[inline:01]The future cannot be known in advance. Nevertheless some degree of prediction on political developments is possible. That is so because politics is based on relations. A large part of politics is determined by three basic relations: The relation between rich and poor; the relation between management and ordinary workers; and the relation between strong and weak employees. These relations are almost universal. The basic features of politics do not change with technological change and economic growth. ‘Poverty’ is historically relative; unemployment is always shifted toward higher levels of labour conditions. There will always be a political divide between rich and poor, no matter how rich the poor are. There will always be an establishment interested in stable power relations. There will always be a clash of interests between employees who can be replaced without losses and employees that are crucial for profitable activities.
That is why we can learn from the past. To be able to predict something about the development of the European Monetary Union (EMU), we must look at what happened with the monetary union of Germany in the 19th century. The history of this monetary union shows many parallels with that of European unification. First there was the German Zollverein founded in 1848 amid economic and political crises all over Europe. This customs union was a spectacular success. The industrial revolution took hold throughout Germany. Economically the different German countries converged. This was the result of a mere customs union. There was no monetary union. There was not even a union of measures and weights. However, the Germans thought they also needed one state and one currency. After the implementation of these 'requirements' Germany ceased to be a success.
The British monetary union, too, is revealing. Scotland did not need monetary union to be in the forefront of the industrial revolution. Up untill the late 18th century the British laws had no effect in Scotland and the Scots had their own currencies. Yet, precisely during this period Scotland was the most advanced country in the world.
The monetary union drives the EU toward further political integration. It sets in motion forces that are difficult to control. Probably we will end up with a United States of Europe, a real federal state with a central fiscal, social, educational, trade and foreign policy. I will explain here why I think this will probably happen, why it is better to stop this development but why it is so difficult to stop.
In theory it could still go the other way. This means broadening the European Union, but not deepening it, by accepting additional member states (the more the better) without abandoning the veto-right of each member state in matters such as fiscal and social harmonisation. The ten new member states have had a beneficial effect on European politics. They have caused mounting pressure to reform the Common Agricultural Policy. Since the Poles joined, for instance, their agriculture has gained access to an enormous market and it will grow enormously. There are no physical restraints to the expansion and the productivity rise in Polish agriculture. But under the current CAP rules the numerous Polish farmers and the emerging big industrial farms will devour the entire European budget. European agricultural policy will simply collapse if it is not changed drastically.
At the same time Polish membership is a serious blow to socialist dreams of a European convergence of social norms. There is no way that Poland can have the same social insurance and minimum wages as France or Germany. Germany has not even processed the integration of its own eastern provinces yet. Especially the monetary unification of the new Germany has caused unemployment in the eastern Länder and the tax-burden in the western Länder to skyrocket.
The new member states of the EU also challenge the common policy of subsidizing depressed regions. That is why the EU is at this moment not developing further in the direction of a redistributive and protectionist superstate. However, I fear that this is only a temporary political situation. There is already a broad political consensus that the European rules of decision making must be loosened to such an extent that the EU can make more political decisions than even before the entry of the ten new members. Moreover some heads of state and ministers of foreign affairs of the ‘Old Europe’ have spoken out in favour of further integration in different gears or speeds: with a core union and a periphery. The reason behind this idea is precisely that the ‘Old Europe’ can go ahead harmonising its policies whenever its monetary union would otherwise cause economic downturns or conflicts of interest among its member states.
Monetary union of sovereign member states sets in motion inflationary policies. There have been many efforts to converge the economies of the member states of the monetary union. The reasons are manifold:
- There is a broad political consensus that the business cycle requires the emission bank to change interest rates.
- If borrowing exceeds saving, than the interest rates have to rise.
- If a region is economically depressed, there is a broad consensus that it should lower wages. Since many western European countries have very rigid industrial relations, wages can only be lowered in a linear way through devaluation of the currency.
It is very unlikely that a country will accept higher interest rates because other member states borrow too much. The problem is solved by inflating the currency. In the long run nobody feels responsible anymore for the stability of the currency. To avert runaway inflation, a creeping inflation will be combined with transfers of federal tax money to depressed regions. These transfers suffer from the dilemma of any form of development aid. Either the authority that furnishes the aid takes over economic decision making. This amounts to central planning, a system that has not proved very successful in the past. Or this authority does not meddle with local affairs and the European taxpayer does not have any control over what happens with the aid. The result is that the local authorities buy a lot of Mercedes cars and build marble office and university palaces with the funds.
