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Options for Europe – Part 96

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).

Part III – Options for Europe


Chapter 1 – Introduction


The German plan for reunification in early not only brought out all the latent hostility towards Germany within Europe and spawned some very bitter political interactions, but accelerated the nations on the path to Maastricht. While the Cold war had dampened the sensitivity elsewhere in Europe about Germany, all changed when the ‘Wall’ collapsed. With German reunification back in vogue, the rest of Europe started to ask what life would be like if Germany became ‘too powerful’. the revival of the ‘German question’ ignited a French press frenzy and Jacques Delors made it clear that the only satisfactory answer was to strengthen the “federalist traits of the Community” (Delors, 1989b: 11).

Margaret Thatcher exposed her racist streak by claiming that the German “national character” was “by its very nature a destabilizing force … in Europe” (Thatcher, 1993: 791). A British government minister, close to Thatcher suggested that he would prefer to be in the shelters fighting against Adolf Hitler rather than be stealthily taken over by the economic might of Germany. Mitterand combined with Thatcher in an attempt to derail the unification. He also tried to ignite the old Franco-Russian allegiances against the German danger. The paranoia and enmities were remarkable given that France and Germany were leading Europe towards an economic and monetary union. But Helmut Kohl largely ignored the paranoia fast-tracked the reunification effort.

The massive economic boost that the reunification generated in Germany strained the capacity of the economy to absorb the growth and the German inflation rate rose more quickly than its European partners, which led the Bundesbank in 1990 to increase interest rates. With a stable, but undervalued Deutsch Mark and the Bundesbank driving down the German inflation rate, Germany’s trading partners had a problem. To remain competitive against Germany they had to drive their inflation rate down well below Germany’s. This required harsh cutbacks in domestic spending, which would certainly invoke a recession. European political nuances were both opposing currency movements that would provide competitive adjustments for each nation and facing the domestic costs of recession.

In other words, even before the delegates turned up in Maastricht, the European nations were rehearsing the problems that come with a fixed exchange rate system, where one nation is economically dominant and the other members of the system struggle to maintain international competitiveness. In 1990, they had a vision of what would come in 2008, but the leaders and their advisors were so besotted with neo-liberal ideology that they couldn’t identify the vulnerability of the monetary system they were set on creating. They certainly had no perception of the enormous costs their citizens would incur when that vulnerability was breached.

In the lead up to Maastricht, there was still discussion about the role of a Community fiscal policy to help complement Member State policies in times of asymmetric spending changes which might cause prolonged recession and entrenched unemployment. The conservatives were resistant to this idea although a number of economists warned that without such a function and with the Delors-type fiscal constraints imposed on national governments, it was highly likely that a nation experiencing a economic slowdown would be forced to cut spending and make matters worse. In other words, the fiscal rules would require governments to introduce exactly the opposite fiscal policy changes to those that would be consistent with sound fiscal policy practice. That sort of advice was clearly ignored. In late 1990, the European Commission released its ‘opinion’ on the design of the union (the Christophersen Report), which basically rubber-stamped the Delors Plan and eschewed the nation of a Community-level fiscal function. The model of economic policy that was emerging was clearly ‘Modell Deutschland’ with the Bundesbank culture to be defined in the proposed legal framework of the new monetary union. Price stability was elevated to the level of a deity and any emphasis on economic growth and low unemployment was downplayed.

There were enough ‘experts’ saying that binding rules of budgetary policy would bias the EMU towards low growth and persistently high unemployment, but such was the neo-liberal that Groupthink and resulting denial that the European politicians successfully had people generally believing that by maintaining price discipline, economic growth would be maximised. The GFC exposed how ridiculous that mantra was. But anyone who dared question the Monetarist supremacy at the time, and instead, advocated Keynesian remedies to reduce the entrenched European unemployment, were met with derision from the bulk of the profession who had embraced the new economic theory and its policy implications.

The European Parliament had been mostly compliant since the release of the Delors Report and toed the ‘Monetarist party line’ by supporting the view that the central bank should adopt as its sole charter an inflation-first policy with no responsibility for economic growth and full employment and no capacity of elected governments to influence that policy. In the Parliament’s vision, Europe didn’t need a federal treasury. How wrong they were.

The stars had aligned. All the expert panel reports, statements from the European Commission, the European Parliament resolitions, and other contributions from the Committee of Central Bank Governors all sang from the same hymn sheet, which meant that the die was already cast in terms of the essential design flaws that would emerge in 2008. It became clear that Maastricht would ratify the imposition of harsh fiscal rules on national governments, prohibit any central bank support for national government deficits, and prohibut bailouts in general. The die was cast and it was only left to work out the ‘reference values’, which would define the fiscal rules.

Once again, the French, in trying to exert influence, scored an ‘own goal’ by leading the way in defining the tough binding rules that would become the SGP. The Germans were using the so-called ‘Golden Rule’, which meant that governments could borrow only to cover their investment expenditure. That rule was being promoted as the way forward for the new economic and monetary union. But when Mitterand turned neo-liberal in 1983, his government had invoked a stricter fiscal regime – that deficits could not exceed 3 per cent of GDP, which it subsequently pushed at the pre-Maastricht conferences in 1990. The development of this rule in 1983 was comedic. The person who came up with the rule admitted in 2010 that economists in the French Ministry of Finance were told that Mitterrand wanted a simple, practical deficit rule which carried the semblance of authority by being endorsed by economists and would provide an image of fiscal discipline so that he could resist the demands for more funds from his government ministers. A ‘back of the envelope’ calculation was produced in a few minutes which had had no theoretical basis in economics. France proposed the rule in the negotiations leading up to Maastricht to outdo the German’s ‘golden rule’ in terms of ‘fiscal toughness’. The rule stuck and it is now used to enforce policies that have lead to millions losing their jobs.

