The Man Who Saw Through the Euro

Rational Irrationality Blog, The New Yorker, November 2, 2011. © 2012 Condé Nast Digital. All rights reserved.

To many Americans, the European debt crisis is a bit like the Asian bird flu of a few years back: a mystery virus that appears from nowhere and threatens to destroy us. To those of us who grew up in northern Europe, and especially Britain, it is the tragic culmination of a fractious political and intellectual debate that goes back almost a quarter of a century.

Twenty years ago, in advance of the 1992 Maastricht Treaty, which paved the way for a monetary union and the creation of the euro, a big dividing line in British politics was between pro-Europeans, who supported these efforts, and “Eurosceptics,” who vehemently opposed them. Most Eurosceptics were on the right, and their spiritual leader was Margaret Thatcher, who viewed Europe through the lens of small-government conservatism. “We have not successfully rolled back the frontiers of the state in Britain only to see them re-imposed at a European level, with a European super-state exercising a new dominance from Brussels,” Thatcher famously commented in 1988.

On the center and the left, most politicians and intellectuals supported further European integration, including a monetary union and common currency. But a few brave souls demurred. Some were old-school socialists and trades unionists, who viewed the European Economic Community, as it was then called, as a ghastly bosses’ plot. But one was a posh Cambridge economic forecaster called Wynne Godley. Previously, Godley had been best known for his critical stance on Mrs. Thatcher’s domestic economic policies and her embrace of monetarism. After Godley’s repeated criticisms of its policies, the Thatcher government slashed the funding to his taxpayer-financed economic institute in Cambridge.

Assiduous readers of this blog will recall that last week I mentioned Godley, who died in 2010, in my post about Keynes. He was an interesting fellow. A professional oboe player before becoming an economist, he worked at the British Treasury department in the nineteen-fifties and sixties, and then taught at Keynes’s old home, King’s College, Cambridge. In the mid-nineties, he moved for part of each year to the Levy Institute at Bard College, a haven for heterodox thought, where he became one of the first economists to query the debt-financed prosperity of the Greenspan-Bernanke years. Today, though, I would like to draw attention to an article he wrote in October, 1992, for the London Review of Books entitled “Maastricht and All That.” (Thanks to Gavyn Davies, who now blogs regularly and informatively at the Financial Times’ Web site, for reminding me about it.)

Unlike many Eurosceptics, Godley wasn’t anti-European or anti-government—far from it. His problem with the plan for a common currency was that it didn’t provide for enough government. The failure of the Maastricht Treaty to set up a proper fiscal policy for the entire euro zone alongside a common currency meant the entire scheme was half-baked and ultimately unworkable. He wrote,

Although I support the move towards political integration in Europe, I think that the Maastricht proposals as they stand are seriously defective, and also that public discussion of them has been curiously impoverished…. The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn’t need any management at all.

As a Keynesian, Godley didn’t believe in self-adjustment. He took it as axiomatic that what had prevented another Great Depression was the worldwide adoption of counter-cyclical policies. Faced with the onset of a recession, governments typically relaxed fiscal policy and devalued their currencies to make their exports more competitive, he pointed out. But inside a monetary union, policymakers wouldn’t have either option available, and the outcome could well be disastrous. Godley ended his essay with these prophetic words:

If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation. I sympathise with the position of those (like Margaret Thatcher) who, faced with the loss of sovereignty, wish to get off the EMU train altogether. I also sympathise with those who seek integration under the jurisdiction of some kind of federal constitution with a federal budget very much larger than that of the Community budget. What I find totally baffling is the position of those who are aiming for economic and monetary union without the creation of new political institutions (apart from a new central bank), and who raise their hands in horror at the words “federal” or “federalism.” This is the position currently adopted by the Government and by most of those who take part in the public discussion.