Some thoughts from last year to add to the million and one other blog posts which have done the rounds on the net on this matter …
No congress of a European nation may call on the key tools used to pull a nation out of a recession (increased government spending to create jobs, lowering interest rates to boost investment, printing more money to create demand through more liquidity).
– Greg Palast, from Armed Madhouse (2006), p 161.
Palast was stating that European Monetary Union is incompatible with Keynesian economics. This is the reason that Gordon Brown, our ‘fiscally prudent’ Scottish Chancellor of the Exchequer – with his tragi-comic ‘son of the manse’ routine – was so keen to keep us out of European Monetary Union, as he knew that running a deficit at the peak of the economic cycle was unsustainable and would need to be inflated away. The Bank of England duly acceded by slashing the base rate from December 2007 onwards and indulging in several years’ worth of ‘Quantitative Easing’ to follow. For the political left to support an inflationary policy is not new. Harold Wilson’s ‘Old’ Labour government of 1974-76 gave in to every trade union wage demand, only realising when it was too late that pensioners and others on fixed incomes suffered most from falling living standards due to price inflation.
Support for European Monetary Union one would therefore expect to come from those who are fiscally conservative, with Angela Merkel being the most obvious. It is bizarre that the BBC, the Guardian and much of the British political ‘left’ are such obsessive supporters of monetary union. They support the EU and the ‘Euro’ in principle but they oppose the ‘austerity’ measures which are a core part of the credibility of monetary union. What they want is for the EU to adopt inflationary economic policies which for obvious historical reasons most Germans are averse to. Therein lies the problem of monetary union. As Palast also mentions, every ‘Euro’ nation must adhere to strict limits on borrowing, but they haven’t which is why the ‘Euro’ has failed as a surrogate gold standard. It could only have succeeded through a fully fledged political union with a single treasury.
A way out of the Eurozone ‘crisis’ and the economic stagnation it has brought about would be to demerge the ‘Euro’ back into national free-floating currencies with all savings and debt in each country being converted accordingly. The government of each country could then inflate away its debt according to previous tradition. For the heavily indebted nations this would be punishing the prudent to bail out the profligate (as happened in the UK) and a run on the banks of those countries with most savings being withdrawn, as happened in Greece last year. Only when the debt, now denominated in the new national currency, has been inflated away and the new national currency has stabilised, through an export-driven economy, would savings return to that country’s banks such that the value of that new currency would start to appreciate, thereby attracting more savings deposits.
Of course, demerging the ‘Euro’ would mean that the irresponsible bankers, who failed to assess the risks on the loans which they made, would have to make do with repayment in the same number of drachmas, pesetas, lire, escudos etc … which in each case would have a far lower value than repayment in the same number of ‘Euros’. But that won’t be allowed to happen, so the Eurozone nations are going to experience decades of debt servitude all in the name of a monetary union that no-one voted for.