, “I think the euro has been a success. Has everyone participated to this success? We have to ask why not. I would like candid, close introspection that could inspire future action on completing the monetary union.” OK, so when something isn’t working you need more of it – it’s the usual response of the EU top brass. He added, “Some of it has to do with national responsibilities, some of it doesn’t”, thus grudgingly accepting a tiny bit of the blame.
Again on the 20th anniversary Jean-Claude Junker said, “For 20 years, the euro has delivered prosperity and protection to our citizens. It has become a symbol of unity, sovereignty and stability, and we must ensure it continues”. He’s a comedian but this isn’t funny for Greeks, Italians and millions of unemployed young people.
Founding Chief Economist of the ECB, Otmar Issing, told Central Banking (13 Oct 2016 ): “The vast majority of German economists advocated the so-called economists’ view that monetary union should be the final step in a long process of European integration. But in 1999, 11 heterogeneous countries embarked on a highly ambitious act towards European Economic and Monetary Union (EMU), despite concerns the euro might fail. As an economist, I shared the German view. But as a central banker (who joined Germany’s Deutsche Bundesbank in October 1990), I had to accept this political decision to create a monetary union and to abandon national currencies.” [1] Eek – that’s the Nuremberg defence!
He continues, “The more the council decides on measures that have immediate implications for individual countries and the closer the policies are to fiscal policy, the more difficult it is for a person to separate their national interests from European interests.” That’s the problem with forcing the pace of political union through crises – let the people decide when, how far and how deep they want to go.
“Today, the no bail-out clause is violated every day, de facto. … It is difficult to forecast how long this will continue for, but it cannot go on endlessly. Governments will pile up more debt – and then one day, the house of cards will collapse.” The Smart Alecs at Westminster think they’re avoiding self-destruction – they’re avoiding self-preservation!
After Greece was given loans by the EU to repay its debts its former Finance Minister, Yanis Varoufakis, wrote this:
“To get a feel for the devastation that ensued, imagine what would have happened in the UK if RBS, Lloyds and the other City banks had been rescued without the help of the Bank of England and solely via foreign loans to the exchequer. All granted on the condition that UK wages would be reduced by 40%, pensions by 45%, the minimum wage by 30%, NHS spending by 32%. The UK would now be the wasteland of Europe, just as Greece is today.”(Guardian, 26 August 2018)
The logic of monetary union for the EU is to support, and even to force, Ever Closer Union. For example, public-sector pricing with bids open to all is more difficult with currency fluctuations. But there must be political will and popular support; the latter is unlikely to continue while an end to impoverishment is nowhere in sight. Maybe the EU may find a way to keep the euro going indefinitely, perhaps by changing it radically, otherwise it will disintegrate in either an ordered or chaotic way.
At Westminster, Parliament, assisted by Speaker John Bercow, has defeated the Government on wrecking amendments designed to kill-off Brexit.
This was intended to be the last of three posts about the fragile euro, we haven’t finished with our analysis but will return with a final part when we have looked into this latest threat to democracy. Meanwhile we will repeat the forecast of the euro’s chief economic architect, Otmar Issing:
“The house of cards will collapse.”
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References and further reading:
[4] The Future of the Euro – 1
[5] Richard Pomfret – Currency Union and Disunion in Europe and the Former Soviet Union
This EU Won't Work 