In the lead up to Maastricht, the Member States met in Rome to beat the final agreement into shape. The deals had already been done and a German victory was obvious. It had demanded that that if it was to surrender the Deutsche Mark and relegate the Bundesbank to being part of the European System of Central Banks with the newly created European central bank at the helm, then the latter would have to be constituted and act as if it was the Bundesbank – independent of the politicians, singularly focused on price stability, and unable to offer any funding assistance to the Member States in economic strife. Even the French hope that Ecofin might be bolstered to act as a European fiscal authority was abandoned because the Germans considered this would compromise the focus of the new European central bank on inflation control. Thus, fiscal policy was left as the responsibility of the Member States, with tight ‘binding’ limits imposed, which would bias Europe towards stagnation. The neo-liberals, of-course, claimed the fiscal constraints and price stability emphasis would maximise Europe’s growth potential. One of many lies they told.

The Executive Director of Dutch central bank at the time, André Szász wrote in 1999 that it was obvious that the arbitrary 3 per cent rule that was agreed at Maastricht would be breached “as soon as an adverse cyclical situation presents itself” (p. 160). As the Member States went to Maastricht to sign off on this ridiculous arrangement, there were many people who could see beyond the neo-liberal ideology and see that the potential for the EMU to collapse under its own compromised and flawed design was high. But political careers were at stake and the Groupthink dominated. The folly that masqueraded as responsible leadership would within 15 years inflict untold misery on the most disadvantaged citizens in many European countries. But in 1991, as December approached the bluster and rhetoric was pushing the throng in one direction only. The cliff would come later.

It is interesting to juxtapose the lack of any commitment to growth and full employment in the Maastricht Treaty with the grand policy statements that accompanied the peace at the end of the Second World War. In 1945, the overwhelming challenge for each nation was how to turn their war-time economies, which had high rates of employment as a result of prosecuting the war effort, into a peace-time economy, without sacrificing the high rates of labour utilisation. Concerns about full employment were at the centre of these policy frameworks released by governments in most nations at the end of the Second World War. The basic rules of macroeconomics that spending equals income were understood as being intrinsic to the desire to maintain a high level of employment. British economist William Beveridge defined full employment as a state where there more “more vacant jobs than unemployed men” (Beveridge, 1944: 18). Advanced nations rejected the old delussion that had dominated the early days of the Great Depression in the 1930s – the so-called British Treasury line – that claimed less government spending and wage cuts would free up the private markets and solve the mass unemployment. The alternative, that required government to take responsibility for ensuring expenditure was adequate to generate jobs for all those who desired them, was the counter view proposed by John Maynard Keynes and others, which eventually won sway. The old British Treasury line was resurrected in the Monetarism of the 1970s and permeated the economic thinking that went into the Maastricht Treaty and the conception by Europe’s leaders of the EMU. The imposition of fiscal austerity during the current crisis reflects the ‘old delusions’ that initially made the Great Depression worse before the more Keynesian policies were introduced.


Additional references

This list will be progressively compiled.

Barbash, J. (1982) ‘The Guilds of Academe’, Challenge, 25(1), March-April, 50-54.

Blanchard, O. (2008) ‘The State of Macro’, NBER Working Paper No. 14259, National Bureau of Economic Research, August.

Democracy Now (2007) ‘The Conscience of a Liberal: New York Times Columnist Paul Krugman on Healthcare, Tax Cuts, Social Security, the Mortgage Crisis and Alan Greenspan’, October 17, 2007.

European Commission (2014) ‘History of the CAP’,, Accessed May 26, 2014.

Independent Evaluation Office (IEO) (2011) ‘ IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004-07’, Washington, International Monetary Fund.

Janis, I.L. (1972) Victims of Groupthink, New York, Houghton Mifflin.

Janis, I.L. (1982) Groupthink: Psychological Studies of Policy Decisions and Fiascoes, Second Edition, New York, Houghton Mifflin.

Goodacre, H. (2014) ‘Economics Departments have fallen behind’, Financial Times, May 23, 2014.

Gordon, D.M. (1972) Theories of poverty and underemployment, Lexington, Mass: Heath, Lexington Books.

Grim, R. (2009) ‘Priceless: How the Federal Reserve Bought the Economics Profession’, Huffington Post, May 13, 2009.

Gross, C.C. (2008) ‘Three before their time: neuroscientists whose ideas were ignored by their contemporaries’, Experimental Brain Research, 192(3), January, 321-34.

Kazin, M. (2006) A Godly Hero: The Life of William Jennings Bryan, New York, Alfred A. Knopf.

Krugman, P. (2009) ‘How Did Economists Get It So Wrong?’, New York Times, September 2, 2009.

Kuhn, T.S. (1996) The Structure of Scientific Revolutions, Third Edition, Chicago, The University of Chicago Press.

Lakatos, I. (1970) ‘Falsification and the Methodology of Scientific Research Programmes’, in Lakatos, I. and Musgrave, A. (eds.) (1990) Criticism and the Growth of Knowledge, Cambridge, Cambridge University Press, 91-195.

Ludlow, N.P. (2005) ‘The Making of the CAP: Towards a Historical Analysis of the EU’s First Major Policy’, Contemporary European History, 14(3), August, 347-371.

Schiller, R.J. (2008) ‘Challenging the Crowd in Whispers, Not Shouts ‘, New York Times, November 2, 2008.

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

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