The European Union has been functioning for a little over a decade now. Up until 2008/09, pretty smoothly also. Overall GDP during the time rose, and everybody got along. That party came to a close during the Global Financial Crisis and a fundamental flaw was exposed. As far as I can tell, I’m the only one who has approached this flaw by proposed my below solution at the end of this post (I’m sure there are others, but I just couldn’t find them, the internet is a big place).
Anyway, here goes As part of the makeup of the EU, national governments keep their national sovereignty, allow an open border policy between other EU nations, but they give up their fiscal sovereignty. That last point is the crux of the flaw. You have 17 nations (who make up the monetary European Union) whom all must use the Euro instead of their own currencies issued by their own central banks.
Now, the way a central bank works is this: A individual central bank must take into account the spending habits of its own people, and then enact policies that can have the greatest benefit to the economy for the well-being of all. For example, a nation of savers would have a low-interest rate, and a nation of spenders would have a higher interest rate (drastic simplification but for the purposes of this example, fitting).
A nation of savers would create excess capital, which can be used to create new business, industries and jobs. Access to new capital would not be as necessary and inflation would become a non-issue and would naturally increase as required by the new jobs and businesses via the money multiplier effect.
On the other hand, a nation of spenders could not have a low-interest as spenders in a fiat currency environment might spend beyond their means and create lots of private debt, and might then pay off the existing debt with new loans and debts. In a low-interest environment, this would create a vicious cycle that would create lots of inflation and economic pain for everyone. So a nation of spenders would need a higher central bank interest rate to dis-incentivate new loans, money creation and slow down and control inflation.
I’m sure by now, some readers have come to the crux of the problem. 17 countries together in the same economic union. A country like Germany, who are a nation of savers, and who work until the age of 65 before retirement, then a country like Greece, who are a nation of spenders, and retire at 50, yet both have access to the same line of credit from the European Central Bank! This has caused huge distortions that can’t be paved over with the current round of bailout after bailout after bailout that don’t even solve the basic problem to begin with, it just papers over the foundational crack that an equal access system like this manifests.
Let me preface the next statement by saying that I am no economist, just a dude who reads a lot. The solution as I see it, is to charge a variable interest to the varying countries that make up the monetary union depending on the macro-economic behaviours of their people. What would an individual central bank in each of the countries set its interest rates at to ensure to the best of its ability, that prices remain stable and the economy remains strong. Then charge that interest rate to each country. Sure, they might cry foul and whine like babies as politicians have habit of doing but so what? Let them bitch and cry until their cheeks become coarse from all that salt and eventually they will get used to it.
Is it fairer that the now richer, more prudent countries who produce excess capital now have to essentially give free money to these countries whose politicians had the foresight of a 5 year old who’s walked into a candy store for the first time. It’s fairer to get what you have shown the world you can be responsible with.
On an individual level, you have to earn other people’s trust before you can be trusted with their friendship, babysitting their child or taking a small loan from a friend etc. The same should be true on an international level, but politicians are some of the most self-serving people on this planet and they think they deserve everything because we have put them on a pedestal.
I am sure that the monetary union would never have gotten off the ground in the first place, as such legislation required unanimous support from all countries involved, and the poorer, spend beyond their means countries would have struck it down immediately. I could be wrong, but I doubt it.
All I know is that, an equal across the board interest rate might seem fair to the socialist leaning tendencies of the left-dominated societies of Europe, but remember in the real world, life isn’t fair. A lion isn’t guaranteed to catch its next meal, elephants are shot and killed for the 1% of their mass that their tusks make up, and injured birds get eaten by cats. The only institution we are (or should be) equal under is the law. Whether poor or rich, we are to be treated equally in justice. However, in a bank, try getting a loan with bad credit. You can’t, and for good reason, the likelihood of you paying it back is slim. The advancement of society so far has come when capital, has been created in excess [savings]. This excess is then used to create new businesses, investments, jobs and the consumption of more products etc. It may come for a while under such liberal make-believe equality but that usually doesn’t last long as the economic reality of such decisions always eventually rears its ugly head and we, the people usually suffer.