Charles Goodhart and Dirk Schoenmaker just released their article on a game plan for saving the Euro, which is approaching its endgame. According to them,
An EZ Minister of Finance without money is like an emperor without clothes. There are proposals to have tax capacity capable of funding a budget of about 2% of European GDP (Marzinotto et al 2011; Goodhart 2011). This 2% should cover most eventualities, including effective stabilisation policies. Yet there may be exceptional circumstances, for example, relating to banking resolution where more is needed (the deep pockets of government).
Given the severe imbalances in the Euro Area, this looks too low. Really 2%? A recent empirical study done by The Economist for the United States suggests otherwise.
What is wrong with the Euro Area? Wynne Godley said this best in an article (written in 1991) in The Observer titled “Commonsense Route To A Common Europe”. Scan here
But more disturbing still is the notion that with a common currency the ‘balance or payments problem’ is eliminated and therefore that individual countries are relieved of the need to pay for their imports with exports.
Quite the reverse: the existence or a common currency makes a country more directly dependent on its ability to sell exports and import substitutes than it was before, particularly as it will then possess no means whereby it can (in the broadest sense) protect itself against failure.
All of this was recognised in the Macdougall Report of 1977 which correctly argued that if a monetary union were not later to fly apart it would be necessary to have a Community budget at least seven times larger than existed then, with most of the increase going into the social and regional fund. The object of having a greatly enlarged budget would, of course, be to carry out the kind of fiscal equalisation that is at present performed by national budgets, and which is essential if a minimum standard of living is to be maintained throughout the Community.
[emphasis added ;-)]
The Macdougall Report is available from the European Commission website: Part 1 and Part 2. Haven’t read it, so my knowledge is restricted to the above quote, and it adds to my huge list of things to do.
At the time of writing, I believe the situation was much different. The imbalances in the “three sectors” (public, private and external) is now severe in the Euro Area. (Three for each country, so actually 17 x 3)
Sir Donald Macdougall died in 2004 and according to The Guardian‘s obituary:
His career – as an Oxford don, a London “special adviser”, a mover and shaker in Whitehall and Westminster – started before the second world war, and wound down with skilful “letters to the editor” against the euro.
There have been so many proposals on attempts to rescue the Euro Area. Ideas termed “monetary financing” by the European Central Bank carry tremendous risks of exacerbating imbalances within the Euro Area, because nations will keep relying on the Eurosystem’s financing and is a potential political time-bomb. And, there are those simpletons, who argue that nations should just walk away! As if …
To me, it looks as if the European leaders know that the size of the central government and the fiscal transfers would be substantial given Macdougall’s estimations were done when the situation was much different and a redoing may prove this. It is the political unacceptability of this, which will finally lead to Eurocalypse.