“America First” may not do itself much good

Eurocrats have lost many of their ideals about how to make a better world. They used to believe that certain types of economic arrangements almost automatically led to a political order preferable to the alternative otherwise available. They very often used the United States of America as their example. In America, they found that interstate commerce was strictly free and a substantial part of taxes are collected by a central treasury, and these two features were sufficient to create a stable government with Washington, D.C. as its centre. The Eurocrats, in thinking about America as an ideal to imitate in Europe, manifestly forgot another characteristic of America as a nation, namely the melting pot. Europe, at least since the 16th century or so has never been a melting pot. Instead it has had distinct nations, and each of these nations had a history of its own which distinguished it from and continued to distinguish it from its neighbours. These histories are likely to make any construction of a “United State of Europe” an enterprise condemned to failure.

With the Maastricht treaty of 1992 and the introduction of the euro in 1999, the Eurocrats set out to create the economic mechanism which was supposed to create a political order as an automatic consequence in a few years. It was not explicitly stated that there was a political consequence to follow from the introduction of a common currency, but this was the chief objective from the beginning. The explicit objective which both the federalists and sovereignists could accept was purely economic. It consisted in the promise that the common currency would improve the efficiency of the Common Market and raise its growth capacity by one percent a year or so, a promise that did not seem to threaten the sovereignty of the member states of the Eurozone.

“The treaty touched upon several nice objectives, each of them unenforceable, or enforceable in theory but not in practical politics.”

The treaty touched upon several nice objectives, each of them unenforceable, or enforceable in theory but not in practical politics. It obliged the member countries of the Eurozone to keep their average budget deficit at or below three per cent of GDP—a limit which had no particular justification in economic theory and has proven itself open to severe criticism. Investment as a percentage of GDP and the balance of payments would have been easier to justify as rational, but the magic three per cent has become the rule which many member countries have not hesitated to exceed in any given year, always with the attached promise they will not do so again the following year.

Almost from the beginning, the Eurozone divided itself into two classes of countries, one with France, Belgium, Italy, Spain, Portugal and Greece and the other side with Germany and the rest of the member countries. Also at the beginning, Germany undertook serious reforms of its labour market, which soon enabled it to respect the three per cent budget deficit limit, despite the burdens of its reunification with East Germany. The other side of the Eurozone, with France at its head, during the same period continued to run budget deficits which have become more and more difficult to justify, as the overall interest burden of the debt of each country kept growing with the addition of successive budget deficits. The chronic deficit countries soon reached stunning cumulative deficits, that is to say total national debts, the interest burden of which was high enough as a percentage of GDP to threaten insolvency in some cases, Greece for example.

After 2012, there was a movement by Eurocrats in Brussels to persuade Germany to move to a policy that would have produced a smaller surplus in its balance of payments, and would be expected to produce the opposite effects for the Eurozone deficit countries. There was even an unofficial proposal for cutting the Eurozone in two halves, one with Germany and its closed economic relations in Northern and Eastern Europe in Class I and the “Club-Med” countries as Class II, adopting the Class II euro as a devalued currency. It was pointed out with some irony that instead of doing this, it would be even more logical to give every country a currency of its own and a deficit conforming to its particular situation- in other words to forget about the euro and come back to the beginning with nation with its own currency.

For more on these topics, see Protectionism by Jagdish Bhagwati in the Concise Encyclopedia of Economics and “Catching Up: Could We Have More Growth?” by Anthony de Jasay, Library of Economics and Liberty, January 2, 2017.

Germany at this point semi-officially refused all these arguments for saving the “Club-Med” countries, pointing out that it was being consistent with its treaty obligations, and should not be expected to adjust its budget and economic policies to save the other countries from the consequences of their own policy defects. Germany was lending its cheque book for purposes of the common interest according to needs agreed in Brussels, and could not be expected to do more than this. The “Club Med” deficit countries should instead keep their own policies in order, as Germany was doing with its own. This is a classic position of what we might call an “innocent” trader which has forges, laboratories, and design bureaus, and cannot be blamed if customers the world over, including customers from other European countries, come and purchase what the forges, laboratories, and others can usefully produce. Considering it as a matter of who is “innocent” and who is “guilty”, there is a strong case for considering Germany as the “innocent” party. The “guilty” parties, if they want to keep a place in the Eurozone, have to adjust their own policies to keep as close as they can to the magic three per cent, which they do by cutting their investments in order to save their consumption, because consumption can only be cut at the cost of the defeat of the government at the next election. The outcome, in other words, is the adjustment of the policies of the “guilty” parties to what their economies can support in the Eurozone- exactly what the euro as a clandestine mechanism for creating a political outcome from an economic instrument was predicted to do, though it is doing it in a most unpleasant way.

“The Art of the Deal”