27 October 2011

Paul Goldschmidt: Comment on the Op-ed by Sir John Major in the FT of October 27 'The Price of the Drift to Fiscal Union'

The authority of the author of this "op-ed" is unquestionable and comments must therefore be measured carefully. Nevertheless, with all due respect, this analysis reeks "self justification".

"In a sensible world, the southern states would devalue but cannot". But in the real world that is precisely what the UK has done and, despite this "sensible advantage", finds itself in the biggest mess ever and is imposing the kind of rigorous policies that mirror precisely those advocated for the southern states. In addition, the UK is experiencing significantly higher inflation than the eurozone which only bodes further devaluations. As long as the short-term respite granted by devaluation is cancelled by creeping inflation eroding rapidly the competitive advantage, EMU countries may "tolerate" this unfair practice. The UK should not assume that this will be allowed to continue.

Turning to the question of fiscal consolidation, the author points to the inevitable growing conflict between the EMU 17 and the other EU 10. This superficial analysis fails to recognise that eight of the 10 are committed to join EMU by Treaty; within the profound structural changes in the offing, implementing this obligation should be high on the list. This leaves Denmark (that in effect aligns its exchange rate and monetary policies on the eurozone) and the UK that will find itself in "splendid isolation". I endorse the author's conclusion that if as a result the UK chose to leave the EU (rather than join EMU) it would "throw up far more problems than it would solve".

While completing an EU-wide fiscal Union certainly involves giving up precious elements of "national" sovereignty, this is no different from what happened when, among the 17 EMU Members who gave up "monetary sovereignty" to the ECB, most (with the glaring exception of Germany) actually recovered a measure of "real" sovereignty within the European system of Central Banks giving up "nominal" sovereignty that had enslaved them in the years prior to the sole dictates of the Bundesbank.

By completing the "E" of "EMU" and permitting the ECB to play its full role of lender of last resort, it is the EU as a whole (with or without the UK) that will regain its full sovereignty in dealing on an equal footing with the USA, China, Japan, India, Brazil, context in which an "independent UK" would not carry much weight or power.

The Brussels accords have, once again bought some time. It must be used to implement as rapidly as possible the further integration of the EU 27 Members rather than exacerbating the divisions between the EMU 17 and the other EU Members.

© Paul Goldschmidt