WINTER 2016/2017 EUROPEAN HOUSE OF CARDS Alberto Bagnai THE EURO BREAK-UP: MANAGING THE INEVITABLE Jens Nordvig THE EURO AS A SOURCE OF DIVISION RATHER THAN UNITY Stefan Kawalec THE EUROZONE IMBALANCES AND GLOBAL TRADE CONFLICTS Desmond Lachman THE REAL SOLUTION TO GERMANY’S EXTERNAL IMBALANCE A Brussels-based free market, euro-realist think-tank and publisher, established in 2010 under the patronage of Baroness Thatcher. We have satellite offices in London, Rome and Warsaw. New Direction - The Foundation for European Reform is registered in Belgium as a non-for-profit organisation (ASBL) and is partly funded by the European Parliament. REGISTERED OFFICE: Rue du Trône, 4, 1000 Bruxelles, Belgium. EXECUTIVE DIRECTOR: Naweed Khan. www.europeanreform.org @europeanreform The European Parliament and New Direction assume no responsibility for the opinions expressed in this publication. Sole liability rests with the author. FOREWORD EDITORIAL Hans-Olaf Henkel is a former CEO of IBM Europe and a former head of the German Federation of Industries (BDI). He is a member of the European Parliament and a Vice-President of New Direction. Tomasz Poręba is a Member of the European Parliament and President of New Direction – The Foundation for European Reform. The limits of my language are the limits of my world. he foundations of the post-WWII Western with the EU. Indeed, the entire enterprise has udwig Wittgenstein’s famous dictum helps illuminate the state of international order are being shaken in undergone profound, disfiguring changes during affairs in Europe. The quality of thinking on economic matters unprecedented ways. State of the global Britain’s membership. Abandoning the principle is reflected by the language and policy debates among elites. economy is the root cause of the wave of of subsidiarity and interfering too deeply in Public discourse driven by policy makers is heavy on discussion Tpopulism and isolationism, which has swept across the affairs of sovereign states, the actions of EU Lof taxes, regulation and the role of the state in the economy, but virtually Europe and the United States. For too long, too many leaders have provoked political backlash. Support absent on monetary arrangements and economic imbalances. people have lived with economic misery from global for the European project is now fading away in imbalances, and the political consequences have, the countries of the eurozone. Despite all this, The consequences of the eurozone crisis and the euro-rescue policy now inevitably, shown up on the both sides of Atlantic. federalist tendencies still run strong in Brussels. reach far beyond the borders of the monetary union. The eurozone, The call for more Europe will not strengthen the now with a higher current account surplus than even China, has Bad economics have consequences. The single EU, and will instead have the opposite effect by contributed significantly to global imbalances. This situation is neither currency was supposed to usher in a period alienating more voters. good for the world nor for eurozone countries, and has profound of prosperity, but instead turned out to be a political consequences, as it has contributed to the rise of isolationism destabilizing force for both the European and The scale of economic misery caused by the in Europe and the U.S. Undoing global economic imbalances in a global economies. The decision by British voters European Monetary Union in Southern Europe has responsible manner is now essential for the health of the global economy. to leave the European Union came in the context been accentuated by the deteriorating condition Globalization is now under heavy fire in Europe. But it should not be of eight years of economic crisis in Europe. In of European banks. Healthy banking systems are blamed for problems arising from the European Monetary Union. contrast to the eurozone, the United Kingdom essential for economic growth, but well-performing managed to return to the road of recovery soon banks also depend on functioning economies. The The European project and the transatlantic alliance have had strong backing after the financial crisis. euro has choked off the engine of the European from both Europe’s elite and broader society. Massive unemployment and economy. It is true that the euro is not Europe’s economic depression have eroded this understanding. Rising public debt When Britain entered the European Economic only problem, but without a new monetary regime and the European banking system are not separate factors but are part of a Community in 1973, the European project was an in Europe the situation will remain bleak. The wider story. Only when the larger picture is in focus can we appreciate the arrangement aimed at improving the economic lessons emerging from the eurozone crisis are economic and political problems facing Europe. This is the aim of this New well being of all Europeans. At present, economic clear: there