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Miguel Otero @miotei
, 16 tweets, 6 min read Read on Twitter
I have just read this column written by Dutch officials from the Ministry of Finance on Eurozone reform "A more stable EMU does not require a central fiscal capacity" | VOX, CEPR Policy Portal… Here my thoughts... (thread)...
Needless to say that the position of the officials from the Ministry of Finance of the Netherlands is diametrically opposed to what we have written @voxeu… and which emanates from the view of the 22 Spanish experts on the Euro…
This debate is of course interesting because it defines broadly the positions of the #Netherlands and #Spain in the debate on Eurozone reform. Remember we had the Eurogroup meeting this week and we will have the definitive Euro summit on the current package of reforms next week
The Dutch take is this: "the EZ should focus on completing Banking Union, developing CMU, & ensuring that MS have the fiscal space to use automatic stabilisers. Doing so would strengthen financial & fiscal stabilization mechanisms & obviate the need for a central fiscal capacity
There are several problems with this statement. First of all it assumes that you can have credit and financial integration (BU and CMU) without the corresponding political integration. Well, money and credit does not work like that, as I explain here:…
The political economy literature on the instability of dis-embedded markets is very old, you can go as far back as Smith, but Keynes and Polanyi suffice here as references. On the "dis-embeddness" of the Eurozone, read the book by @m2matthijs & @MkBlyth…
Money, and therefore the euro, cannot be separated from politics. The scholar that has explained this best is @ProfKMcNamara. Read these two short pieces: "The euro is an experiment in making a currency without a government. That’s why it’s in trouble"… ...
And also this one, with the telling title: "This is what economists don’t understand about the euro crisis – or the U.S. dollar"… Key sentence here: "single currencies are never the product of debates about optimal economic solutions", like a BU and a CMU
When the Dutch ministry of Finance advocates the completion of a banking union and a capital markets union to absorb macroeconomic shocks, drawing on the US experience, it misses the fact that the US had to first integrate politically before consolidating its single market
Despite already having a political union of sorts, creating a single market in banking and finance took decades in the US and necessitated great efforts in regulatory and legal convergence (ie. a lot of politics). See the excellent work of @MichelleEgan14…
Our Dutch counterparts somehow think that with the current Eurozone governance structures and more fiscal discipline we are prepared for the next crisis. This is extremely optimistic. First of all, in a systemic crisis you need a much larger European fiscal backstop.
Secondly, on the legitimacy and political side of things, the next crisis will essentially be governed like the previous one. We will have an intergovernmental ESM with no voice defending the European interest and "men in black" deciding and supervising structural reforms. Toxic!
Leaving now the governance of crisis, aside there is of course the issue of "joint public goods in the Eurozone". Without a central fiscal capacity to finance those (a proper, safe and competitive single market), do we really think that Europe can compete in the 21st century?
Overall, in the long term, the Eurozone and the European single market will not have sufficient stability and scale to compete with the US and China with a risk free sovereign asset. As long as we don't understand that we are screwed (and sorry for my French)
This has, of course, an external dimension, no central fiscal capacity means no European safe sovereign asset able to compete with US treasuries, ergo no single international representation of the Eurozone, ergo no capacity to stand up against US dollar predatory hegemony
So, yes, the economics of the Dutch proposals is flawless. If we have a banking union, and a capital markets union and on top of that sufficient fiscal room for stabilisation we are all good. The politics, however, is nonexistent or simply wrong. End of the thread.
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