Home/Search - Löntagarfonder - Houseprices - EMU - Kronkursförsvaret - Dollar - Finanskrisen

Monetarism - Rome, Habsburg and the European Union - Göran Persson, EMU och Federalismen

Map of the Roman Empire - Another excellent map showing The Roman Empire at its Greatest Extent

"ever closer union" - The United States of Europe

German politics is tilting towards federalism
The CDU and SPD accept the principle of a fiscal union for macroeconomic stabilisation, and transforming the European Stability Mechanism (ESM), the rescue fund, into an institution of the EU.
Otmar Issing, a former member of the European Central Bank’s executive committee, rightly recognised the importance of the EU section in the agreement.
As an economic conservative he was appalled by the ease with which Germany raised the white flag in the eurozone debate. Banking union, fiscal union, transfer systems — it could all happen very soon.
It is what the conservative, ordo-liberal German establishment always fought against.
Wolfgang Münchau, FT 4 February 2018

At present, the argument for German leadership boils down to a plea that it should put more and more money on the European table.
Yet the principle that there should be no bailouts is fundamental in a union of countries that share a currency but remain sovereign when it comes to public finances.
A democratic European monetary union could not have been built without respecting this principle.
It will be a long time before a fully fledged political union is established.
Fiscal transfers will remain a matter for national parliaments.

Jointly issued eurozone bonds would violate this principle and undermine democracy.
Otmar Issing, Financial Times 25 March 2014

German Constitutional Court

Otmar Issing vänder sig mot hur ECB-chefen Mario Draghi har drivit igenom obligationsköp
som ska stötta euroländer med stora interna problem som Italien och Grekland
Johan Schück DN 26 maj 2018

– För mig är det ett politiskt ställningstagande som en oberoende centralbank, styrd av teknokrater, inte ska ägna sig åt.

Det säger Otmar Issing, som länge ingick i Europeiska centralbankens ledning och är en av arkitekterna bakom euron.
Nu varnar han för en chock med återverkningar på hela Europa.

Full text

EMU - "One day, the house of cards will collapse,”
said Professor Otmar Issing, the ECB's first chief economist and a towering figure in the construction of the single currency.
Ambrose Evans-Pritchard, Telegraph 16 October 2016

“Realistically, it will be a case of muddling through, struggling from one crisis to the next. It is difficult to forecast how long this will continue for, but it cannot go on endlessly,"
he told the journal Central Banking in a remarkable deconstruction of the project.

Full text

Top of page

Otmar Issing - a former chief economist at ECB:
Five Presidents Report creating a fiscal union "without democratic legitimacy".
Telegraph 3 March 2016

Father of the euro fears EU superstate by the back door
Professor Otmar Issing has warned against handing over control of tax and spending before a democratic political union has been established
Ambrose Evans-Pritchard, Cernobbio, Italy, 6 September 2015

The euro’s founding father has warned that Europe’s latest plan for an EMU-wide finance ministry is a dangerous attempt to smuggle through political union, and breaches the basic tenets of modern democracy.

Professor Otmar Issing, the chief architect of monetary union through its early years, said it would be “dangerous” to transfer control over tax and spending to the EU federal level before full political union has been established first on democratic foundations.

Such a quantum leap in the constitutional structure of Europe – effectively the creation of an EU superstate, with a parliament comparable in power to the US Congress – is unthinkable in the current political atmosphere.

The euro may survive “for a period” under its current structure, but it will break apart if the principles of monetary union are permanently violated. “Pacta sunt servanda (Agreements must be kept),” said Prof Issing.

Full text

Finanskrisen avslöjade obarmhärtigt bristerna i eurons konstruktion. Medlemsländerna var för olika
För federalisten är allt okomplicerat. Lösningen heter finanspolitisk union, en enda budget bestämd av ett departement i Bryssel
En sådan är fullständigt otänkbar för Tyskland
För Sveriges del skulle euron vara för evigt omöjlig.
DN huvudledare 4 september 2015

Top of page


1. The Lessons of History

IN THE FIRST CENTURY AD, a merchant setting off from Rome on a journey to Cologne was able to pay his bills with the same coin, the denarius, over his entire journey.

Initially, Rome safeguarded cohesion of its large empire by fire and sword, then increasingly by placing even the most remote provinces under the legal system and administration of Rome.

The precise lessons to be drawn from such historical episodes may not be entirely clear.


