A Remarkable Quote From The 1970s That Perfectly Predicted Why The Euro Would Be A Disaster

A Remarkable Quote From The 1970s That Perfectly Predicted Why The Euro Would Be A Disaster

Some pretty incredible Nicholas Kaldor quotes on Europe from the early 70′s. It’s really remarkable commentary given the time it was written. Given its pre-Euro timeframe, one could even argue that this is more prescient than the Wynne Godley comments in the early 90′s that predicted why the Euro would not work. Kaldor passed away in 1986 but he likely would have had a similar view of the Euro that Godley had before it was implemented, but that’s just a guess. Unfortunately, he wasn’t around to advise on the European Monetary Union.

“… Some day the nations of Europe may be ready to merge their national identities and create a new European union – the United States of Europe. If and when they do, a European Government will take over all the functions which the Federal government now provides in the U.S., or in Canada or Australia. This will involve the creation of a “full economic and monetary union”. But it is a dangerous error to believe that monetary and economic union can precede a political union or that it will act (in the words of the Werner report) “as a leaven for the evolvement of a political union which in the long run it will in any case be unable to do without”. For if the creation of a monetary union and Community control over national budgets generates pressures which lead to a breakdown of the whole system it will prevent the development of a political union, not promote it.

…The events of the last few years - necessitating a revaluation of the German mark and a devaluation of the French franc – have demonstrated that the Community is not viable with its present degree of economic integration. The system presupposes full currency convertibility and fixed exchange rates among the members, whilst leaving monetary and fiscal policy to the discretion of the individual member countries. Under this system, as events have shown, some countries will tend to acquire increasing (and unwanted surpluses) in their trade with other members, whist others face increasing deficits. This has two unwelcome effects. It transmits inflationary pressures emanating from some members to other members; and it causes the surplus countries to provide automatic finance on an increasing scale to the deficit countries.

… This is another way of saying that the objective of a full monetary and economic union is unattainable without a political union; and the latter pre-supposes fiscal integration, and not just fiscal harmonisation. It requires the creation of a Community Government and Parliament which takes over the responsibility for at least the major part of the expenditure now provided by national governments and finances it by taxes raised at uniform rates throughout the Community. With an integrated system of this kind, the prosperous areas automatically subside the poorer areas; and the areas whose exports are declining obtain automatic relief by paying in less, and receiving more, from the central Exchequer. The cumulative tendencies to progress and decline are thus held in check by a “built-in” fiscal stabiliser which makes the “surplus” areas provide automatic fiscal aid to the “deficit” areas.”

- Umesh Shanmugam