FEPS Fresh Thinking

In a recent article in the New York Times, Nobel prizewinner Paul Krugman gave us a very exciting and comprehensive explanation of how to overcome the Euro Crisis.

He explained why Nevada is different from Ireland in the context of economic and monetary crisis. Surprisingly, the answer is simple: Nevada is part of a solid federal system, Ireland is not!

Europe needs to understand that federalism is not a threat but an opportunity. Sharing sovereignty and giving responsibilities to a federal system is a means to ensure long term sustainability and welfare. The current political dispute over economic policy focuses only on the question of whether the more solvent members of the European Union, first and foremost Germany, are willing to accept a socalled “transfer union“.

But: The story of European integration is a story of giving away and sharing sovereignty. It is also a story of accepting the need to help the weaker in the interest of all, hence a question of solidarity. What about the structural funds? What about the Common Agricultural Policy? What about Enlargement? Or what about the principle of the Single Market? To be blunt, the European Union is already by practice a “transfer union”! It is a shame that this principle is now under threat.

The Euro and the monetary union of Europe can only survive when further steps are introduced. The need for a common fiscal and economic policy is obvious and should have priority. This is not only a question of further harmonisation. This is first and foremost a question of willingness, conviction and commitment for Europe.

The more convincingly we now answer “YES”, the sooner nervousness, disastrousspeculation and panic will be over.

But: It is clear that the road back to confidence, growth and stability is painful. Restructuring the European economies, reducing sovereign debt, undertaking effective savings in the national budgets is not easy. But it is all about a coordinated and well defined coherent economic and social policy. And it is all about risk sharing in the Eurozone. The best solution to share risks is common bonds or Eurobonds.

Eurobonds would have the advantage that the entire Eurozone takes responsibility. It is not only that solid states like Germany are taking over all the risks together with higher interests. In the medium and long term, solid states will alsohave substantial advantages when sharing more responsibilities and solidarities.

This is the idea of Europe: Being responsible, sharing together risks and also gains, in one word: to be solidaire.

Solidarity is the key to success!

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  1. I fully agree. And we have to explain/defend this reality again and again against all the german “Stammtisch” convictions – and often in our direct neighborhood and family.
    Michael Holzhauser

  2. I fully concur with the thrust of the message. But it needs to be more convincing to take European citizens along. Transfer is not good per se. The CAP is not acceptable if it serves only to pay farmers € 300 per hectare whatever they cultivate. And euro-bonds are no panacea: they have to be fine-tuned, as is being done by the European Financial Stabilisation Facility.
    European policies will more and more have to stand a qualtity test like any national or regional a policy.
    As to Nevada or California, the US Federal government will not bail them out but let them settle their debts on their own.
    Eberhard Rhein, European Policy Centre

  3. Following Krugman’s advice could prove to be a minefield. Let us remember that his advice was at the origin of the real estate bubble in the United States. He insisted that the US should have a housing bubble – and his wish was granted, according to Ben Steil (Council on Foreign Relations).

  4. From a theoretical viewpoint this is certainly true. But, now coming to concretely how to make it reality is not as easy. Giving sovereignty has never been easy within the EU.
    Does this mean that it should not be our common goal? Probably not. Europe needs to set a clear objective and define its next integration/cooperation step. But this needs “Great Politicians” convinced about the need of more Europe… not really the case at the moment.

  5. Although Prof Krugman mentions Schuman several times he does not analyze his concepts of monetary integration that are implicit in supranational democracy that Schuman introduced. Krugman refers to to the problem Irving Fischer pointed to — of getting out of debt in a deflationary situation but does not mention Fischer’s decentalised solutions to the problem. Some of these are possible today and would work wonders if politicians would respect the treaties. My last commentary at democracy.blogactiv.eu related to the failures. The positive application could introduce an economic resurgence probably equal to any of the postwar spurts of growth. Coherence can only come from in-depth democracy not from top-down inter-governmentalism.

    Monetary union was implicit in the original Schuman Declaration — this was pointed out more than 11 or 12 years ago on the site http://www.schuman.info. However monetary union and economic union were not seen as purely economic challenges — like Mundell et al. They are part of a larger envelope that includes constitutionality, democratic politics that would unite several democratic states and increase their democratic commitment, and moral improvement of the system (starting with making war materially impossible — as Krugman mentions). Those who apply Mundell to Europe too often make the mistake of forgetting the context of the Schuman Plan. I am not convinced that the fabricators of the euro in the 1990s analysed supranational economics before they hit on their choice of plan. I saw little evidence for it.

    Thus there is a fifth alternative to Krugman’s four — the last relating to classical federalism rather than supranational democracy. Europeans will only successfully find a solution if they apply those principles which creates a democratic array embracing not only governments, but associations of sectoral socio-economic interests as well as a full voice for individuals. What is needed is not ‘great politicians’ of the style of Napoleon or de Gaulle who wish to push themselves forward but great democrats who wish to provide the appropriate voice for others in the appropriate institutions which have appropriate power.

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