Otmar Issing, a former European Central Bank chief economist, warned that the eurozone could be heading towards fracture
in a book called How we save the euro and strengthen Europe published this week.
"Everything speaks in favour of saving the euro area. How many countries will be able to be part of it in the long term remains to be seen,"
said Mr Issing in the book, which is written as a conversation between an economist and a journalist.
Telegraph 8 August 2012

Full text

Otmar Issing, ECB’s former chief economist, one of my Gurus,
apparantly does not understand that Germany no longer is an idependent state, regarding monetary policy.
Rolf Englund blog 24 October 2014

Issings två katastrofscenarier
Den hälosamme ekonomisten, 10 Augusti 2012

Tycker det här citatet av euroarkitekten Ottmar Issing förtjänar en egen bloggpost:

"A break up of the euro area would be a major disaster but the alternative to that, being a monetary union in which the reputation of the ECB would be undermined, or even destroyed. The euro would tumble and governments would pile up debts without any limit. I think this is a scenario – a horror scenario – which comes close to the disaster of a break up.”

Tyvärr är det många som inte förstår att en skuldunion vore en mycket större katastrof än ett utträde av ett eller flera euroländer

Full text

He added that weaker banks in the euro zone should be allowed to fail. Several European governments, such as the U.K. and the Netherlands, have been forced to bailout banks, increasing sovereign debt burdens.

“The medicine still has to be solving problems where they were caused, in the banking industry, restructuring banks, and also cleaning the mess in banks. This can for some time be kept through the crisis for some time through measures from outside, but in the end, Europe is overbanked and weak banks have to disappear,” Issing said.

CNBC 10 August 2012

Moral Hazard

Should Europe now seek political union?
Forming such a union implies nothing less than the end of the nation state.
There are powerful arguments why “Europe” – whatever this means and how many countries might be included – should have this ambition.
However, to base the argument for integration primarily on saving monetary union is anything but convincing.
And it is more than strange when foreign politicians and experts are pressing eurozone states to give up national sovereignty, out of fear that a collapse of monetary union might have severe consequences for their economies.
Otmar Issing, Financial Times 29 July 2012

But, independent of any answer to these questions, political union is impossible to achieve within a few years. It cannot be a means of crisis management.

Political union is not the solution. All measures that implicitly pre-empt the establishment of political union are inconsistent and dangerous. They imply huge financial risks for a few member countries and could not only undermine honest efforts in the direction of political union, but also destroy the fundament on which such a process finally rests, namely the identification of the people with the European idea.

Full text


The small number of intelligent officials and the economic elite understand what is at stake, but are willing to take the risk of an accident.
The preservation of the euro is not their primary objective.
When Otmar Issing, the former chief economist of the European Central Bank, categorically rejects any form of debt mutualisation,
as he did in a recent newspaper article, he omits to mention what would happen if the government were to follow his advice.
The eurozone would break up.
Wolfgang Munchau, Financial Times 24 June 2012

Full text

Otmar Issing

"The 50 Days That Changed Europe" explains how the EU grew from a six-nation trade alliance to a 27-country behemoth with its own currency.
in Strasbourg on Dec. 9, 1989, after the Berlin Wall fell,
Germany agreed to monetary union in order to get President Mitterand to agree to German reunification

WSJ 23 Sept 2011

Kommentar av Rolf Englund:
Tänk om det är så att Tysklands motsträvighet att rädda euron beror på att
Frankrike tvingade Tyskland att gå med på euron för att få återförenas?
Hemska tanke!

Otmar Issing warns against a further mutualisation of debt and risks
“Germany would do the right thing to stick to the treaty and as the others to do the same.
A Germany that would drown in debt because it takes liabilities as a result of an ill-conceived sense of solidarity
will provoke the rage of its citizens and alienate them even further from the European idea as is unfortunately already the case now.”
Frankfurter Allgemeine Zeitung via Eurointelligence 12 June 2012

“The principle that each country is responsible for the mistakes of its own policy (no-bail-out-clause) is not only a fundamental part of the foundation of the currency union, it is also a non-negotiable element of a union of sovereign states”, the former ECB chief economist writes.

It is in total contradiction “with democratic principles and economic reason for citizens to accept liability when they have no influence on the parliaments that take the decisions


Barroso pushes EU banking union
All 27 EU countries should submit their big banks to a single cross-border supervisor as part of a banking union to be enacted as soon as next year
Financial Times, 11 June 2012

A Sneak Peek at Tomorrow's Europe - the abyss is no longer very far away
Politics is a strange business, and one of its premier oddities is that monumental changes are rarely heralded by great speeches.
Chancellor Angela Merkel in recent weeks has revealed just such a change in tone.
"More than anything, we need a political union,"
Der Spiegel, 11 June 2012
Higly recommended

Der frühere Chefvolkswirt der Europäischen Zentralbank, Otmar Issing, fordert einen Schuldenschnitt für Griechenland und hält in der Folge einen Ausstieg des Landes aus der Eurozone für unvermeidlich.

