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Options for Europe – Part 31

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014.

You can access the entire sequence of blogs in this series through the – Euro book Category.

I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).


Back to the East Coast

I don’t have much time today as I have a lot of travel coming up. Today marks my last day in Darwin as a resident. I am heading back hometo Newcastle. I will be returning intermittently to Darwin until the end of this year (about every 6 weeks) to check on projects and give some workshops but for intents and purposes my main work location will be the University of Newcastle again. Back to the beach, decent weather and less travel time to my other commitments (mostly Melbourne). Excuse me while I breathe a sigh of relief.

Back to the Book


In other words, the ‘Delors Plan’ was effectively, dealing fiscal policy out of the game and constructing what economists call counter-stabilisation policy purely in terms of monetary interventions (interest rates adjustments) to stabilise the price level. In the Werner era, counter-stabilisation policy involved governments adjusting their discretionary spending and tax policies in order to minimise output gaps and sustain high levels of employment. It was recognised, that at times, government deficits would have to rise significantly as economic activity fell not only because tax revenue declines as less people are in employment, but also, because governments have to inject stimulus spending to get the economy moving again. The Delors Plan was in contradistinction to that Keyenesian orthodoxy of the 1960s.

The reality is that the final recommendations of the Delors Committee mirrored both the plan laid out by Hans-Dietrich Gensher in his February 1999 memo and the statement released by the Bundesbank President, Karl Otto Pöhl which was published in the ‘Collection of Papers’ accompanying the main Report (Delors Report, 1989b: 131-155). The latter, of-course, was just an elaboration of the former. Pöhl rejected the idea that a plan for a monetary union could just pick up the “ideas contained in the Werner Report” (p.132). He wanted a “new start” and that no progress could be made until there is “agreement … that stability of the value of money is the indispensable prerequisite for the achievement of other goals” (p.132). The threads from the Werner Report were cut by the shift from the Keynesian macroeconomic policy dominance with the emphasis on full employment that pervaded in the late 1960s, to the Monetarist dogma, which effectively abandoned full employment as a legitimate policy goal in favour of price stability.

What emerged was clearly the Bundesbank model – an independent central bank focused mainly on maintaining low inflation. The independence would provide the bank with the capacity to ignore political demands to compromise its monetary policy stance in recognition of rising unemployment, for example. The word ‘unemployment’ does not appear in the entire Delors Report. While there is some reference to the need to promote economic growth, the Report repeats the Monetarist mantra that the attainment of price stability will lead to long-term growth.


In the ‘Collection of Papers’ that informed the Delors Committee, there was much discussion about regional disparities in economic performance and whether they challenged the concept of a monetary union. Delors (1989: 81), himself wrote, that the creation of a monetary union “eliminates the instrument of exchange rate adjustment between the regions of the economy” and raises the issue of how disparate regions will converge in economic performance. He noted that “disparities within the EC at present are considerable, but not incomparably greater than in some mature federations such as the United States, Canada or Switzerland” (p.81). His conclusion was that “the problem of regional disparities … would not seem to be an obstacle to a furthering of the EC’s economic and monetary integration” (p.81).

He then considered the vexed issue of “how the mature federal monetary unions” handles these regional disparities. He noted that (Delors, 1989: 82):

The experience of all federal economic and monetary unions is that a diversity of budget mechanisms combine in assuring an important ‘shock-absorber’ function between regions and states with respect to the impact of cyclical and structural shocks … It would thus seem plausible to expect a substantial developmemt of the budgetary function of the EC in the case of a monetary union.

In other words, all mature federal monetary unions have a federal fiscal capacity that allows the union to distribute public spending in an asymmetric way, not only to help poorer regions make structural transitions (via public infrastructure development and the like), but also, to address the impact of negative private spending movements which impact asymmetrically across the regional space as part of the economic cycle. Delors might have said that this ‘federal’ fiscal capacity is a per-requisite for an effectively functioning economic and monetary union, and, while the ‘states’ might retain some fiscal functions, they are dwarfed in magnitude by the capacity inherent in the currency-issuing federal sphere.

Delors seemed aware this in his closing remarks, which reiterated the “powerful ‘shock-absorber'” capacity of a federal fiscal function. He said that this use fiscal policy to dampen “the amplitude of economic difficulties or of surges in prosperity of individual states” was “both the product of, and source of the sense of national solidarity which all relevant economic and monetary unions share” (Delors, 1989: 89).

