Monday, February 22, 2010

Is Europe and/or the eurozone a failure? 

George Soros (with whom I normally disagree about almost everything) has an excellent article published today in the FT ("The euro will face bigger tests than Greece"). The article is excellent because it reflects my own views. He explains the central fallacies underlying European monetary union without a central government and a treasury:

The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency. 

I briefly list below the reasons why the eurozone is not only a mistake but indeed a potential disaster:
  • Monetary union without political union or a federal government;
  • Not only no provision for rescue of member states, but indeed a prohibition which has been confirmed by the German Constitutional Court;
  • Unenforceable rules for fiscal policy and debt levels;
  • A central statistical body that relies on the unverified published by member states;
  • Until now, an absence of market discipline on states which lie about and/or disregard the Maastricht rules;
  • A "consensus" that a member state can neither default nor be bailed out (eurothink, file under "religion");
  • No provision for states to leave EMU;
  • Given ECB's deflationary stance, no way for states with sticky wages to remain competitive in real wages via inflation;
  • And above all, no one is in charge. As Henry Kissinger once said "What is the phone number for Europe?"

I would assert that there were two reasons for "Europe": (1) to prevent another war between France and Germany; and (2) to counterbalance America's hegemonic role (especially after the USSR went away). 

Well, in retrospect, this looks pretty foolish. France and Germany have belonged to the same military alliance for 60 years. And forming a club that meets periodically has not quite provided the EU with the geostrategic power envisioned by Kohl, Chirac & Co. The EU has no army and no seat on the Security Council. So what is its raison d'etre today?

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