The euro: will monetary union destroy national autonomy?

The euro is currently under intense scrutiny. Why? Because the reputation of the single currency – originally based largely on that of the Bundesbank for its (relatively) sound money policy – is under threat, alongside that of the EU’s Stability and Growth Pact (SGP).

The most recent danger has come from the near-certainty that Greece will be bailed out by the EU, despite its fudging of the books for its adoption of the euro and its blatant disregard of the SGP ever since, where it is not alone.

Last month, the basic issue was well put by Liam Halligan in the Sunday Telegraph:

“How can you enforce collective fiscal discipline in a currency union of individual sovereign states, each answerable to its own electorate? The truthful answer is that you can’t – not unless you subjugate the autonomy of democratically elected politicians and, by proxy, their voters.”

Most recently, this question has been tested in Iceland, whose voters gave a resounding no to the idea that the criminal carelessness of many UK local authorities in putting money in Icesave should be made good by the ordinary people of Iceland. (Were the UK in the same situation, there would have been no similar referendum; such is the power of the UK government’s executive which permits breathtaking theft from its people for whatever purpose it likes.)

In fact, the UK may well be in a similar situation in that it will surely get caught up in bailouts for Greece and others (PIGS can’t fly!), even though it is not part of the eurozone. More generally, the importance of fiscal policy to monetary union suggests that members of the eurozone will eventually become part of a de facto single state unless they abandon the single currency.

I tend to agree.Personally I am hoping that the pressures that are gradually emerging as a result of the recession will create political tensions that will ultimately result in the collapse of the Euro or at least its shrinking to a much smaller number of core states (e.g., France, Germany).

Iā€™m not sure that a currency union necessarily leads to political union. Individual states may have a good deal of freedom to make tax and spending decisions within the fiscal rules. Nevertheless, in the case of the EU there is a clear and longstanding centralisation agenda (see The European Institutions as an Interest Group by Roland Vaubel). Accordingly, the political response to the growing eurozone crisis is likely to be greater central control over domestic policies. This strategy may be very risky, however, given that the economic adjustments required in southern Europe are so enormous.

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