Robert Mundell, father of Europe?
Well before the creation of the euro, the Canadian Robert Mundell who died a few days ago, laid out the conditions for success of a monetary union. His works won him the Nobel Prize for economics in 1999, the year that the euro launched. According to Mundell, a currency shared by a geographical region would only be viable if capital and work were mobile, wages and prices flexible, economic cycles similar and internal budgetary transfers possible within the zone. In other words, money and workers should be able to (and want to) travel and set themselves up in different parts of the union. Prices should be able to fall if necessary, not just rise. The members of the union would all see an expansion of their economies, or suffer together a contraction. Also, an (ideally automated) solidarity would allow certain regions in torment to receive financial support from a body created for this purpose or from the federal government.
Today, the European Union possesses none of these features, which make the Union barely viable, at least according to Mundell’s criteria, contrary to the United States whose structure allows it to absorb economic crashes. Someone unemployed in South Carolina is indeed able to move to Texas where they’ve just got a job, whereas a Greek would have difficulty going and setting up shop in the Netherlands and vice versa. Equally, a European country in turmoil or suffering a considerable economic slowdown is not entitled to receive any subsidies whatsoever from a federal body (that doesn’t exist) that would allow it to turn the tide and successfully fight off its recession. As for the union in force in the USA, it only works thanks to the mobility of its workforce, unhindered interstate capital flows, as well as institutionalised and automatic mechanisms that soften the blow of economic crashes. In fact, not content with these congenital deficiencies, the European Union has even turned out to be a machine that generates imbalances due to a common interest rate shared by regions and nations that go through de facto and effective divergences in their exchange rates.
The euro works like a standard, in that its adjustments and vital recalibrations – that can only occur by means of a currency increasing and decreasing in value – are made exclusively via prices and wages. In the absence of the characteristics outlined by Mundell and in the presence of a uniform interest rate for all members, the euro has ended up hurting economies and in some instances causing recession. Let us look back to another standard, the gold standard, that ended up being routinely adjusted at the expense of the weak economies and currencies plus to the benefit of the stronger nations. Isn’t it peripheral Europe that suffered and endured all the imbalances of the European crisis? The gold standard exerted downward pressure on certain unstable currencies of nations that were suffering economic contraction and heightened unemployment, due to their inability to perform vital domestic readjustments. The euro – like the gold standard – therefore makes the situation for member states in recession worse by dumping deflation on them. Let us never forget that it was by sticking with the gold standard that we were unable to fight effectively against the Great Depression, and the countries that quickly abandoned it at the time were the first to recover.
However, to expand on Mundell’s contribution and in the euro’s defence, he had concluded that equilibrium does not exist when it comes to economics. In fact, the use of a stable currency, the free circulation of capital and an effective monetary policy (that being interest rates) that regulates the money supply in the same economy is impracticable. Therefore, it is impossible to conjoin this Trinity which fundamentally destabilises any fight against the “natural” anarchy inherent to capitalist competition built on the accumulation of capital. Mundell’s works have even led to a conclusion we all feel intuitively, being that any attempt to control the imbalances of capitalism ends up causing more destabilisation, and that the imbalances are in fact the very essence of the capitalist (de)construction. This is why a monetary union will never be able to function in an optimal manner, which would be to meet the needs of all its members at the same time. Unless, of course, automatic transfer mechanisms are put in place to ensure unfailing solidarity.