In einem Interview mit dem stern sagte der langjährige Notenbanker, er halte es für "ausgeschlossen" dass Griechenland mithilfe radikaler Sparmaßnahmen wieder auf die Beine komme.

Das Land würde im kommenden Jahr eine Schuldenquote von 160 Prozent des Bruttoinlandsprodukts erreichen


In the end, Issing suggests the current policy is not merely unattractive from a policy standpoint, it is also doomed to fail.
That is not an anti-European British minister speaking, it is a founding father of the single currency with a deep attachment to the European project.
FT, Brussels blog, 9 August 2011

Full text

Too Big to Fail undermines the free market faith

Once a financial institution has become so big or interconnected that its insolvency threatens the stability of the system, politicians must intervene.
The problem of “too big to fail” has made society – more precisely, the taxpayer – hostage to the survival of individual financial institutions.
Otmar Issing, Financial Times, January 19, 2012

President of the Center for Financial Studies and a former member of the European Central Bank’s executive board

As Hayek explained, the market is the best discovery process.

The rules of the game should be clear. Those who succeed are free to take the profits (after taxation); those who make losses have to bear the consequences, with bankruptcy the ultimate sanction. Thus, “too big to fail” not only undermines a fundamental principle of market economies but also a principle of societies in which individuals are responsible for their actions. The crisis has provided strong arguments for opponents of the financial system. Interventions to avoid its collapse have severely undermined not only confidence in financial markets but also in the market economy as a whole. Isn’t it strange? When the Berlin Wall fell and the Iron Curtain was raised, a historic competition appeared to have come to an end. Observers saw capitalism triumphing over communism, free markets over central planning, democracy over dictatorship, Hayek over Marx.

Francis Fukuyama even proclaimed the end of history – mankind had supposedly reached an optimum state, with no feasible alternative.

From the outset, this was a false doctrine. Whereas “real socialism” ended in disaster wherever it was tried, history teaches that the idea of a socialist society promising equality will never fade, whatever empirical evidence shows.

Full text

Too Big To Fail

Slithering to the wrong kind of union
This time the consequence would be to threaten the collapse of the most successful project of economic integration in the history of mankind.
Otmar Issing, Financial Times, August 8, 2011

Any attempt to “save” monetary union via agreements which transfer sovereignty to a European level, where violations of fundamental treaties have become a regular event, lacks any logic. In the end it will only further alienate the people from Europe itself.

A monetary union with a stable euro can only survive if central bank independence is fully respected. This implies that the European Central Bank abstains from fiscal policy actions. Yet to change the “no bail-out” clause ever more in the direction of a bail-out regime is not a step towards a democratically-legitimised political union. It is a move on a slippery road to a regime of fiscal indiscipline drowning hitherto solid countries in the morass of over-indebtedness.

This type of political union would not survive. Its collapse would be brought by resistance from the people. In the past cries of “no taxation without representation” have brought war. This time the consequence would be to threaten the collapse of the most successful project of economic integration in the history of mankind.

Full text


EMU Collapse

Top of page

SPIEGEL Interview with Ex-ECB Chief Economist Issing
Issing: Before the euro was introduced, former Chancellor Helmut Kohl said: The monetary union will not function without a political union.
But a political union of Europe doesn't exist, and it won't happen in the foreseeable future.

That's why we need mechanisms that force the member states to pursue solid financial policies. These mechanisms are missing, and even the most recent decisions reached in Brussels can do little to change this.
Otmar Issing, Der Spiegel 23/3 2011

SPIEGEL: The EU heads of state want to significantly tighten the Stability Pact so that debt crises can be prevented before they begin. Why isn't this enough?

Issing: My confidence in the sustainability of such resolutions has always been limited. But it was completely shaken when Germany and France mutually killed the pact in 2003. At the time, several European finance ministers said to me: How are we to convince our citizens to support a stability pact if not even Germany wants to abide by it?

Issing: I have never been one of those people who trusted the market completely. The most important thing is how the government sets the underlying conditions. And this is where the euro has its greatest shortcomings.

- Under the Maastricht Treaty, EU members agreed that they would not be liable for each other's sovereign debt. But the markets never trusted this pledge and, as it turned out, they were right. This is the key starting point for a reform. It has to be clear to investors that they are partly liable when a country can no longer service its debt.

SPIEGEL: But this is precisely what is happening at the moment. The German government has made sure that private creditors will be involved on a case-by-case basis when a country can no longer service its debt. That's progress, isn't it?

Issing: Case-by-case means that the issue is ultimately resolved politically. However, I doubt that politicians will administer such bitter medicine when push comes to shove.
That's why the involvement of private creditors must occur automatically and in accordance with set rules.

Full text

Stability Pact - Federalism

Top of page

It is one thing for an anti-European British politician, or a short-selling New York banker, to express scepticism about the euro’s future.
But when doubts come from a founding father of European monetary union, everyone should pay heed.
Otmar Issing, who served from 1998 to 2006 as the European Central Bank’s first chief economist,
is one of the most decent and thoughtful men in German public life.

Financial Times, editorial, January 11 2011

His intervention matters because it shows how deadly serious the crisis is

Full text

Det finns egentligen inte någon Eurokris.
Stefan Fölster, 2010-06-15

Prof. Dr. Dr. h.c. mult. Otmar Issing
President Center for Financial Studies

The German finance ministry responded that its current account surplus was “no cause for concern, neither for Germany, nor for the eurozone, or the global economy”.
This reaction is as predictable as it is wrong.
The surplus, forecast by the IMF at $215bn this year (virtually the same as China’s) is indeed a big issue, above all for the future of the eurozone.
Martin Wolf, Financial Times, 5 Novermber 2013

So what, in brief, is happening?
The answers are: creeping onset of deflation; mass joblessness; thwarted internal rebalancing and over-reliance on external demand.
Yet all this is regarded as acceptable, desirable, even moral – indeed, a success. Why? The explanation is myths

Full text

Martin Wolf

U.S. criticism of Germany points to euro strains
Debt write-downs is the only way out for the euro zone
David Marsh, MarketWatch, Nov. 4, 2013

Just as with the D-mark at the end of Bretton Woods, the “German euro” within monetary union is significantly undervalued.
Without the problem countries, the exchange rate of a European currency bloc of northern creditor nations grouped around Germany (”a hard core of the euro”) would be closer to $1.80 than the present $1.38 EUR/USD.

The euro is too strong for permanently indebted peripheral countries, not nearly strong enough for Germany, whose burgeoning exports outside the euro area are bolstered by the German currency’s intrinsic under-valuation. Even after 3 1/2 years of overt euro crisis, Europe remains beset by distortions in competitiveness, indebtedness and underlying economic conditions that exceed anything seen under Bretton Woods.

Distortions of this sort can be cured only by sustained growth, adjustments in foreign exchange rates or a debt write-down.

Since, under current conditions, the first two solutions are not available, the probability of substantial debt restructuring in the euro bloc next year now looms larger.

David Marsh is chairman of the Official Monetary and Financial Institutions Forum.

Full text

Official Monetary and Financial Institutions Forum


Mr Issing said proposals that Emu should be expanded into a “transfer union” – the transfer of funds from Germany and other financially strong states to weaker, highly indebted states – were wrong.
“This would wholly change Emu’s character,” he said.
FT 11/1 2011

He observed that some European politicians were advocating a bold leap towards political union as a solution to the crisis, but said: “I can only warn against the objective of trying to create political union through the back door of the common currency.

Full text


Otmar Issing, the former chief economist of the European Central Bank and the German Bundesbank,
is a genial number-cruncher who believes in the overall benefits of European integration
has turned virulently pessimistic over the European single currency.
In a marked change from his relative sanguinity during his eight years at the ECB,
he terms member countries’ unreliability on economic policies “a basic design flaw of monetary union.”
David Marsh, Market Watch, Jan. 10, 2011

David Marsh is co-chairman of the Official Monetary and Financial Institutions Forum.

And he unashamedly says — in an essay in the January Bulletin of the Official Monetary and Financial Institutions Forum due to be published this week — the days of the single currency may be numbered.

“The present seemingly unstoppable process toward further financial transfers will generate tensions of an economic and especially political kind. The longer this process is characterized by unsound conduct of individual member countries, the more these tensions will endanger the existence of EMU.”

Full text


Even some architects of the euro are becoming pessimistic about its future.
New York Times 11/1 2011

Otmar Issing, the influential former chief economist of the European Central Bank, warns that the common currency’s existence could be threatened unless member countries find a way to impose tougher spending curbs on one another.

Full text

Top of page

Det är inte uteslutet att ett eller flera länder så småningom kan överge euron som valuta,
säger Ottmar Issing, före detta ledamot i Europeiska centralbankens styrelse.
Ekot 23 september 2010

– Det skulle innebära ekonomiskt och politiskt självmord att gå ur valutaunionen, men det utesluter inte att det kan hända.

– Det kan hända att länder lämnar eurosamarbetet om de hamnar i en så katastrofal politisk situation att ytterlighetspartier växer och får politisk makt, säger han.

Full text

En som tidigt varnade för detta: Ur Margit Gennser: EMU - en kritisk analys, Fischer & Co 1997

Början på sidan

"economically absurd", "economically erroneous and politically dangerous", "a scandal", "insane"
Europe’s monetary union is in a deep crisis.
In the context of Greece’s debt concerns and emerging problems in other countries, huge current account imbalances have been identified as a major threat.
But since the adoption of a single currency, devaluation is no longer available to correct an unsustainable current account deficit.
Otmar Issing, FT March 18 2010

Now, following years of divergence between unit labour cost and losses in competitiveness in a number of countries, the idea is gaining ground that the country with the biggest surplus, Germany, should help by raising wages in the interests of deficit countries and the community as a whole.

This idea, presented as a panacea for Europe’s problems, is so economically erroneous and politically dangerous that it would hardly deserve being taken seriously – were it not for the risk that it might actually prevail.

Following years of wage restraint, Germany has reaped the benefits in the form of a remarkable number of new jobs.

Since joining the euro area, a number of countries have allowed unit labour costs to increase at an above average pace, impairing their competitiveness. It is a scandal that the EU tolerated such developments, which were doomed to lead to the current crisis.

However, the idea that unit labour costs in individual countries should be “governed” – or whatever word is used – by a European authority is an economically absurd and politically dangerous concept.

The economics are wrong because balancing current accounts via unit labour costs has no conceptual anchor and would disconnect wages from the situation in the labour market. It would be insane, for instance, for Germany to embark on an expansionary wage policy that led to higher unemployment.

Transferring responsibility to the European level would be politically dangerous because it would create permanent tensions. “Europe”, this time for the right reason, would be held responsible for the negative consequences of its policies

The writer is president of the Centre for Financial Studiesand a former member of the European Central Bank’s executive board

Full text

Otmar Issing om Europas ödestimma nu
Otmar Issing är sannolikt, vid sidan av USA:s Volcker, världens mest respekterade centralbanksperson.
Rolf Englund blog 15/2 2010

It was also a moving event, with a rich human dimension heralded by the ten-minute-long standing ovation Otmar Issing received at the dinner, not exactly what you would expect from a gathering of grave central bankers and distinguished economists.
Eric Chaney, Morgan Stanley, 12/6 2006

"This moment is a turning point for Emu, and for the future of Europe."

It seems that quite a number of observers have forgotten what Emu is, and what it is not.
Financial aid from other EU countries or institutions that amounted, directly or indirectly, to a bail-out would violate EU treaties and undermine the foundations of Emu.
Such principles do not allow for compromise.
Once Greece was helped, the dam would be broken. A bail-out for the country that broke the rules would make it impossible to deny aid to others.
Otmar Issing, February 15 2010

Should Greece be left to go bust?
Otmar Issing, a former board member of the European Central Bank, says an EU rescue would be disastrous.
The Economist online Feb 3rd 2010

Europe's monetary union, which launched the euro almost a decade ago,
remains an "experiment" with the outcome "likely to remain uncertain for a considerable time to come"
writes Otmar Issing, who served as the European Central Bank's chief economist for its first eight years
Financial Times, April 16 2008

These developments also raise some questions about the process of selecting members of the MPC.
It might be helpful if its members were a bit more heterodox:
someone with the monetarist views of, say, Otmar Issing, the former chief economist of the European Central Bank, would be helpful.
Martin Wolf June 15 2007

It was also a moving event, with a rich human dimension heralded by the ten-minute-long standing ovation Otmar Issing received at the dinner, not exactly what you would expect from a gathering of grave central bankers and distinguished economists. I want to pay my own tribute to Pr. Issing
Eric Chaney, Morgan Stanley, 12/6 2006

Chefsekonomen Otmar Issing vid ECB går i pension
Han har varit den främste försvararen av ECB:s strategi med två pelare
där det inte bara handlar om inflationsbekämpning utan även om kontroll av penningmängden.
Den linjen har varit kritiserad från många håll, men på senare tid vunnit större erkännande.
DN Ekonomi 2/6 2006


Otmar Issing, Europe's high priest of monetary orthodoxy, has confessed that the euro was launched on flawed foundations and is now threatened by "big tensions" between north and south.
"The proper functioning of a monetary union requires flexible labour and good markets. These conditions have not been fulfilled from the start."
Ambrose Evans-Pritchard, Daily Telegraph 31/5 2006

Otmar Issing, the European Central Bank’s chief economist, steps down in May.
As at /Bundesbank/, Mr Issing has been the guiding spirit behind the monetary “pillar” of the ECB’s strategy, with its focus on monetary aggregates such as M3, the broad money supply measure.
Mr Issing studied classical languages and held professorships in German universities before becoming a central banker.
Financial Times 16/3 2006

Full text

Monetary analysis is essential, not old-fashioned
Can any central bank rely solely on developments in money and credit to come to its policy decisions? The answer is clearly “no”. Can any central bank afford to ignore the information in monetary developments in formulating monetary policy? Again, the answer is “no”.
Otmar Issing, Financial Times, December 15 2005

"What has Happened to Monetarism?

