Wim Duisenberg (1935-2005) was popular in Holland with his J.F. Kennedy looks, as minister of Finance in 1973-1977, then President of the Dutch Central Bank 1982-1997, and then the first President of the European Central Bank 1998-2003.
He is remembered in Holland with a bronze in his birthplace of Heerenveen in Friesland, with his name attached to the building of the Economics Faculty of Groningen University where he studied and presented his thesis, and then in Amsterdam, where he lectured as professor, with the Wim Duisenberg School of Finance, a school that claims to train for leaders in Europe.
Let us look at the ravage.
First error: The euro, with a monetary union (EMU) without a political union (EPU)
September 30 1991 is on record as:
BLACK MONDAY has become synonymous with a meeting of European Communities ministers of foreign affairs on 30 September 1991. At this meeting an ambitious draft of a potential treaty on political union submitted by the Dutch presidency as part of the deliberations of the intergovernmental conference charged with drawing up the Treaty on European Union (TEU) was rejected by almost all other national delegations. Only Belgium accepted the draft. This was an embarrassing rebuke to the Netherlands and to the most enthusiastic supporters of deeper integration. The dismissal of this Dutch text and of its efforts to promote a unitary structure for the European Union essentially paved the way for the pillar structure that was enshrined in the TEU at Maastricht in December 1991. (David Phinnemore & Lee McGowan, A dictionary of the European Union, Routledge, 2nd edition 2004. Dutch readers can watch this documentary of the NPO history channel.)
Duisenberg had been working hard to create an EMU with that EPU. Textbooks in economics show that money cannot exist without the political framework. Non-economists can see it now in the Depression in Southern Europe and the miserable state of bank, sovereign and private debt, and in the worry by creditors whether this debt has any quality. Still, Germany and France were not willing to accept the EPU. Helmut Kohl and François Mitterrand had agreed only on the EMU as a favour to France in return for its support of German re-unification. See the fall of the Berlin Wall 25 years ago.
When this EMU without EPU was politically agreed upon, Duisenberg should have protested, as he was the independent monetary authority, and have shown that he was serious by raising interest rates on the Dutch Guilder to show the increased uncertainty. Later on, when Bernard Connolly at the EU Commission wrote The rotten heart of Europe in 1995, and was dismissed for speaking his mind, Duisenberg should also have protested that government bodies should not infringe upon freedom of speech. Instead, Duisenberg accepted the political manipulation and let himself be chosen as the first President of the ECB.
You may listen to the Nobel lecture on December 8 2011 by Thomas J. Sargent, on the US experience with monetary union in 1780-1840, that he explicitly relates to the current EU situation. Less polished is the presentation by Luigi Zingales of December 10 2013 at BFI in Chicago, but with the advantage that we can compare to his September 2014 survey Monnet’s error? on sentiments in the EU about the state of the union.
Do partial steps toward European integration generate support for further steps or do they create a political backlash? We try to answer this question by analyzing the cross sectional and time series variation in pro-European sentiments in the EU 15 countries. The two major steps forward (the 1992 Maastricht Treaty and the 2004 enlargement) seem to have reduced the pro-Europe sentiment as does the 2010 Eurozone crisis. Yet, in spite of the worst recession in recent history, the Europeans still support the common currency. Europe seems trapped in catch-22: there is no desire to go backward, no interest in going forward, but it is economically unsustainable to stay still. (Luigi Guiso, Paola Sapienza, Luigi Zingales, 2014)
My suggestion is that each nation adopts its own Economic Supreme Court (ESC), based in science (RES Newsletter, October 2014). These ESCs will tend to exchange information, which enhances world governance. For the EU it could provide a missing link for the theory of the optimal currency area, see the paper Money as gold versus money as water (2013). This suggestion presumes that countries have learned from Duisenberg’s error of neglecting economic science (at critical points). See the paper Cause and cure of the crisis (2014).
