Can we sustain an inclusive EU monetary system? Overcoming design failure and a look at the Eurozone 2018

Last night, Professor Domenico Siniscalco (Vice Chairman of Morgan Stanley) gave his views on ‘The Eurozone 2018: what should we expect ten years after Lehman Brother’s collapse?’ The overarching theme of the lecture was tied to system design failure and how European leaders would sustain a political vision for an inclusive monetary union despite huge discrepancies in the wealth generating capacity, political maturity and economic strength of its constituent members.

Touching on both economic and geopolitical issues during his presentation, it was interesting that Domenico harked back to the early writings of Marty Feldstein – who wrote in the 1990s about the possibility of convergence or divergence a result of a European economic union. Contrary to the grand plan i.e. the ‘Great Convergence’ set out at the time, he argued for divergence, an outcome that would eventually be exposed by economic turmoil. Similarly, Domenico argued that if the single currency is going to survive, it will need either more or less of a European (political) Union and with sentiment leaning towards less in most European states (citing the rise of UKIP in England and the Northern League in Italy) less might be a more likely outcome.

Yet the big question amongst audience members was how wealthier states such as Germany and France would protect themselves against moral hazard by bankrupt states who possess the knowledge that whatever happens, the unwinding of multibillion euro contracts that come with the fiscal union will always be more expensive than bailing out weaker, irresponsible economies time and again? It was suggested the Troika might provide a short-term solution, but without underlying economic growth, the principal of subsidy – long-adopted by European nation-states in their own internal governance could really be put to the test.

The second half of the lecture took on a more global dimension where the three-pronged strategy of Japan (the ‘beacon of hope’) and the Abenomics experiment was compared to EU policy. Where Europe fits into the ‘Great Imbalance’ of trade was also discussed, in relation to China (high saving, low consumption) and the USA (low saving high consumption), and the Marshall-Lerner condition was used to explain how the system is managing to sustain itself. Once again the question that arose from this discussion was what kind of growth will Europe require to stay afloat?

The response to crises by central bankers has always been to flood markets with liquidity, and while there has been some major financial innovations in the lead up to the crisis, in the form of risk products that brought the system to its knees, as well as policy innovations which have since helped to prop it back up again, I felt the final slide of the presentation captured something far more fundamental about questions relating to growth. Domenico concluded his presentation with the image of Charles Darwin, choosing to focus on his notion of the ‘survival of the fittest’ before going on to promote a more qualitative, even historical lens for devising appropriate solutions to current economic uncertainty.

As a former historian, that picture had different connotations for me, more related to the perspectives of evolutionary economists such as Schumpeter – who promulgated evolutionary models of technological change and economic growth. Arguably, we are experiencing a period of technological ferment and without knowing from where the next paradigmatic change in technology will emerge (both geographically and from which technological field), economists and governments should place greater emphasis on the technology component of economic growth and less on tweaking consumption or trying to effect household savings.

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