Friday, 9 December 2011

Federal Europe 1

Federal Europe: how can rich and poor co-exist ?

"If Ecuador can share a currency with USA, why not Greece with Germany?"

In the nineteen eighties and early nineties the ethos in the European Communities (EC) was positive, expansionist, welcoming. Funding was made available to improve impoverished corners of Europe, and to fund collaborative research between member states. The motive was no doubt to entice conservative populations into the concept of a united Europe. It seemed to be an accepted principle that all Europeans should enjoy the same benefits and the same standard of living. No one complained.

No one accept me. Holidaying in southern Europe, as we northerners love to do, I was struck by the absurdity of this thinking. Those who live in the sunshine do not need shopping arcades and motorways; they do not need work, achievement, wealth, museums and theatres in order to feel that life is worthwhile, for it is so patently enjoyable simply to sit under a tree and to wait for the cool of the evening. Europe, extending from Norway to Spain and from Ireland to Hungary, comprises very different lifestyles and life-purposes, as well as very different standards of living. This has been true for centuries, and no doubt for millennia. I have implied that it is largely to do with climate, though historical accidents will have played a part; and to some extent migration will have allowed people to select a climate, a culture, and a lifestyle, that suits their temperament. It should never have been part of the European mission to even-out cultural and economic differences; both are intimately connected to each other and to the terrain.

Simon Wolfson (Baron Wolfson of Aspley Guise; Next, P.O Box 4000, Sheffield, S97 3ET) believes it is impossible for rich Germany and poor Greece to co-exist in the Eurozone and to share a common currency. (Admittedly, some others share that view). I, on the other hand, question the impossibility of rich and poor countries sharing a common currency.

I was surprised to learn that Ecuador (in 2000) adopted the US dollar as its national currency. Their own monetary unit, the Sucre, came off the gold-standard in 1932 at 5.95 to the US dollar but by the end of the millennium had sunk to 25,000 to the dollar. Its rapid slide was a disadvantage to trade and tourism. Ecuador does not have access to the US Federal Bank, and it cannot print dollars. But it has complete sovreignty over its interal finances; it can raise and spend tax with complete independence from the USA. If Ecuador runs a trade surplus with the USA it keeps the dollars; it thus misses out on the interest that would accrue if it bought US bonds. The US on the other hand benefits from what amounts to an interest-free loan of the 'goods and services' it gains in this exchange.  (International Economics, Robert Carbaugh, 13th ed. 2011). In effect, Ecuador opted, in 2000, to go back onto a sort of gold-standard; a pseudo-gold-standard (Milton Friedman, Journal of Law and Economics, Vol. 4, Oct., (1961) pp. 66- .)  Ecuador and the USA are vastely different in per capita wealth yet they share a common currency. This is only possible while Ecuador operates a fiscal balance internally, and a trade balance externally. If Ecuador can share a currency with USA, why not Greece with Germany?

How on earth were the indebted countries of the Eurozone allowed to break the obviously inexorable rules regarding balancing both tax and trade budgets? Some people were aparently prepared to lend the Greek government money which it promptly spent. I think those lenders were at least as guilty as the borrowers, particularly as their motive was personal gain. So, let the borrowers default! 

No comments: