Wray Has the Economics, but the Nations Have Their State
L. Randall Wray wrote a wonderful piece on the euro crisis back in July that shares some similarities to my piece on the euro crisis written at the end of August. Wray discusses many of the difficulties faced by the European Monetary Union that I do (he covers more). He also inches towards the nationalist causes of the crisis that my piece is based on, although unfortunately he does not mention the issue specifically:
“Now, some EMU nations also ran chronic current account deficits. And if these had been monetarily sovereign nations (in the sense that they each issued their own floating rate currency), then the worry would have been over the private sector balance. But here the EMU nations diverged significantly from one another [my italics]—some with current account deficits did not run up huge private sector debts, others did.”
He then goes on to explain the critical fact that the inability of the EMU to marshal sufficient policy has at least something to do with the blurred EMU lines between sovereign and non-sovereign:
“[EMU member states are] not monetarily sovereign. Each dropped its own currency in favor of a “foreign” currency—the Euro. So there are two issues: a current account deficit mostly offset by a private sector deficit, versus a current account deficit offset mostly by a government sector deficit. My argument is that for a monetarily sovereign nation only the first of these is a problem; but for Euro nations, either of these can cause trouble.
“Now why am I making this distinction—between sovereign and nonsovereign nations (in the monetary sense)? Look at it this way. What is the current account balance between, say, Alabama and Idaho? Does anyone know? Does anyone care? They both use the Dollar. Yet, both Germany and Greece use the Euro and I doubt there is a single reader out there who does not know that Germany runs a positive current account against Greece. And most of them care. A lot.”
I have nothing to disagree with in this analysis, but the reason I wrote my piece was that many economists writing on the subject, like Wray in this article, do not continue the analysis to a level beyond economics of why these problems exist in the first place. As I wrote in my piece:
“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.”
I suggest that the most persistent cause of the crisis, both why the crisis began and why it has not been slowed, is that the different preferences on the optimum policy mix (which is a manifestation of the social consciousness on things like the role of government and public goods) among member states prevents effective fiscal and monetary policy. I use the following example:
“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.”
Now, Wray addresses, quite appropriately, this issue in his article when he discusses the US economy and its single currency. But going beyond recognizing the problem to identifying its roots necessitates going beyond economics. I discuss public spending to demonstrate the difficulty of a monetary union with such dramatic differences of opinion on social policy:
“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.”
As Wray explains, the members of the EMU have had different experiences with the euro, some better and some worse. I call this the phenomenon of the EMU creating winners and losers, the reality of which:
“[H]as 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.”
Wray provides an economic analysis of the crisis beyond what I am capable of myself. However, because economic policies have thus far been inadequate in addressing the issues in long-term, meaningful ways, there is clearly another level of analysis required to fully understand the cause of the crisis and appreciate all the problems that need attention, including non-economic ones like nationalism and the priority of one’s own:
“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 States to 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.”
The economics of the crisis are discussed in ways that relate them to EMU-level policy; when nations act, they ought to do so in order to strengthen the central authority-making of the Union. But the central authority lacks critical capabilities that, at least at this point, reside only at the national level. In effect this means central authorities are inadequately armed to address the problems. We have seen EMU-level actions and their limited ability to address the problems of individual member states. Yet because of their participation in the Union, the member states are unable to act on their own on important issues. And states’ individual preferences, like Germany’s export-driven priorities that Wray covers, mean that the requisite policy complementarities of a monetary union are instead “contradictories.” It is hard to mend this without addressing the nation-state, whether you’re trying to explain why the euro crisis began or design fixes.
One Response to “Wray Has the Economics, but the Nations Have Their State”
Very good article. How about throwing in some details about private investment cartels(whether families, friends, nations or corporations), and black market cartels that are supposedly in control of substantial sums of monies. Then don't certain other imbalances really paint a clear picture of effects on "public goods" provisions, foci, and policies? But, hey the revenues have really shown a good positive increase in Aspen in 2012 vs. 2011. So who cares if the rest of wherever, any where is in shambles. There are a quite a number of safe havens for the unaccountable percentage of people who reside or are fleeing to them. The rest are increasingly surviving only at the beck and call of the "unaccountables". The specific fiefdoms of the sovereign individuals rather than sovereign states/nations are benefitting exponentially as individual states/nations are plundered.