Democracy And Monetary Union: How Not To Do It

With the showdown between the “institutions” and Greece catching the headlines of policy discussions across Europe, the publication of the report on completing Economic and Monetary Union (EMU) has almost been lost from sight. The report, signed this time by five presidents including the President of the European Parliament, raises several interesting issues ranging from banking union to democratic legitimacy. At the same time, it fails to address what is one of the key flaws in the design of European Monetary Union, proposing instead to build technocratic institutions with the mission to discipline wages and workers’ rights even more than already is the case.

The White Elephant In The Room

There is not a shadow of a doubt that EMU is incomplete. The key problem is that sovereign debt of individual euro area member states is no longer backed by a central bank of their own. Indeed, when adopting the single currency, member states not only become members of EMU, they are also divorcing in some way from their national central bank. The Banca d’ Espana (just to name one) continues to exist but with its competence on monetary policy transferred to Frankfurt, the government in Madrid can no longer call upon the assistance of a money-creating institution in case of emergency.

This peculiar combination of one supranational central bank together with 19 different sovereign debt stocks has made euro area member states extremely vulnerable in the event of a run on the bond market for their sovereign debt. No longer able to resort to their own national central bank as a lender of last resort, governments inside EMU have no other choice but to adopt brutal austerity – or else default – in dealing with any liquidity crisis. In a sense, Eurozone member states can be compared to emerging economies that are issuing debt in a (foreign) currency they have no control over and get into serious trouble when market momentum changes and access to finance is completely cut off.

Until 2010, this gap in the construction of monetary union in Europe went completely unnoticed. However, when the crisis in Greek public finances erupted back in 2009 and with central bankers openly declaring their increasing unwillingness to accept Greek debt as collateral, the fault-line in monetary union became painfully clear. Financial markets reacted in a predictable way, by panicking and staging a self-fulfilling prophecy. Realising that, in the absence of the ECB backing up Spanish, Italian, French, or Belgium sovereign debt, a run on these bonds could trigger default, markets started running for the exit by massively dumping them.

The rest of the story is well-known. Euro Area Member states, trying to calm down markets, embarked on the experiment of highly pro-cyclical austerity and topped this up with wage devaluation. Their hopes soon turned out to be vain as austerity and internal devaluation triggered a double dip recession, thus even stoking markets’ worst fears of default and/or the break-up of monetary union. This vicious circle was only broken some years later (2012) when the ECB’s president, Mario Draghi, finally addressed market concerns about the absence of a lender of last resort by orally promising to do “anything it takes” to save the single currency.

Europe has paid a high price for this. The price does not simply come in the form of economic stagnation, record high unemployment and rising inequalities. An even more worrying issue is that the principle of democracy is being hollowed out. Elected governments have repeatedly found themselves confronted with little choice but to abide by what the markets seem to be demanding or, alternatively, to obey the detailed “diktats” prescribed by the ECB in – not so – secret letters.

What does the five presidents’ report have to say on all of this? The answer is nothing or very little. The report simply ignores this problem of the “denationalisation of money” in EMU. And on democratic legitimacy, the report only makes far from convincing proposals. Organising additional hearings and debates between the Commission and the European Parliament is welcome in itself but this does not really address the concern over the power that markets and the ECB have acquired over elected governments in shaping economic and social policies and, ultimately, in deciding on the societal choices to be made. 

The Central Planning Of Wages: “Power To The Experts”

Instead of reflecting on how to complement EMU with a lender of last resort for sovereign debt, the five presidents’ report resorts back to the same recipes that were tried out over the past years: If monetary policy is “rigid” and cannot be used to shield member states from financial market turmoil, then everything else, in particular wages, must be made super flexible. It is the simple adagio saying: “if we can not devalue the currency, then we need to devalue wages”.

Here, the report is extremely ambitious when it proposes that each euro area member state set up what it calls a “Competitiveness Authority”. This “Authority” (notice how the terminology recalls a body issuing central directives) is defined as an “independent entity” that has the mandate to compare wages in one member state with developments in other Euro Area countries. Social partners “should” (again, mind the terminology) use the opinions of the Authority to guide their wage setting negotiations. Furthermore, these “Competitiveness Authorities” should form a Euro area system that also includes the Commission. The latter is expected to use the outcomes of the Euro Area wage authority system for decisions under the Macroeconomic Imbalances Procedure, implying the possibility of sanctions on non-complying member states. (Will the ECB be playing a leading role in this Euro Area competitiveness system?).

All of this is going too far, for two reasons.

Even if the presidents’ report takes great care in saying that the intention is not to harmonise national collective bargaining institutions, from the moment that social partners are forced in any way to follow these guidelines when setting wages, the freedom to bargain collectively (as stipulated in ILO conventions) as well as the principle of autonomous social dialogue (as stipulated in the European Treaty) are infringed upon.

Besides contradicting our model of social dialogue, there is the fact that wage competitive positions are relative, certainly in a region as integrated as the Euro Area. Squeezing wages in one country (France for example) improves the French competitive position but it automatically implies a worsening of competitive positions in Spain, Belgium, and Germany. Thus, a dangerous game will be played: one whereby workers and wages from different member states are systematically being played off against each other, where the economy that squeezes wages the most becomes the standard of reference for all to follow, where all of us are undermining both our own domestic demand dynamics as well other member states’ export markets. In short, it boils down to explicitly legitimising and even organising the wages race to the bottom. It is a “beggar-thy-neighbour” strategy that will end in depression, more disinflation, and probably even deflation.

Making Democracies Conform To The Markets

A couple of years ago, at the height of the euro crisis, Chancellor Angela Merkel publicly stated that democracies in Europe needed to “conform to the markets”. With monetary policy in the hands of a supranational central bank, with fiscal policy enchained by the Stability Pact and the Fiscal Compact with its Fiscal Councils, democracies are already well under way to be made “market conforming” under the tutelage of these gatherings of independent professionals. The next step seems to be to also bring wages and wage bargaining under the discipline of experts’ councils and to do this on the basis of rules forcing workers across the Euro Area to compete with each other in poaching each other’s jobs. It is not a prospect that augurs well for a democratic Europe.