The European Monetary Union failed because of misunderstood macroeconomics
Jesper Jespersen
Department of Social Sciences and Business Roskilde University, Denmark
Please cite the paper as:
Jesper Jespersen, (2018), The European Monetary Union failed because of misunderstood macroeconomics, World Economics Association (WEA) Conferences, No. 2 2018, The 2008 Economic Crisis Ten Years On, 15th October to 30th November, 2018
This paper has been included in the publication
“The 2008 Crisis Ten Years On: in Retrospect, Context and Prospect Paperback”
Abstract
The European Monetary Union and by that the Euro has failed because of not fulfilled expectations related to economic growth and prosperity for the participating countries. The glittering promises were expressed when the idea of a common European currency was launched back in 1989 and repeated frequently until the (misunderstood) macroeconomic realities hit back from 2008 and onwards.Even before 2008 it became a constant battle to counterbalance some of the negative consequences of a prematurely introduced common currency. A process, which has absorbed a large part of the time and decision power of the European council ever since the euro was made real. Instead of enforcing an integrative process, the increasing economic diversion have caused disruption inside euro-countries and tensions among the EU-member states. The macroeconomic performance has been within the euro-zone significantly below the non-euro countries with regard to unemployment, growth and public debt. On top of that, there has been ever since 2010 an ongoing and increasingly intense political debate (outside the corridors of Brussel, Berlin and Paris) about the scraping of the common currency and by that to break the downward spiral of low growth and high unemployment. This paper will conclude with a strong recommendation that monetary and fiscal policies should be coordinated and directed towards a reduction of the private sector structural excess savings and hereby, to avoid low growth and persistently high unemployment. As long as the private sector is not self-adjusting to full employment, the public sector budget should mirror the private structural surplus. Unfortunately, a policy which the fiscal compact is preventing.
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I appreciate your work, is really full of insights. My modest idea is that the EU’s trouble does not lie so much in Maastricht parameters but in interpreting them through the neo-liberal lens of reducing at any cost public spending. This neo-liberal drive has been responsible for the lack of public investments in material and immaterial infrastructures and the consequent loss of competitiveness and resilience of the EU in the international arena. As for fiscal policy, I would stand for a policy of a tendentially balanced public budget. As a matter of fact, a policy of deficit spending, although far more advisable than a policy of “austerity”, has the serious drawback of increasing the burden of interest payments.
In this way, a growing share of public spending is diverted from objectives of public utility to rent. This aspect plays a two-fold role in depressing the economic system, because: (a) the multiplier effects of rent-based incomes are likely to be lower than that of public spending; (b) public spending directed to public purposes is likely to be more useful than rent for economic and social progress. In order to overcome these drawbacks, it is appropriate to note that, as highlighted by the “Haavelmo’s theorem” (1945), public spending can have an expansionary effect even if it is accompanied by an equal amount of taxation.
Another relevant element for promoting economic development is a monetary policy oriented to keep at a permanent low level real interest rate.
Another key element for promoting EU’s economies pertains to a better coordination between macroeconomic and structural policies.
In this regard, many theories point out that in order for an economic area to be successful (and even more so when there is a common currency), it is necessary a parallel convergence of the main economic parameters of member states. However, this condition it is often difficult to realise, in particular when a monetary union steers up, by facilitating transactions, “economies of agglomeration” in the stronger areas.
This being the case, leaving the euro would weaken economically and politically EU’s member countries in the face of financial speculation and of stronger countries. A much more promising alternative would be to promote structural policies for revitalising the economies and societies of peripheral areas. Many initiatives, with the key involvement of local communities, can be projected – also by fostering synergies – in culture, tourism, high-tech industries, sustainable agriculture.