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The future cannot be known in advance. Nevertheless some degree of
prediction on political developments is possible. That is so because
politics is based on relations. A large part of politics is determined
by three basic relations: The relation between rich and poor; the
relation between management and ordinary workers; and the relation
between strong and weak employees. These relations are almost
universal. The basic features of politics do not change with
technological change and economic growth. ‘Poverty' is historically
relative; unemployment is always shifted toward higher levels of labour
conditions. There will always be a political divide between rich and
poor, no matter how rich the poor are. There will always be an
establishment interested in stable power relations. There will always
be a clash of interests between employees who
can be replaced without losses and employees that are crucial for
profitable activities.
That
is why we can learn from the past. To be able to predict something
about the development of the European Monetary Union (EMU), we must
look at what happened with the monetary union of Germany in the 19th
century. The history of this monetary union shows many parallels with
that of European unification.
First there was the German Zollverein
founded in 1848 amid economic and political crises all over Europe.
This customs union was a spectacular success. The industrial revolution
took hold throughout Germany. Economically the different German
countries converged. This was the result of a mere customs union. There
was no monetary union. There was not even a union of measures and
weights. However, the Germans thought they also needed one state and
one currency. After the implementation of these 'requirements' Germany
ceased to be a success.
The British monetary union, too, is revealing. Scotland did not
need monetary union to be in the forefront of the industrial
revolution. Up untill the late 18th century the British laws had no
effect in Scotland and the Scots had their own currencies. Yet,
precisely during this period Scotland was the most advanced country in
the world.
The monetary union drives the EU toward further political
integration. It sets in motion forces that are difficult to control.
Probably we will end up with a United States of Europe, a real federal
state with a central fiscal, social, educational, trade and foreign
policy. I will explain here why I think this will probably happen, why
it is better to stop this development but why it is so difficult to
stop.
Creeping
Inflation
In theory it could still go the other way. This means broadening
the European Union, but not deepening it, by accepting additional
member states (the more the better) without abandoning the veto-right
of each member state in matters such as fiscal and social
harmonisation. The ten new member states have had a beneficial effect
on European politics. They have caused mounting pressure to reform the
Common Agricultural Policy. Since the Poles joined, for instance, their
agriculture has gained access to an enormous market and it will grow
enormously. There are no physical restraints to the expansion and the
productivity rise in Polish agriculture. But under the current CAP
rules the numerous Polish farmers and the emerging big industrial farms
will devour the entire European budget. European agricultural policy
will simply collapse if it is not changed drastically.
At the same time Polish membership is
a serious blow to socialist
dreams of a European convergence of social norms. There is no way that
Poland can have the same social insurance and minimum wages as France
or Germany. Germany has not even processed the integration of its own
eastern provinces yet. Especially the monetary unification of the new
Germany has caused unemployment in the eastern Länder and the
tax-burden in the western Länder to skyrocket.
The new member states of the EU also challenge the common policy
of subsidizing depressed regions. That is why the EU is at this moment
not developing further in the direction of a redistributive and
protectionist superstate. However, I fear that this is only a temporary
political situation. There is already a broad political consensus that
the European rules of decision making must be loosened to such an
extent that the EU can make more political decisions than even before
the entry of the ten new members. Moreover some heads of state and
ministers of foreign affairs of the ‘Old Europe' have spoken out in
favour of further integration in different gears or speeds: with a core
union and a periphery. The reason behind this idea is precisely that
the ‘Old Europe' can go ahead harmonising its policies whenever its
monetary union would otherwise cause economic downturns or conflicts of
interest among its member states.
Monetary union of sovereign member states sets in motion
inflationary policies. There have been many efforts to converge the
economies of the member states of the monetary union. The reasons are
manifold:
There is a broad political consensus that the business cycle
requires the emission bank to change interest rates. If borrowing
exceeds saving, than the interest rates have to rise. If a region is
economically depressed, there is a broad consensus that it should lower
wages. Since many western European countries have very rigid industrial
relations, wages can only be lowered in a linear way through
devaluation of the currency. These have been the traditional measures
to cope with macroeconomic fluctuations. Europe does not have immediate
alternatives. Yet these alternatives have become impossible because of
the European Monetary Union.
