A Tale of Politically-Failing Eurozone..Case of Supra-national governance..

A nice short paper by Assaf RazinSteven Rosefielde.

He says the problem in Eurozone is because of its design. The design is flawed as it follows a special form of governance called “supra-nationality”.

The disparity is traced to the EU’s and Eurozone’s special form of governance called “supra-nationality” (a partially sovereign transnational organization) that has been largely ignored in economic treatises about the costs and benefits of monetary unions. The EZ members have put themselves in a monetary cage, akin to the gold standard, in which member states have surrendered control over their monetary and foreign exchange rate policies to the German dominated European Central Bank (ECB), without supplementary central fiscal, private banking and political union institutions.

It was the vision of Robert Schuman which got this union going:

Nation states before World War II never voluntarily surrendered their control over fiscal and monetary policy as part of a package to achieve political goals, even though they participated in international institutions like the League of Nations. The horrors of WWII, combined with cold war politics and the welfare state tide, however, propelled Europe along a novel supranational trajectory with some unintended consequences.

On September 19, 1946 Winston Churchill gave a speech in Zurich not only advocating Franco-German rapproachement, but a kind of United States of Europe, called a European “Third Way.” He also advocated a “Council of Europe”. formed thereafter with the assistance of French Foreign Minister Robert Schuman, mandated to create supranational communities on the path to a fully democratic, integrated Union.

The Schuman Declaration May 9, 1950 reaffirmed the concept in conjunction with the formation of the European Coal and Steel Community (ESCS). It proclaimed the European Community as the world’s first supranational institution, marking the “birth of modern Europe,” and initiating an epoch where intra-European wars were impossible. The Soviet Bloc formed a rival economic community, the CMEA (Council for Mutual Economic Cooperation) in 1949, but Comecon, as it is sometimes called , was more a body for policy exchange, like the OECD (Organization for Economic Cooperation and Development), rather than a supranational economic governance mechanism superior to national authorities.

The vision goes back to other visionaries:

Schuman’s utopian vision which can be traced back to France’s first socialist Claude Henri de Rouvroy, the Comte de Saint-Simon (1760-1825) [On the Reorganization of European Industry, 1814] was the prelude to a succession of developments culminating in today’s European Union including the European Economic Community (EEC), known as the Common Market (1958), the European Community (1967) [together with the European Commission and the European Council of Ministers], the European Council (1974), the European Monetary System(1979), the European Parliament (1979), the Schengen Agreement (1985), The Single Market Act (1986), the Maastricht Treaty (1993) founding the European Union(EU), and the European Monetary Union (2002), which inaugurated the euro.

The experience has been mixed:

Europeans are broadly pleased with European integration. There has been no intra-member war, a common European identity has emerged, members are democratic and socially progressive, there is free travel, labor and capital mobility within the EU space, the economy has been liberalized, and living standards have risen. However, EU economic performance has hardly matched Schuman’s idealist claims for supranational communitarianism. Growth has been anemic, unemployment high, and moral hazard problems severe. Supranational governors have found it easier to agree on broad principles, than to implement them and exercise fiscal discipline. Schuman felt sure that communitarians would be considerate, fair, self-restrained, and altruistic or could be tutored to act responsibly, but this proved to be the triumph of hope over experience.

On one hand, the supranational deck was stacked in favor of over borrowing by the PIIGS and east Europeans. On the other hand, the PIIGS were misled into prematurely surrendering control over their monetary and exchange rate policy without receiving fiscal quid pro quos. As a consequence, the EU finds itself in an idealistically incorrect position, where the gap between rich and poor members is widening, at a time when supranational institutional arrangements are forcing the PIIGS to extricate themselves from their predicament with painful and problematic deflationary tactics necessary to regain their competitive strength; the so-called internal devaluation.

Good paper on political economy of Eurozone..

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