EU: Federal Superstate or Confederation?

How Europe can be made sustainable in all its diversity!

An Article in the Compendium of Market-Based Social-Ecological Economics

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Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: EU: Bundesstaat oder Staatenbund?

Table of Contents

  1. Abstract
  2. Blindly on the Road to a Federal Superstate
  3. Supranationalism and Monetary Area
  4. The ECB’s Infringements
  5. Breach of EU Treaties: the Eurozone Rescue Package
  6. The Fiscal Pact as a Sham Solution
  7. The Free Trade in Euro and US Dollar
  8. The No-Bail-Out Dilemma of the Euro Zone
  9. The Disempowerment within the Euro Zone
  10. Federal State versus Confederation
  11. Sustainable Mechanisms in the Confederation
  12. Autonomous Economic Policies in the Confederation
  13. Greece’s Future in the EU Confederation
  14. Exemplary: Iceland’s Unconventional Path

1. Abstract

EuropaJPG12Ever since the financial crisis took its course in 2008 and subsequently turned into a general economic crisis, it has become increasingly obvious how vulnerable the current political and economic structures of the EU are, and in particular the structures of the euro zone. The European treaties have proven to be incompatible with both the European diversity and the neoliberal reality, and have plunged the EU into a seemingly irresolvable dilemma: Neither the strict observance of the European treaties, especially regarding the »no bail-out« rule, promises success, nor does the excessive financial assistance for countries faltering. A further complication results from the fact that rich exporting countries and overindebted importing countries have developed a seemingly indissoluble mutual dependency resting on their different (and fatally complementary) interests, blocking any possible rethinking from the outset. In view of the gratifying economic diversity and heterogeneity of Europe, however, an urgent rethink is absolutely imperative. Good examples for the integration can not be found, least of all in the United States.

Even though the linguistic, cultural and political homogeneity of the United States justifies a single currency and economic area – contrary to Europe’s inhomogeneity –, the US suffers just like the euro zone countries from predatory global competition (based on dollar prices) in deregulated global markets resulting in extremely high concentration of economic power and capital, and subsequently in unemployment, poverty and national debt.

No doubt whatever that Europe is unique in every respect and that it has to go its own way. This is precisely what this article is all about:

2. Blindly on the Road to a Federal Superstate

Europe is traditionally and economically a very inhomogeneous continent, of course not comparable to the United States. The economic productivities between developed and less developed European countries differ, depending on industry, up to a factor of 2, 3 or even 4. The further east the European border is drawn, the greater the differences. An alignment of productivities and living conditions, in consideration of national circumstances and peculiarities and with the aim of enhancing social and environmental standards, is no doubt an undisputed and desirable goal. The crucial question under these conditions is, however, can this objective be achieved through open markets and supranational directives, as currently practiced or planned, or better through national political autonomy, regulated foreign trade and future-oriented normative guidelines agreed upon at the European level? In other words: Does Europe’s future lie in limitless economic unification or rather in political unity and economic diversity on the basis of a uniform system of values and normative guidelines?

Europa14The European institutions have, however, already paved the way towards a European federal state along the lines of the United States – together with the majority of national governments, especially those of the euro zone, and long before democratic debate and decision even had a chance to address the crucial questions.

The course towards a federal state is postulated very clearly and exemplary in a summary paper of the Greens in the European Parliament. The paper demands to safeguard the European Union »against the risk of non-coordinated national policies,« and that Europe now needs the courage »to transfer more power to the Union’s economic, financial, fiscal and tax policies, to build a more social Europe, and to allow the European institutions to exert more power and democracy.«

Since the Greens’ paper does not capture the imperative principle of subsidiarity defined in the European treaties, it can only be understood as a postulate for »democratic centralism« – a conceptual nonsense similar to the quality of »democratic socialism«. There can be no doubt that democracy is conceptually open by nature, fostering personal freedom, and therefore needs to be practiced bottom-up, not top-down. Meanwhile, the European Parliament tries to absorb powers assigned to various national democratic levels, thereby undermining the necessary political subsidiarity and preventing an integration sustainably supported by Europe’s citizens. As a compliment I recommend the article Undemocratic EU Institutions.

