Progressive alternatives to the
Eurosystem
Andreas Nölke
Goethe University, Frankfurt
Overview
• The institutional constraints of the Eurosystem
are not compatible with progressive policies
• Progressive reform of the Eurosystem (Plan A)
is possible in principle, but highly unlikely
• We need to think about progressive
alternatives to the Eurosystem (Plan B)
• Modest option: reformed European Monetary
System; radical option: European Clearing
Union
Institutional constraints for progressive
policies within the Eurosystem
High unemployment, slow growth, social austerity
and rising tensions: not (only) bad policies and
political weakness of progressive forces, but
structural institutional constraints of Euro
• No devaluation option and relentless German
mercantilism
• Powerful position of surplus countries, e.g. with
regard to fiscal policies (Fiscal Compact, SGP)
• Super-independent ECB: Tough limits for policy
space of progressive national governments
Requirements for progressive reform
of the Eurosystem (Plan A)
• A decade of over-proportional wage increases in
Germany
• Flexibility for national fiscal policies (no FC, SGP)
• Strongly increased European fiscal redistribution
and democratic legitimacy
• Debt relief for countries like Greece
• Democratization and modification of ECB
mandate
• Transnational coordination of wage negotiations
Institutional and political constraints
for a realization of Plan A
• Limited incentives for German unions and work
councils to give away competitiveness
• Powerful position of Northern governments (and their
focus on internal devaluation/austerity)
• No sufficient pan-European solidarity for permanent
Eurobonds or fiscal transfers
• No social/political support for jump in integration
• Super-independence of ECB
• Absence of European structures for wage negotiations
(in particular employers‘ associations)
Options for progressive alternatives to
the Eurosystem (Plan B)
1) a reformed European Monetary System
2) a European Clearing Union
(selection)
A reformed European Monetary System (1)
• E.g. Oskar Lafontaine, Martin Höpner, Fritz Scharpf
• EMS 1979-1998: Exchange Rate Mechanism (ERM)
• Fixed exchange rates within bands, intervention
obligations for national central banks, with political
adjustment options (consensus between MoF)
• Partially still existing: Denmark sole member of ERM 2
• Better than its image : much stability in turbulent
times, limited current account imbalances, limited
inflation, no devaluation races
• Problems: frequent negotiations/political energy, too
powerful role of Bundesbank, unification boom 91/92
A reformed European Monetary System (2)
• Principle of a new EMS: re-introduction of national
currencies, re-establishment of national monetary
policies
• First: 1:1 relations beween national currencies and
Euro (as remaining common currency, instead of ECU)
• Second: realignment of currencies (devaluation of
Southern members), based on negotiations
• Third: negotiation of fluctuation bands of currencies
• Fourth: interventions to keep currencies within bands
• (non-Euro countries such as Poland, Sweden etc. may
join)
A reformed European Monetary System (3)
Reform option in comparison with old EMS:
• Democratized ECB/ESM as „European Monetary
Fund“ – advisor, negotiation platform, provision
of short-term credits for countries with balanceof-payment constraints, interventions to keep
currencies in fluctuation bands
• Much more fiscal firepower than old European
Monetary Cooperation Fund, less powerful role
for Bundesbank than under old EMS
A European Clearing Union (1)
• Keynes, Paul Davidson, Philip Whyman
• Keynes plan for International Clearing Union /
British government white paper 1942
• Fixed (but adjustable) currency union, closed
payment system, capital controls
• Symmetric rebalancing: penalties for both
deficit and surplus countries, forced utilization
of idle reserves to promote investments („use
it or loose it“)
A European Clearing Union (2)
Application to Europe:
• Different mandate of ECB (focus on payments
balance, full employment)
• Surplus countries (e.g. Germany) would be forced
to either increase domestic spending or spend
money in other European countries (FDI, aid)
• ECU light: common currency
• full ECU: re-introduction of national currencies
for quicker rebalancing
A European Clearing Union (3)
• Advantages: expansionist pressure on
European trade, high level of demand (no idle
reserves), reduction of financial instability
• Disadvantages: unwillingness of powerful
Germany to give up mercantilism, economic
feasibility under high financialization
Conclusion
• Even if an alternative monetary system still
seems to be far out, we should start thinking
about the latter today
• Having a Plan B also increases the negotiation
power for Plan A