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WynneGodleyMaastrichtandAllThatLRB8October1992

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MaastrichtandAllThat
WynneGodley
AlotofpeoplethroughoutEuropehavesuddenlyrealisedthattheyknowhardlyanything
abouttheMaastrichtTreatywhilerightlysensingthatitcouldmakeahugedifferencetotheir
lives.TheirlegitimateanxietyhasprovokedJacquesDelorstomakeastatementtotheeffect
thattheviewsofordinarypeopleshouldinfuturebemoresensitivelyconsulted.Hemight
havethoughtofthatbefore.
AlthoughIsupportthemovetowardspoliticalintegrationinEurope,Ithinkthatthe
Maastrichtproposalsastheystandareseriouslydefective,andalsothatpublicdiscussionof
themhasbeencuriouslyimpoverished.WithaDanishrejection,anearmissinFrance,and
theveryexistenceoftheERMinquestionafterthedepredationsbycurrencymarkets,itisa
goodmomenttotakestock.
ThecentralideaoftheMaastrichtTreatyisthattheECcountriesshouldmovetowardsan
economicandmonetaryunion,withasinglecurrencymanagedbyanindependentcentral
bank.Buthowistherestofeconomicpolicytoberun?Asthetreatyproposesnonew
institutionsotherthanaEuropeanbank,itssponsorsmustsupposethatnothingmoreis
needed.Butthiscouldonlybecorrectifmoderneconomieswereselfadjustingsystemsthat
didntneedanymanagementatall.
Iamdriventotheconclusionthatsuchaviewthateconomiesareselfrightingorganisms
whichneverunderanycircumstancesneedmanagementatalldidindeeddeterminethe
wayinwhichtheMaastrichtTreatywasframed.Itisacrudeandextremeversionoftheview
whichforsometimenowhasconstitutedEuropesconventionalwisdom(thoughnotthatof
theUSorJapan)thatgovernmentsareunable,andthereforeshouldnottry,toachieveany
ofthetraditionalgoalsofeconomicpolicy,suchasgrowthandfullemployment.Allthatcan
legitimatelybedone,accordingtothisview,istocontrolthemoneysupplyandbalancethe
budget.Ittookagrouplargelycomposedofbankers(theDelorsCommittee)toreachthe
conclusionthatanindependentcentralbankwastheonlysupranationalinstitution
necessarytorunanintegrated,supranationalEurope.
Butthereismuchmoretoitall.Itneedstobeemphasisedatthestartthattheestablishment
ofasinglecurrencyintheECwouldindeedbringtoanendthesovereigntyofitscomponent
nationsandtheirpowertotakeindependentactiononmajorissues.AsMrTimCongdonhas
arguedverycogently,thepowertoissueitsownmoney,tomakedraftsonitsowncentral
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bank,isthemainthingwhichdefinesnationalindependence.Ifacountrygivesuporloses
thispower,itacquiresthestatusofalocalauthorityorcolony.Localauthoritiesandregions
obviouslycannotdevalue.Buttheyalsolosethepowertofinancedeficitsthroughmoney
creationwhileothermethodsofraisingfinancearesubjecttocentralregulation.Norcanthey
changeinterestrates.Aslocalauthoritiespossessnoneoftheinstrumentsofmacroeconomic
policy,theirpoliticalchoiceisconfinedtorelativelyminormattersofemphasisabitmore
educationhere,abitlessinfrastructurethere.IthinkthatwhenJacquesDelorslaysnew
emphasisontheprincipleofsubsidiarity,heisreallyonlytellinguswewillbeallowedto
makedecisionsaboutalargernumberofrelativelyunimportantmattersthanwemight
previouslyhavesupposed.Perhapshewillletushavecurlycucumbersafterall.Bigdeal!
