Normative Narratives

Economic Outlook: The United States of Europe?

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The title of this post is a bit of a joke, even in the unlikely scenario that such a federation is established, I’m sure they would make it a point to make a name less similar to that of the USA. What is not a joke is the state of the European economy, whose unemployment rate and output gap makes America seem like the a model of economic efficiency. (It is impossible to find a single EU or Euro Zone output gap figure, but one can safely assume based on unemployment levels that it is significantly large).

French President Francois Hollande made strong, if not novel, points.

“The French proposal, which Hollande said he would submit to his eurozone partners, also calls for much deeper fiscal integration between the eurozone nations, with a common budget and the authority to issue debt. The government would also debate the main political and economic decisions to be taken by member states and launch a battle against tax fraud.”

“He acknowledged he could face resistance from Germany, Europe’s dominant power, which opposes mutualising debt among member states. Berlin is also reluctant to give the euro zone its own secretariat for fear of deepening division in the EU, between the 17 members of the single currency and the 10 others.

Non-euro Britain’s government already faces growing domestic pressure to hold a referendum on leaving the bloc.

Hollande said he wanted Britain to stay in the EU but added: “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.”

Hollande said a future euro zone economic government would debate the main political and economic decisions to be taken by member states, harmonize national fiscal and welfare policies, and launch a battle against tax fraud.

He proposed bringing forward planned EU spending to combat record youth unemployment, pushing for an EU-wide transition to renewable energy sources, and envisaged “a budget capacity that would be granted to the euro zone along with the gradual possibility of raising debt”.

He also called for a 10-year public investment plan in the digital sector, the promised energy transition, public health and in big transport infrastructure projects.”

Indeed, these concepts are not new. There has always been doubt as to whether the Europe had the necessary preconditions for a strong currency union (based on the theory of optimal currency area). There is considerable economic interdependence, but differences in language and culture make labor less mobile (which is why some countries in the EU have unemployment rates above 25%, while others are high but more manageable).

The head of the Economics department at Fordham, Dominick Salvatore, (a man whom I greatly admire) wrote about the issue of having a currency union without fiscal coordination in the early 1990s. He was probably not the only one to identify this obvious flaw. European leaders thought that by creating the EU and Euro zone, that greater coordination would naturally occur, however this has largely not taken place (at least with respect to fiscal coordination).

The E.U. is at a cross-roads (it has been at it for some time). Britain will eventually have a referendum on whether or not to stay in the EU (a few high level officials have recently signaled they would vote to leave). The economic recovery in Europe has been non-existent. If a stronger European economic government make the Euro zone project more sustainable, it would be in the best interest of both the 17 Euro Zone countries and the 10 countries in the E.U. but without the Euro.

I used to be worried about a E.U. breakup, but I do not think such an outcome would be as painful as a Euro zone breakup. The E.U. was recently given the Nobel Prize, a symbolic move emphasizing the importance of the block of countries in promoting democracy and human rights globally. But if the E.U. wished to merely become a FTA or  common market, I do not see any of the countries drastically changing their political ideology. All of these countries still have a shared history in which peace and trade led to mutually beneficial outcomes, while war and isolation led to pain and suffering; allowing countries to leave the E.U. to sustain the Euro Zone would not change this. Indeed, I do not believe there is any foreseeable outcome that could change decades of hard learned lessons .

Economic integration would continue to exist between non Euro Zone and Euro Zone countries. The Euro Zone, with a more unified political and economic voice, would undoubtedly be a more meaningful partner with the U.S. in terms of global governance. The Euro Zone would become more effective in global security measures, with a strong unified military–in this sense having the Euro Zone move forward without all of the E.U. would help achieve many of the original goals of the E.U.

There is no question that a monetary union cannot be sustained without fiscal coordination. President Hollande was dead on when he said “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.” Sometimes you have to cut off the limb to save the patient, and it seems like this might be the case with the Euro Zone. E.U countries not in the Euro Zone could wake-up tomorrow, decide to leave, and as long as economic ties remained very little would change. If the Euro Zone fell apart, there would be unprecedented losses as countries scrambled to put the pieces of their monetary policies back together.

If allowing countries to leave the E.U. is what it takes to make the Euro Zone sustainable, then this option has to be explored. When has forcing someone to stay, when popular consensus is to go, ever led to a sustainable union? If countries want to go, they should be allowed to go, so that those who remain can move forward.

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