By Carlos García Hernández
Article originally published in Spanish by El Común here.
On the 4th of April Robert Mundell, the Canadian Nobel laureate in economics, died at the age of 88. The press all around the world covered his passing as the death of the intellectual father of the euro. However, this headline is more than debatable. Robert Mundell was not the intellectual father of the euro, but rather one of its most dishonest stepfathers.
His name came to the forefront of European economics as a result of his 1961 paper “A Theory of Optimum Currency Areas”. This work was part of the pre-Maastricht Treaty research aimed at elucidating the conditions that had to be met for the Economic and Monetary Union (EMU) to succeed. That is how Mundell introduced the concept of optimum currency areas (OCA) into the debate.
In his book “Eurozone Dystopia”, Bill Mitchell quotes the three conditions that Mundell believed were necessary to achieve an OCA:
- The economic cycles of the countries move together (up and down) and they face common consequences if hit by a negative shock (for example, a decline in private spending). Thus there should be no major asymmetric shocks, which would affect one region/state significantly more than another. A consequence of this condition would be, for example, that unemployment rates should be similar across the countries in the union;
- There should be a high degree of labour mobility and/or wage flexibility within the group of countries such that if unemployment rose in one country, workers could quickly move elsewhere to find jobs. Mobility also refers to a lack of cultural and institutional barriers (for example, a pension entitlement in one nation would be transferable to another without cost; no language barriers);
- There is a common risk-sharing structure so that fiscal policy can transfer resources from better-performing to poorly performing countries without constraints.
From the outset, and today more than ever, it was clear that none of these three conditions is even remotely fulfilled in Europe. Unemployment rates have long been much higher in southern Europe than in northern Europe. One reason for this is that southern economies are more sensitive to private-sector spending shocks. As a result, southern Europe’s economic stability depended to a large extent on public spending policies. The proposals that led to the Maastricht Treaty and the creation of EMU not only failed to reflect this reality, but also proposed to take away from southern European governments the fiscal policy levers that had traditionally stabilized southern economies during economic shocks. This loss of sovereignty was not compensated for by the creation of the European Central Bank (ECB). The ECB was to be founded on an alleged independence and strict austerity of spending that would crystallize in what later became the Stability and Growth Pact. Thus, the European Parliament would not be a political power endowed with sufficient spending capabilities to transfer to member countries the funds needed to balance significant increases in their unemployment levels during economic crises.
Even Mundell’s second condition, that of labour mobility, was not met. Not only there is no European demos, but language and cultural barriers are insurmountable for the vast majority of the European population.
All this made it clear that the path taken by the European Commission was suicidal. However, the Commission never took Mundell’s indications and the OCA concept seriously. That is why Mundell played a very minor role in the design of the euro. His research was aimed at building a kind of United States of Europe similar to the United States of America, where Congress controls a budget of about 25% of the American GDP, while the European Parliament before the COVID pandemic controlled less than 1% of the European GDP. Without a sufficiently funded governing body and with a European Central Bank bent on pursuing ineffective monetary policies rather than common fiscal policies, EMU and the euro were doomed to failure from the outset.
I have to admit that, although I do not consider myself a pro-European, the construction of a United States of Europe organized in an OCA is not a proposal that repulses me. The feeling of fraternity that I feel for the Ibero-American peoples, I do not feel for the people of Poland or Romania, but I admit that I do feel sympathy for the idea of a cosmopolitan Europe as conceived by the sons of the Danube, especially their most brilliant offspring Immanuel Kant. I believe that Spain can and should learn a great deal from these peoples, for example, in terms of their knowledge of foreign languages, a great deficiency in Spanish culture. A polyglot Spain that would choose a common administrative language with the rest of Europe is not something that, in the long term, seems far-fetched to me.
However, such a Europeanism can in no way resemble the current Europeanism of the European Union and the euro. It is not possible to build any OCA consisting of one private sector and 27 public sectors, as is currently the case. Any OCA would entail the creation of a single private sector and a single public sector, where a democratic European Parliament would have the power to carry out transfers and investments that would guarantee equal rights for all Europeans. It would also require the existence of a European Central Bank and a European Treasury, democratically controlled by the Parliament, that would carry out a fiscal policy at European level whose objectives would be full employment and the quality of social services. Can anyone imagine such a European Parliament under the government of, say, a Greek? I can, but in Central Europe and Scandinavia, this is simply unimaginable. That is how pro-European these countries are.
The main enemy of this true Europeanism is today’s European Union. Just as from Central Europe, Kant spoke of perpetual peace among the European peoples and barely 120 years later the First World War broke out, today the main supporters of the European Union would never accept that its trade surpluses should be shared by all Europeans or that a European Central Bank should be governed by the maxim that the correct public deficit is one that guarantees full employment and price stability (not one that conforms to austerity limits such as those currently enshrined in the Stability and Growth Pact). The European Union and the euro must therefore be abandoned as soon as possible.
Mundell showed great intellectual dishonesty when, once the single currency was in place, he called the euro “a huge success”. His own work belies his words, and the concept of OCA is still valid when analyzing future monetary unions.