Creeping inflation is more dangerous than runaway inflation. The latter reverses the chain of causes and effects. When prices rise very fast, the emission bank has to hurry to print enough money to keep up with inflation. Instead of monetary expansion causing inflation, it is inflation that creates a shortage of money. This process cannot last very long and soon ends with monetary reform and a fresh start. Creeping inflation on the other hand can be maintained indefinitely and it causes families and businesses to make the wrong buying decisions. Creeping inflation is nice for vested interests on the supply side of the economy (industrialists, workers, banks, government) because, and for as long as, people do not fully anticipate the price rises that will come. This causes bad investment and lower quality of life.
What are the alternatives?
- Very strict federal controls over national budgets. But this would mean a further encroachment on national sovereignty. If some states are unable to balance their budget then the European Commission would have to step in and take over the departments that are shedding too much money. This is clearly not intended in the consecutive treaties that form the European Union and that were ratified in the national parliaments. It would not be democratic to let monetary affairs dictate a further political unification of the European member states.
- The best possible solution to these tensions would be of course to return to national currencies. But that is probably too late now.
- Another solution would be to have a very strict monetary policy combined with the principle that the member states simply do not have the right to borrow money at all. Depressed regions could not be bailed out by inflation, nor by budget deficits. I think this would be a good thing. So in principle the monetary union could work. (The dollar union is to some degree such a system. There are very strict rules for the states and local governments to borrow money.) But why will this last solution not be chosen in Europe?
European Conservatism in General
To answer this question we have to learn something of the character of the Europeans or at least of some of the Europeans. Germans, Belgians, French, Dutch, Danes, Northern-Italians and Austrians think of themselves as some kind of übermenschen. They are wealthy because they are hard working, hard saving, tidy and well organised. In itself this belief is not untrue. But the problem is that when there is a financial and economic crisis, übermenschen do not blame themselves, but tend to blame international capitalism. How can they be to blame if they work hard, save hard and are well-organized and disciplined? Europeans simply do not accept to undergo economic downturns.
We see the same story unfold in Japan for the past fifteen years. In Japan we see very clearly that the problem is not the quantity of investment (the Japanese are the thriftiest people in the world and put up more than enough capital to invest), but the quality. Japan suffers from bad management. The problem became chronic because übermenschen do not seek for the culprits among their own people.
There is always the danger that the captains of industry, the bank executives and the bureaucrats form an elite. They come from the same schools and they rather protect each other than compete and control each other. Today they are called the Masters in Business and Administration, in ancient China they were called the Mandarins. They prosper under the ideology that administration and management are very important for society to prosper. Today this ideology is reinforced with the high regard we have for science and scientific planning. Although we seem to agree that central planning did not work and that we need a market economy, economists of today think the market should be scientifically planned.
Not only the European Commission, but every modern state nowadays has its bureau of competition planning. ‘Planning competition’ sounds to me like an internal contradiction but not so for the economists of today. They think they have a meaningful concept of optimal production and they can prove mathematically that some forms of imperfect competition result in suboptimal production. Since monopolists hurt the scientifically proven optimal outcome for society, they must be a kind of criminals. That is why the intellectual elite of contemporary Europe thinks monopolies should be broken by judges instead of by brilliant innovators. The market, however, is not a device only to raise production and lower prices, but also to lower costs, create new needs and solve problems that could not be solved before.
The intellectuals have effectively taken over decision power in Europe. The number of science and management jobs in Europe more than doubled between 1960 and 1994. In that year they already formed 25% of the total workforce. Managers in office are in general a conservative (in the sense of wanting everything to remain as it is) force. Why should they allow laymen to judge them? The consumer is a layman. How does the consumer know what is good for him?
If more consumers postpone the purchase of a new car, the manager of the car factory does not want to know why this is so. He only wants the consumers to come back. He wants cheaper money. Little does he know that more consumers want better health insurance first, or a private nurse for their ailing grandparents, rather than a new car. Little does he care that inflation will create the illusion for the consumer that he can have both. Because of inflation the consumer who bought the car will later be confronted with prohibitive health care prices. But then it will be too late. The same holds for the investor. Because of inflation he will overestimate the purchasing power of the potential consumer and he will invest too much. The problem then reoccurs with a vengeance. Suddenly nobody wants to buy a new car anymore because people hardly come by to pay health care. More inflation is needed. This vicious circle progressively lowers the standard of living. But why should a manager care? A manager has no more stomach for reorganising, cuts, sacking workers than the workers themselves. Everybody on the supply side of the market wants no market. It may sound strange, but the people on the supply-side want demand-side economic policies.
The Drive Toward A Corporatist Europe
In a monetary union with sovereign states the effects of budgetary free rider behaviour of some states are ‘federalized.’ A strong currency and stable prices are a ‘public good’ for all the member states. But when some member states borrow too much, the price (higher interest rates or a weak currency) is spread over the entire union. Those who cause the problem do not have to pay the full price.
