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Policies of Scale: Efficient Global Policy

The EMU Crisis is a Battle of Nationalism Versus Transnationalism, not Economic Prescriptions

They Have it Wrong

The debate over how to save the euro and the economy of its union has taken shape around economic prescriptions. On the surface this makes sense; after all, the euro is the currency for seventeen national economies. But whether the debate’s outcome is austerity and budget controls, “pro-growth” policies, or some compromise of the two, the debate (and therefore the outcome) overlooks the reason for the crisis and its persistence: nations still exist and are the most relevant actors. The European Monetary Union (EMU) is a disparate collection of seventeen nations whose differences, always present, have been made increasingly obvious by the crisis. As the nation is still the primary level of political analysis, only once the nation becomes the central concern can a final resolution be found.

The discourse is stuck in the muddled world of finance and monetary policy. Many have argued that the EMU is far from an optimal currency union, and this is true. Even those who advocate for a European currency union have to acknowledge its shortcomings: restricted labor mobility, insufficient regulatory adjustments, asymmetric supply shocks. Yet proponents persist, perhaps because for the first eight years of the union the economies of its members performed reasonably well, or perhaps because they view the EMU as step towards a larger goal of a European state and identity.

These proponents rarely acknowledge issues like national interests or sovereignty while debating the euro crisis because the focus has been on how to keep the union together, and keeping the union together becomes significantly harder when the differing interests of the member states are recognized. Even many of the euro skeptics have backed away from putting the interests of nations ahead of the union because the potential for pain with an EMU dissolution seems too much to bear. The easier debate is therefore how to maintain the status quo, when in fact the more appropriate debate, and its central question of whether the reality of the EMU is the best reality for individual nations, is far more important for the lives of the people living in Europe.

The crisis may subside with greater fiscal integration, but it will not be resolved. Robert Mundell, the father of the optimum currency zone, said in 2003 that “Money has a cultural dimension; it has been called the centerpiece of civilization. Money integration in past centuries paralleled the forging of the nation states, entities linked together usually by culture, language, religion, and political aspirations.” At this point in time, the countries of the EMU are linked neither by culture, language, religion, nor common political aspirations, and the crisis reflects this.

The Real Debate

Current EMU debates are verbalized in tactical terms: eurobonds, uniform budgetary rules, greater integration, “more Europe.” The goal of these ideas is to successfully achieve macroeconomic stabilization of the euro zone economy. Given that states are the most important debtors in capital markets, achieving sound regulation is a prerequisite for stabilizing the union and returning it to acceptable economic growth. This is the logic behind the terminology of the debate.

If fiscal and monetary policies are to be the tools of EMU stabilization, those participating in the EMU will have to either better coordinate their national policies voluntarily or hand decision-making to the authority of a more powerful central European government.

This primary approach, however, is geared towards the secondary problem of collective action. It perpetuates the inherent weaknesses of the EMU, the design of which cannot adequately accommodate differing national priorities or, equally important, values, thereby setting in motion the current mutually assured destruction facing the members of the union.

The more appropriate debate would focus on a strategy for saving the economies of the euro zone. The current pressure to solve the crisis through “more Europe” currently comes not from the voters, but from “the European Central Bank and global investors.”[1] Investors must not be thought of just as those with economic interests, but also those with concerns of broad transnational interests, including human rights and international legal norms, for whom their work is a full time investment in a transnational vision of the future they passionately hold and therefore can be referred to as “transnationalists.” The real debate, then, is not how or whether to save the euro, but over the future governmental structure of Europe.

Within this debate there would be two polar opposites. The rabid supporters of the “save the euro” campaign would be those who created it, the unelected transnationalists: Eurocrats, academics, NGOs, international foundations, international corporations, and the like. The rabid supporters of the “dump the euro” campaign would be the nationalists: a likely majority of the voting citizens of European countries who are by growing numbers identifying themselves as “very attached” to their country as the “European” identity stagnates.[2]

If the transnationalists win, then a strengthened European government will lead towards greater supranational governance and a “European” identity at the loss of more sovereign governance and identity of individual nations. If the nationalists win, then the individual nations will become “liberated” from the central European governance structure and regain much of their previous ownership of self-determination lost to the EMU.

