Government and Institutions

How the Eurozone could survive without building a European super state


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When the euro was adopted, British sceptics argued that it was impossible to have a single currency without a single country. They suggested that you need central control of fiscal policy to stop governments from borrowing too much. It was also argued that you would need huge fiscal transfers to depressed countries given that they could not follow independent monetary policies.

But many did not agree. German liberals, in particular, argued that, as long as the southern countries liberalised their economies and we had a strict no-bailout policy, we could have sovereign countries and a single currency. Indeed, there were even Institute of Economic Affairs’ (IEA) publications arguing the benefits of separating – in principle – currencies from governments and suggesting that the euro might be a step in that direction. In light of the Greek crisis, is there a future for a single currency without a single state?

If it had been possible to ensure that Greece was not bailed out by Eurozone members, there might never have been a Greek crisis. The Greeks would have defaulted, but life would have gone on.

The problem is that we are in a situation where nobody can move. First, there is no exit mechanism from the euro even if Greece wished to avail itself of the opportunity. Second, the European Central Bank (ECB) filled its boots with Greek debt through its monetary policy operations. We do not have a typical default situation whereby a wide variety of domestic and international private sector creditors will feel the pain. It is the ECB and other Eurozone countries that hold the debt. EU countries do not wish to allow Greece to default because it will encourage others to do so.

Greek debt has been socialised through the back door and it is difficult to see how this problem can be controlled in the future unless there is ECB control of taxation and government spending. But such central control by EU institutions of national government fiscal policy would not be desirable even if it were possible.

There is, in my view, one feasible long-term solution, similar to one outlined in an IEA publication, The Euro – the beginning, the middle and the end?, by German economist Bodo Herzog. We must have a system to ensure that monetary policy operations do not lead to the ECB being mired in bad debt. To do this, a series of staged, credible, rule-based mechanisms is needed.

When a country goes over pre-set borrowing or debt limits, the first thing that should happen is that the ECB should refuse to take that country’s debt in monetary operations. The next trigger should lead to the country losing its vote in monetary policy meetings. Then it should lose its seat on the ECB board. The final step would be that the ECB, in effect, disowns the country. At that stage, the offending country could carry on using the euro, just as non-Eurozone-member Montenegro does, or it could issue its own currency in parallel with or in place of the euro.

Now is a good time to begin thinking about how to strengthen monetary policy arrangements when the Greek crisis is finally solved. Of course, there may be no euro. But if a single currency remains, we need really effective mechanisms to ensure that no member country or the ECB ever becomes responsible for the debt of another member country again. Sadly, I suspect the path suggested above will not be followed and, instead, we will get more integration and central control of fiscal policy.

Prof Philip Booth is the IEA’s Editorial and Programme Director, and Professor of Finance, Public Policy and Ethics at St Mary’s University. This article first appeared in City AM.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.


1 thought on “How the Eurozone could survive without building a European super state”

  1. Posted 21/07/2015 at 11:53 | Permalink

    The problem is not so much that the Greek debt has been socialised but that Greek government spending has been socialised.

    It is said that either income redistribution from Northern countries to Southern countries is an imperative or we should become accustomed to writing off Greek debt from time to time.

    As with many other countries the answer is plain; governments must reduce their spending and reduce it fast.

    The web is now so tangled the Greeks now fear the consequences of reducing the size of the state. Lower spending will result in lower government employment and a consequential increase in an already unsustainable level of unemployment.

    Additionally they fret that without further loans the demand side of the economy will falter which will further increase their inability to service debt.

    Keynes was of course resonsible for a lot of this nonsense and it is now becoming clear that more debt might not actually be the answer.

    The Greeks are suffering from a recession whilst at the same time supporting a minimum wage. Far better to abandon the minimum wage and allow the unemployed to determine it.

    An increase in productivity is what the Greeks need and a workforce that is fully employed is the way they will achieve it.

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