It is very unlikely that a country will accept higher interest
rates because other member states borrow too much. The problem is
solved by inflating the currency. In the long run nobody feels
responsible anymore for the stability of the currency. To avert runaway
inflation, a creeping inflation will be combined with transfers of
federal tax money to depressed regions. These transfers suffer from the
dilemma of any form of development aid. Either the authority that
furnishes the aid takes over economic decision making. This amounts to
central planning, a system that has not proved very successful in the
past. Or this authority does not meddle with local affairs and the
European taxpayer does not have any control over what happens with the
aid. The result is that the local authorities buy a lot of Mercedes
cars and build marble office and university palaces with the funds.
Creeping inflation is more dangerous than runaway inflation. The
latter reverses the chain of causes and effects. When prices rise very
fast, the emission bank has to hurry to print enough money to keep up
with inflation. Instead of monetary expansion causing inflation, it is
inflation that creates a shortage of money. This process cannot last
very long and soon ends with monetary reform and a fresh start.
Creeping inflation on the other hand can be maintained indefinitely and
it causes families and businesses to make the wrong buying decisions.
Creeping inflation is nice for vested interests on the supply side of
the economy (industrialists, workers, banks, government) because, and
for as long as, people do not fully anticipate the price rises that
will come. This causes bad investment and lower quality of life.
What are the alternatives?
Very strict federal
controls over national budgets. But this
would mean a further encroachment on national sovereignty. If some
states are unable to balance their budget then the European Commission
would have to step in and take over the departments that are shedding
too much money. This is clearly not intended in the consecutive
treaties that form the European Union and that were ratified in the
national parliaments. It would not be democratic to let monetary
affairs dictate a further political unification of the European member
states. The best possible solution to these tensions would be of course
to return to national currencies. But that is probably too late now.
Another solution would be to have a very strict monetary policy
combined with the principle that the member states simply do not have
the right to borrow money at all. Depressed regions could not be bailed
out by inflation, nor by budget deficits. I think this would be a good
thing. So in principle the monetary union could work. (The dollar union
is to some degree such a system. There are very strict rules for the
states and local governments to borrow money.) But why will this last
solution not be chosen in Europe?
European
Conservatism in
General
 To answer this question we have to
learn something of the
character of the Europeans or at least of some of the Europeans.
Germans, Belgians, French, Dutch, Danes, Northern-Italians and
Austrians think of themselves as some kind of übermenschen. They
are wealthy because they are hard working, hard saving, tidy and well
organised. In itself this belief is not untrue. But the problem is that
when there is a financial and economic crisis, übermenschen do not
blame themselves, but tend to blame international capitalism. How can
they be to blame if they work hard, save hard and are well-organized
and disciplined? Europeans simply do not accept to undergo economic
downturns.
We see the same story unfold in Japan for the past fifteen years.
In Japan we see very clearly that the problem is not the quantity of
investment (the Japanese are the thriftiest people in the world and put
up more than enough capital to invest), but the quality. Japan suffers
from bad management. The problem became chronic because
übermenschen do not seek for the culprits among their own people.
There is always the danger that the captains of industry, the
bank executives and the bureaucrats form an elite. They come from the
same schools and they rather protect each other than compete and
control each other. Today they are called the Masters in Business and
Administration, in ancient China they were called the Mandarins. They
prosper under the ideology that administration and management are very
important for society to prosper. Today this ideology is reinforced
with the high regard we have for science and scientific planning.
Although we seem to agree that central planning did not work and that
we need a market economy, economists of today think the market should
be scientifically planned.
