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 : 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 balance- of-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