3. Supranationalism and Monetary Area

EUFederalStateConfederationPNG01The figure shows in blue letters the steps already been taken on the road to a federal state: European Council and European Commission exercise power as supranational institutions, increasingly assuming nationally assigned powers, while the European Parliament, although directly elected, has little influence, with its role alongside the national parliaments remaining in the dark. However, an often demanded democratization of the European level does not make sense, at least not when powers are centralized around Council and Commission and with national democratic institutions being disempowered at the same time. The low turnout at European elections is proof that voters can not comprehend the contradictory development and stand helpless, indifferent or even hostile in the face of the European project.

Points four and five in blue refer to the euro zone, which has existed for years now as a single currency area with open markets and absolute freedom of movement. Although the steps taken clearly suggest a federal state, a violation of European treaties had not been recorded up to this point – but that changed abruptly in the aftermath of the global financial and economic crisis commencing in 2008: from undercapitalized and insolvent banks to crashing real economies and accelerated state indebtedness. The last three points in blue, referring to the euro zone too, I shall discuss in more detail:

4. The ECB’s Infringements

For the common monetary policy of the euro zone, the European System of Central Banks (ESCB) was established, consisting of the European Central Bank (ECB) and the national central banks. In open financial markets the system is regularly put on the defence when speculators bet against the creditworthiness of faltering euro countries, forcing the ECB to stabilize state budgets and make bets unattractive through the purchase of government bonds.

Between August 2011 and January 2012, the ECB buys government bonds of weakening euro countries with a total value of 214 billion euros; Germany is liable for a portion of roughly 50 billion euros. With its purchase programme the ECB arbitrarily implements a European fiscal policy for which she is not authorized. Her original assignment is to establish a common monetary policy for the euro zone, primarily securing monetary stability by controlling the money supply and the interest rates. For a deaper insight into the mandate of the ECB I recommend the article Money Creation and Destruction.

With the purchase of government bonds, the ECB aims to raise bond prices and lower interest rates to enable debtor countries to borrow on more favorable terms in the global financial markets. As a side effect however, the commercial banks, acting as creditors, will receive safer securities from the ECB in exchange for the government bonds, while the amount of ECB profits distributed to the euro-zone countries decreases at the same time. Each of the three effects constitutes an indirect fiscal transfer to the debtor countries, a task actually being reserved for the nation-states’ fiscal policies.

Whenever an ECB purchase programme does not achieve the desired effect, the EU and the International Monetary Fund (IMF) additionally come under pressure to increase the volume of the euro rescue packages, also with the aim to make speculative transactions unattractive.

EuropaJPG13Moreover, unadjusted balances (so-called Target2 balances) have been formed within the ESCB between the national central banks, which correspond to the balance of payments of the euro countries and are being updated for each cross-border electronic money transfer. For example, if a Greek customer imports a German product, the payment is transferred from its commercial bank to the Greek National Bank, whose target account will be charged with a liability (debt) equivalent to the amount transferred, while the German Bundesbank is credited with a claim of the same amount on its target acount, and will subsequently transfer the money within its framework of money creation to the commercial bank of the German exporter. Meaning that no actual transfer of payments takes place between the euro countries, instead, liabilities and claims are only entered into the target accounts. The risks posed by this system is that there is no mechanism being provided for the clearing and settlement of the imbalances, and not even for their limitation. It’s as if one could go into debt unlimitedly at the shopkeeper around the corner without ever having to settle the account. Thus, the claims of the German Bundesbank against all other national banks of the euro zone have accumulated already to 500 billion euro in early 2012. The imbalances represent, in addition to the rescue packages, the greatest financial risk for the export-oriented countries of the euro zone, especially for Germany.