There is little compromise for the pan-Europe vision of transnationalists. Their success requires national interests become subservient to a euro zone-wide institution regulating the fiscal and monetary policies of all EMU members; anything less gives Europe either its current crisis, or a euro-free Europe. And with the euro identified by Europeans as the most important element of the European identity, the crisis has become an existential challenge for those invested in the project of a European identity and government.[3]

The Winners and Losers of the EMU

An optimum currency zone has a set of criteria that make it optimum. One way in which a currency zone becomes optimal is when the interactions between members are characterized by complementarities. The EMU was therefore designed on a rules-based framework predicated on complementary interaction. Yet the way the EMU has worked thus far as created economic winners and losers because members have acted in contradictory ways.

Greece, for example, cooked its books for its own gain and later its people protested the terms of financial assistance to correct the impact of their fraudulence on others. Germany, too, has acted contradictory to the interests of others by keeping its domestic wages down to prioritize its exports and maintain its high employment while demanding measures of Greece that worsen its already dreadful unemployment and exporting industries.

Germany has been able to keep its wages low because devaluation, which could be used to affect wage pressures, has been ruled out. Thus, the only mechanism remaining in the union to affect prices is the competitiveness of exports.Germany, because of its political strength and creditor status in the union, has been able to shore up its exporting strength relative to other EMU members and, naturally, seeks to protect its position even though it has negative consequences for EMU members and therefore the EMU economy.

The reality of winners and losers has meant that, within the union, the level of policy analysis has been done on the national level, positioning nations as the key players, reinforcing the importance of the nation and making the adoption of policies geared towards integration incredibly difficult.

One of the creators of winners and losers in the EMU has been inflation, which is normally controlled by the willingness of governments to allow unemployment in deficit regions of their territory. But a common currency zone like the EMU cannot prevent both unemployment and inflation among its members. The inability of the EMU to regulate employment and price levels is one reason for the winners and losers outcome.

Another creator of winners and losers is that when member states act in self interest, they produce a random aggregate outcome that affects other members in different ways. The interaction of these policies is crucial for attaining, simultaneously, stable prices, balanced growth, and high employment. The Stability and Growth Pact of 1998 stipulates how each country ought to regulate, but where it matters at the aggregate level, the result is only the incoherent mix of essentially random processes of member countries. This means that national fiscal and monetary policy cannot be used to address EMU fiscal and monetary issues because this incoherent mix is unable to be marshaled to address challenges. Therefore, when decisions are made in the context of national constituencies, as they are in the EMU, the ability to achieve a optimal mix of prices, growth, and employment, becomes impossible.

In 2010, for example, the price level index for household consumption ranged across the EMU from a little over 70 to a little over 120 on Eurostat’s index, while growth rates among EMU states ranged from the negative to the positive and uneven employment rates spread across the union. This wide spectrum of results is an inevitable outcome for a suboptimal currency zone predicated on the optimal currency zone model.

The Difficulty of Governing on Two Levels

Every euro spent by national governments at the national level adds to the aggregate demand at the euro level; the two levels are neither independent of each other nor shielded from one another. The national allocation of resources therefore has ramifications for all euro zone customers that need to be internalized by aggregate stabilization policies, such as those being discussed today to stem the crisis.

However, the amount of national government spending at the euro level represented little more than 1% of the EU members’ combined GDPs. Yet, stabilization at the euro level itself can only work if the definition of total expenditure applies to itself. This gets to the heart of the economic component of the crisis: how can the EMU stabilize if its “total expenditure” is referred to as a percentage of an aggregate of independent nations?