Not only the European Commission, but every modern state nowadays
has its bureau of competition planning. ‘Planning competition' sounds
to me like an internal contradiction but not so for the economists of
today. They think they have a meaningful concept of optimal production
and they can prove mathematically that some forms of imperfect
competition result in suboptimal production. Since monopolists hurt the
scientifically proven optimal outcome for society, they must be a kind
of criminals. That is why the intellectual elite of contemporary Europe
thinks monopolies should be broken by judges instead of by brilliant
innovators. The market, however, is not a device only to raise
production and lower prices, but also to lower costs, create new needs
and solve problems that could not be solved before.
The intellectuals have effectively
taken over decision power in
Europe. The number of science and management jobs in Europe more than
doubled between 1960 and 1994. In that year they already formed 25% of
the total workforce. Managers in office are in general a conservative
(in the sense of wanting everything to remain as it is) force. Why
should they allow laymen to judge them? The consumer is a layman. How
does the consumer know what is good for him?
If more consumers postpone the purchase of a new car, the manager
of the car factory does not want to know why this is so. He only wants
the consumers to come back. He wants cheaper money. Little does he know
that more consumers want better health insurance first, or a private
nurse for their ailing grandparents, rather than a new car. Little does
he care that inflation will create the illusion for the consumer that
he can have both. Because of inflation the consumer who bought the car
will later be confronted with prohibitive health care prices. But then
it will be too late. The same holds for the investor. Because of
inflation he will overestimate the purchasing power of the potential
consumer and he will invest too much. The problem then reoccurs with a
vengeance. Suddenly nobody wants to buy a new car anymore because
people hardly come by to pay health care. More inflation is needed.
This vicious circle progressively lowers the standard of living. But
why should a manager care? A manager has no more stomach for
reorganising, cuts, sacking workers than the workers themselves.
Everybody on the supply side of the market wants no market. It may
sound strange, but the people on the supply-side want demand-side
economic policies.
The Drive
Toward A Corporatist Europe
In a monetary union with sovereign states the effects of
budgetary free rider behaviour of some states are ‘federalized.' A
strong currency and stable prices are a ‘public good' for all the
member states. But when some member states borrow too much, the price
(higher interest rates or a weak currency) is spread over the entire
union. Those who cause the problem do not have to pay the full price.
The European Council agreed in Amsterdam 1997 on a monetary
stability pact. The member states must be open about their budget. Each
year the European Commission defines budgetary targets for each country
with the intention that the budget deficits or surpluses of the
different member states converge. Otherwise a country that has a
balanced budget will still have to pay high interest rates because some
other member states borrow too much money. This would create political
tensions. Either the good member states have to slow down their economy
because of the others. This would undermine the legitimacy of the union
and the loyalty of the European citizens as such. Or these tensions are
smoothed out by monetary expansion. Then the good countries would not
pay higher interest rates, but they would have a weak currency and
inflation despite their sound financial policies.
The right of the member states to have their own deficits will in
the near future create political tensions within the monetary union. At
first sight, the tax-payer does not have to worry about the deficits of
other member states, because it are the tax-payers of those member
states who will have to carry the burden of the interest payments on
the public debt. It is true that the Irish citizen is not affected by
Belgian or Walloon state-debt in his capacity of a tax-payer. But an
Irish citizen is not only a tax-payer, he is also an investor, a
wage-earner and an account-holder. As such he is affected by the
deficits made by other member states because those deficits will be
made in his own currency. The Irish investor, borrower and wage-earner
will not accept recession because interest-rates rise as a result of
the rising demand for credit by the member states unwilling to cut
their deficits. The only possible political compromise is then to let
the money supply increase. But this loose monetary policy is exactly
what some of the criteria of Maastricht and the stability pact were
meant to prevent.
Monetary expansion is of course a concealed form of taxation
which, much more than ordinary taxes, creates distortions in the entire
economy because it creates within the private households an illusion of
wealth. This illusion causes people to buy more than they can afford.