Letmeexpressadifferentview.Ithinkthatthecentralgovernmentofanysovereignstate
oughttobestrivingallthetimetodeterminetheoptimumoveralllevelofpublicprovision,
thecorrectoverallburdenoftaxation,thecorrectallocationoftotalexpendituresbetween
competingrequirementsandthejustdistributionofthetaxburden.Itmustalsodetermine
theextenttowhichanygapbetweenexpenditureandtaxationisfinancedbymakingadraft
onthecentralbankandhowmuchitisfinancedbyborrowingandonwhatterms.Theway
inwhichgovernmentsdecideallthese(andsomeother)issues,andthequalityofleadership
whichtheycandeploy,will,ininteractionwiththedecisionsofindividuals,corporationsand
foreigners,determinesuchthingsasinterestrates,theexchangerate,theinflationrate,the
growthrateandtheunemploymentrate.Itwillalsoprofoundlyinfluencethedistributionof
incomeandwealthnotonlybetweenindividualsbutbetweenwholeregions,assisting,one
hopes,thoseadverselyaffectedbystructuralchange.
Almostnothingsimplecanbesaidabouttheuseoftheseinstruments,withalltheirinter
dependencies,topromotethewellbeingofanationandprotectitaswellasmaybefromthe
shocksofvariouskindstowhichitwillinevitablybesubjected.Itonlyhaslimitedmeaning,
forinstance,tosaythatbudgetsshouldalwaysbebalancedwhenabalancedbudgetwith
expenditureandtaxationbothrunningat40percentofGDPwouldhaveanentirely
different(andmuchmoreexpansionary)impactthanabalancedbudgetat10percent.To
imaginethecomplexityandimportanceofagovernmentsmacroeconomicdecisions,one
hasonlytoaskwhatwouldbetheappropriateresponse,intermsoffiscal,monetaryand
exchangeratepolicy,foracountryabouttoproducelargequantitiesofoil,ofafourfold
increaseinthepriceofoil.Wouldithavebeenrighttodonothingatall?Anditshouldnever
beforgottenthatinperiodsofverygreatcrisis,itmayevenbeappropriateforacentral
governmenttosinagainsttheHolyGhostofallcentralbanksandinvoketheinflationtax
deliberatelyappropriatingresourcesbyreducing,throughinflation,therealvalueofa
nationspaperwealth.Itwas,afterall,bymeansoftheinflationtaxthatKeynesproposed
thatweshouldpayforthewar.
Ireciteallthistosuggest,notthatsovereigntyshouldnotbegivenupinthenoblecauseof
Europeanintegration,butthatifallthesefunctionsarerenouncedbyindividualgovernments
theysimplyhavetobetakenonbysomeotherauthority.Theincrediblelacunainthe
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Maastrichtprogrammeisthat,whileitcontainsablueprintfortheestablishmentandmodus
operandiofanindependentcentralbank,thereisnoblueprintwhateveroftheanalogue,in
Communityterms,ofacentralgovernment.Yettherewouldsimplyhavetobeasystemof
institutionswhichfulfilsallthosefunctionsataCommunitylevelwhichareatpresent
exercisedbythecentralgovernmentsofindividualmembercountries.
Thecounterpartofgivingupsovereigntyshouldbethatthecomponentnationsare
constitutedintoafederationtowhomtheirsovereigntyisentrusted.Andthefederalsystem,
orgovernment,asithadbetterbecalled,wouldhavetoexerciseallthosefunctionsinrelation
toitsmembersandtotheoutsideworldwhichIhavebrieflyoutlinedabove.
Considertwoimportantexamplesofwhatafederalgovernment,inchargeofafederal
budget,shouldbedoing.
