Wealth and Happiness

The European debt crisis is reaching the boiling point, as are European finance ministers.  Yesterday, the head of the European Commission, the executive arm of the EU, lectured its assembly about the urgent need to come up with a unified economic policy across the EU community.  This reflects, and emphasizes, the point I’ve made before, about the tension between EU sovereignty and the sovereignty of its individual members.  For a common, enforceable EU economic policy would in fact be a declaration of sovereignty of the EU over the nations that compose it, going a long way toward converting it from a federation of independent states into a unitary sovereign state in its own right.

That  is the preferred solution to the crisis for finance ministers, who always prefer a unitary authority to make their jobs easier, and it represents one extreme in the range of solutions, one not likely to be adopted in anything like a pure form.  The other extreme of the solution range would be dissolution of the fixed relationships between the Euro and national currencies, also not likely.  For it would reclaim the economic sovereignty of each member nation, leaving them to set their own courses toward salvation or disaster, and in the process abandon the many gains they have made together.

There is a curious tension between the power of sovereign states to set economic policy, an adjunct of the power to regulate commerce, and the power to set the value of currency.  Traditionally, sovereign revaluing of currency has been a solution to end or ameliorate national debt crises.  If Greece or Spain or Portugal had the sovereign power to revalue their currencies, they could have repaid their foreign debts with considerably less stress than has been the case.  But countries have surrendered their power to control their own currencies to an international money market, operating between multinational financial corporations which daily revalue it in relation to the major currencies of the world. 

The big step in that direction came in 1971 when, interestingly enough, the U.S. converted its currency  to a fiat currency under pressure of a run on gold from the Deutsche Bank.  By declaring it no longer convertible to gold, the U.S. made the reserve currency of the world fully subject to the market fluctuations of the international currency market.  But nations perceived as having differing economic policies will have their currencies differently valued in the international market.  By requiring a fixed exchange rate between the drachma and the euro, the EU is thus dictating the need for a common EU economic policy.

The deeper issue is that financial institutions operate by economic policies, while nations operate by socioeconomic policies.  That is because financial institutions seek as their objective to maximize the economic return, measured by monetary profit, to their investors, while nations seek “the general welfare” of their people.  Financial institutions can’t help it; their hands are handcuffed by fiduciary requirements which prohibit  goals other than maximizing returns on investment; nations also must answer to the needs of their people, even when it requires debt.  A too simplified solution to that dilemma has been in use since 1934 through the use of GDP (which began as GNP) as measuring rod.  But that just aggregates financially measurable activities into a nice round number, leaving aside things like education levels, pollution, income disparities and the like, which are equally the responsibilities to manage of sovereign states.  A nation which chose to lower its GDP to increase the happiness of its people, like some traditional nations which have rejected “modernity”, would be regarded as backward or insane, but a nation that bases its socioeconomic policies solely on the effect on GDP is not likely to be a contented nation.  China maintains one of the fastest growing GDPs in the world, but remains way down the list on many other scales.  You are what you choose to measure. 

So solutions to the debt crisis will lie in the middle, acknowledging the need for both fiscal integrity and responsiveness to the needs of people.  The EU chairman is right.  A unified policy for the EU is needed.  But it must go beyond simple financial goals to include more than just fiduciary requirements.  A movement has been afoot already in Europe to extend our national obsessions with measurement to include some of these other societal issues into what is sometimes called a “happiness index”.  Perhaps some of the preliminary results of those efforts might prove useful.  And perhaps fiduciary rules might be relaxed to enable actions “for the public good”, such as debt forgiveness, and to prohibit actions “against equity and good conscience”.  Already,  under American law governments are subject to that prohibition in financial actions against individuals.  Whatever the solutions reached, they must enable financial interests and governments to work together toward common goals. Extreme solutions are not in the interest of either.