More often than not they will spend money which will subsequently be
lacking to finance more urgent needs. In that way society harbours
primary frustrations despite its apparent affluence. An already
classical example of misoriented individual planning is the person who
lives in luxury but when he retires is taken aback by the prohibitive
cost of housing and health care. This illusion of wealth may bail out
industries with overcapacity, but only at the expense of industries
with undercapacity.
Since all processes of production overlap (in the process from
bare nature to finished product all products compete several times for
the same resources) there can only be more fully staffed service-flats
for the elderly when less value is consumed in the production of cars.
‘Overcapacity' really means that the industry or factory in question
cannot raise prices enough so as to be able to pay the costs. This
industry could sell its stocks and work at capacity levels if it would
lower its prices. If it cannot lower wages nor find cheaper
sub-contractors, this means that the industry is not adapted to the
real priorities on the market. Instead of attracting more labour and
capital, it should lay-off resources and thus signal to society that
resources and people, especially young people, should look for
employment elsewhere. If fresh money is poured into the economy
(inflationary policy), this adaptation will be postponed because prices
never adapt perfectly. Some prices will rise too fast, others too slow.
Moreover, as soon as prices adapt to the swollen money supply, the
overcapacity will reoccur. Bad investment will cause wages and
suppliers' prices to rise faster (or to drop slower) than the prices
the customers are willing to pay. Average price-level trends in
themselves never cause business cycles. The real cause is that the
industries with overcapacity are bailed out (either directly or through
inflationary policies) and do not adapt, but instead keep on attracting
resources which could have generated more value somewhere else. When
prices adapt themselves, the overcapacity will show and will force the
industry to shrink. When not, shortages will occur and society will not
be able to reproduce its current level of wealth.
A recession is caused by bad investment or miscalculations.
Miscalculations are inevitable. If there is a coincidence of many
miscalculations there will be an economic downturn. This means that too
many producers are confronted with prices of the suppliers that rise
faster (or drop slower) than the prices they can get for their
products. Inflation will bail them out temporarily on condition that
the prices do not adapt in time to the increased money supply.
But this means that the same problem as before will return with a
vengeance. The reorganisations are only postponed. This adds to the
problem. If there are miscalculations, adaptations are necessary. If we
agree that an economy must adapt to changing circumstances, then there
is no defence for inflationary policies. The reason why we need a
market economy is not to lower prices and raise production. The reason
is that man does not accept natural selection. The reason for a market
economy is that the economy must adapt, not man. As long this is not
clearly stated, the people on the supply side of the market will
invariably call for measures against competition. In that case we will
always end up with an old-European political coalition between the
management elite, the hard working and hard saving workers who are
afraid to lose their jobs because of international competition and the
spoiled youth who thinks wealth is a birth right.
I always wonder why it is so difficult to understand fascism.
Fascism is nothing else but this coalition of conservatives. The hard
working, hard saving workers do not accept an economic downturn and
want steady jobs. The elite wants to stay in power. The youth wants
everything immediately for free. When these three groups find each
other there will be an anti-capitalist coalition from the political
right that is extremely socialist and anti-modern.
Towards the
European "Grossraumwirtschaft"
A small country cannot afford to be protectionist. The European
economic space gives the illusion that it can. And at least for a while
it can. A vast European economic expanse can withdraw itself from
international trade. At first this will seem as if business cycles were
not necessary after all. It will fuel the belief that capitalism is not
necessary. Only in the long term will the relative decline and the real
drop in the standard of living be noticed.
