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Monday, November 5, 2012

Romania’s Monetary Policy in Federal Europe

Sometimes monetary policy and federalism can interact in interesting ways. To grasp a particular relation, such as that of Romania in the European Union, it is first necessary to keep in mind that monetary policy is not federalism and vice versa. An anti-federalist, for example, might have an incentive to conflate the two concepts out of a desire to deny the existence of a federal system already underway.
As if the euro were yet another federal union in the E.U., the New York Times refers to “the euro zone’s one-size-fits-all monetary policy.” The expression is doubtless oriented to the ECB’s arduous task of setting one interest rate that won’t trigger too much inflation or over-heat booming areas of the economy, while at the same time being sufficient to stimulate investment in “austerity” states such as Greece and Spain. The expression “one-size-fits-all” is awkward in referring to monetary policy because interest rates generally apply to areas of varying economic activity. The phrase fits much better in referring to federal law as an alternative to subsidiarity, or states’ rights, particularly in federal systems like the E.U. and U.S. that are imperial in terms of territorial scale and political form. In such federal systems, the member states are of such scale that the federal government must inevitably accommodate cultural and ideological differences from state to state (diversity may or may not exist within a given state, hence the fundamental difference between an imperial federal government and a state government thereof).  
Applying “one-size-fits-all” to monetary policy is essentially to state the obvious, for it is always the case that a given interest rate applies to different extents of economic activity. In contrast, applying the expression to federalism is essentially to claim that the political system is becoming consolidated at the expense of federalism. Such consolidation is not obvious or always the case in a federal system; rather, the change represents a fundamental lapse—the cost being in building political pressure from the increasingly pent-up diversity seeking expression in terms of policy and law.
In short, having a currency does not constitute a sort of federalism, so it is erroneous to treat monetary policy as though it were by misappropriating an expression such as “one-size-fits-all.” This is not to say that federalism cannot have particular impacts on monetary policy (and vice versa). The state of Romania in the E.U. is a case in point.

                                                                                         Romanian currency.                 banknotes.com
Retaining its own currency, the lei, when Romania joined the union (as the U.S. states did, by the way, when they formed a military alliance and then a confederation until 1789), the state government was able to maintain its cheaper currency to encourage exports to the E.U. states that use the euro while lowering the cost of living within the state. This in turn made the state attractive to workers particularly from heavily-indebted states in recession, such as Spain.
In contrast to Romania’s monetary discretion, Greece and Spain could not on their own depreciate the euro to similarly encourage exports and lower their respective costs of living. Those states had to rely on fiscal stimulus even as they had to cut back on public spending to receive bailouts from the E.U. and international organizations. In other words, with monetary policy effectively off the table, as the ECB had to balance its watch on inflation with pressure to stimulate the indebted states, states like Greece and Spain had to rely on their weakest tool—that of fiscal spending. Lest it be argued that federal spending could obviate this difficulty, this solution runs up against a particular weakness in European federalism—namely, the want of federal power relative to that of the state governments.
As an aside, the early U.S. suffered from the same weakness. In fact, the U.S. was originally a military alliance and then an alliance-confederation with the sovereignty being retained by the states. It would take a century or more for the power of the federal union to match that of the states.
The division of power in the E.U., wherein the union itself is relatively weak in comparison with its state governments, exacerbates the indebted-states’ reliance on fiscal measures because federal redistributive spending can be vetoed by a state whose immediate interest is contrary to such a “net outflow.” Moreover, the want of federal power renders inter-state redistribution itself “an encroachment” on the states.
In contrast to Greece, Spain and even Italy, Romania could use monetary policy to effect economic growth, and thus not be so reliant on the state’s own fiscal means or on federal redistribution. Romania was thus in a better position to avoid one of the major flaws in European federalism at the time. Had the E.U. more of a balance of power between the government of the union and those of the states, Romania would likely not have had to hold so fast to the lei. European integration would have been greater, while the “states’ rights” or anti-federalist Euro-skeptic movement would have lost an advocate concerning monetary policy at least.
In short, the Romanians were wise to retain the lei and depreciate it rather than adopt the euro as the E.U. was reeling from the debt crisis. This wise choice illustrates the flexibility in the E.U. (i.e., every state did not have to adopt the euro—unlike in the early U.S. from 1789 on concerning the dollar and the various state currencies). At the same time, Romania’s “opt out” on the euro reduced pressure on the E.U.’s political system itself to be reformed such that a balance in power between the union and the states could be achieved in a more perfect union. Ideally, sufficient motivation for additional shifts in governmental sovereignty would exist alongside the positive feature of multiple tracks, including on currency.


Dan Bilefsky, “Resilient Romania Finds a Currency Advantage in a Crisis,” The New York Times, November 4, 2012.