is no economic justification for a Direction magazine. Only through changing the language of the debate, can success is not an idea commonly associated federal Europe or a single currency. ■ the limits of our world be redefined. ■ TABLE OF CONTENTS 8 10 13 16 20 Desmond Lachman Jens Nordvig Alberto Bagnai Kamil Kamiński Brigitte Granville THE REAL SOLUTION TO GERMANY’S THE EURO AS A SOURCE OF THE EURO BREAK-UP: THE EURO AND THE UNMAKING LESSONS FROM DISMANTLING THE RUBLE ZONE EXTERNAL IMBALANCE DIVISION RATHER THAN UNITY MANAGING THE INEVITABLE OF THE EUROPEAN PROJECT FOR A EUROZONE BREAK UP 34 26 30 33 36 Antoni Soy Mojmír Hampl Zdzisław Krasnodębski Jacques Sapir Hans-Olaf Henkel THE CASE OF THE INSIDE AND OUTSIDE THE EUROZONE THE EURO AS THE ILLUSIONS OF THE THE EURO AND THE SPANISH ECONOMY A BACK-OFTHE-ENVELOPE CALCULATION UTOPIA ‘FIVE PRESIDENT’S REPORT’ GERMAN MINDSET 40 42 44 48 52 Jean-Pierre Vesperini Joachim Starbatty David Liebers Pieter Cleppe Stefan Kawalec THE TRAGEDY OF THE EMU AND A A TRUE KEYNESIAN PERSPECTIVE UKRAINE: THE UNNAMED VICTIM BREXIT: THE EURO’S FIRST MAJOR THE EUROZONE IMBALANCES CALL FOR A NEW FRENCH PARADIGM ON THE EUROZONE CRISIS OF THE EUROZONE CRISIS BLOW TO THE EUROPEAN UNION? AND GLOBAL TRADE CONFLICTS The magazine was edited by Kamil Kamiński and Hans-Olaf Henkel. New Direction – The Foundation for European Reform, a non-for-profit organisation (ASBL/VZW) registered in Belgium and partly funded www.europeanreform.org follow us @europeanreform by the European Parliament. Registered Office: Rue Du Trône 4, Brussels, 1000, Belgium. Director General: Naweed Khan. The European Parliament and New Direction assume no responsibility for the opinions expressed in this publication. Sole liability lies with the author. Desmond Lachman THE REAL SOLUTION TO GERMANY’S EXTERNAL IMBALANCE welcome debate seems surplus all the more troubling on Germany’s large external SADLY, SO LONG AS by effectively increasing the real to have started in the is the fact that it is occurring imbalance, as is the US Treasury GERMANY REMAINS TIED wage level through lowering United States as to what at a time when the German in its latest currency report to TO THE EURO, THERE IS the price of imports. The second should be done about economy is cyclically in a very Congress, the solutions that they LITTLE PROSPECT THAT element would be to substantially AGermany’s inordinately large much stronger position than its are proposing to redress this IT WILL BE FACED WITH loosen German domestic fiscal and external current account surplus. European partners. imbalance are partial at best. As A STRONGER CURRENCY monetary policies to boost domestic However, it is to be regretted that an example, Greg Ip of the Wall ANYTIME SOON. demand to make up for the reduced in this debate little attention is Germany’s maintenance of a Street Journal proposes that the support to the domestic economy Desmond Lachman is a resident fellow being focused on the free ride that current account surplus as large as problem might best be addressed from the external sector. at the American Germany continues to get from it has now would be damaging to by having Germany somehow Indeed, in much the same manner Enterprise Institute. He was formerly a tying itself to a weak euro. Since both the global and the European engineer a rise in its domestic as the IMF would prescribe a Sadly, so long as Germany remains Deputy Director in without a basic change in German economies. From a global wage level. He makes this proposal comprehensive approach for a tied to the euro, there is little the International exchange rate policy, there is every perspective, at a time that there on the grounds that the German country to redress a large external prospect that it will be faced with Monetary Fund’s Policy Development and prospect that the German current is insufficient global aggregate imbalance problem has its roots current account deficit, so too a stronger currency anytime soon. Review Department account surplus will only get even demand, a large German current in excessive savings in the private would a comprehensive approach, Indeed, with US and European and the chief emerging market economic larger in the period ahead. account surplus would constitute a sector. For his part, Brad Setser of albeit in reverse, be indicated for a monetary policies now out of strategist at Salomon drain on aggregate demand in the the Council of Foreign Relations country with a very large external sync and with the European Smith Barney. The fact that Germany is running rest of the world. Similarly, from proposes that the German current account surplus. economy still struggling, there is a disturbingly large external a European perspective, at a time government take advantage every prospect that the euro will imbalance is hardly open to that countries in the European of currently very low interest Two key elements would be continue to depreciate.