Until now the architects of the Monetary Union assure us that the
member states will comply with strict limits on their deficits also
after they enter the monetary union. But in practice, the political
strength of the corporatists by far outweighs the political strength of
the modernisers. This is also true for every member state separately,
but up till now there was still competition between the European trade
partners which made it possible to compare the results of different
national policies and which provided a check on what the politicians
were inclined to do. In a politically integrated Europe, this check
will disappear and we will get a convergence to the lowest common
denominator. If for instance the Belgian government needs alternative
funds to finance its social insurance and wants to introduce a new tax
on carbondioxide-emissions or some other tax on so-called ‘pollution'
then the other countries will follow suit. Today this is not possible,
because Belgian industry would have an additional competitive
disadvantage through the introduction of such a tax in Belgium alone.
Although in the proposed European Constitution the unanimity rule has
largely survived, the pressure to abandon the unanimity rule for
decisions on tax-harmonisation in Europe will rise in the future.
This is ‘deepening' the EU in practice. It is needed in order to
be able to increase taxes without one country having to endure
competitive blows by its major trading partners. Of course this
convergence to the lowest common denominator of more taxes and deficits
will diminish the competitive strength of Europe as a whole in the
global economy. But this only illustrates that politicians often create
the circumstances where it becomes difficult to stop further steps in
an undesirable direction, in this case towards protectionism. Political
integration of Europe will spontaneously create a European
Grossraumwirtschaft, the nazi-ideal of a heavily politicised European
protectionist block against the rest of the world.
The majority in Europe does not really want this to happen, but
it will happen because the same majority is not prepared to accept
massive unemployment when entire European industries are defeated in
the global competition. So the drive toward a European protective block
will be a spontaneous process. The deliberate construction of a
monetary union will drive the European leaders to take steps nobody
wanted. The constructivists are surely wrong when they think that the
EU will further develop according to some blueprint. But evolutionists
could make the opposite mistake in thinking that whatever evolves
spontaneously will be desirable.
The monetary union could thus cause a drive towards a European
federal state. Although this end result is not likely in the short run,
it may be the outcome of a long and painful process of experiencing the
drawbacks of monetary union. It is simply impossible to allow member
states to abuse their autonomy indefinitely at the expense of the
European taxpayer and Euro-account holders. If Europe is not ready to
choose between permanent recession because of skyrocketing interest
rates on the one hand and letting its currency become some kind of
totally unreliable and inconvertible rouble on the other hand, then it
will have to interfere in the policies of the different European
governments. Only a federal state can stop deficit spending by
financially unaccountable member states.
Even education could not be left to the discretion of the member
states. Belgium's French-speaking region of Wallonia is already
creating its own regional debt because it has not enough revenues to
finance its own educational system. When the European majority decides
to make cuts in education, then the Walloons and the Greeks and the
French would not only have to follow suit, they would simply have to
implement orders from the European state. In such case a monetary union
would have more chances of survival.
However, it would still lack the mobility of labour that we see
in the United States. And even the dollar union creates tensions.
American families move house more readily than Europeans do. America is
not hindered by language barriers. But even in the USA there are
depressed regions next to booming regions. The former need to produce
more and consume less. The latter on the contrary need a strong dollar
in order to use their surplusses - not to increase exports - but to
innovate. Otherwise they will keep on exporting products at the expense
of investments in new activities with higher added value. Strong
economies should have high purchasing power abroad so that they are
compelled to use their strength to modernise instead of maintaining
their traditional export of products which could be imported cheaply.
In the meantime, while the debates about more centralisation
continue and popular resistance does not die down, the regions which
lag behind get addicted to European tax funding, and in the strong
regions the people begin to lose interest in modernisation because they
get addicted to inflationary cheap money. Corporatist Europe will win
the debate probably before centralist Europe does. Most opponents of
the European Constitution fear a European superstate but like a weak
euro and inflationary low interest rates to bail out industries with
overcapacity, and whenever their jobs are at stake they like Europe to
protect them against cheap imports.
Since the EMU is big enough to develop into a protectionist
block, it is likely to undergo a long
process of decline caused by the
inflationary policies to smoothen out the conflicts of interest between
the member states, unless financial discipline is forced upon
the
member states by a strong central European state which nobody wants
today.