The European Council agreed in Amsterdam 1997 on a monetary stability pact. The member states must be open about their budget. Each year the European Commission defines budgetary targets for each country with the intention that the budget deficits or surpluses of the different member states converge. Otherwise a country that has a balanced budget will still have to pay high interest rates because some other member states borrow too much money. This would create political tensions. Either the good member states have to slow down their economy because of the others. This would undermine the legitimacy of the union and the loyalty of the European citizens as such. Or these tensions are smoothed out by monetary expansion. Then the good countries would not pay higher interest rates, but they would have a weak currency and inflation despite their sound financial policies.
The right of the member states to have their own deficits will in the near future create political tensions within the monetary union. At first sight, the tax-payer does not have to worry about the deficits of other member states, because it are the tax-payers of those member states who will have to carry the burden of the interest payments on the public debt. It is true that the Irish citizen is not affected by Belgian or Walloon state-debt in his capacity of a tax-payer. But an Irish citizen is not only a tax-payer, he is also an investor, a wage-earner and an account-holder. As such he is affected by the deficits made by other member states because those deficits will be made in his own currency. The Irish investor, borrower and wage-earner will not accept recession because interest-rates rise as a result of the rising demand for credit by the member states unwilling to cut their deficits. The only possible political compromise is then to let the money supply increase. But this loose monetary policy is exactly what some of the criteria of Maastricht and the stability pact were meant to prevent.
Monetary expansion is of course a concealed form of taxation which, much more than ordinary taxes, creates distortions in the entire economy because it creates within the private households an illusion of wealth. This illusion causes people to buy more than they can afford. More often than not they will spend money which will subsequently be lacking to finance more urgent needs. In that way society harbours primary frustrations despite its apparent affluence. An already classical example of misoriented individual planning is the person who lives in luxury but when he retires is taken aback by the prohibitive cost of housing and health care. This illusion of wealth may bail out industries with overcapacity, but only at the expense of industries with undercapacity.
Since all processes of production overlap (in the process from bare nature to finished product all products compete several times for the same resources) there can only be more fully staffed service-flats for the elderly when less value is consumed in the production of cars. ‘Overcapacity’ really means that the industry or factory in question cannot raise prices enough so as to be able to pay the costs. This industry could sell its stocks and work at capacity levels if it would lower its prices. If it cannot lower wages nor find cheaper sub-contractors, this means that the industry is not adapted to the real priorities on the market. Instead of attracting more labour and capital, it should lay-off resources and thus signal to society that resources and people, especially young people, should look for employment elsewhere. If fresh money is poured into the economy (inflationary policy), this adaptation will be postponed because prices never adapt perfectly. Some prices will rise too fast, others too slow. Moreover, as soon as prices adapt to the swollen money supply, the overcapacity will reoccur. Bad investment will cause wages and suppliers’ prices to rise faster (or to drop slower) than the prices the customers are willing to pay. Average price-level trends in themselves never cause business cycles. The real cause is that the industries with overcapacity are bailed out (either directly or through inflationary policies) and do not adapt, but instead keep on attracting resources which could have generated more value somewhere else. When prices adapt themselves, the overcapacity will show and will force the industry to shrink. When not, shortages will occur and society will not be able to reproduce its current level of wealth.
A recession is caused by bad investment or miscalculations. Miscalculations are inevitable. If there is a coincidence of many miscalculations there will be an economic downturn. This means that too many producers are confronted with prices of the suppliers that rise faster (or drop slower) than the prices they can get for their products. Inflation will bail them out temporarily on condition that the prices do not adapt in time to the increased money supply.
But this means that the same problem as before will return with a vengeance. The reorganisations are only postponed. This adds to the problem. If there are miscalculations, adaptations are necessary. If we agree that an economy must adapt to changing circumstances, then there is no defence for inflationary policies. The reason why we need a market economy is not to lower prices and raise production. The reason is that man does not accept natural selection. The reason for a market economy is that the economy must adapt, not man. As long this is not clearly stated, the people on the supply side of the market will invariably call for measures against competition. In that case we will always end up with an old-European political coalition between the management elite, the hard working and hard saving workers who are afraid to lose their jobs because of international competition and the spoiled youth who thinks wealth is a birth right.
I always wonder why it is so difficult to understand fascism. Fascism is nothing else but this coalition of conservatives. The hard working, hard saving workers do not accept an economic downturn and want steady jobs. The elite wants to stay in power. The youth wants everything immediately for free. When these three groups find each other there will be an anti-capitalist coalition from the political right that is extremely socialist and anti-modern.
