Steve Keen dug up a 1992 post by Wynne Godley on the London Review of Books that offers sharp insight into the fundamental problems with the euro. “Godley’s remarks, no doubt seen as extremist when he uttered them,” Keen writes, “have proven to be utterly prophetic.”

The piece begins by asserting that while the political goals of greater union in Europe are admirable, the Maastricht treaty had serious shortcomings, stopping short as it did of providing a means to supranational management of the currency zone:

The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn’t need any management at all.

Indeed, that is where the eurozone finds itself today: in a battle between calls for greater union (economic, political, fiscal, banking) and transnational oversight, and resistance from countries unwilling to sacrifice their sovereignty to a system set on enforcing further austerity.  Predominantly, it is of course a battle between core and periphery.

Ivo Arnold notes of the need for a banking union:

A consensus in the economics profession is that the euro area needs a real banking union. In addition to standardized regulation and centralized supervision, such a banking union would also provide for European risk-sharing. Proper risk-sharing is deemed an essential ingredient to break the vicious link between banks and sovereigns in the euro area.

Of the halting move toward political union/federalism, Marc Chandler writes that:

Integration in Europe is primarily an elite project and that elite seems divided and jealously guard their sovereignty.  Europe has not created Europeans.

Paolo Manasse speaks to the inherent difficulty in achieving a risk-sharing mechanism:

By indulging in sharp criticism of Germany piece-meal approach, too many seem to forget that the ECB was created “in the image and likeness” of the Bundesbank, with price-stability as its core mandate. That was the price to be paid in for convincing Germany to give up the DM, and to share the same currency with inflation and deficit prone Italy. Now that the survival of the Euro seems to hinge on the monetization of Southerners’ public debt, one way or the other (primary or secondary purchases, anti-spread firewall), it is not surprising that Bundesbank, backed by the FDP and  CSU parties, is simply saying “no.”

Godley saw all this in advance:

It needs to be emphasised at the start that the establishment of a single currency in the EC would indeed bring to an end the sovereignty of its component nations and their power to take independent action on major issues… The incredible lacuna in the Maastricht programme is that, while it contains a blueprint for the establishment and modus operandi of an independent central bank, there is no blueprint whatever of the analogue, in Community terms, of a central government.

The contrasting fiscal policies of the eurozone states, then, had the power to run astray, but not the power to compensate for competitiveness issues, growth issues, mounting sovereign debt, or the eventual banking crisis that engulfed the periphery. Again, Godley saw the potential for such an unraveling:

What happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback? So long as it is a sovereign state, it can devalue its currency. It can then trade successfully at full employment provided its people accept the necessary cut in their real incomes. With an economic and monetary union, this recourse is obviously barred, and its prospect is grave indeed unless federal budgeting arrangements are made which fulfil a redistributive role.

If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.

The full Godley paper is free to read at the London Review of Books. Shoutout to Steve Keen for the link.