Give me two good reasons why I should listen to some American tell me about the euro.
All right. Number One: We don’t care. There’s no emotional baggage here. Frankly, I couldn’t care less whether the Queen’s nose remains on your coinage or not.
Number Two: Americans invented the euro. And it’s time you learnt why.
In 1970, Professor Robert Mundell, now at New York’s Columbia University, proposed the ‘Europa’, based on his theory of optimal currency areas. It won him the Nobel Prize. On the Continent, Mundell is dubbed ‘father of the euro’.
But in the US, he is best known for the other creation he spawned. To Americans, Mundell is ‘father of Reaganomics’, the supply-side monetarism and tear-down-the-government philosophy which is the heart, soul and agenda of the extreme free marketeers.
Mundell was, even more than Milton Friedman, their leader. ‘Ronald Reagan would not have been elected President without Mundell’s influence,’ wrote the Wall Street Journal’s Jude Wanniski.
Canadian-born Mundell is a clever and cohesive thinker. It would be impossible to accept one side of his coin – the euro – without accepting the flip side: supply-side economics. They’re inseparable, like marriage and lies.
Let’s begin with Mundell in his own words. ‘They won’t even let me have a toilet,’ he told me last week. Mundell has bought a castle in Tuscany. (Like many supply-side economists, he created prosperity, at least for himself.)
His problem is that, to preserve the ancient structure, local officials won’t let him simply rip out a couple of walls to put in a bath and WC. His point is this: ‘Europe is over-regulated. Regulated to death.’
There’s more than plumbing on Mundell’s long list of bureaucratic bugaboos. ‘It’s very hard to fire workers in Europe,’ he complains. To solve such problems, Mundell conceived the euro. ‘It puts monetary policy out of the reach of politicians.’
Yet that does not seem the most direct route to eliminating government. Even defenders of monetary union argue that each nation will remain in control of fiscal policy.
Oh no they won’t , says Mundell: ‘Monetary discipline forces fiscal discipline on the politicians as well.’ The Maastricht rules, the conditions for entering the euro – limiting annual deficits to 3 per cent of GDP and total debt outstanding to 60 per cent – leave little room for active government. As Mundell explains it, Maastricht limitations mean individual nations will have nothing left to entice inward investment except lower tax rates and de-regulation. Governments will compete by shrinking.
Wholesale privatisation is also, for Mundell, a predictable effect of monetary union. To meet the 60 per cent debt limitation, nations privatise infrastructure such as water or air traffic control. These asset sales don’t affect the public’s obligation to use these services, and the public still pays for them – but Maastricht is satisfied.
John Maynard Keynes wrote: ‘Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler a few years back.’ Now, I would never suggest that Baroness (Shirley) Williams is either mad or in authority – nevertheless, as a fervent supporter of the euro, she could explain, I thought, why Britain and Greece meet the criteria for one of Mundell’s optimal currency areas.
The Lib-Dem peer had studied at Mundell’s school. She told me she’d ‘read lots and lots’ on the Euro but not much ‘before the last 20 years’, so missed Mundell. (Actually, Mundell won the Nobel only last year for continuing work.) What of Britain as optimal mate for Euroland? She spoke of European tax and budget policies, though they have not a thing to do with reasons to meld currencies.
I would not say that Professor Williams (she teaches at Harvard) was faking it, but it was clear there was no point asking her about the supply-side economics underpinning the Euro’s conception.
Williams did argue that ‘tiny’ Britain must seek shelter within a large currency area. She may have thought I had a hell of a lot of nerve, as an American suckled in one big currency, to suggest Britain float alone.
However, the US does not have a single currency, at least not in the Maastricht sense. We have at least 50 currencies. Each state, every little burg and hamlet, has its own tax and employment policy. That’s what saved the US economy from Mundellian Reaganomics. What Reagan took away in federal funds, states and cities restored.
Recently, in my village outside New York, the fire department decided we needed a new fire house. The citizenry voted to issue bonds on Wall Street and tax ourselves to cover the debt. We didn’t need Washington’s approval. Neither the state nor the Almighty (Alan Greenspan) could stop us.
America’s states and municipalities have never ‘converged’ in the manner required of Britain by Eurocrats. As a result, debts of America’s governments and local authorities are easily double the Maastricht ceiling of 60 per cent of GDP. Yet the US economy is doing quite well, thank you. The American experience suggests that what Britain needs is not a lower rate of exchange with the D-mark, but a little more democracy.
I may seem to be drifting off the point by hauling in what is euphemistically called the UK’s ‘democratic deficit’ (the attraction to autocracy) into discussion of the euro. But, as the TGWU’s Bill Morris writes*, the risk of the euro is that it puts the economy ‘outside democratic control’.
This is not the whacko fear of a Sun reader that some Brussels bureaucrat will bark humiliating orders at Gordon Brown. Rather, says Morris, Britain’s government ‘could – if it so wished – ameliorate unemployment’. But monetary union ‘removes that power to nowhere’.
Morris underscores the point that no one is ultimately in charge of the euro. Rather, Britain’s economy will be ruled by the 3 per cent rule, the 60 per cent debt rule and the European Central Bank’s 2 per cent inflation target. This is the dream of Mundell’s monetarist circle – an economy run on automatic, by the monster in the box, a set of rules impervious to democratic forces – which will dictate policy long after they are gone and their theories are discredited.
Euro boosters think of monetary union as an an exchange mechanism to rival the Yankee dollar. But that was never the key concern of the euro’s North American inventors. Indeed, it is a supply-side axiom that a nation cannot gain long-term competitive advantage by altering the exchange rate any more than nations can alter the weather by switching from Celsius to Fahrenheit.
But what about the loss of jobs at Rover’s Longbridge and Ford’s Dagenham? Mundell’s collaborator, Art Laffer, told me: ‘If exchange rates made a difference, all cars would be made in Moscow.’
For supply-side economists, terms of trade are a sideshow. The real goal of the Mundell Reaganauts, like all revolutionaries, is to smash the state, in this case through Maastricht-driven tax cuts, state spending caps, privatisations and deregulation of labour markets (and plumbing).
In this, they share a little with left-wing supporters of the euro. England’s sharpest long-term strategist is Ken Livingstone. His long-term ambition is, he suggests, to demolish capitalism. How interesting that when the mayor called for rapid entry into the euro – presumably step one toward his ultimate goal – London’s captains of commerce applauded. ‘He understands us,’ one banker said. I believe he does.
* Emu and the Democratic Deficit, Bill Morris: The Single European Currency In National Perspective (Macmillan).
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Gregory Palast’s column “Inside Corporate America” appears fortnightly in the
Observer’s Business section. Nominated Business Writer of the Year (UK Press
Association – 2000), Investigative Story of the Year (Industrial. Society – 1999), Financial Times David Thomas Prize (1998).