Posts Tagged ‘monetary union’

Plan 9? Ah, yes.

Monday, 15 August 2011

Sometimes a person or group of persons will present a system of lies that they know to be unsustainable, with the intention of gradually abandoning the pretense. The purpose is largely to pay the costs of truth in installments which, by virtue of their distribution, are more bearable than would be the cost if borne more immediately. (There may also be the hope of identifying a point at which the lies remaining are sustainable.)

This is how the Clinton Administration handled its sex scandal (calling the process telling the truth slowly) and how John Edwards seems to have handled his.

It is now how world leaders are handling the disintegration of the European Monetary Union.

The prevailing rates of time preference and understandings of the nature and origin of wealth vary markèdly amongst the cultures within Europe. By comparison with northern European nations, southern European nations tend to have very high rates of time preference and have less reälistic understandings of wealth, so that they are relatively less willing to save and to invest.

Under a union of shared fiat currency, if fiscal policy remains at the discretion of each state, then some states are able to adopt an otherwise unsustainable fiscal policy which other member states become obliged to support in order to support the shared currency.

A system of enforceable fiscal policy rules was not adopted at the time of the monetary union. The states of all of these nations are representative democracies of one sort or of another, with a strong sense in each nation that popular will must ultimately be obeyed, so that unpopular regimes would be quickly over-thrown; and national sovereignty is important in most or all of these nations. Additionally, few state officials are keen to lose their own power, and therefore most resist a surrender of power to the European Union unless they imagine themselves either as retiring or as moving on to positions within the Union as such. Under these circumstances, a monetary union could not be founded with sufficient mechanisms to compel southern European states to behave like northern European states, especially as northern European states wanted an ability to stray at their own discretion from their norms, during extraordinary circumstances; so, instead, the union was formed based upon wishful thinking.

Rather than behaving as many wished, some member states acted as was feared and as should have been expected.

The peoples of the southern European nations might like best to be bailed-out by the tax-payers of other nations; but failing that option, with their rates of time-preference and with their illusions about wealth, they would rather leave the monetary union than adopt the habits of northern Europeans; they would certainly not be willing to subject themselves to the rule of German bankers, regardless of what their states might want. Meanwhile, whatever northern states might want, their peoples are not willing indefinitely to subsidize the vacations and retirements of southern Europeans. And the democratic impulse will bend the wills of these states to those of their respective peoples.

The political leaders of the European Union are acutely aware of the beliefs and powers of the peoples of their respective nations. Most leaders of Western-style democracies understand the situation as well. (Officials of states such as that of the PRC are, however, likely to stare with a sense of outraged bewilderment.) Yet virtually all are maintaining the pretense that the EMU may plausibly be saved.

Nor is it merely state officials who are doing this. Newspapers and magazines have been confronted with explanations of why the Monetary Union cannot be fixed, but most choose to pass over them in silence. The financier George Soros, who has been insisting that the EMU must be preserved, has more recently spoken of the desirability of Greece and Portugal leaving it; yet he is aware that Italy will almost certainly default, and that Spain is very likely to do so as well.

It may be that these leaders are stalling with absolutely no Plan B, but I believe that the real point of present discussions ostensibly on how to save the Monetary Union is actually to buy time to develop and agree upon a plan to unwind it, with a minimum of political fall-out and of economic damage. The unstated objective is to preserve as much as possible of the existing political and economic order, with most or all of the same people in its ruling class.