Towards the European “Grossraumwirtschaft”
A small country cannot afford to be protectionist. The European economic space gives the illusion that it can. And at least for a while it can. A vast European economic expanse can withdraw itself from international trade. At first this will seem as if business cycles were not necessary after all. It will fuel the belief that capitalism is not necessary. Only in the long term will the relative decline and the real drop in the standard of living be noticed.
Until now the architects of the Monetary Union assure us that the member states will comply with strict limits on their deficits also after they enter the monetary union. But in practice, the political strength of the corporatists by far outweighs the political strength of the modernisers. This is also true for every member state separately, but up till now there was still competition between the European trade partners which made it possible to compare the results of different national policies and which provided a check on what the politicians were inclined to do. In a politically integrated Europe, this check will disappear and we will get a convergence to the lowest common denominator. If for instance the Belgian government needs alternative funds to finance its social insurance and wants to introduce a new tax on carbondioxide-emissions or some other tax on so-called ‘pollution’ then the other countries will follow suit. Today this is not possible, because Belgian industry would have an additional competitive disadvantage through the introduction of such a tax in Belgium alone. Although in the proposed European Constitution the unanimity rule has largely survived, the pressure to abandon the unanimity rule for decisions on tax-harmonisation in Europe will rise in the future.
This is ‘deepening’ the EU in practice. It is needed in order to be able to increase taxes without one country having to endure competitive blows by its major trading partners. Of course this convergence to the lowest common denominator of more taxes and deficits will diminish the competitive strength of Europe as a whole in the global economy. But this only illustrates that politicians often create the circumstances where it becomes difficult to stop further steps in an undesirable direction, in this case towards protectionism. Political integration of Europe will spontaneously create a European Grossraumwirtschaft, the nazi-ideal of a heavily politicised European protectionist block against the rest of the world.
The majority in Europe does not really want this to happen, but it will happen because the same majority is not prepared to accept massive unemployment when entire European industries are defeated in the global competition. So the drive toward a European protective block will be a spontaneous process. The deliberate construction of a monetary union will drive the European leaders to take steps nobody wanted. The constructivists are surely wrong when they think that the EU will further develop according to some blueprint. But evolutionists could make the opposite mistake in thinking that whatever evolves spontaneously will be desirable.
The monetary union could thus cause a drive towards a European federal state. Although this end result is not likely in the short run, it may be the outcome of a long and painful process of experiencing the drawbacks of monetary union. It is simply impossible to allow member states to abuse their autonomy indefinitely at the expense of the European taxpayer and Euro-account holders. If Europe is not ready to choose between permanent recession because of skyrocketing interest rates on the one hand and letting its currency become some kind of totally unreliable and inconvertible rouble on the other hand, then it will have to interfere in the policies of the different European governments. Only a federal state can stop deficit spending by financially unaccountable member states.
Even education could not be left to the discretion of the member states. Belgium’s French-speaking region of Wallonia is already creating its own regional debt because it has not enough revenues to finance its own educational system. When the European majority decides to make cuts in education, then the Walloons and the Greeks and the French would not only have to follow suit, they would simply have to implement orders from the European state. In such case a monetary union would have more chances of survival.
However, it would still lack the mobility of labour that we see in the United States. And even the dollar union creates tensions. American families move house more readily than Europeans do. America is not hindered by language barriers. But even in the USA there are depressed regions next to booming regions. The former need to produce more and consume less. The latter on the contrary need a strong dollar in order to use their surplusses - not to increase exports - but to innovate. Otherwise they will keep on exporting products at the expense of investments in new activities with higher added value. Strong economies should have high purchasing power abroad so that they are compelled to use their strength to modernise instead of maintaining their traditional export of products which could be imported cheaply.
In the meantime, while the debates about more centralisation continue and popular resistance does not die down, the regions which lag behind get addicted to European tax funding, and in the strong regions the people begin to lose interest in modernisation because they get addicted to inflationary cheap money. Corporatist Europe will win the debate probably before centralist Europe does. Most opponents of the European Constitution fear a European superstate but like a weak euro and inflationary low interest rates to bail out industries with overcapacity, and whenever their jobs are at stake they like Europe to protect them against cheap imports.
Since the EMU is big enough to develop into a protectionist block, it is likely to undergo a long process of decline caused by the inflationary policies to smoothen out the conflicts of interest between the member states, unless financial discipline is forced upon the member states by a strong central European state which nobody wants today. Either the EMU is abandoned or it forces upon the people a federal European state, but then only after the ‘Old Europe’ has been through decades of decline.