Europeancountriesareatpresentlockedintoasevererecession.Asthingsstand,particularly
astheeconomiesoftheUSAandJapanarealsofaltering,itisveryunclearwhenany
significantrecoverywilltakeplace.Thepoliticalimplicationsofthisarebecoming
frightening.YettheinterdependenceoftheEuropeaneconomiesisalreadysogreatthatno
individualcountry,withthetheoreticalexceptionofGermany,feelsabletopursue
expansionarypoliciesonitsown,becauseanycountrythatdidtrytoexpandonitsown
wouldsoonencounterabalanceofpaymentsconstraint.Thepresentsituationisscreaming
aloudforcoordinatedreflation,butthereexistneithertheinstitutionsnoranagreed
frameworkofthoughtwhichwillbringaboutthisobviouslydesirableresult.Itshouldbe
franklyrecognisedthatifthedepressionreallyweretotakeaseriousturnfortheworsefor
instance,iftheunemploymentratewentbackpermanentlytothe2025percent
characteristicoftheThirtiesindividualcountrieswouldsoonerorlaterexercisetheir
sovereignrighttodeclaretheentiremovementtowardsintegrationadisasterandresortto
exchangecontrolsandprotectionasiegeeconomyifyouwill.Thiswouldamounttoare
runoftheinterwarperiod.
Iftherewereaneconomicandmonetaryunion,inwhichthepowertoactindependentlyhad
actuallybeenabolished,coordinatedreflationofthekindwhichissourgentlyneedednow
couldonlybeundertakenbyafederalEuropeangovernment.Withoutsuchaninstitution,
EMUwouldpreventeffectiveactionbyindividualcountriesandputnothinginitsplace.
Anotherimportantrolewhichanycentralgovernmentmustperformistoputasafetynet
underthelivelihoodofcomponentregionswhichareindistressforstructuralreasons
becauseofthedeclineofsomeindustry,say,orbecauseofsomeeconomicallyadverse
demographicchange.Atpresentthishappensinthenaturalcourseofevents,withoutanyone
reallynoticing,becausecommonstandardsofpublicprovision(forinstance,health,
education,pensionsandratesofunemploymentbenefit)andacommon(itistobehoped,
progressive)burdenoftaxationarebothgenerallyinstitutedthroughoutindividualrealms.
Asaconsequence,ifoneregionsuffersanunusualdegreeofstructuraldecline,thefiscal
systemautomaticallygeneratesnettransfersinfavourofit.Inextremis,aregionwhichcould
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producenothingatallwouldnotstarvebecauseitwouldbeinreceiptofpensions,
unemploymentbenefitandtheincomesofpublicservants.
Whathappensifawholecountryapotentialregioninafullyintegratedcommunity
suffersastructuralsetback?Solongasitisasovereignstate,itcandevalueitscurrency.It
canthentradesuccessfullyatfullemploymentprovideditspeopleacceptthenecessarycutin
theirrealincomes.Withaneconomicandmonetaryunion,thisrecourseisobviouslybarred,
anditsprospectisgraveindeedunlessfederalbudgetingarrangementsaremadewhichfulfil
aredistributiverole.AswasclearlyrecognisedintheMacDougallReportwhichwas
publishedin1977,therehastobeaquidproquoforgivingupthedevaluationoptioninthe
formoffiscalredistribution.Somewriters(suchasSamuelBrittanandSirDouglasHague)
haveseriouslysuggestedthatEMU,byabolishingthebalanceofpaymentsprobleminits
presentform,wouldindeedabolishtheproblem,whereitexists,ofpersistentfailureto
competesuccessfullyinworldmarkets.ButasProfessorMartinFeldsteinpointedoutina
majorarticleintheEconomist(13June),thisargumentisverydangerouslymistaken.Ifa
countryorregionhasnopowertodevalue,andifitisnotthebeneficiaryofasystemoffiscal
equalisation,thenthereisnothingtostopitsufferingaprocessofcumulativeandterminal
declineleading,intheend,toemigrationastheonlyalternativetopovertyorstarvation.I
sympathisewiththepositionofthose(likeMargaretThatcher)who,facedwiththelossof
sovereignty,wishtogetofftheEMUtrainaltogether.Ialsosympathisewiththosewhoseek
integrationunderthejurisdictionofsomekindoffederalconstitutionwithafederalbudget
verymuchlargerthanthatoftheCommunitybudget.WhatIfindtotallybafflingisthe
positionofthosewhoareaimingforeconomicandmonetaryunionwithoutthecreationof
newpoliticalinstitutions(apartfromanewcentralbank),andwhoraisetheirhandsin
horroratthewordsfederalorfederalism.Thisisthepositioncurrentlyadoptedbythe
Governmentandbymostofthosewhotakepartinthepublicdiscussion.
