“The EU budget is only a tiny part of the Union’s GDP. As such, there is good reason to centralize more power, but certainly not at a higher cost! Rather, power should be centralized at the European government level,” says ROBERT MUNDELL, a Nobel Prize laureate in Economics and the mastermind behind the euro.
A debt crisis is now replacing our current financial crisis. Governments have run into debt as they’ve attempted to save the financial sector.
Indeed, the United Kingdom is currently experiencing a great deal of trouble. I wanted the Brits to join the eurozone in 1999. At that time, they could have easily complied with all the criteria; in fact, they had some of the best results of all the large states in the EU. More specifically, they had the lowest public debt in relation to GDP. Britain‘s entry would have also helped the euro. Less than one hundred years ago, Great Britain was the most important global empire with the most powerful currency. Thus, it was too difficult for the Brits to give up the pound, which remains in their eyes a symbol of their former imperial glory.
Should Great Britain accept the euro as fast as it can now?
They cannot do so during the crisis. I do, however, believe that the ―Greek problem‖ is largely passé now. The former head of the European Commission, Romano Prodi, said in March that the crisis in Greece is gone. I do not agree with that. On the other hand, it will disappear within the next few months. The problem will be solved.
But the debt crisis in Greece is only one example. We must examine not only Greece, but other countries which could have similar debt problems. I must return to the UK question. It is as good as impossible for Britain to accept the common currency in the near future. The upcoming elections provide one good reason why not: it is not politically possible to bring Britain into the eurozone because the euro‘s reputation on the Isles is not very good. We should also not forget that some other states in Europe are significantly more worse off.
Italy? You have said that Italy is more of a threat to the eurozone than Greece.
I have been misquoted. The journalists asked me which state is the real problem for the eurozone if it is not Greece. I said that a real problem would materialize if a country such as Italy, which has the second largest debt, would have fiscal trouble. Italy‘s share in the eurozone‘s entire performance is much larger than Greece‘s. Now Italy‘s deficit is five percent of the GDP. That seems like a lot when compared with the EU‘s Maastricht criteria which limits a member‘s deficit to three percent. But during an economic slowdown and lengthy recession such as this one, this deficit isn‘t so bad.
Some economists suggest that the eurozone’s only savior will be a tighter political union. Do you agree?
In this respect, much has been achieved (at least theoretically) by the Lisbon Treaty. Lisbon did in fact establish the concept of an EU presidency. Unfortunately, the Treaty will not play a vital role during this recession. For now, the political union is not sufficient. The presidency and other similar elements within Lisbon are recent developments whose significance requires more time to develop. This trend towards ever closer cooperation must continue. More central governance is necessary.
Why?
The EU budget is only a tiny part of the Union‘s GDP. As such, there is good reason to centralize more power, but certainly not at a higher cost! Power should not be concentrated at the state level, but rather in Brussels for such things as product standardization. This would improve general coordination. Of course, I am not saying that Brussels has not overstepped its bounds in other spheres.
I have been misquoted. The journalists asked me which state is the real problem for the eurozone if it is not Greece. I said that a real problem would materialize if a country such as Italy, which has the second largest debt, would have fiscal trouble. Italy‘s share in the eurozone‘s entire performance is much larger than Greece‘s. Now Italy‘s deficit is five percent of the GDP. That seems like a lot when compared with the EU‘s Maastricht criteria which limits a member‘s deficit to three percent. But during an economic slowdown and lengthy recession such as this one, this deficit isn‘t so bad.
Some economists suggest that the eurozone’s only savior will be a tighter political union. Do you agree?
In this respect, much has been achieved (at least theoretically) by the Lisbon Treaty. Lisbon did in fact establish the concept of an EU presidency. Unfortunately, the Treaty will not play a vital role during this recession. For now, the political union is not sufficient. The presidency and other similar elements within Lisbon are recent developments whose significance requires more time to develop. This trend towards ever closer cooperation must continue. More central governance is necessary.
Why?
The EU budget is only a tiny part of the Union‘s GDP. As such, there is good reason to centralize more power, but certainly not at a higher cost! Power should not be concentrated at the state level, but rather in Brussels for such things as product standardization. This would improve general coordination. Of course, I am not saying that Brussels has not overstepped its bounds in other spheres.
Do you think a more centralized government is better? Economists such as Hayek would probably not agree.
I knew Hayek very well; we first met in 1955 or so. He was opposed to socialism, authoritative governments, and governments which infringed on human rights. He would never have approved of shifting towards a social state, as has occurred in Europe and is now occurring in the USA under President Barack Obama. He would have said ―no‖ to an increase in public debt. But as for greater centralization as I suggested, he would have said ―yes‖ to that.
Some economists of the Austrian school (Hayek’s ideological successors) wish to return to the gold standard. Supposedly, the current financial crisis could have been avoided that way. Do you agree?
Personally, I have never been a great fan of the real gold standard. The world has not had a real gold standard since 1914, since the beginning of World War One. We returned to the gold standard during the inter-war period, but the exchange rate was set up badly and it subsequently led to deflation and the great economic crisis of the 1930s. That was a big mistake. After devaluation occurred in 1934, the dollar was the only currency which could be converted into gold. But only central banks could do this, not standard citizens. It was like that up until 1971.
You have, however, stated that precious metals should play a certain role in the creation of a new global monetary system. Could you explain this?
As I mentioned, I have never been a fan of the real gold standard. What I stated is that it might be useful—in terms of renewing the international monetary system—to keep a certain role for gold as an asset. Currently, gold reserves held by central banks are, after the US dollar and the euro, the third largest item in the reserves and worth billions of dollars. Gold should play a role in the new international monetary system which would remove the instability of floating exchange rates.
Robert Mundell (77)
Dr. Mundell is a renowned Canadian economist and Nobel Prize laureate whose theories were key in the creation of the European monetary union. He is often referred to as the ―father of the euro.‖ Mundell, a professor at Colombia University, received a Nobel Prize in 1999 for analyzing monetary and fiscal policies using various modes of exchange rates and analyzing optimum currency areas. His theory of optimum currency areas became the underlying theoretical pillar in the creation of the eurozone.
Mundell believes the Czech Republic should not wait to enter the eurozone: ―There are no advantages for the CR to wait longer before joining the common currency.‖ ―I certainly would not wait until 2020 or anything like that.‖ He also thinks it strange that Slovakia, whose economy is pooer than the Czech Republic, accepted the euro first. He also believes that Greece‘s recent crisis is a national fiscal problem, not a problem rooted in the euro or eurozone. ―California‘s bankruptcy was not the dollar‘s problem, it was California‘s own fiscal problem,‖ he explains.
Mundell calls attention to the instability of floating exchange rates. According to him, fixed exchange rates not only curb inflation, but also discipline states in the fiscal sphere (which is much needed and often absent today).
Mundell himself certainly does not lack a sense of humor. He has been a guest on Letterman several times; in one show he told anecdotes about how the Nobel Prize changed his life and in another he recited excerpts from Paris Hilton‘s memoirs.
Published in The New Presence (The New Presence), issue: 2 Spring / 2010, pages: 8084, on www.ceeol.com.
