What happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback? So long as it is a sovereign state, it can devalue its currency. It can then trade successfully at full employment provided its people accept the necessary cut in their real incomes. With an economic and monetary union, this recourse is obviously barred, and its prospect is grave indeed unless federal budgeting arrangements are made which fulfil a redistributive role.
I saw this paper from 1992(!) being re-tweeted by my former Economics professor Simon Evenett of The St.Gallen MBA. The author sees the issue of having an monetary union without a federal European government, thus preventing necessary actions (such as devaluation of currency) of individual countries.
As was clearly recognised in the MacDougall Report which was published in 1977, there has to be a quid pro quo for giving up the devaluation option in the form of fiscal redistribution.
Currently Europe does not want to do either of both. Neither fiscal redistribution / transfer payments including a central European government, nor giving the option to drop out of the Euro. Where is the way out? Does the described situation from 1992 sound familiar?
This is as far from what Germany wanted as can be imagined. But Greece could not live with German demands, and Germany could not live with Greek demands. In the end, the banking crisis gave Germany an irresistible tool. Now the circumstances demand that the Greeks accept austerity and transfer key elements of sovereignty to institutions under the control or heavy influence of the Germans.
Extremely interesting opinion piece from Stratfor on the Greek crisis. While I do not agree on many points such as the “aggressive inflexibilty of the Germans”, I still believe that the current solution is not sustainable on the long term. The question remains whether we should make a painful break rather than draw out the agony.