Currency union requires the abandonment of a great deal more sovereignty than has so far taken place in the euro-area. They haven’t had to abandon sovereignty much yet because the zone has not significantly been tested till now. There is a reason why the US states were eventually relieved of the ability to run budget deficits, having given up their own currencies and joined the USA currency union known as the dollar. What we’re seeing now is the moment of truth in the euro-area. For this to be a sustainable currency zone, some aspects of sovereignty need to flow from the members to the area authority, dominated though it is by the paymaster, Germany.
So watch Ireland closely. It has a very low tax rate on corporations. And the present government has sworn this is not something that should be changed. Yet the rest of the euro-area would very much like to see it changed. After all, Ireland’s ultra-low corporate tax rate undercuts their own economies as places to set up European operations. The present crisis is the irresistible opportunity for Ireland’s neighbours to insist on a change in Irish corporate tax policy. So who wins? It’s a test case of sovereignty.
There’s a larger aspect of sovereignty here. It goes to the heart of policymaking in response to the current financial recession in Europe. If they wish to remain in the euro-area, the authorities in these benighted economies have to pursue limitless austerity. And even when they do — as Ireland has unquestionably already done — they fail. And sovereignty has to be relinquished, to some extent — as the price of the inevitable financial ‘assistance’ from the neighbours. What kind of assistance is this? If it’s there to keep you locked into perpetual deflation, austerity, and unemployment, is it really assistance? I have no doubt that in one or all of these economies, the exercise of sovereignty will be preserved and put to use. In the form of departure from the currency union. No one is beholden to stay inside the euro (although new members of the EU are obliged to aspire to joining the euro-area, and most still want to do so, despite the current difficulties).
There’s an opening here for a reasonable political stand on sovereignty and the return of national monies. It will be greeted with hysteria, scaremongering and opprobrium, much of it based on sheer dogma. Beware these dogmas. When next you read that leaving the euro would be cataclysmic, ask for the reasoning. And analyse it critically. What do you think the Argentine people were told in the waning days of their “irrevocable” peg to the dollar? Sure: “Exit is cataclysmic”. In the event, although devaluation (and default) were not pain-free, they did unleash growth — strong growth, indeed, after years of deflation and recession.
The bottom line is this: Show me an economy that made it through the travails of overvaluation via internal deflation (rather than currency devaluation) and I’ll show you a small and very unique economy. Hong Kong is the example par excellence, but none of the euro-area members can even remotely compare to it, in terms of price flexibility and the generally laissez-faire economic arrangements needed to allow a restoration of competitiveness on the back of internal deflation. The policy prescription for the overvalued euro-area members today is exactly what it was 80 years ago for the overvalued European economies in the opening years of the Great Depression: Don’t devalue, deflate. It didn’t work then just as it isn’t working now. When internal deflation/recession/austerity failed 80 years ago, the politicians who pursued it were swept from office and replaced with bolder ones, many of whom were able to defy the received policy wisdom and to exercise sovereignty.