5. Breach of EU Treaties: the Eurozone Rescue Package

The rescue packages, reaching a temporary peak with the 700 billion euro European Stability Mechanism (ESM), are, alongside the aforementioned Target2 balances of the ESCB, clearly an infringement of the »no bail-out« rule of the European treaties, most recently re-enshrined in Article 125 of the 2009 Lisbon Treaty. They also undermine the fiscal discipline of the euro zone member states agreed upon in the Stability and Growth Pact, including the limits on annual deficits (3 % of gross domestic product (GDP)) and on total indebtedness (60 % of GDP). In addition, the ESCB’s facility to accumulate unadjusted Target2 balances creates incentives for less developed countries to first and foremost neglect export-generating investments and hence become more and more dependent on imports.

Germany’s entire liability from the EFSF (the old rescue package), the ESM, the ECB government bonds and the negative Target2 account of the Deutsche Bundesbank adds up to nearly a trillion (1000 billion) euros at the beginning of 2012 – equivalent to more than three times the volume of the German federal budget.

With the ECB’s infringements and the non-conforming rescue packages the EU breaks the categorical link between risk and liability. Just as each economic player is held liable for the consequential damages of actions taken, each national economy must assume full liability for the consequential damages of its policies. Joint liability, as practiced and further envisaged by the EU, must inevitably lead to the abandonment of any risk assessment.

6. The Fiscal Pact as a Sham Solution

In March 2012, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, shortly Fiscal Pact, was signed by all euro countries and most non-euro EU countries. The treaty entered into force on 1 January 2013, and is indeed a fiscal pact, because it focuses on centralist European control of national government expenditures and revenues, i.e. the control of national budgetary policies, allegedly to promote growth, employment and competitiveness, as the Treaty states. In the long term however, it obliges the signatories to accelerate the convergence of their economic and financial policies, thus initiating a step going far beyond fiscal control – in fact going towards a unified federal superstate.

With the Fiscal Pact, the limit for annual deficits is reduced for signatories from 3 to 0.5 % of their GDP, based on a strict deficit procedure with the European Court of Justice to decide in the last instance on penalties to be imposed. The limit of 60 % on total indebtedness remains, but is complemented by precisely timed austerity measures being laid down for exceedances. As from now, financial assistance from the ESM may only be granted to countries having signed and ratified the fiscal pact prior to January 2013. This underlines the EU’s expectation that the pact may avoid ESM rescue operations from the outset. Nevertheless, the EU prefers to have the ESM coexist with the fiscal pact to deter speculators from betting against individual euro zone countries.

Although the fiscal pact threatens to override Germany’s constitutional budget authority and the control rights of the Bundestag, especially in conjunction with the ESM, and although it would furthermore affect the budgets of the German states (Länder), and – even worse – although it can not be terminated regularly, the fiscal pact was ratified by the German president end of December 2012. Fortunately, the Federal Constitutional Court had enacted a preliminary ruling in September 2012 envisaging a liability cap of 190 billion euros as well as approval of the Bundestag for all further liabilities. Regrettably, the court has also (indirectly) recognized the ECJ as a superior court – a novelty – paving the way to supranationalism and relinquishing national sovereignity. Anyone who had expected a judgement in favour of national sovereignity has to realize now that the German constitution (Grundgesetz) offers no protection against the self-serving interests of powerful economic players and their political henchmen of all shades. It is evident that whoever postulates a European federal state is dreaming the wrong dream, or is campaigning for dishonest interests.

If we are to believe the protagonists on the European stage, the fiscal pact is going to empower the euro zone, and later the entire EU, to embark on a path towards a stable monetary and economic union with strict controls, correspondingly low liability risks for the member states, high competitiveness, steady growth, and a high level of employment. The path towards a federal superstate, as laid down in the above figure in black letters, appears to be paved.

But in fact, the protagonists are turning a blind eye to the real cause of the runaway national debt, and also to the ever-increasing economic and social devastation. The motivation for their blindness, however, can vary widely due to country-specific developments and resulting egoisms.

In what follows, I shall highlight the main cause, but also the background and context of the crisis, and finally demonstrate the opportunities offered for a sustainable European integration when taking a sober view:

7. The Free Trade in Euro and US Dollar

EUFederalStateConfederationPNG02Developed and less developed countries experience quite different consequences from free trade. To illustrate this, a comparison of the two economically most extreme members of the euro area is best suited: Germany and Greece. Both countries are participating in both the free trade competition of the euro zone, which is based on absolute price advantages in euros, and the global free trade competition, de facto based on absolute price advantages in US dollars.

