Tuesday 13 December 2011

Fiscal Union

Staying on the European theme, the latest conventional wisdom seems to be that the difficulties of the Eurozone prove that the UK’s decision to stay out was the right one.  I’m not so sure – the problem is that we only get to run history once, so it’s impossible to be certain how things might have turned out if a different decision had been taken.
It is surely at least possible, however, that the currency itself would have been stronger and more able to resist speculative pressure if the UK had been part of it from the outset. 
It’s not just that the UK is the third largest economy in the EU, and that having one of the biggest players staying outside was inevitably going to cause continuing doubt about the project.
It’s also that, by staying outside the Eurozone, the UK did two other things which were less than helpful.  Firstly, it provided a home within the EU itself for the financial speculators who have done so much to undermine the Euro in particular and the global economy in general.  And secondly, sterling provided an alternative currency to use in financial trading on those markets – credible alternative currencies are a key element in the operation of the financial markets.
I doubt that such considerations will affect for one moment the view of those who have been hostile to the single currency from the outset; and as I noted above, I cannot be certain that things would have panned out very differently.  My point, though, is that those who are claiming that the UK Government’s decision was the ‘right’ one cannot really be that certain either.
One other point, almost as an aside.  If it is true – as many are now claiming – that monetary union is impossible without fiscal union, where does that leave the idea – proposed by some nationalists – that an independent Wales could continue to use sterling? 
It’s not an exact parallel, of course, but neither is it a completely irrelevant one.  Being part of a monetary union implies similar fiscal policies; the lack of that has been the Euro’s weakness, and the need for it the justification of many for staying out.  Those fiscal policies can either be set jointly, in some sort of club or federation, or be set by the larger partners and imposed on the others. 
That’s the choice facing the Eurozone; it would also be the choice facing members of any sterling zone.


Anonymous said...

This issue is a problem for London.

Wales and Scotland can do a Saorstát pound, upon gaining independence. This Irish pound remained at fixed rate of exchange in the Stirling zone from 1928 until 1978. In 1978, the Irish government broke with fiscal controls for the Sterling zone, and joined the European Exchange Rate mechanism. From 1979 until 1999 the Irish Punt was subject to realignment, in other words fiscal control dictated by the ERSM, essentially the Deutch Mank. In 1999, the Irish joined the Euro. The reality is that fiscal control has never been wholly controlled in Dublin and the Irish chose to opt into the fiscal union best suited to the nation. The issue of fiscal union does not effect Welsh nationalists, except those who think Wales should invent it's own currency, but I see no need for that. An independent government would just have to choose what external fiscal policeman to opt into. It just means for a while a factory in Llantisant might have the option to stamp a picture of Owain Glyndwr on the coin instead of the mother in-law from Slough. There may well be a time for moving fiscal policing from Threadneedle Street to Grossmarkthalle, but that should only be done under conditions of best interest for Wales.

For Scotland, see above only use Robbie instead of Owain, as they already do.

Anonymous said...

The point is however that what is proposed by the EU is not fiscal federalism at all, but a mechanism to ensure the protection of private bondholders and the effective criminalization of anything other than draconian1930s hard-right austerity policies within the Eurozone. There is no element of solidarity to mitigate the trade and competative imbalances between the Eurozone core and periphery, a root cause of the crisis. Fiscal federalism done properly is vital to Europe's future, but this isn't it. Cameron espouses a downscale neoliberal currency area, Merkozy the same deal at continental scale. Both will fail in their current or currently proposed models.

John Dixon said...


There is much in what you both say with which I do not disagree. I think, though, that we need to distinguish between structure and policy. There is no necessary reason why the Eurozone fiscal arrangements cannot follow a more Keynsian policy rather than a neo-liberal one, just as there is no reason why the sterling area cannot do likewise. I'm not convinced that the choice between the two structures should be made on the basis of the policy being followed at a point in time. Changing the policy is a matter of politics rather than of economics or structures.

Anon 09:53 said "There may well be a time for moving fiscal policing from Threadneedle Street to Grossmarkthalle, but that should only be done under conditions of best interest for Wales." I actually agree that that is what the choice is; I'm not sure, however, that all those advocating retention of the pound following independence understand the choice they are making. And that's part of the point that I was making - membership of any monetary union involves acceptance of rules, and those rules will either be made for us, or be made by a club of which we are a member. Short of an independent currency (which I would not advocate, although there are some who would), there isn't any other alternative.