Second error: Natural gas and the earthquakes in Groningen
The province of Groningen where Duisenberg studied appeared to contain the originally largest natural gas resources of Western Europe. The exploitation since 1963 caused the economic phenomenon of the Dutch disease. A slowdown of current exploitation is less likely now that Europe needs all its resources in case that Vladimir Putin would employ his “gas weapon” these coming winters.
Duisenberg could have realized as Finance minister that exploitation of such huge resources would cause a lowering of the Groningen soil. It is a no-brainer. He could have made sure that there would be independent research in the geophysics of extraction and soil behaviour, to provide for warnings when extraction was too much. He didn’t, and left such research to the exploiting company. Now, the province suffers serious earthquakes, see this BBC report. The last quake measures officially 2.8 on the Richter scale, but, since the sub-soil center is relatively close to the surface, the impact is larger than for common quakes of that scale deeper down. Thus proper comparison requires a surface-Richter. Dutch homes also aren’t built for earthquakes and they get damaged rather easily.
Soccer player Arjen Robben comes from the village of Bedum in that area, and novelist Frank Westerman curiously calls on Robben to become “the people’s ambassador”, as his voice would be heard supposedly better than those of the aggrieved Groningers. I have a hard time imagining Robben visiting Putin and asking whether he can keep the natural gas flowing to Western Europe and the Ukraine, so that the earthquakes in Groningen may be reduced. And would we want to insult the Russian people and make Putin more popular by not having the 2018 World Cup in Russia ?
Another novelist, the late Willem Frederik Hermans (1921-1995), would however think that the Groningers just get what they deserve. He was a lecturer at Groningen University in physical geography in 1958-1973, and could have warned about the effects of natural gas extraction, and he could have done so with much success since he was an acclaimed writer and sharp critic. However, his success caused some people in 1972 to slander that he spent more time on writing his books than on his lectures and grading his students. A committee cleared him from the accusations, but the university had done little to defend and clear him, the slanderers were not reprimanded, and Hermans was also given other work than he was hired for. In 1973 he quit and left Groningen in disgust. The university has never been willing to acknowledge that they had treated him badly, while it is obvious that they have.
This slander reminds of that one wielded against professor W.F.P. Fortuyn, who was eventually vilified so much, also by leading politicians like prime minister Wim Kok and minister Ad Melkert (later at the World Bank and UNDP and Iraq, and candidate for ILO), that an animal rights maniak got the idea to murder him in 2002. Dutch readers are advised to consider this book that calls for a parliamentary enquiry into the role of slander in Dutch society. For economic thought there is reason to speak about the Dutch Mental Disease.
Third error: Lowering tax exemption and creating the tax void
Duisenberg’s term as minister of Finance in 1973-1977 occurred at a crucial point in time in the first years of the Great Stagflation of 1970-now.
The earlier government had already concluded that tax exemption was too low and had to be raised, since the purpose of exemption is to allow for a decent income for workers with the lowest wages. Already in 1889 the tax theorist Cohen Stuart gave the analogy of a bridge, that it first has to support its own weight before it can carry a load. Duisenberg however went along with a new policy: “that the social minimum had been raised sufficiently so that it also could contain some taxes” (which is a rough translation of a government quote). This effectively creates a tax void under the minimum wage, raises the gross minimum, causes more unemployment and contributes to stagflation.
How this exactly works, is explained in my book DRGTPE and supporting articles, see the About page.
Instead of solving the problem then and there, Duisenberg aggravated it, went along with a silly rationale, and helped cover it in bureaucratic jargon so that others would not easily spot it. While I started studying econometrics in September 1973, it took me till 1989/90 to grow aware where the structural unemployment in Holland came from. And actually the world. The 1986 OECD study, An empirical analysis of changes in personal income taxes, occurred during Duisenberg’s term as DNB President, and reports that there is an international agreement that tax parameters are adjusted for inflation. But the social minimum rises because of human social psychology with both inflation and the general level in welfare. Duisenberg should have been aware of it, but didn’t buck the trend.