In a recent contribution to the understanding of the origin of the European Monetary Union (EMU) crisis, Paul Krugman*   argues that this has been due to the choice made by the European politicians of putting the reasons of politics that called for a closer union, presumably after the German reunification, before those of economics. Since political union was not yet insight, a shortcut to an irreversible path has been found in a monetary union. In another contribution, Carlo Panico** found the origins of the crisis in an institutional failure. Both arguments are fine as far as they go. However, both the political choice made by the European politicians and the institutional framework they selected are more calculated than it would appear from the interpretations considered here. Let us begin with the second argument.

1. The reference by Panico to the institutional weakness of the European economic governance is useful and relevant.  No doubt that the absence of a respected European economic authority on the one hand and the prevalence of political dithering especially by the main regional power on the other, has favoured the speculative activities that have worsened an already serious situation. Panico points out, in particular, the lack of an official status of the Eurogroup, the committee composed of the EMU finance ministers (with the participation of the President of the ECB). Having said so, the question that Panico does not
discuss is why Europe has not endowed itself with a more authoritative economic governance.

International institutions do not fail because they are badly designed, as Panico seems to suggest, but because, as political realism taught us, States quite rarely surrender their sovereignty – certainly only weak or defeated powers accept to relinquish it, or perhaps national elites that are unable to pass some desired (for them, but unpleasant for the majority of the population)
measures at the national level that are thus gladly delegated to a super-national authority. The existence of mutual economic advantages might, of course, also justify some devolution. As a matter of fact, France has traditionally, and repeatedly from 2008, pressed Germany to accept a stronger European governance, in particular, a coordinated fiscal policy.

The Germans have always firmly rejected these proposals since a higher status of the Eurogroup would have de facto weakened the authority and independence of the ECB.Clearly an authoritative political body charged with the coordination of economic policies would have a status higher than a technocratic body as the ECB. Going a step further, in summer 2009,
a sentence of the German Constitutional Court ruled any hypothetical European federal economic governance as unconstitutional, thereby reaffirming the nature of the EU as a club of independent states.

According to historian Carl-Ludwig Holtfrerich (1999), Ludwig Erhard – the legendary guide of the German economic policy in the fifties – and Wilhelm Vocke, the President of the Bank Deutscher Lander (as the central bank was then called), deliberately
decided to pursue a ‘monetary mercantilist’ model taking advantage of the Bretton Woods context: assure through internal price stability, or a lower inflation rate than the competitors, a competitive advantage. This model, by implying domestic labour discipline, involved the trade unions in the success of the model: “foreign trade is not a specialised activity for a few who
might engage in it, but the very core and even precondition of our economic and social order”, stated Erhard in 1953. The ‘independent’ Central Bank was anyway the watchdog of the last instance of wage discipline.4 The great success of this model is widely known. Domestic fiscal rigour, sterilisation measures and capital exports (followed in the sixties by two revaluation of
the DM) protected the country from what was at that time called ‘imported inflation’. Fiscal surpluses and wage growth moderation explain why the export-led model was accompanied by large trade surpluses.

 
2. This is not the place to illustrate the vicissitudes of this model in the period since World War-II. The natural impression arises that the recent policies pursued by Germany, after some fiscal profligacy that followed unification, were an attempt to reaffirm this model, particularly under the Gerhard Schroder’s Kanzleramt. This is not a model that Germany would give easily up. In
this context, the surrender of the monetary sovereignty is not surprising, since it assured the working of the German ‘monetary mercantilism’ without the noise created by the competitive devaluations of weaker countries

Another story would be, of course, the devolution of macroeconomic policy- monetary and fiscal- to an external authority that had to also take care of the balance of payments disequilibria among member countries, possibly compelling the surplus countries to reduce their trade surplus – by imposing a laxer fiscal and wage policy on them (Williamson 2011), or by enforcing compensatory fiscal transfer to deficit countries, the ‘transfer union’ so-feared by the German public opinion. The German total closure towards anything
vaguely close to these stances explains why France, after some grumbling, has always ended up backing Berlin views.

Of course, the crisis has shown the short-sightedness of the German views of a non-cooperative international capitalism, given that as a credit country it is would be fully involved in a possible bankruptcy of the indebted countries. The hope that worse scenarios will not materialise, and theprogressive projection of this country in the extra-European markets – particularly in the Chinese– may explain Germany’s relatively little interest in more stable inter-European solutions that might jeopardize her economic model. It is also possible, however, that the materialisation of the worse scenarios will impose on her some previously unthinkable solution. Anyway, the question is not of institutional design, but of convergence or lack of it, of national interests.

3  American economists have always been skeptical about the EMU. Krugman’s explanation of the decision by the European powers to endeavour such a risky enterprise (from the point of view of economic analysis) refer to the widespread argument that the European politicians put the cart before the horse, the political design of a closer Europe ignoring ‘the warnings, which were
issued right from the beginning.’ The standard account of this forcing is usually found in the French will of rendering the German western European ties irreversible after the unification and the collapse of eastern Europe real socialism, moderating the natural tendency of Germany to reestablish her old eastern ties. This argument is fine as far as it goes. It does not, however,
satisfactorily explain why peripheral European countries – including Italy - strived to obtain the EMU membership. The ambition to import the German discipline was likely the main motivation for these countries, although hidden behind the pro-European rhetoric.

This is another case in which a national elite regards it convenient to release national sovereignty to a super-national authority. The point is that Germany will always be the best player at its own game, so that the price paid by the European periphery to ‘import discipline’ has been progressive trade imbalances vis-à-vis Germany. On the other hand, had the European periphery being better at the German game – for instance by avoiding an economic growth fed by cheap capital inflows, keeping wages and prices more competitive -, Europe would have anyway died of a competitive deflation spiral. ‘Profligate’ PIGS countries, sustained by capital flows from core European countries, gave the illusion that the EMU was working and a catching up taking place, while avoiding Germany’s fall into a recession given its renewed restrictive wage and fiscal policy stance. Germany could thus also celebrate the full recovery of her export-led model.

4. To sum up, both the policy and the institutional options taken by core and peripheral European countries do not appear as the result of too haste political decisions or ill institutional design, but as deliberate choices, method in the madness. A better designed Europe could, of course, be possible with fiscal and monetary coordination, and internationally planned national wage and fiscal policies aimed to correct the infra-European imbalances. The only problem is that this does sound like an unpleasant joke to German ears.

*Krugman P. (2011), Can Europe be Saved? http://www.nytimes.com/2011/01/16/magazine/16Europe-t.html
**Panico C. (2010), “Causes of the Debt Crisis in Europe and the Role of Regional Integration”,http://www.networkideas.org/featart/oct2010/Carlo_Panico.pdf.