Europe: Political Union Through Common Money?

Boken kan beställas här:


A lesson from Issing
FT Observer 98-12-14

Want to know what’s going through the mind of Otmar Issing? The learned chief economist at the European Central Bank drops regular public hints about the future direction of monetary policy. But for real insight, buy a copy of his economics textbook.

Issing, 62, has just published a new edition of his tome on monetary theory, a standard text in the economics departments of German universities. The 11th edition of Introduction to Monetary Theory contains one intriguing change: the chapter on price instability — which was previously heavily weighted to the discussion of inflation — now includes a far bigger chunk on deflation.

Issing denies there is any likelihood of deflation in the euro-zone. The change of emphasis merely reflects the drift of recent public discussion. In the inflationary 1970s, he says, he thought hard about removing the section of deflation altogether because no-one was interested. The chapter on inflation, we are reliably informed, is there to stay.

Otmar Issing: Monetary Theory as a Basis for Monetary Policy: Reflections of a Central Banker

It was also a moving event, with a rich human dimension heralded by the ten-minute-long standing ovation Otmar Issing received at the dinner, not exactly what you would expect from a gathering of grave central bankers and distinguished economists. I want to pay my own tribute to Pr. Issing
Eric Chaney, Morgan Stanley, 12/6 2006

Last Thursday, for the first time in its nine-year history, the Governing Council of the ECB met without Pr. Otmar Issing, whose term had expired one week before. In my view, Issing was remarkably and, to some extent unexpectedly, successful in building the credibility and the intellectual franchise of the ECB, a central bank that he and other pioneers such as Alexandre Lamfalussy and Jean-Claude Trichet built from scratch. Together with several friends and colleagues, I had the privilege to attend the ECB colloquium organised in honour of Otmar Issing three months ago. It was an intellectually exciting conference, with top-notch academics and central bankers talking freely about monetary policy — ‘a journey from theory to practice’ was the banner of the conference. It was also a moving event, with a rich human dimension heralded by the ten-minute-long standing ovation Otmar Issing received at the dinner, not exactly what you would expect from a gathering of grave central bankers and distinguished economists. I want to pay my own tribute to Pr. Issing and draw a couple of lessons from conversations I had with him over the years, as well as from exchanges during this conference.

Full text


See also:
Economic and Monetary Union in Europe: political priority versus economic integration?
By Professor Otmar Issing, Member of the Executive Board of the European Central Bank, Paper for the Conference 2001 of the European Society for the History of Economic Thought

1. The Lessons of History

IN THE FIRST CENTURY AD, a merchant setting off from Rome on a journey to Cologne was able to pay his bills with the same coin, the denarius, over his entire journey.

1,600 years later, anyone departing from what was then the Prince-Bishopric of Würzburg and heading for the same destination faced a host of hitherto unknown problems. More than 300 independent German territories, which had been left as a legacy by the Peace of Westphalia, levied taxes and customs not only at their borders but also within their boundaries, on roads and rivers, city gates and market-places...

Relationship Between Political and Currency Systems

What lessons can be drawn from these two periods of European and German history? In the days of the Roman Empire, a common monetary system with a single currency existed in Europe. However, the conditions on which the system was based were:

Initially, Rome safeguarded cohesion of its large empire by fire and sword, then increasingly by placing even the most remote provinces under the legal system and administration of Rome.

The precise lessons to be drawn from such historical episodes may not be entirely clear.

But it does seem that the interrelationship between the political and currency systems is of particular significance.

Any historical process of integration involving previously independent states, whatever its singularities, possesses a political as well as an economic dimension. Any blueprint for an integration process must determine the right mix between the degree of common political order and the extent of economic unity.

It remains an open question whether there is an optimal solution or a number of different options each having its strong and weak points.

In implementing the integration strategy a hypothetical demiurge would have to consider the correct sequence of the individual steps, take into account the extent to which each intervention might trigger other adjustment processes and what the end-result would be.

He would also have to decide whether the final result is best found through a process of search or by strictly adhering to a previously determined path of development.

3. The Role of Monetary Policy in the Integration Process

IN ThE MAASTRICHT TREATY, the Heads of State and Government decided to adopt an institutional arrangement which, by design, clearly departs from qualitative as well as chronological conformity between political union and monetary union.

Do resolute courage in monetary policy and timid hesitation in the area of general politics complement each other to produce a promising integration strategy?

Historical experience shows that national territories and monetary territories normally coincide. In the age of paper currencies, the relevant legislation, as a rule, defines monetary sovereignty in relation to a national territory.

