This post is archived. Opinions expressed herein may no longer represent my current views. Links, images and other media might not work as intended. Information may be out of date. For further questions contact me.
Mr Otmar Issing is a prominent German economist. He was one of the architects of the euro, serving as a member of the European Central Bank’s Executive Board. On July 29, 2012 he published an article on the Financial Times titled “Europe’s political union is an idea worthy of satire”. I have not yet found any refutation of his position, hence I shall take it upon myself to challenge his argument as I find it to be established on a tissue of misunderstandings.
Being in part responsible for the creation of a problematic single currency, Mr Issing has attempted to absolve himself of any responsibility as he makes no reference whatsoever to the systemic flaws of the euro. Instead he attempts to obfuscate the fact by emphasizing on issues that are secondary in importance. Not surprisingly he denigrates the idea of a political union as the only sustainable solution to the eurocrisis, as this is the very idea that he and the rest of the euro’s founding economists undermined from the very beginning by establishing a monetary union along the lines of perfectly separable fiscal and banking responsibilities, within a decision-making context that in effect is inter-governmental, not federal.
History aside, his main thesis against a political union is that steps towards further integration cannot be part of a credible solution to the current crisis, because they will supposedly place more burdens on a few financially sounder countries while not addressing the alleged cause of the crisis, the violation of the rules that governed the monetary union. In saying so he succeeds in misdirecting the uninformed minds into thinking that the crisis is only caused by certain states which disobeyed some rules, the Stability and Growth Pact in particular, as if everything else were perfect and as if these rules were sufficient in guaranteeing the long-term sustainability of the euro. That countries like Spain or Ireland were in a better shape regarding these rules prior to the crisis than say Germany, is of course inconvenient for or irrelevant to the kind of self-serving interpretation of the crisis that Mr Issing expounds on.
Given that himself together with the rest of people who set to create the euro, denied the monetary union of those institutions and mechanisms that would have allowed for the mitigation of all kinds of asymmetric shocks and that would have prevented such a crisis from ever taking place, it is normal that Mr Issing vindicates the (non-)logic of his and the rest of the euro’s architects by attempting to beat down the ideas of eurobonds, banking union, fiscal union and eventually a political union. With respect to eurobonds he puts forth the following dubious argument:
Take eurozone bonds, which would lead to higher interest rates for government bonds in countries of (so far) good reputation in financial markets. The implicit transfer of taxpayers’ money would be a violation of the fundamental democratic principle of no taxation without representation. This is true for all forms of debt mutualisation. This is hardly the proper way to create a democratic European Union.
|Picture credit: Wikipedia|
Plausible as this view may appear to be, it really is not a valid opposition to the introduction of eurobonds, as it contains a number of misconceptions and fallacies. At first Mr Issing makes the erroneous assumption that the interest rates in core countries are only a function of these countries’ good reputation. He ignores all other subjective parameters such as time, the expectations for other government bonds, the way institutions hamper or facilitate the pricing of bonds etc. He thus implies that these countries operate in a vacuum where politics, time or any other external factor does not exist and that investors are only led to their choices by a single force, good reputation. In other words Mr Issing suggests that the setting of the euro as it currently stands does not have any impact on the way investors price assets and shape their expectations. He therefore sacrifices everything that influences markets to a chimerical understanding of value as an intrinsic property of reputation and nothing else. Reputation is indeed important, but it is only one in a series of factors which are directly related to the given institutional order. Mr Issing being an experienced economist is by no means justified in making such a lamentable error or crude over-simplification.
Furthermore such an unrealistic interpretation of the events necessarily omits the insight that negative or near-zero yields on core country bonds are due to investors perceiving such countries as safe havens to hedge their assets from a possible re-introduction of national currencies in the eurozone’s periphery. Negative or near-zero rates, are directly related to the uncertainty investors feel over the integrity of the euro. Investors withdraw their money from countries which are seen as candidates for an exit from the euro and flock to buy assets (bonds) of seemingly safer countries so that the inflation and devaluation of new national currencies in the periphery will not erode the value of their holdings. In rushing to safe havens, investors greatly increase demand for core country assets, therefore putting a downward pressure on yields. Meanwhile the exact opposite phenomenon –increasing yields– occurs in the periphery as capital shifts to the center. If investors were convinced that the euro will not fall apart, then the entire concept of a country or group of countries being seen as safe havens within the euro zone would be meaningless. It is not therefore the absolute, the “objective” factors which determine the interest rates of the financially sounder countries, but their subjective desirability relative to the periphery under the given conditions. Lacking such insight on the political economy of the euro zone in general and the eurocrisis in particular, any discussion on mere good reputation is nothing but idle talk.
But this not the end of Mr Issing’s problem. He then states the well-known Bostonian slogan of no taxation without representation. In principle one must agree with this concept in the sense that taxing people without giving anything in return is outright injustice. However this is not a legitimate argument against eurobonds because this principle has in this case been applied selectively. To better appreciate this, one must be aware that the issuance of any government bond which increases public debt, as well as the increase in the money supply are indirect forms of taxation which no one really votes for – they are taxation without representation. Government bonds are money since they fulfill all the functions of money such as a means of exchange, store of value etc. (note that money in economic terms has a different meaning than its colloquial use which actually refers to “currency”). Whenever the government issues new bonds it effectively increases the money supply and this process can and does have a multiplying effect on inflation as these bonds may be incorporated in financial derivatives –which can serve as private money– thus greatly increasing the demand for and the prices of certain classes of assets or high ordered goods (e.g. rising commodity prices relative to wages).