De facto means, prices are still being relativized within the dollar area due to existing exchange rates between national currencies (including the euro) and the US dollar. But these relativizations – actually being desirable as a condition for profitable trade, especially between countries disparate in terms of productivity, and constituting the original function of the exchange rate – are incalculable for trade partners because of fluctuations caused by currency speculation. An exact relativization (or neutralization) of the differing price and productivity averages is not possible on these grounds, if at all, only by chance and for a short time. Exchange rates basically turn out chaotic, tempting countries to reduce their prices by means of dumping to remain competitive – aiming to compensate even the most unfavourable exchange rate. And besides, countries try to protect themselves against foreign export strategies by introducing tariffs, duties and trade quotas. The World Trade Organization (WTO), which sees itself as the keeper of the holy grail of neoliberal »free trade«, turns a blind eye to the devastations caused by social and eco-dumping, but initiates sanctions against useful protection through tariffs, duties and trade quotas. That is an unprecedented scandal!

In short, all dollar area countries are forced to make every effort to achieve competitive prices in US dollars. This also applies to China, which can allow itself in the light of its extreme economic power to keep the rate of its currency against euro and dollar as low as possible by strict control and intervention of its Central Bank, of course, to achieve a monopolistic dominance in export markets.

Back to Germany and Greece: As shown in the figure above, Germany, in comparison to Greece, has relatively diverse economic structures, produces with high productivity on a world scale, and has relatively intact administrative and executive powers, so that corruption and black economy have little impact.

EUFederalStateConfederationPNG03Germany has recorded surpluses both in its trade and services account – in euros as well as in dollars. Its surplus in the balance of payments is correspondingly high. Greece has, quite in contrast, reported overall deficits. It is typical for the so-called free trade, however, that both countries suffer from squeezing-out of companies from open markets resulting in structural degradation (de-industrialisation), that is inevitable in a competition based on absolute prices: Both countries are affected regarding labor intensive production, while Greece has no chance at all to establish capital-intensive productions in view of the cost-pressure and dumping enforced by its competitors. Greece’s unit costs increase in international comparison, while its competitiveness and its national product decrease. In Germany, the cost pressure facilitates a process of concentration of capital-intensive productions, that further aggravates the geographical desertification and exclusion. In both countries unemployment is high, in Greece, however, it is four times higher than in Germany.

The simultaneous occurrence of unemployment and skills shortage in Germany seems to be an inexplicable curiosity at first. But it is simply due to the globally high demand of rare skills being essential for the perverted technological requirements of global export markets on which the extremely export-oriented German economy depends.

Finally, both countries have to go into high debt to tackle their social burdens. Again, Greece is hit harder because its vicious cycle of unemployment, declining tax revenues and growing public debt is spinning faster than that of Germany. The growing disparity is the result of extremely differing national conditions.

8. The No-Bail-Out Dilemma of the Euro Zone

EUFederalStateConfederationPNG04With the launch of the euro zone, it was the EU’s declared intention to create a currency area in which the member states would retain full responsibility for their national budgets. Financial assistance (bail-out) was meant to be definitely excluded both bilaterally and between the EU and individual states, so as not to provoke any incentive effect for careless indebtedness. In the above mentioned 2009 Lisbon Treaty, the »no bail-out« rule was even extended beyond the banned EU liability to also declare voluntary assistance illegal, in particular bilateral and multilateral assistance granted to circumvent EU legislation.

But the EU has misjudged the constraints that countries are exposed to in unregulated markets, or has preferred not to admit it. The aforementioned inevitable and mostly definitive squeezing-out of competitors who are not able to dump their prices or withstand the cost pressure leads to a dilemma that is typical for an inhomogeneous currency area like the euro zone, and that is further exacerbated by the extra-European competition in US dollars:

Affected countries have to compensate squeezed-out productions through imports and are ultimately reduced to an irreversible state of import dependence, which is all the more comprehensive the lower their overall competitiveness is. In the euro zone all southern European countries have fallen into a permanent state of import dependence, while the dependence in Central Europe is (still) being held within tolerable limits. Import dependence must not necessarily be connected with a trade deficit. Germany is the most extreme example, being dependent on imports of mainly labor-intensive goods in spite of a high trade surplus. While countries with trade deficits and structural desertification are in danger of being overrun by foreign investors, who wish to combine their capital with cheap labor without having a beneficial development of economic structures in mind, and who are not shy to withdraw their capital whenever desirable.