Anonymous said...

I agree John, structure and policy are distinct and I advocate fiscal union, provided it is done properly, respecting the principles of democracy, autonomy and solidarity ie that the overall structural framework be based on democratic institutions and oversight and embodying the flexibility permitting the member states and electorates to make meaningful political choices within that structure, with mechanisms to mitigate the inevitable structural, cyclical and fiscal imbalances between members which left unchecked will undermine the cohesion of any union.

However, the structure proposed by Merkozy is the antithesis of federalism- no solidarity, democracy, or autonomy. Critically, the restrictions on defecits mean that realistically only one policy is open to member states- this structure is extraordinarily narrow and prescriptive in policy terms. That is the problem. It is imperative that we condemn both Cameron's isolationist stance both in general and in terms of the danger to Welsh interests it poses, but the Merkozy pact is also a threat to poor and peripheral areas such as Wales. Gareth Owen's piece in today's Guardian offers a possible way forward, beyond the false choice between Ukipia and Merkozia.

You mean there's more??? said...

I wonder if much of the problem is inside capitalism. The banking crisis was a capitalist crisis.

Countries today are in thrall to ratings of them by credit agencies.

These agencies seem to arrive on a judgement of a country by two means, the extent to which the state spends little on it's people and services and the extent to which a state permits the uber rich to avoid taxation.

I think incidentally the best summation of Camerrons performance came from one Dennis Skinnner

Anonymous said...

Strangely, the "framework be based on democratic institutions and oversight and embodying the flexibility permitting the member states and electorates to make meaningful political choices within that structure" was a found made by the ever federalist Germans. Let's not forget that it was Merkel who wielded the first veto, to Sarkozy, to prevent the Central European Bank being the lender of last resort. The question now is, whether the other states find this third policing option respectful of meaningful domestic political choices flexible enough. May I point out that Wales does not currently have such a choice, that was made even more remote by Cameron's veto. He turned his back on the 'other small states' in the EU.

Scrutineer said...

"Wales and Scotland can do a Saorstát pound, upon gaining independence. "

This is not what the SNP is proposing though. They are advocating pounds sterling. That may even be a credible position, but you have to accept in the real world that that is what they are opting for.

For the SNP currency union with London would be preferable to currency union with Germany/France. Politically, even.

Anon 12:28 is quite close to the mark. There is a view that the whole Cameron thing was more or less staged. Cameron, Merkel and Sarkozy all have the same economic agenda. They are all centre-right leaders. The episode was based not on economics but on nationalism. British nationalism versus continental European projectism.

Anon 16:28 raises a nice utopian state of affairs where democratic institutions would be involved to make it a genuine fiscal federal union. Has he/she been watching the European project at all? Remember the Irish Lisbon treaty referendum?

Not convinced by the other Anon (14:44) about Cameron isolating Wales. Nobody has really been isolated. It's all a charade. Capitalism on the mainland needs the British markets and the British markets need the Eurozone. They're "all in it together". They want the UK to contribute to IMF funds for Eurozone bailouts.

A tightened fiscal union based on raising more cash for bailouts, more rewards for failure? Whether you're Welsh, British, Irish or whatever, it's "more of the same". A bankocracy. Welcome to "balanced budgets" (permanent cuts) and "fiscal discipline" (reducing the scope of the state). You can have it in European or British flavours. How will Scotland position itself now?

Anonymous said...

I cannot agree with the statement "Capitalism on the mainland needs the British markets and the British markets need the Eurozone." Whilst it's true that any reduction in trade with EuroZone would spell collapse for the UK economy. British markets are only 8% of EuroZone economic activity. To put it in an independent perspective : Trade turnover between China and the UK is $40billion per year. Between Germany alone and China it is $200billion per year. Capitalism on the European mainland patently does not regards 'British markets' as significant. Only a fool falling for the British nationalist machismo would conclude that. At times of crisis, and some would argue is a capitalist crisis, it's important to take a cool realist analysis of the situation. Allies for the economy of Wales will not be found in London, but in the politics of Europe it will. Pity we have a First Minister who cannot see this, unlike in Scotland.