Will integration win for Europe? Robert Mundell won the 1999 Economics Nobel Prize for explaining precisely what is needed in order to have an "optimum currency area" -or what is needed to integrate several formerly independent economies with different currencies into one single market economy. However -for a reason
- Have Labor Mobility within its boundaries. If you quit your job you easily get hired somewhere else.
- Have Capital Mobility. So investment decisions are not influenced by which region within the country one is doing business other than the risks inherent in the project per se.
- Share a Central Fiscal Revenue collection agency, so taxes are levied on prosperous regions to subsidy and eventually develop less rich areas.
Labor mobility is something Europe definitely lacks. Spain's 20% unemployment rate (44% among youths) is due in great part because -ironically- people don't get fired. It's very expensive for Spain bosses to fire employees -despite the government's lukewarm efforts to liberalize its labor market. Unions there have succeeded in restricting labor supply, making wages artificially expensive. In Italy the government still controls the supply of labor by issuing permits for certain professions -a practice Milton Friedman derides as a way to restrict economic freedom and limit economic development. Then you have the cultural barrier - imagine that moving from Texas to Oklahoma you had to speak a different language to be able to get a job.
Capital mobility is something that Europe scores better, though. One needs only to see the footprint of European transnationals within the continent to know that they have easily established operations in different regions of the Euro area. Santander, Deutsche Telekom, Vodafone, are good examples of companies that have harnessed well the ease of capital mobility within the Eurozone. The very fact that Germany exports 60% to the other Eurozone countries is also good. Although trade by itself is not strictly capital mobility as Mundell defines it -it is the mobility of capital goods' end products-, trade is a precursor that can lead to capital mobility.
And as far as sharing fiscal revenues, well, that's definitely an area Europe has not succeeded. I don't need to extend much here. They don't have a joint tax collector, and every state has responsibility to combat its own evasion. Frugal, efficient tax-collector states (Germany) wince at the thought of subsidizing so-called squandering nations.
Out of 3 conditions, Europe fails on 2. Notice that these 3 factors in Mundell's Optimum Currency Area are preconditions for it to work. You have to have them, and then issue the single currency. Europe did it backwards. The Maastricht Treaty was supposed to lay the ground for those conditions to be met, not by creating a unified European fiscal revenue agency, but by simply "inviting" its member to abide to the 3% of GDP deficit rule. Not exactly the best way to enforce fiscal frugality.
So, we have arrived here. The European nations (plural) are suffering from labor pains, struggling to give birth to the new European nation (singular). Will the baby survive? If they don't give him the right medicine, (liberalizing labor markets and implementing fiscal integration) chances are he will not. Somebody call the Doctor!
I now have a theory about why Mundell´s model has not been quoted during this whole European Debt debacle. Maybe -just maybe- it has to do with the Canadian's damaged reputation after his participation in Olympus' board and its epic corporate scandal.