Hey, Economics! Meet Politics!

Economists are fond of simplistic generalizations, which they refer to as “laws” (in imitation of Physics, itself showing its links to Theology), or as stylized facts.   Most such are, at best, default conclusions, since there are always exceptions.  Here are several generalizations, linked in a chain of inferences:

  • A successful single European currency requires a single European monetary policy.
  • A successful single European monetary policy requires a single European fiscal policy.
  • A successful single European fiscal policy requires fiscal transfers from one part of the European Union to another.
  • Fiscal transfers from one part of the European Union to another can only be undertaken over the long term by European institutions having democratic legitimacy.
  • To achieve democratic legitimacy for European institutions, the nations of Europe will require full political union.

This is not a new argument.  I first heard it put by Zambian economist Chiselebwe Ng’andwe in a paper read to a meeting of the African Association of Political Science in Salisbury (later Harare), Zimbabwe, in May 1981, talking about regional economic unions in Africa.   Dr Ng’andwe was subsequently a Board Member of the Zambian Central Bank and is currently Chairman of the state-owned National Savings and Credit Bank of Zambia. In today’s Guardian, Simon Jenkins refers back to a book about European integration by Larry Seidentop, published in 2000, which apparently makes a similar case about Europe.  Here is Ng’andwe in 1981:

Central banks play a pivotal role in the harmonization of fiscal, monetary and general economic policies.  Hence, separate central banks make it difficult to harmonize even those policy areas where joint arrangements exist such as a common tariff.
The Central bank is such an important institution for economic policy control that a joint central bank [in an economic union of states] needs total political harmony to function.  The necessary political harmony is not possible without political union.  Hence, a joint central bank and its potential benefits are simply not possible in a grouping of political[ly] independent states.  If one state wants some specific monetary policy to deal with an internal problem, a joint central bank will [op]pose some problems [policies?] unless the desired action is completely consistent with the economic and (or) political mood of the other countries.  The loss of some territorial capacity for fiscal and monetary manoeuvre entailed by a joint central bank may involve a greater loss in territorial economic growth than the territorial gain from joint economic actions. This possibility of net economic loss does not augur well for a joint central bank.  But even more important to the territorial political leaders is the loss of control over the key instruments of economic policy.  This loss can create frustrations in the internal economic and political policies of individual countries.
. . .
Another signifance of joint policy instruments lie in the capacity of these instruments to reduce imbalances in the distribution of economic benefits.   .  .  .  Even in the U.S.A. where there is practically no government industrial and commercial activities, the availability of common fiscal and monetary policies enable[s] the central government to redistribute income throughout the federal states.
This redistribution may not be enough to remove inequalities completely, but it does remove the rough edges from any regional economic imbalances.”  (pp. 13-14)

Why is this argument not, then, widely understood?  Is it that some ideas are too comprehensible – in other words, apparently lacking in complexity or subtlety – to be understood by intelligent people? Or is that the political forces which benefit from the non-democratic European status quo are so strong as to prevent the adoption of democratic structures, and to muzzle the arguments for them?  As I recall, Ng’andwe’s talk was received very coldly by his audience, most of whom were keen on economic unions (between African countries), while maintaining national sovereignty in all other respects.
POSTSCRIPT (2014-12-07):  Another aspect of the failure of economic union without political union is revealed in George Packer’s profile of Angela Merkel, a bland woman seemingly arisen without trace:  her insistence on austerity policies for southern Eurozone countries in crisis is a play to her own, intensely financially conservative, voters.  Without an over-arching federal political structure no politician in Europe has an electoral incentive to consider the good governance of the global whole, rather than just their own, local or national part.  When historical accounts are eventually drawn up for responsibility for prolongation of the Great Global Recession of 2008-?, the small-minded, economically illiterate Mrs Merkel will be one of those most culpable.

Chiselebwe Ng’andwe[1981]:  Problems of Economic Integration in Africa.  Paper presented to the Fourth Bi-Annual Meeting of the African Association of Political Science (AAPS 1981).  Salisbury, Zimbabwe:  23-27 May 1981.
George Parker [2014]: The quiet German.  The New Yorker, 1 December 2014.
Larry Seidentop [2000]:  Democracy in Europe.  London, UK: Penguin.

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