On the idea of a decentralised euro area

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In a September 4 article for the Brussels Times, titled “You Never Want a Serious Crisis to go to Waste”, Philippe Legrain suggests the following:

The eurozone could then have much looser fiscal rules – or none at all. That would enable governments to borrow freely to counteract recessions and to invest – if they want to. And it would restore voters’ democratic right to elect governments that can pursue different political priorities. As they say in Germany, national liability, national control.

While I encourage the reader to study this piece, I do have to express my disagreement with Mr. Legrain’s thesis of a decentralised euro area.

One must not ignore the historical context in which the original Economic and Monetary Union was introduced. The Cold War had ended, while the global economy was enjoying the final stages of the era of the “Great Moderation”. The conventional wisdom was that western-style market capitalism was the most preferable mode of economic and/or political organisation courtesy of the private sector’s capacity to both self-regulate and to put pressure on governments to pursue prudent fiscal policies.

The euro was thus introduced as a currency union characterised by the following:

  • a single monetary policy, trusted in the hands of the most independent central bank in the world, the ECB which was made to pursue a narrow mandate for targeting medium-term inflation;
  • a set of common rules for public debt and budget deficit, the famous 60% debt and 3% deficit criteria, which would enjoy a status of quasi-permanence, superior to any national constitutional law, for the sake of providing a clear signal to private actors as to the expectations they ought to shape with regard to a euro Member State’s outlook;
  • a decentralised approach to rule enforcement, resting on inter-governmental methods that involved the European Commission in a purely technocratic capacity to [try and fail to] enforce the Maastricht criteria;
  • no fiscal capacity for the euro area at-large, which could have been used to address cyclical asymmetries, with the underlying rationale being that markets would force national government’s to correct themselves;
  • no democratic government for the euro area as a whole, which could have reformed the initial ruleset to match citizen’s demands and circumstances-specific needs, with the assumption being that “de-politicised” rules provide a clearer signal to markets as to the strength and validity of the euro Member States’ commitments;
  • no fiscal backstop for the single currency, coupled with a Treaty-level “no bailout” clause to further reinforce the notion of de-politicisation of the rules and, a fortiriori, to prove to market actors that policy-makers are genuine in their efforts to make the fiscal targets as sacrosanct as any human law can ever be.

The items on this list point towards a euro area that was indeed decentralised and supposed to function on the ill-advised tenet of “common rules without common politics”. As with Mr. Legrain’s argument, the architects of the euro considered this to be a desirable construct, for they truly believed in the market’s capacity to foster and to promote rationality on a macroeconomic level.

The erroneousness of this mode of thinking about the private sector has been exposed by the financial crisis itself. The tissues of assumptions and hypotheses presenting an efficient market dominated by rational agents were considered plausible at a time when neoliberal economics appeared as the preponderant force on the planet. They have since been proven to be misaligned with the actuality of markets as imperfect mechanisms and with the behavioural traits of the agents dominating them which, on a macro level, can—and do—exhibit an emergent irrationality.

Narrowly-conceived economic liberalism belongs to an era when the science of economics was still nascent and was studied in tandem with morality. Romanticised chimeras such as the homo economicus can no longer afford to be the midpoint of our legal-political framework, nor can blind dogma in the market’s capabilities be the basis for complacency and for constructing evidently flawed political orders, such as the euro: Europe’s misguided experiment in a stateless currency.

The correct decentralisation

As a response to the euro crisis, policy-makers have indeed proceeded with the introduction of a nexus of rules that push towards a much more centralised control of the single currency. These namely are the Two-Pack and Six-Pack of Community regulations, the Fiscal Compact, and the European Stability Mechanism.

Though policy that is introduced ex post facto can be excused for overcompensating and for going a step further than it ought to, the tendency for centralisation is indeed a source of concern. In the absence of a genuine republic that will enjoy democratic legitimacy, central control over economic governance can only be increasingly technocratic, alienating, and heteronomous as seen from the perspective of national parliaments, governments, and citizens.

[see analysis Five Paradoxes of EU inter-governmentalism]

Yet the alternative of going back to a pre-crisis euro does not address the issue of legitimacy nor does it render the system more robust to future financial shocks.

For the euro to continue to exist, for it to be socially-sustainable and democratically-controllable, the EMU needs to undergo thoroughgoing reform. A unified body of rules is necessary to regulate a currency area. My disagreement with—and critique of—Europe’s common rules is that they are not accompanied by common politics, by a federal European government capable of pursuing policies for the euro area at-large.

Instead of reinforcing the mindset of Maastricht, we need to abandon it, proceeding with a four-fold change of the current system:

  • federal republic: the idea of quasi-permanent rules that reinforce the capacity of markets to regulate the system is egregiously mistaken, so we must then proceed with what has always been the right approach to rule formation, the creation of a genuine European republic whose [federal] government will have the capacity to manage the euro and to govern in accordance with evolving needs and requirements;
  • optimal currency: the operational viability of the EMU needs to be greatly improved, in particular with respect to the creation of a fiscal union that will establish a counter-party treasury to the ECB, with the capacity to raise taxes, issue debt, and channel resources for tackling cyclical fluctuations and for funding longer-term strategic investments;
  • social union: with further advances in the creation of a banking union, policy-makers need to consolidate and to expand the scope for common social policies, such as in the introduction of a euro-wide unemployment scheme, while also introduce legislation for standardising the corporate tax base;
  • common politics: the drive for de-politicisation of the rules needs to be brought to its conclusion, both because it does not deliver the desired results and it engenders heteronomy on a number of levels, and must therefore be replaced by a sphere of common politics centred around a European bicameral Parliament (European Congress) within the context of a European Democracy.

The euro as it currently stands is a badly-designed currency, one that deepens and lengthens asymmetric shocks, that grants more power to bankers and multinational corporations than to the medium-to-lower parts of the income distribution. This EMU is not desirable, nor was the pre-crisis model.

As I see it, we face three possibilities for the euro:

  1. its democratisation, which I consider the most desirable;
  2. its orderly abolition, which I consider the least desirable;
  3. its preservation in its present state or its evolution along the current path as per the “Five Presidents” report or Mr. Macron’s notion of “economic government”, which I outright object to for several reasons [see all posts tagged with “Actual Europe”].

At any rate and whatever the outcome, clinging on to the much-vaunted ideology of having markets self-regulate and force states to control themselves is not advised. It has already failed, it will deliver sub-optimal results once again. To that end, a decentralised euro area that lacks a common government presents no solution, but the reinvigoration of the problem.