The only answer thus far, and it is the consensus pick of the transnationalists, is greater centralization of policy and regulation. This will not be sufficient, though because a bigger role for the central authorities in providing public goods will be necessary as well, further shrinking that which is considered the national domain.

An effective stabilization strategy is one that finds the optimal equilibrium of stable prices, balanced growth, and high employment through fiscal and monetary policy. The ability to achieve this relies on an actor who has the legitimacy to determine the policy mix or the optimal equilibrium. Yet as we see, there is not one authority that has the ability or right to set such policy and implement it. In fact, the reason for this is that no one authority exists who reflects a European consensus. Going one step further, no one European consensus exists either, because, of course, different countries have different views on the optimal policy mix and equilibrium.

An important component of the optimal policy mix is the provision of public goods, which in Europe includes significant welfare systems unique to each country. These systems are paid for through national taxation of the citizens who elect the governments who make the decisions of how to allocate these revenues. Countries have different preferences than others; thus we see different reactions to government austerity measures in, say,Greece and Portugal, where one countries reacted with massive and violent demonstrations while the other received the cut backs peacefully and quietly. Integration would produce coherent fiscal and monetary policies if it included a single policy on the provision of public goods, but the reactions of Greeks and Portuguese to austerity exemplifies just how dramatic the differences of opinion are across the euro zone.

Delivery of public goods is not the only governance issue to find dissimilar policies across the union. The very size of the public sector itself is also quite different. Public spending in 2010 ranged from 41% of GDP to 67% across the EMU. This represents a significant discrepancy across the euro zone between individual member states. Within this range of public spending lies the reality that the same sense of social fairness, justice, and role of government is not shared across the EMU, and these contradictory forces will keep the union split on formulating the singular policy necessary to make a currency union viable.

Consider a long-lived currency zone: the United States. Imagine if the same negotiation process going on now between EMU members was the same process used to allocate federal funds in the United Statesto smooth out the internal “US Dollar Union.” If the seventeen-member EMU cannot find cohesion, imagine the level of cohesive difficulty faced by the fifty states. It is also understandable why the US does so much for low-income Americans while doing so little for low-income Mexicans. The reason is nationalism, and it inspires Americans to prioritize their own over those living in other countries. The same dynamics occur in Europe.

Countries Compete, Even Members of a Union

Another important factor is highly mobile factors of production. As factors become, albeit slowly, more mobile in the EMU, it will prove increasingly difficult for any state to achieve their redistribution goals independently of other states; attempts to redistribute within states will drive out mobile factors in search for lower burdens from redistribution.

Redistribution affects various states in America, but it does not affect the overall American economy in the same way because factors of production move within America, thereby remaining in the same national economy. InEurope, this mechanism becomes a major threat to national economies and nations’ abilities to achieve their redistributive policies, especially with the expansion of the European Union to include a large number of low per capita income member states. The effect is a different sort of redistributive force that threatens to level incomes across EMU member states by lifting up poor countries and bringing down richer countries. It may take time for this to occur at meaningful levels, but it is another example of the EMU creating winners and losers.

A ramification of this winners and losers reality is that, although not unique to a European supranational system (the same phenomenon is seen in European nations themselves, especially Spain), taxpayer resentment toward being a high net contributor is generally widespread in the richer EMU states. It was prevalent in the Dutch referendum and public sentiment during the French presidential election, and has dominated German politics for a long time. The idea of sacrificing for an international union, as Germany and the AAA-rated countries would need to do to save the euro, is a meaningless concept when faced with unavoidable divergent national priorities, as those of Greece, Spain, and others no doubt are. Yet if Germany and the other AAA-rated countries make sacrifices, and the union is preserved, those making the sacrifices will not only feel economic pain, but national pain as well as other countries increasingly dictate their options for self-governance.