Moreover, with the beginning of the global financial crisis in 2008, the Euro-Southerners and Ireland were not able to finance their rising social benefits anymore and were forced to accumulate more and more debt. The borrowing was initially sweetened with favourable terms not corresponding to their actual risk profile, but rather owing to their euro zone membership and the realistic assumption of creditors that the EU would bail them out in an emergency.

Here, at the very latest, the dilemma becomes obvious: The strong export countries of the euro zone, first and foremost Germany, being under the pressure of their export industries, are advocating for a softening of the »no bail-out« rule to secure their intra-European export markets and their associated economic structures. The economic and political protagonists of the EU are immediately giving in to the pressure, which is massively and at first unexpectedly being exerted from two sides: Apart from the export countries, additional pressure comes from southern European deficit countries being trapped in their own addiction and incapable to ensure the supply of their population without massive imports. At first sight, they see no other way out but to incur more debts, preferably at favourable conditions. But the bond market doesn’t offer such conditions anymore, at least not after ratings of deficit countries have been downgraded to almost »junk status«, hence forcing the EU to deploy financial »rescue parachutes« to bail them out. Subsequently the ECB feels urged, quite contrary to its original mandate, to stabilize the budgets of deficit countries by purchasing their bonds.

The consequences are characteristic for the neoliberal doctrine to which the EU has committed itself: Developed countries back up their private sector exports by tax-financed subsidies granted to foreign countries for import financing. Put pointedly: German taxpayers finance the export of German products as the German finance minister transfers the invoice amount for Greek imports to the Greek buyers. Which also means, that trading in the euro zone contributes with its tax-financed subsidies to the current social redistribution from bottom to top – just like the entire unregulated global trade that is euphemistically called »free trade«.

9. The Disempowerment within the Euro Zone

EUFederalStateConfederationPNG06All 153 countries having committed themselves through their WTO membership to deregulated global trade in the dollar area, have already delegated their essential economic powers to the »free world market« and the WTO as its guardian. An additional membership in the euro zone further reduces the leeway national governments have, because the economic freedom is totally unimpeded under a single currency, and because the EU’s regulations intervene even deeper into domains of national sovereignty than those of the WTO. When joining the euro zone, countries set the seal on their own economic incapacitation. The figure lists the most important rights and obligations no longer exercised at national level, either due to the effects of predatory competition or EU intervention.

Given the heterogeneity of Europe, the crucial economic and political misjudgement with regard to the EU concretizes in transfers of powers and functions to the supranational level, in particular those transfers being meaningful and effective at the national level only. The national level is, contrary to widespread naive and idealistic perceptions of the European integration, still, and probably for a long time to come, the most important level for all three national powers (executive, legislative and judiciary power) within each country, as well as for the cooperation among countries.

Because the only stable foundation for supranational approaches are sovereign, democratically constituted nation-states. Any erosion of this foundation will play into the hands of the ever-present oligarchic self-interest.

Even for the more distant future, the national level will not lose its importance, especially not if the EU and its member states will eventually reflect on the principle of subsidiarity originally declared in the Maastricht Treaty. It should be noted that the centralizing efforts of the EU implicate a creeping loss of democracy, and democracy will only revert to Europe once the political structures, and congruently the economic structures, are being shaped subsidiarily and decisions taken at the lowest level qualified at a time.

It is regrettable that the incapacitation of the nation states and the economic, social and environmental devastations, which are continually increasing in the neoliberal euro zone, have discredited the necessary and desirable political integration of Europe among its citizens. It’s still a practical error not to distinguish between the opportunities, objectives and processes of the political integration on the one hand and the economic integration on the other. Because only such a differentiation provides the basis for a coordinated and promising constitution of the European house.

