The ability to print money is a precondition of sovereignty. It is also a cornerstone of modern financial and economic systems. For all the talk of money being created by banks, in a panic it is clear that the only money you can always rely on is that created by the government via the central bank. This fact lies behind the stabilising role of deposit insurance, the role of government debt as a risk-free asset, and the central bank’s ability to act as lender of last resort. Without these, no modern financial system can function. For all the talk of Scottish independence, it will mean little without the ability to create money.

These simple observations explain why the financial crisis, and the Eurocrisis, resulted in a devastating loss of sovereignty of member states. Jean Claude Trichet could outline on a couple of sides of A4 a reform programme for Ireland, overthrow an Italian government, and earlier this year, the ECB illustrated with brutal clarity, that elections in Greece are largely a symbolic ritual: the fate of nations is determined the ECB.

The legitimacy of many of these specific acts under EU law is highly controversial, and not the subject of this blog. The point I am making is that foregoing the right to print money is a major act in the loss of sovereignty.

How then can democracy function in the Eurozone? Unless countries exit the Euro, it is a matter of fact that national parliaments play a subsidiary function to EU decision-making bodies. It follows that national elections have a secondary role in law-making. These are facts. For national elections to truly matter, nations must leave the Euro.

Does it follow that the Eurozone inherently lacks legitimacy? Not if nations have chosen this arrangement, voluntarily, and accept its consequences, and not if direct elections to the decision-making bodies could re-establish representative democratic function.

Over lunch this week, the Financial Times economics columnist, Martin Wolf, outlined a compelling case for the former. I will paraphrase his argument and take responsibility for any loss of nuance and error of analysis. Martin’s perspective is that the European project is, for most states within it, a reaction to two beliefs: the myth of sovereignty, and the fear of democracy. The myth resides in the fact that all the large nations of the EU (bar the UK and Spain) – indeed, almost all members – have been conquered in recent times. Sovereignty is an illusion if one cannot be confident of remaining independent. ‘Fear of democracy’ is related: democracies might choose extremist populist ideologies (as in Germany and Italy before World War II) or succumb to civil war (as in Spain). The European project is designed to protect its members from both themselves and one another. As such, it represents not a violation of sovereignty or democracy, but a way to ensure the survival of relevant quantities of both.

These remain relevant and powerful arguments. For example, although many will attribute the rise of the National Front in France to the dysfunctional consequences of the EU, the truth is that the hands of any extremist future government in France will be severely bound by EU institutions – not least the ECB – and an integrated financial system. The financial system is a check on national extremism.

So where does this leave us? Two forces are necessary for any state to survive: its institutions must function in the broad interests of its population, and it should have a strong claim to be representative. In the Eurozone, increasing federalism would appear to be a sine qua non on both counts.

Martin Sandbu, in his superb book, Europe’s Orphan, suggests that precisely this claim was made for the Euro: “Rarely if ever has there been a greater voluntary concession of national sovereignty than Europe’s Economic and Monetary Union (EMU), created with both the promise of greater prosperity and stability, and a convergence of both status and identity.”

It is profoundly ironic that the most federal institution – arguably the only truly federal entity in the Eurozone – its central bank, is both responsible for the Eurocrisis, and its termination. The ECB caused the crisis by failing to fulfil the duties of a sovereign money-issuer, outlined in the opening paragraph, it ended the panic with an (almost) unconditional commitment to do the reverse.

Aside from the ECB, decision-making in the Eurozone is based on bargaining between a large number of states, with severely circumscribed financial resources. Individual nations will retain an effective power of veto, which completely undermines this process, until federal EU institutions have material tax raising powers. Many extremely important functions, such as counter-cyclical fiscal policy, have been neutered by wrong-headed bargaining.

We are left then, with a single truly federal decision-making body, which can overrule the interests of any single state – the European Central Bank. It also has close to unlimited financial power. Mario Draghi is not just the President of the Governing Council of the ECB, he is Europe’s President – period.

What is intriguing is how little is known about the Governing Council of the ECB – who the national representatives are, and what views they bring to the debate, is seldom even commented on in national politics. This should change: presidents of national central banks should be held to account, and their appointment subject to national, democratic scrutiny. Perhaps, if we genuinely want a Eurozone democracy, we should consider direct elections to the Governing Council of its central bank?

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

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