Neither the crowding out of inflation-eroded national money by a foreign currency nor a Currency Board System is a genuine deviation from this rule. The first reflects a pathological condition of the monetary system. In the Currency Boards case, a country voluntarily places itself in the care of the monetary policy of another country which has a stable currency, while in principle retaining its monetary sovereignty.

In contrast to the normal rule, the Maastricht Treaty implies a clear discrepancy between the intentionally rather modest political integration and monetary integration.

For those member-states qualifying for monetary union the ultimate goal is unrestricted participation in a common monetary system and a single currency, whereas a step on such a scale is not even remotely planned for the government system.

The attitudes of politicians and academics towards this discrepancy are ambivalent. For some, the agreements reflect the political compromise between those who wished to take European integration much further and those who were essentially interested in the free exchange of goods and capital.

Others argue the imbalance will almost certainly set off a process of progressive integration extending to the very heart of politics.

There is no denying that introduction of a single currency would change the nature of the integrated system. The architecture of the European house is being re-arranged.

Do the other parts of the blueprint need to be adjusted in line with the establishment of the monetary union or is a structure so diverse in terms of currency and politics able to weather the storms of the future? In his speech to the Italian Senate on 11 April 1995, Bundesbank President Hans Tietmeyer addressed the problem:

After a certain point, economic integration cannot realistically be expected to advance further without the prospect of further progress in the field of politics. The transfer of an elementary sovereign right such as monetary policy to a European Central Bank is likely to mark that point.

4. Common Currency as Pace-setter for Political Union

IF MEMBER-STATES ARE unable to agree on parallel progress towards integrating major areas of policy, a widely-held view is that nevertheless monetary union does not have to be shelved, at least not for the time being; quite the contrary.

The notion that monetary union should take the lead, and serve as a pace-setter for political union, was already succinctly expressed by Jacques Rueff as early as 1950: LEurope se fera par la monnaie, ou ne se fera pas.

Since then, this belief has been espoused in various forms. Recently, the former President of the Federal Republic of Germany, Richard von Weizsacker, was asked whether it was right to begin with monetary union if a common foreign policy was the actual objective. He replied:

Its the other way round: if this common foreign policy is to be realised, it will only come about through monetary union. Such monetary union will of course be implemented only with some delay. And it will not be cheap. Compensation payments will have to be made if the exchange rates of areas which are at different stages of economic development are no longer able to fluctuate in relation to each other. Getting used to monetary union is for me the only discernible route by which a common foreign policy can ultimately be achieved.

Among economists the idea of the pace-setter role of a single currency has found few supporters. Perhaps that is because economists have only a limited understanding of the winding paths of politics. They are even less in a position to predict all the unforeseeable events triggered by the creation of a single currency - a radical move likely to transform relationships between the coexisting peoples.

The economists role is confined to analysing the mechanisms which might become operative in such a situation.

The symbolic power of a single currency should certainly not be underestimated when trying to explain the pace-setter function of monetary union. During a debate in the European Parliament on 30 November 1966, it was characterised as follows by a member of the European Parliament, Hans Dichgans:

When everyone is holding in their hand a European coin showing a shapely young lady riding on a bull ... the graphicness of this coin would provide an impetus to strengthening the idea of Europe.

It is difficult to tell to what extent allusions to Greek mythology will have this effect now that classical languages have long been on the retreat in schools; in principle, however, the uniting power of a single currency through everyday experience cannot be denied.

There is no universally valid answer to the question of how far experience of a single currency will promote integration in other areas. However, it is safe to say that community-enhancing strength can come only from money which carries conviction on account of its stability and ensures that the former national currency is not missed.

Public statements stressing the importance of price stability for the future European Monetary Union are, quite rightly, unanimous on this matter.

It is difficult to perceive how a single currency could generate community-building developments in other fields of politics. A particularly relevant case is Europes frequently criticised failure in major policy areas, as experienced after the opening of the Iron Curtain.

If, for whatever reasons, agreement on effective joint action and on state-building constitutional arrangements is not possible, how can the desired result be expected to emerge simply through the catalyst of a single currency?

Both the labour market and public finances will undoubtedly be affected by monetary union. But we cannot reasonably be optimistic about the results: indeed, because of major loopholes in the Maastricht Treaty, Europeans sense of community may even be impaired.

5. The Labour Market and Social Union

WITH THE TRANSITION to stage three, exchange rate parities will be irrevocably fixed. The exchange rate change option will be removed from the list of economic policy instruments.

The burden of adapting to exogenous shocks, such as major changes in supply and demand conditions in the global economy, will then have to be borne in other ways.