Vol.14No.198October1992WynneGodleyMaastrichtandAllThat
pages34|1954words

Letters
Vol.14No.2022October1992
WynneGodley(LRB,8October)presentsastrongcaseinfavouroftheviewthatmuch
moreattentionshouldbegiventofiscalpolicyinthedebateoverEuropeanintegration.
Hepointsoutthatthosewhoplacealltheemphasisonthecoordinationofmonetary
policyoftensmuggleintheassumptionthattherealeconomywilltakecareofitselfand
thattheonlylegitimateconcernofgovernmentis(therateofchangeof)thepricelevel.
However,heweakenshisargumentandgivesammunitiontohisenemieswhenhe
claimsKeynesssupportforaninflationtaxasamethodtopayforWorldWarTwo.In
fact,Howtopayforthewarwasapolemicagainstinflationarywarfinance.Keynes
advocatedfiscalmeasures,includingacompulsorysavingsscheme,toreduce
inflationarypressureinasituationinwhichtherewereextraordinarydemandsona
fullyemployedeconomy.KeynesarguedthattheinflationaryfinancingofWorldWar
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Onehadprovedtobeinefficientandinequitableandhadstoredupseriousproblems
forthepostwarperiodhisschemewastobebothfairerandmoreefficientandmake
demandmanagementeasier.
ThefactthatthefirstpracticalapplicationofKeynesiananalysiswasinsuchasituation
shouldnotbeforgotten,especiallywhencircumstanceshaveagainariseninwhich
thereareextraordinarydemandsontheoutputoftheEuropeaneconomyfollowing
Germanreunificationandtheneedforreconstructionfurthereast.IfGerman
consumershadbeenpreparedorforcedtosavemore,oratleasttopaymoretaxes,
reunificationmightnothaveputsuchastrainonGermanmonetarypolicy.Thiswould
haveeasedthepressureoncountriesliketheUK,France,ItalyandSpainwhichhave
recentlysufferedmorefromhighinterestratesandappreciatingcurrenciesvisvis
theirnonEuropeanmarketsthantheyhavebenefitedfromhigherdemandin
Germany.Givingintoinflationarypressureswouldnothavehelped.Whatwasneeded
wasatemporaryredistributionofconsumptionintime(frompresenttofutureGerman
consumers)andspace(fromGermantononGermanconsumers).Ofcourse,thiswould
havebeenmucheasiertoachieveiftheinstitutionalarrangementsforfiscalco
ordinationadvocatedbyGodleyand,beforehim,inadifferentcontext,byKeynes
hadbeeninplace.
TerryOShaughnessy
StAnnesCollege,Oxford

Vol.14No.215November1992
TerryOShaughnessyrightlytakesmetotaskconcerningKeynesandtheinflationtax
(Letters,22October).ItransposedacourseofactionwhichKeynesdiscussedintoone
which(Iforamomentwronglyimagined)hehadadvocated.Butmymistakehasno
bearingonthesubstantialpointsarguedinmyarticleandOShaughnessyistherefore
wrongtosaythatitweakenedmycase.Hegoesontoexpressanumberofviewsabout
economicpolicyinGermanywhichalsohavenodirectbearingonthemeritsor
otherwiseoftheMaastrichtTreaty.
WynneGodley
DepartmentofAppliedEconomics,CambridgeUniversity
ISSN02609592CopyrightLRBLimited2015

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