The Wrong People are at the Helm

The policy convergence needed across the EMU to secure the euro zone is daunting. In order to achieve convergence, a process of political justification is needed between EMU member country citizens as opposed to transnationalists. However, the current venue for EMU debate is isolated among a small, unrepresentative, and unaccountable group of whom many are isolated from the individual member country polities who are having their own debates. Such an arrangement prevents the realization of a “European” consensus needed to solve the euro crisis, no matter how it turns out. The ways in which policies are debated and implemented dictate their success. The EMU, absent a democratic political process involving the revenue base, is therefore in crisis.

An obvious solution would be to engage multiple levels of society, including those outside governments and bureaucracies, in an open, EMU-wide discourse to generate a European consensus. Legitimacy is the wellspring of government power, and is a necessary prerequisite for effective economic policy. Without collective acceptance of the decisions and rules enacted that effect investment, savings, taxes, consumption and spending, the optimal allocation of resources is impossible. Therefore, key questions for the euro crisis include what source deserves the legitimacy to determine policy, and how it should be implemented.

To this point, the Europe-level bureaucracy and select national leaders have played the source of legitimacy and the implementer, but the masses have not exactly agreed with this arrangement. One only need consider that it was European bureaucrats, not voters, who ousted elected officials in Greece and Italy and replaced them with technocrats whose allegiance is stronger to Brussels than their national constituencies.

Of the many lessons history teaches, surely one is that nationalism is a powerful motivator and should not be underappreciated. The current debate surrounding the euro crisis, and the tactics being outlined to resolve it, are despite history’s warnings missing a crucial component: an appreciation of the role nationalism is playing in perpetuating the euro crisis.

Nationalism, Front and Center, the Key to Resolving the Crisis

When a country is made to suffer because of the actions of another country, the two will likely find themselves in some sort of conflict. When they are bound together, preventing either from doing what they most desire, that conflict deepens. This, thus far, is the experience of the euro.

In one example, negotiations between two parties trying to form a government in the Netherlands broke down because of a disagreement over whether to accept the austerity requirements set by euro negotiations. If the EU is able to split a nation, surely split nations will split the euro.

In another example, at the onset of the crisis and through its early stages, Germany insisted that Greece should not be helped despite the desire of many in the EMU to assist Greece, setting the standard that within the EMU there exists no solidarity. Later, as it became clear the EMU was in critical condition, acting in its own interest to protect its export-driven economy that benefits so much from the euro, Germany changed its mind.

Germany is now in the process of changing its position on supervision and enforcement of EMU member fiscal policy, but it is doing so in a way that perpetuates the divergence in individual member nation economic performance and thus divergent national interests. Wiser people will therefore put nations at the center of the debate.

The importance of nations is, however, distinctly avoided by the leading proponents of the EMU because acknowledging its significance would pull the average European, likely in opposition to deeper fiscal and monetary integration in the name of other nations, into the discussion. Yet only once the role of the nation is determined can the future of the euro be resolved.

The outcome of this discussion may not be as dreadful as those who avoid it fear. The result could very well be a smaller EMU comprised of those countries most committed to its existence. Commitment is a crucial factor in whether or not a challenge will be met, and it is quite clear that EMU members come to the table with varying degrees of commitment. Given the massive and existential compromises that nations wishing to join in an optimal currency union must make, it seems only logical that those unwilling to make such compromises will spoil the experiment for others. Therefore, a membership comprised of only those truly committed to the union’s success seems far more desirable than the current half measures that have kept the crisis flourishing.

The current approach, however, is instead focused on how to keep everyone in, even as this approach threatens to bring the economic ceiling crashing down on all those who stand under and around it. Not everyone is on the same page, and everyone need not be on the same page. The way the transnationalists approach this issue puts the horse before the cart, and are therefore they are unlikely to provide the economic stability and prosperity they seek. For their sake, and for the sake of Europe, they must recognize that nationalism exists and is as relevant as ever.


[1] Howard Schneider and Michael Birnbaum, “As euro problems fester, ECB eyes a more perfect economic union.” The Washington Post, June 4, 2012

[2] Report: “New Europeans.” Special Eurobarometer, European Commission, April 2011.

[3] Ibid, “New Europeans”

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