Either the EMU is abandoned or it forces upon the people a
federal European state, but then only after the ‘Old Europe' has been
through decades of decline.
Martin De Vlieghere
27-08-2005
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Martin De Vlieghere
is economist and doctor of philosophy since 1993. His PhD was
written on the
conditions of modernity in the works of Habermas and Hayek. He has been
assistant professor at the Department of Philosophy of the University
of Ghent. He is president of the "Free Association for Civilization
Studies" and member of the board of directors of Nova Civita, and
fellow of the Brussels' think tank Work and Wealth for All. More About the
Author here
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Please also visit our  with free downmoads of :
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 The Road to Serfdom. This masterpiece of
Nobel Prize laureate Friedrich Hayek
is an eye-opener,
strongly advocating the free market principles. In this all-time
classic Hayek persuasively warns against the authoritarian utopias of
central planning and the welfare state. Fascism, communism and
socialism share these utopias. For the implementation of their plans
these authoritarian ideologies require government power over the
individual, inevitably leading to a totalitarian state. Every step away
from the free market toward planning reduces people's freedom and is a
step toward tyranny. Planning also cannot assess consumer preferences
with sufficient accuracy to efficiently co-ordinate production.
However in a free market, "Price" is the all-inclusive source of
information, guiding entrepreneurs to produce whatever is wanted and
directing workers wherever they are most needed. Free markets also
provide the entrepreneurial climate for a thriving economy and for
releasing the creative energy of its citizens. Free individuals in
their native strive to develop their talents and to improve their fate
produce spontaneous progress.
All public interference in the economic process disturbs the market
equilibrium, distorts the optimal allocation of resources and
consequently reduces the level of wealth. Where planning replaces free
markets people do not only loose their freedom and individuality.
Resulting slow
growth also increases welfare demands causing dependence similar to
slavery. In the end people's self-reliance and self-respect is ruined,
and citizens are degraded to a means to serve the ends of the
collective mass. |
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Free condensed pdf
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Abstract
Overview
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Digest
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Friedrich
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The
Tragedy of the commons by Garrett
Hardin Free
access
and unrestricted demand for a finite resource ultimately
dooms the resource through over-exploitation. This occurs
because the benefits of exploitation accrue to individuals,
each of which is motivated to maximise his or her own use of
the resource, while the costs of exploitation are
distributed between all those to whom the resource is
available (which may be a wider class of individuals than
those who are exploiting it). The theory itself is as old as
Aristotle who said: "That which is common to the greatest
number has the least care bestowed upon
it. more
here
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| Ludwig Von
Mises: A Bundle of six short Essays.
(22 pages). In his usual easy-to-read style, Von Mises explains the
very basics of sound economics. The first essay vindicates the role of
capital goods and saving. Mises explains how saving inaugurates a
process toward prosperity. By consuming less than they produce, savers
furnish resources for investment in machines and tools which make the
laborers' efforts more efficient. Higher output per unit of input can
so be achieved. The productivity gain of such investment allows for
non-inflationary wage increases which is the sole road to real
progress and prosperty for all. Public policy should therefor favour
saving and investment, rather than stimulate growht through
inflationary easy money policies. In the second essay "The
Individual in Society"
Mises pleads for a free market economy based on division of labour and
strong property rights as the sole guarantee of liberty. For Mises,
government intervention implies compulsion, exactly the opposite of
liberty. In a market economy individuals are the supreme arbiters in
matters of their needs, both material and spiritual. They alone decide
what is more and what is less valuable. Central planning is unable
to assess the
individual's priorities so that planners permanently make wrong choices
lessening
consumer value and satisfaction. The government apparatus of
coercion is not only costly and inefficient. Many also consider state
compulsion as
unbearable. Other excellent
essays in this bundle: The Economics and Politics Of My Job,
The Elite Under Capitalism,
Facts about the Industrial Revolution
and The Gold Problem |
Free Download
here (pdf) |
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