Joy In Heaven – A Sinner Repents

When I left British politics in 1994, the Independent published a leading article in which, alongside some generous comments, they regretted my adherence to “Keynesian macroeconomics” and my “fervent Euro-scepticism”.

I imagine that support for Keynesian macroeconomics does not seem as anachronistic today as it apparently did then. And, I would argue, my “Euro-scepticism” (which was so easily and wrongly translated into anti-Europeanism) should now more readily be recognised as all of a piece with the Keynesian view that keeping control of one’s own macroeconomic policy, rather than handing it over to an unaccountable international central bank, was an important safeguard against recession.

I was reminded of all of this by last week’s Financial Times piece by the veteran economics commentator Sam Brittan. He argued that the introduction of the euro had been premature, and that the plight of Greece (and perhaps of other euro-zone states to follow) was a direct consequence of failing to recognise that a common currency could succeed only if there was a convergence of costs across the whole economy – and if the common currency helped towards, rather than hindered, that end.

Sam Brittan’s current view is of course in marked contrast to what he thought and wrote on many previous occasions. I recall that, in 1988, when Britain’s membership of the Exchange Rate Mechanism – the euro’s precursor – was a live issue in the Labour Party, Sam Brittan spoke at a meeting of the party’s backbench economic affairs committee, and advised my colleagues to “put Bryan Gould on a slow boat to China” while the party changed its policy in favour of supporting ERM membership.

Since Keynes is now once again all the rage, Sam Brittan is entitled to quote the great man’s famous response that “when the facts change, I change my mind. What do you do sir?” The problem here is that it is not the facts that have changed; it is the minds that were wrong. The arguments against a common currency across such a wide and diverse set of individual economies were as strong in 1988 as they apparently have now become.

The essence of the case for the euro (and of the EMS and the ERM before it) was always a political one. A common currency can only work and make sense if the whole economy is subject to one central monetary policy which must supplant other elements, such as a national fiscal policy, that would ordinarily constitute macro-economic policy. In a democracy, a power of this kind could only be properly exercised by a democratically accountable government. The unstated conviction of the proponents of a single European super-state was that this logic would mean that a common currency would inexorably lead to the creation of a single European government to provide at least the illusion of democratic control over what would otherwise be government by central bank..

The economic consequences of such an arrangement pointed to the same outcome. The improbability of the whole of such a diverse economy being appropriately served by a single monetary policy was so great that it could only be contemplated if a sort of Faustian bargain were struck by the participants.

The powerful advanced economies would inevitably dominate monetary policy which would be framed to suit their interests; and that would mean that weaker economies would have great difficulty in living with it. In the absence of the ability to deploy an independent fiscal policy or to devalue, their only recourse would be to deflate and accept unemployment. They could be persuaded to accept this only if the stronger countries would implicitly undertake to treat them as – in effect -social security claimants and recipients of regional aid, and that could be made palatable to the taxpayers of the richer countries only if they could be induced to see those in poorer countries as fellow-citizens.

That bargain has now – as evidenced by the difficulties that Greece and their euro-partners are facing and failing to resolve – broken down. The Greeks, having long struggled with an inappropriate monetary policy, are finding the required deflation extremely painful; while the Germans have reneged on their implicit undertaking to maintain the integrity of the euro by bailing out countries that find the going tough.

The collapse of that bargain may well signal the end of the euro-zone. But it should also sound an alarm. We ignore the importance of a broader-based, democratically accountable, properly focused macroeconomic policy at our peril. The economic interests of a wider European economy – to say nothing of small matters like a functioning democracy – will be best served, not by a forced but failed attempt at convergence through a single monetary policy, but by country-sized governments deploying all the instruments of macro policy to suit the needs and interests of the economies for which they are responsible. The European dimension should rest mainly on a high and growing level of co-ordination of policy and functional cooperation among separate and well-performing economies which see their future as developing together.

Keynesian macroeconomics and a scepticism about forcing the pace on creating a single European state and economy should be seen as going hand in hand. As we now know, a failure to learn the lessons threatens recession and drags down all parts of an artificially constructed single economy. Hopefully, that has now become clear; and it might have served us well if it had been recognised in 1994.

Bryan Gould

25 February 2010

This article was published in the online Guardian on 27 February.