Wednesday, November 9, 2011

Why is the EU failing?

The simple answer is that it divorced monetary and fiscal powers. This cannot be sustained because fiscal actions have a direct impact on the monetary system and vice versa. The EU stripped themselves of the ability to deal with crises of any kind and those who understand monetary systems predicted this from the very beginning. Among those includes Wynne Godley who wrote this article about the EU in 1992 (via New Economic Perspectives).

I just want to highlight one paragraph, but I highly recommend reading his entire piece.
Let me express a different view. I think that the central government of any sovereign state ought to be striving all the time to determine the optimum overall level of public provision, the correct overall burden of taxation, the correct allocation of total expenditures between competing requirements and the just distribution of the tax burden. It must also determine the extent to which any gap between expenditure and taxation is financed by making a draft on the central bank and how much it is financed by borrowing and on what terms. The way in which governments decide all these (and some other) issues, and the quality of leadership which they can deploy, will, in interaction with the decisions of individuals, corporations and foreigners, determine such things as interest rates, the exchange rate, the inflation rate, the growth rate and the unemployment rate. It will also profoundly influence the distribution of income and wealth not only between individuals but between whole regions, assisting, one hopes, those adversely affected by structural change...Almost nothing simple can be said about the use of these instruments, with all their inter-dependencies, to promote the well-being of a nation and protect it as well as may be from the shocks of various kinds to which it will inevitably be subjected...I recite all this to suggest, not that sovereignty should not be given up in the noble cause of European integration, but that if all these functions are renounced by individual governments they simply have to be taken on by some other authority...The counterpart of giving up sovereignty should be that the component nations are constituted into a federation to whom their sovereignty is entrusted.

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