Much of the debate about the future of the EU and the Eurozone has been driven by nationalist European euroceptics, and US neo-liberal economic globalists opposed to corporate regulation and social provision. The europhile response has been largely a defensive one, arguing that compared to the USA and the UK, the Eurozone hasn’t been doing at all badly, always excepting the current difficulties being experienced by the PIIGS countries. Perhaps it is time for europhiles to go on the offensive and start arguing that the problem with the Eurozone is not that there is too much integration, regulation and social provision, but that there isn’t enough.
Marco has a well recommended diary out detailing how Krugman has criticised the EU for forming a currency Union well before the continent is ready for one. Krugman’s argument is that without the fiscal and economic integration that the US enjoys, the project for a common EU currency zone is fraught, at best. Whereas a US state like Florida can look forward to continuing support in the form of Federal spending on infrastructure, heath and social welfare if it gets itself into a severe recession and its own tax take and budgetary position tanks; Greece as part of the Eurozone can look forward to no such automatic stabilisers and supports for their economy from the EU Budget.
The first thing to note about this argument is that it is not your typical neo-lib Europe is doomed argument because the EU hasn’t “reformed” its economies enough by slashing wages, regulation of business, taxes on the rich, and spending on social welfare. If anything, Krugman is arguing that the EU hasn’t done enough to integrate its economies (e.g. through greater labour mobility) and provide a sufficiently large centralised EU budget to provide more support for member states in trouble. Whilst obviously taking the US as his comparator, if not his model, Krugman appears to be arguing that the Euro is not a long term viable project without a lot more political, economic and fiscal integration within the EU. Given that he is not arguing for the dismantling of the Euro project, Krugman is therefore arguing for more EU integration and transnational social provision, not less.
Having just finished the Lisbon Treaty ratification process, most EU citizens, even Europhiles, might have hoped that that would be that as far as institutional reform of the EU has to go for at least a decade to come. The political appetite for a further EU Treaty could not be less. What has become clear with the global economic crisis, however, is that even with the Lisbon Treaty now in force, further measures may be required to enable the Eurozone, if not the EU as a whole to function more effectively. Given that the Euro is not universal within the EU, perhaps the best way to achieve this further integration and enhanced social provision is through the enhanced cooperation provisions of the Nice Treaty now subsumed into Lisbon. So how could the EU, and particularly the Eurozone improve its performance and help countries like Greece which get into severe economic difficulty – always assuming that grandstanding and moralising about dodgy statistics is not a solution?
At the moment EU Finance Ministers have this to say to Greece:
EU says Greece may face more cuts
European ministers told Greece today it may need to take further steps to bring a swollen debt under control and calm “irrational” financial markets, as wage cuts already announced by Athens sparked another strike.
At a European Union meeting, finance ministers from Germany, Austria and Sweden led the charge, with Germany’s deputy finance minister saying Greece should mimic Ireland and Latvia, both of which are slashing spending and wages savagely.
However the classic Keynesian response to a severely deflationary situation is to develop some kind of stimulus spending programme to maintain economic activity and employment. This is how Obama has averted a second Great Depression in the USA. So why are we currently, at the behest of “irrational markets”, trying to exacerbate an already severe recession in Greece and other peripheral Eurozone members – one that might well spread to the central Eurozone members themselves? Greece obviously cannot afford to fund a stimulus package itself, so the only alternative is an EU or Eurozone wide response. So what might such a response look like?
The US Stimulus programme looked like this:
American Recovery and Reinvestment Act of 2009
The measures are nominally worth $787 billion. The Act includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, health care, and infrastructure, including the energy sector. The Act also includes numerous non-economic recovery related items that were either part of longer-term plans (e.g. a study of the effectiveness of medical treatments) or desired by Congress (e.g. a limitation on executive compensation in federally aided banks added by Senator Dodd and Rep. Frank).
No Republicans in the House and only three Republican Senators voted for the bill.<sup id=”cite_ref-bbc1_0-0″>[1]</sup><sup id=”cite_ref-1″>[2]</sup><sup id=”cite_ref-2″>[3]</sup> The bill was signed into law on February 17 by President Obama at an economic forum he was hosting in Denver, Colorado.<sup id=”cite_ref-law_3-0″>[4]</sup>
So if even some moderate Republicans can vote for such an Act, we are hardly talking left wing ideology here. So what could the EU/Eurozone/ECB do? Initially many of the measures would be specific to Greece to tackle the immediate crisis there, but many should also be considered for broader implementation throughout the Eurozone/enhanced cooperation area.
- Guarantee Greek Sovereign debt so that interest rates on Greek Sovereign debt converge with the European norm. This could make the biggest single contribution towards reducing Greek interest payments (and thus reduce their budget deficit) going forward.
- Encourage greater worker mobility by harmonising educational and training qualification and certification regimes throughout the EU. This might also require investment in education and training in some countries to ensure that qualifications are harmonised up rather than down.
- Harmonise public health care entitlements throughout the EU so that the treatment you get is not dependent on where you happen to reside. Again, this might require significant budgetary transfers to those member states which currently have lesser public healthcare provision and would also stimulate their economies by requiring the expansion of their public healthcare services and facilities.
- The development of an enhanced EU wide electricity grid to facilitate and maximise the integration of wind, solar, wave and other renewable power sources and enable the EU to achieve enhanced carbon emission reduction targets.
- Enhancement of an EU wide energy efficient goods and public transport systems including high speed rail, shipping (particularly helpful to Greece), and a public infrastructure for charging plug-in electric cars.
- Convergence of an integrated income tax rates and social welfare benefits system throughout the EU – again requiring transfers to poorer member states to ensure the harmonisation is upward rather than downwards.
Obviously all of this will not come cheap and would require massive transfers from richer to poorer regions which would be resisted by taxpayers in richer states. But how about funding such a harmonisation of benefits EU wide through the introduction of an equalised EU tax? Anyone for a Tobin tax on all financial transactions within the EU, and particularly on speculative transactions in the Euro? Should not the costs be borne by those who have benefited most from the derivatives, currency and interest rate turmoil which has, in large measure, been responsible for the crisis in the first place?
It is time for europhiles to come off the defensive and start projecting a more positive vision of a more integrated, harmonised and egalitarian EU. It is also time to stop the pace of EU development being determined by its most recalcitrant members. If this means a two speed Europe, then so be it. The Eurozone effectively constitutes that in any case. It is time that the Eurozone members started building on their considerable achievements to date. We’ve got the Euro, and we’re proud of it. And we are going to build a more just economy, polity and society around it.