The juxtaposition of the fiscal policy acting to redress cyclical difficulties across all regions and the legitimation of the same in terms of a sense of national solidarity is highly significant for what was to come and what options Europe now faces. Citizens of the US or Australia refer to themselves as Americans or Australians. Citizens of Germany and Greece refer to themselves as Germans and Greeks, respectively. There is a crucial difference in those self-assignments that no economic or monetary infrastructure can usurp.

Bundesbank President, Karl Otto Pöhl did understand the requirements of a functioning monetary union. He wrote (Delors Report, 1989b: 136) that:

A monetary union presupposes considerable shifts in the responsibility for economic policy to a central authority and hence a far-reaching reshaping of the Community in political and institutional terms in the direction of a broader union. Although
complete political union is not absolutely necessary for the the establishment of a monetary union the loss of national sovereignty in economic and monetary policy associated with it is so serious that it would probably be that it would probably be bearable only in the context of extremely close and irrevocable political integration. At all events, within a monetary union, monetary policy can only be conducted at a Community level. A substantial transfer of authority will also be necessary in the field of fiscal policy.

The relevant question is what would the federal fiscal authority be able to do? The vision of a federal fiscal capacity in the proposed economic and monetary union presented by Bank of International Settlements representative on the Delors Committee, Alexandre Lamfalussy indicated he thought there was no place for a sizeable federal role. In noting that most federal systems conducted their macroeconomic policy “in the context of context of their sizeable federal budgets, while budgetary policies of individual states are left primarily to the discretion of their governments” (Lamfalussy, 1989: 94):

This solution, however, is out of the question for a prospective European EMU because its central budget is not expected to exceed 3 of GDP … The size of the Community budget would clearly be too small to provide for an adequate masse de manoeuvre for an effective macro-fiscal policy.

Lamfallussy also concluded that (1979: 108) that “the relatively small present and prospective role of budgetary transfers in the Community is ultimately a reflection of the lack of political unity, which imposes major constraints on the acceptability of redistributional transfers between member countries”. At that point, the political leaders involved in this venture should have concluded that, given these constraints, the creation of an effective economic and monetary union was nonviable. Events have proven that to be the case, but it was obvious in 1989 that there was not a sufficient commitment nor “sense of national solidarity” to create a single functional European economy.

The other inference of Lamfallussy’s observation about the political impossibility of allowing the federal fiscal position to be flexible enough to meet the demands imposed by fluctuations in private spending of the magnitude we saw in 2008 and since is that
the Member States’ fiscal positions would have to do the work that is ordinarily done by the federal government. In times of recession, an effective policy position would imply significant Member State deficits in excess of 3 per cent of GDP. As we will see, the system ruled that possibility out by imposing the tight fiscal rules in the Stability and Growth Pact (SGP). The system was in a straitjacket from day one.


Additional references

This list will be progressively compiled.

Committee for the Study of Economic and Monetary Union (Delors Report) (1989a) Report on economic and monetary union in the European Community, April 17, 1989.

Committee for the Study of Economic and Monetary Union (Delors Report) (1989b) Collection of papers submitted to the Committee for the Study of Economic and Monetary Union, April 17, 1989.

Danescu, E.R. (2013x) The Werner Report and the Delors Report, Centre Virtuel de la Connaissance sur l’Europe. ba66db14dcac.html

Delors, J. (1989) ‘Regional implications of economic and monetary integration’, in Committee for the Study of Economic and Monetary Union (Delors Report), Collection of papers submitted to the Committee for the Study of Economic and Monetary Union, 80-89.

European Commission (1999) ‘Pierre Werner — testimonies at the threshold of the 21st century’, Documentary film referred to in Danescu (2013x).

European Council (1988) ‘Conclusions of the Presidency European Council, Rhodes, 2 and 3 December 1999’.

Haas, P.M. (1992) ‘Introduction: Epistemic Communities and International Policy Coordination’, International Organization, 46(1), 1-35.

Lamfalussy, A. (1989) ‘Macro-coordination of fiscal policies in an economic and monetary union in Europe’, in Committee for the Study of Economic and Monetary Union (Delors Report), Collection of papers submitted to the Committee for the Study of Economic and Monetary Union, 93-125.

Pöhl, K.O. (1989) ‘The further development of the European Monetary System’, in Committee for the Study of Economic and Monetary Union (Delors Report), Collection of papers submitted to the Committee for the Study of Economic and Monetary Union, 131-153.

Verdun, A. (1999) ‘The Role of the Delors Committee in the Creation of EMU: An Epistemic Community?’, Journal of European Public Policy, 6(2), 308–28.

That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

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