Brussels: A Willing Scapegoat
Colombatto, Enrico, Global Finance
The creation of an artificial monetary union is necessarily an act of political will. By creating the European Economic and Monetary Union, Europe's national policymakers are voluntarily ceding their sovereignty in the domains of monetary and exchange rate policies. Policymakers from all the countries preparing to enter EMU have found it expedient to be no longer responsible for such policies.
The desire to elude responsibility first surfaced in the 1980s in particular response to those (including pensioners) who relied on welfare state transfers for their living. The expansion of the welfare state, unemployment-enhancing policies, and demographic change had created a powerful, risk-averse interest group that feared erosion of its fixed income base. In order to satisfy this relatively new coaition, politicians engaged in tighter monetary policies to check inflation, even at the expense of higher growth.
But policymakers usually find inflation appealing. It makes transferring resources to friendly coalitions easier The so-called inflation tax allows the public sector to grow without increasing other, more visible forms of taxation. Finally, upward changes in nominal prices make it easier to correct real wages and, generally, the relative price structure.
Meanwhile, low GDP growth in European economies during the late 1980s and early 1990s was magnifying the inefficiencies of bloated governments. It became obvious that growth could not occur without decreasing government intervention. At the same time, policymakers could not afford to reduce the role of government. Doing so would invite censure from groups dependent on the state-government employees, selected industries, and state pensioners, for instance.
Politicians can expect electoral success only during periods of relatively high GDP growth and/or high inflation, or in a context where political transparency is reduced, so that voters find it hard to determine if politicians have served the national interest. But politicians are reluctant to pursue growthenhancing policies that reduce benefits, fearing widespread disapproval from various interest groups. Similarly, criticism would come from groups affected by rising prices should the government choose an inflationary solution.
However, if decisions about monetary policy (ie, inflation) are taken somewhere else, then politicians will no longer be forced to face unhappy coalitions at home. …