10. Federal State versus Confederation

EUFederalStateConfederationPNG05Even with the best will in the world, there is only a single and also very flimsy argument in favour of a European federal state: namely that the German export industry is, ahead of all other players, the major beneficiary of the open markets of the euro zone, including the tax payer’s money meant to save the euro and pave the way to the intended federal superstate. Undoubtedly, all the workers, who are fortunate enough to earn their money in the German export industry, are also benefiting. But the economic and social price to be paid by all euro zone countries for this »advantage« is too high. That leaves only the counter-arguments: I have already described the chain of causes from predatory competition to trade imbalances, forced government debt and subsequent bail out. Now the EU stresses precisely these constraints – which must be attributed to the EU’s own economoc policies and which are symptomatic of the inhomogeneous euro zone – to employ the fiscal pact and its built-in debt brake to justify a strict central control of national budgets as the next step towards the intended federal state.

The development is somewhat ironic, because the economic and social decline of the Euro-Southerners will undoubtedly continue with and without a debt brake. If the debt brake can be strictly enforced as outlined in the pact, countries would slip deeper into public and private poverty due to consequential austerity measures – with unpredictable consequences. Without a debt brake they would sooner or later lose their creditworthiness completely, because of outstanding loan interest and redemption payments, and would finally have to declare themselves insolvent. If in this case the EU would refuse additional financial assistance, chaotic national bankruptcies and economic isolation would be inevitable. The EU has thus maneuvered itself into a position where she can only choose between »pest and cholera«, at least as long as the protagonists refuse to accept the realities beyond the export and growth mania imposed by industrial interests. The German foreign minister seems to be still clueless as he demonstrates neoliberal loyalty with respect to the euro zone and the fiscal pact by stating the often heard, but inappropriate aphorism on a visit to Brussels: »We need more Europe, not less!«.

As an introduction to the arguments »pro confederation« I’d at first like to allude to the economic truth that national currencies (or currencies of uniform currency areas) in combination with bilateral exchange rates constitute the only effective instrument to enable a sustainably profitable trade between differently developed countries. It is the original purpose of the exchange rate to relativize prices and thus provide the basis for beneficial trade and competition across national borders. The problems of the euro zone are proof enough that an inhomogeneous supranational currency area is doomed to failure.

The idea from the 90’s that the introduction of a common currency would serve the economic and political integration of Europe proves to be a historical fallacy.

As already mentioned, the opposite has been achieved: the acceptance for Europe’s integration by its citizens is declining because of economic problems.

A profitable trade between differently developed countries inevitably requires national currencies and bilateral exchange rates calculated to neutralize the average price difference of all products to be traded between two countries. Both for budgetary policies and borrowing non-restrictive national autonomy is imperative to give those responsible the scope for good governance. Given the existing inhomogeneity, the economic integration of Europe can initially only be advanced by means of jointly developed normative guidelines. As soon as intra-European competition is based on relative prices secured by calculated exchange rates, the initially differing standards will converge at a high level over the years. Thus, the confederation can be the precursor to a later federal state.

11. Sustainable Mechanisms in the Confederation

EUFederalStateConfederationPNG07For the time being, the secret of a future-proof development of the EU lies in the economic autonomy of its nation-states, as only they can develop their domestic economies in accordance with their traditions and resources, and only they can incorporate their external relations, in particular their foreign trade, into this development. This is the only way to give the desirable harmonization of vital standards a chance – based on a common system of values​​. The process of integration can be implemented based on a set of common normative guidelines agreed upon by the member states, initially being of qualitative nature in both the social and environmental sphere, but also increasingly quantitative in the latter one only.

