It's not something Dr. Randall Wray wanted to be right about.
"When you have your own currency, you have sovereign power," said Wray, a professor at the University of Missouri Kansas City.
But when it came to predicting Europe's financial downturn, the economics professor was spot on.
"We developed a different way of looking at money and currency sovereignty," he explained. "We use it to analyze the way the EMU [Economic and Monetary Union] was being formulated. We could see it had fundamental problems."
He wrote about that theory in his book Understanding Modern Money. That was in 1998, years before Greece even joined the European Union and a decade before Europe's fiscal problems came to a head.
Understanding Modern Money excerpt:
"Under the EMU, monetary policy is supposed to be divorced from fiscal policy, with a great degree of monetary policy independence in order to focus on the primary objective of price stability. Fiscal policy, in turn will be tightly constrained by criteria which dictate maximum deficit-to-GDP and debt-to-deficit ratios. Most importantly, as Goodhart recognizes, this will be the world’s first modern experiment on a wide scale that would attempt to break the link between a government and its currency. ... As currently designed, the EMU will have a central bank (the ECB) but it will not have any fiscal branch. This would be much like a US which operated with a Fed, but with only individual state treasuries. It will be as if each EMU member country were to attempt to operate fiscal policy in a foreign currency; deficit spending will require borrowing in that foreign currency according to the dictates of private markets."
"We laid out how they could've set it up originally, but given the way they had set it up, we also have formulated ways they could resolve the problems they had," said Wray.
Now, he's passing on that knowledge to the next generation of policy makers, economists and professors through UMKC's higher learning economics programs.
"It's not only great to be around these people with big ideas, it's also great to be around people with real professional integrity," Stephanie Cole said of Wray.
Initially Cole planned to only take a few prerequisite classes at UMKC. She was so impressed by the program, she decided to get her Ph.D. in economics there.
"You get multiple perspectives and you get a broader understanding, a more pluralistic understanding of how the economy works," said Ph.D. student Nicola Matthews.
He's also teaching them how to develop their own economic forecasts, though he gives this advice: Just because you formulate a solid theory doesn't mean the powers that be will listen.
Read more about Wray's economic theories in the books he's authored.
Q&A with Dr. Randall Wray
What exactly were you forecasting back in the mid-90s when it comes to the formulation of the European Union and the subsequent economic downturn?
We developed a different way of looking at money and currency sovereignty. We use it to analyze the way the EMU was being formulated. We could see it had fundamental problems. For example if a financial crisis hit, they wouldn't be able to deal with it because of the way they set up the European Union.
What should the EU have done instead? Do you have an example?
If you look at the United States as a monetary union, we set it up in a way that is very stable. We have a fiscal authority in Washington, D.C. - Uncle Sam. He has a budget that is about 20% of the GDP. When necessary Uncle Sam is able to deficit spend, as we did when the global financial crisis hit. We had deficit of 10% of GDP, $1 trillion a year, that grew up naturally as Uncle Sam tried to rescue the economy. In 'Euroland', they could not do that because the individual nations had given up their currencies. They had adopted essentially a foreign currency and they weren't able to spend as necessary to bring them out of the crisis. When their deficits did increase, the markets reacted against them because they realize they are no longer sovereign governments.
So, what should the EU do to become more stable?
They need to create an equivalent of Uncle Sam. There are two ways to do it. You could give fiscal authority to the European Parliament. They need to ramp up their budget. It needs to be 10 times bigger than it is now. Or, you could have the ECB (European Central Bank) support the individual member nations' governments by purchasing their debts at very low interest-rates. That would then get the individual nations the fiscal capacity they need.
What's your forecast this time around?
I think things will only get worse. The U.S. is probably slowing down; China is slowing down; probably Japan is slowing down. All of these are bringing down the global economy. That makes it even harder for Europe to recover. Then on top of that, the formulation of the Euro is just wrong.
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Terra Hall can be reached at terra.hall@kshb.com.
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