For the labour market, this implies a need for greater flexibility, in particular with regard to the wage bargaining process. The more quickly nominal wages and salaries respond to changing labour market conditions, the less likely is a negative shock to result in increased unemployment.

Undesirable trends arising from the labour market itself, such as excessive wage and salary increases or a decrease in the flexibility of the work-force, will be directly reflected in a decline in employment in the monetary union. However, it is only within the labour market that the necessary corrective action should be taken.

Calls to supplement monetary union by a social union, therefore, are on the wrong track. Social union in the European debate essentially means a harmonisation of social standards - what is more, at the highest possible level.

Social union demands a greater number of and more stringent regulations in the labour market. Monetary union requires the opposite: considerably more flexibility in the labour market.

Harmonisation of social standards, together with monetary union, would significantly reduce the ability of national (and regional) labour markets to absorb asymmetric shocks. As a consequence, there would be mounting pressure to adjust through higher labour mobility.

In effect, increased labour mobility would be politically enforced. It is questionable whether that would increase the welfare of the labour force.

6. Compensatory Transfers

DIFFERING LIVING CONDITIONS, and, above all, distinctly diverging rates of unemployment would inevitably produce political pressure for compensation via transfer payments from the wealthier or less indebted to the poorer or more indebted areas.

A currency area which is not optimal from a purely economic point of View can be held together in a single state through political solidarity reflected in a willingness to make transfer payments.

Studies of the United States, for instance, conclude that the transfer system - which is significant in quantitative terms - is a major factor underpinning the common currency area. (See e.g. Barry Eichengreen, One Money for Europe? Lessons from the U.S. Currency Union, Economic Policy, Vol.5, No.10, April 1990, pp.1 17-87.)

The notion of a single currency as pace-setter stands this idea on its head: common money produces a transfer requirement which, in turn, is expected to establish political structures.

At this point, it is important to prevent two possible misunderstandings. First, it is not a valid argument, in this context, simply to refer to the existing European Union transfer system.

Transfer payments necessitated by monetary union would have to be based on quite different criteria from those adopted under the existing system. Currently, financial transfers are focused on preserving existing structures and are biased towards agriculture.

Under a monetary union the transfers necessitated by external shocks and national developments would have to be designed quite differently, and would be on a much larger scale.

If the Community wishes to keep open the option for the European countries in transition to join, reform of the existing transfer system will be required. It would be disastrous if enlargement of the Community were hindered by failure to meet this need for reform, or if new members entered the union with financial illusions which could not be realised.

Decisions about enlargement of the Community should be taken on the basis of general political and economic considerations and not through the dictates of a badly designed transfer system. Reform of the existing system should perhaps be undertaken before the need for a new and additional one is created.

7. Possible Political Tensions

MORE FUNDAMENTALLY, a single currency which acts as pacesetter opens up the possibility that member-states political solidarity would be seriously undermined as a result of such transfer requirements.

Although it is sometimes argued that the solidarity which manifests itself in willingness to accept transfer payments is a major argument in favour of creating a European sense of community, it is more than doubtful whether transfer payments will have such a positive effect.

More likely the exact opposite will happen.

Even now, the burden carried by the net contributor countries has not helped the EUs popularity. Any kind of expansion would increase ill-feeling and possibly even encourage populist and extremist tendencies in some countries - perhaps even in those member-states that are net receivers, where allocations from the Community might be regarded as too low in comparison with the amount of assistance the recipients thought necessary.

Sizeable payments between member-states would inevitably cause tension and could ultimately even jeopardise the existence of the Community.

The existing framework of the Maastricht Treaty offers some protection against these dangers, but only if very strict conditions are fulfilled - for example, if developments within and between the member-states progress so harmoniously that no large-scale macro-economic imbalances occur.

The number of member-states participating in the monetary union and their degree of homogeneity also play a crucial role. It is not only a question of the economic and political structures at the time of accession, but also of their future development.

The probability that all these favourable conditions will be met is not very high, especially given the possibility of further asymmetric exogenous shocks or radical changes in Central and Eastern Europe.

Monetary union, therefore, not only represents a great opportunity for Europes future; it also embodies a great risk. The transfer issue is at the heart of the problem. /RE: För mer härom se Lindsey och Nils Lundgren/

To avoid political discontent and, if the worst comes to the worst, the break-up of the union, specific guarantees are required so that no transfer quarrels will arise at a later date.

Hayek, Currency Competition and European Monetary Union
Otmar Issing, IEA, April 2000

Ännu är ingen stolt över att vara europé
Sylvia Asklöf, politisk redaktör

Barometern, Onsdag 18 December 2002
Highly Recommended, with many links

Map of the Roman Empire

Another excellent map showing The Roman Empire at its Greatest Extent

Top of page