The odd fiscal ‘implicit bargain’ in the Eurozone. A continental view of sovereignty: List, Chartalism, and Keynes’ international economics

By Ignacio Ramirez Cisneros

PKES Working Paper 2013

July 2020

At present, the European customs and currency union finds itself in a transitional period. Without a path forward toward greater political unity, it has prematurely bound constituents by ‘hard law’ fiscal limitations (the Maastricht criteria, Stability and Growth pact, Fiscal Compact) not dissimilar to those applying to provinces, states, or Laender. In other words, it is caught in an odd 'implicit bargain’ (Goodhart) where members are expected to abide by de jure fiscal constraints with no central authority having the fiscal capabilities for stabilization, redistribution, and state-building (Arrighi) expenditures --all of which are indispensable in modern credit economies. The present paper makes use of European economic traditions reliant on statecraft to revisit the region's integration under the leitmotiv of economic sovereignty as a continental project. Specifically, we look at the work of List, Keynes, and the Chartalists. The work of F. List sets European economic unification in its historic place as a strategy founded in large part on exploiting economies of scale (demand and supply-side) by political and economic aggregation of smaller non-self sustaining economies into one market. This proposal for a new Continental System sought to lay the foundation for ‘catching-up’ or emulation of world economic leaders. Keynes’s international economics serves as the most useful orienting blueprint to begin to address the particularity of economic unification among sovereigns absent political unity. Chartalist insights into the political nature of central banks are of great value, and can help frame the European Central Bank's often clumsy attempts to hold together the Union within a broader scope. Despite its differential treatment of members thus far, the ECB could become a centerpiece institution in the consolidation of Europe as a self-sustaining pole of international effective demand. The overriding thematic principle encompassing the different authors (and traditions) discussed is that of European economic sovereignty in a region continuously struggling to balance political independence with economic co-dependence, and possibly unity.

Keywords: sovereignty, eurozone, sovereign-constituent fiscal implicit bargain, continental political economy, international macroeconomic viability

JEL classification: B15 B52 E12 F15 F45