The fact that governments are restrained by the total amount of sovereign debt they can issue is irrelevant to the economic function of this process per se, which is inflationary from the outset. Same logic applies to the expansion of the money supply by central bank operations, either by the arbitrary determination of (monopolistic) interest rates, or by open market operations. In any case the introduction of new money, inflation, is a form of taxation as on one hand the real amount of tax on goods increases, since it is a percentage of their nominal price, while on the other, the purchasing power of individuals diminishes so that the state may keep spending at their expense. This too is taxation without representation litanies to the contrary notwithstanding; so if Mr Issing were to be consistent he would have to say that all kinds of sovereign bonds, not just eurobonds, violate his principle since no parliament can really check them; and he would have to further this position by denouncing central banking as an institution of despotism since it is not subject to democratic scrutiny; none can vote on the determination of the money supply, the fixing of primary interest rates, the assets that the central bank purchases in its open market operation etc.
If Mr Issing universalized his principle, ultimately reaching a minarchist position I would be the first to acknowledge his commitment to the lofty ideal of “no taxation without representation”; but in selectively and arbitrarily using this argument for the attainment of mainly nationalist objectives, he is only making an evidently biased case that has nothing to do with the principles he ostensibly stands for.
Adding to his initial fallacy, he then makes mention to the “mutualization of debt” the big bugaboo of our days which every demagogue resorts to in an attempt to oppose further integration. As a corrective of this view it must be pointed out that when a national government issues bonds which account for the national debt, it does so in the name of all its citizens regardless of the fact that some may benefit at the expense of others. Any national bond, or indeed any concept of public debt and anything else related to the way modern states earn their revenue is in this sense a “mutualization of debt” in one way or another, because not each and every single individual has agreed to it and not each and every individual’s property rights are perfectly delineated and safeguarded. The premise which justifies bonds at the national level can also legitimize them at the European level, if we are again to apply principles universally and not selectively. Hence the only real challenge is not debt mutualization as such, but how will this be done in a democratically legitimate, fair way as is or should be the case at the nation-state level? Towards that end, one must accept the idea of a political union in Europe as it precisely aims at strengthening all the democratic functions at the federal, European level, so that “taxation without representation” in the sense that Mr Issing ascribes to the phrase, will be avoided – nobody wants opaque and unfair institutions after all and no one ever said that eurobonds are an end in themselves.
Mr Issing has presented a distorted image of the eurobond, in portraying such an instrument as the great undemocratic threat that no power will ever be able to control. This is manifestly unjust and flatly incorrect because eurobonds are an integral part of further integration within the context of a political union that will provide democratic checks and balances. Any rhetoric against taxation without representation and against the mutualization of debt is nothing but scaremongering and an odious perversion of reality. It is the perfectly separable, nationalistic amalgamation of states, which Mr Issing seems to approve of which will always make any European-wide measure unjust and undesirable. It is this “union” which Mr Issing and his associates worked so hard for, which created a flawed euro that was destined to fail, because it was designed along the inherently erroneous understanding of European integration as an elitist affair between governments. Mr Issing who supposedly champions “representation” stood and still stands for policies that effectively deny genuine democracy in the European Union. A political union is not “worthy of satire” as he scornfully writes in his article, but worthy to work for and to establish as soon as possible, in order to put an end to the current largely undemocratic European Union which has no real connection to its citizens.
Finally the claim that some states will be forced to carry a greater burden, is false or misrepresented. If integration proceeds then the confidence crisis that has gripped the euro will gradually subside, as investors will realize that there no longer exists any convertibility risk (euro breakup), therefore bringing down the borrowing costs of Spain, Italy and the rest. If interest rates are brought back to affordable levels, then no further bailouts will be needed, no ad hoc mechanisms and arid controversies at EU Council meetings will henceforth be required; no massive interventions by the ECB will be necessary and so on. It is to the political, economic and social benefit of all countries involved to solve the crisis the soonest by committing to further integration in the light of stronger and more inclusive institutions, so that an end may be put to the continuing loss of value in the euro area and the deleterious effects this has on domestic economic relations and the social fabric.
If we are to listen to Mr Issing’s siren call and approve of his cultivation of fear we will in fact perpetuate the crisis, thus exacerbating the existing problems. This will ultimately be calamitous not just for the periphery but for the core countries as well, because for as long as they are seen as safe havens, they will inevitably experience irresistible inflationary pressures. Meanwhile their electorates will become frustrated with all these half-measures and hasty bailouts that lack any credible legal and political framework to support them and which only deal with the symptoms not the causes of the crisis; those being found in the flawed design of the euro (without prejudice to the malignancies of national economies of course). Mr Issing is either consciously or not the cheerleader of parochial interests and the representative of ideas that no longer serve the cause of peace, stability and liberty in Europe. The establishment of a political union is the only legitimate, democratic and sustainable path towards recovery and a better future. The question is not “if” but “how” and “when” are we going to have a political union featuring a fiscal union, a banking union and mechanisms such as eurobonds that will allow for the mitigation of any asymmetric shocks. This is all we need to search for. The short-sighted “nostrums”, all this oratory of negation and denial of any progress, peddled by Mr Issing, will inevitably lead Europe to disintegration and its people to untold immiseration. Further integration is the only step forward at this point in history, by using reason and common sense for the interest of all, not by resorting to self-defeating fear which will eventually bring misanthropy back to the foreground.