To give an example: It obviously doesn’t make sense to impose uniform wages, social benefits and taxes upon member states with differing productivity levels, but it is no doubt desirable to agree on uniform standards for the use of chemicals in agriculture within a short period of time. What can also be harmonized in the foreseeable future are the legal systems. However, the key to securing Europe’s future is to maintain or restore the subsidiarity of political structures as laid down in the Maastricht Treaty, supplemented by a congruent subsidiarity of economic structures. It is only in such structures that the European integration is conceivable as a unique model of diversity and democracy being socially and environmentally justifiable. For the subsidiarity to be continued across national borders, mainly to facilitate large supranational projects and to allow for intense, profitable cooperation and foreign trade, a number of prerequisites are mandatory: namely national currencies, bilateral calculation of exchange rates, autonomy on trade tariffs and quotas, control of capital transfers and well adjusted balances of payments (balances of trade in goods and services).

12. Autonomous Economic Policies in the Confederation

EUFederalStateConfederationPNG08Following I summarize the two main tasks to be performed by the autonomous member states of a European confederation on the basis of common normative guidelines:

The domestic foundation is secured by a constant process of subsidiarization of economic structures. That is, industrial premises are continually led back to their optimal production-related size through progressive taxation to counteract the natural tendency towards capital and power concentration and to ensure widespread entrepreneurship and a multifaceted labor demand and product supply.

The external interfaces rest primarily on national currencies and bilateral exchange rates directly derived from the respective differences in the average prices of all trading products of two trading partners. As a complement, autonomy on trade tariffs and quotas is mutually conceded to avoid squeezing-out of competitors on the one hand, and to constructively expose the domestic production to international competition on the other.

In addition, I recommend the articles Economic Competition, Comparative Advantage – Upgraded and Future-Proof Foreign Trade.

13. Greece’s Future in the EU Confederation

EUFederalStateConfederationPNG09The question remains, how Greece could be compatibly transformed from its current state into a sustainable member state of a future EU confederation. It is essential that the first prerequisite therefore be the willingness of both the EU and Greece to restore a non-restrictive economic autonomy in the country. Greece would then have to introduce a legislation prohibiting euro transfers abroad as well as a legal obligation for the return of all old euro deposits from abroad. Thereafter, the drachma could be reintroduced, all euro deposits be exchanged at the former rate, capital transfer controls be established, and exchange rates be set to other currencies.

For the drachma a depreciation of about 40 percent against foreign currencies would be effected and immediately trigger an explosive boom in tourism and exports of agricultural products of Greece, and create the basis for the medium to long term (re-) construction of the country’s own economic structures. Correspondingly, the prices of Greek imports would be increased at the same time and would be temporarily subsidized under the »Marshall-Plan« of EU, ECB and IMF.

Holders of Greek government bonds would have to bear the loss, which would correspond to the voluntary concessions under the recent EU rescue attempts anyway. Additionally, longer maturities and lower interest rates for the bonds would have to be agreed upon so that Greece can repay its debts in the long term. The loans already been disbursed to Greece or scheduled under the current rescue packages could be incorporated into a Marshall Plan, because the country would most likely never be able to repay them.

It is only this way to ever open up the chance to transform Greece into a prosperous, independent trading partner able to generate returns for the more productive euro countries on the invested financial aid. The recent rescue efforts do not offer this perspective. They simply put Europe’s future at risk by powerfully trying to preserve the sacrosanct and fatal interdependences between the differing interests of more productive exporting countries as creditors and less productive importing countries as debtors.

14. Exemplary: Iceland’s Unconventional Path

Finally, I would like to refer to the turbulent history of the small country Iceland, from which there is much to be learnt. In 2008, Iceland’s banks collapsed following their excessive global speculation and would have almost dragged the whole state into bankruptcy. The new government did thereupon the right thing: It left the banks sitting on their debt (some had then to announce insolvency), introduced strict capital transfer controls and adjusted the exchange rates between the local currency (the crown) and the euro as well as the US dollar.

Today, five years later, the country has overcome the crisis to a great extent and is much better on track than the southern countries of the euro zone. But meanwhile, the old elites and profiteers pipe up again inflaming the debate on whether the country wouldn’t be better off loosening the capital controls and joining the euro zone. One can only advise the Icelanders: Keep your own currency, enter into agreements on controlled capital transfers and trade, ban your banks from speculative transactions, and use your successful model to get involved with the sustainable development of the European Union!

Click here for the German-language version: EU: Bundesstaat oder Staatenbund?

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