Maastricht and All That

Letters

Vol. 14 No. 20 · 22 October 1992

From Terry O’Shaughnessy

Wynne Godley (LRB, 8 October) presents a strong case in favour of the view that much more attention should be given to fiscal policy in the debate over European integration. He points out that those who place all the emphasis on the co-ordination of monetary policy often smuggle in the assumption that the real economy will take care of itself and that the only legitimate concern of government is (the rate of change of) the price level.

However, he weakens his argument and gives ammunition to his enemies when he claims Keynes’s support for an ‘inflation tax’ as a method to pay for World War Two. In fact, How to pay for the war was a polemic against inflationary war finance. Keynes advocated fiscal measures, including a compulsory savings scheme, to reduce inflationary pressure in a situation in which there were extraordinary demands on a fully employed economy. Keynes argued that the inflationary financing of World War One had proved to be inefficient and inequitable and had stored up serious problems for the post-war period; his scheme was to be both fairer and more efficient and make demand management easier.

The fact that the first practical application of Keynesian analysis was in such a situation should not be forgotten, especially when circumstances have again arisen in which there are extraordinary demands on the output of the European economy following German reunification and the need for reconstruction further east. If German consumers had been prepared – or forced – to save more, or at least to pay more taxes, reunification might not have put such a strain on German monetary policy. This would have eased the pressure on countries like the UK, France, Italy and Spain which have recently suffered more from high interest rates and appreciating currencies vis-à-vis their non-European markets than they have benefited from higher demand in Germany. Giving in to inflationary pressures would not have helped. What was needed was a temporary redistribution of consumption in time (from present to future German consumers) and space (from German to non-German consumers). Of course, this would have been much easier to achieve if the institutional arrangements for fiscal co-ordination advocated by Godley – and, before him, in a different context, by Keynes – had been in place.

Terry O’Shaughnessy
St Anne’s College, Oxford

Vol. 14 No. 21 · 5 November 1992

From Wynne Godley

Terry O’Shaughnessy rightly takes me to task concerning Keynes and the ‘inflation tax’ (Letters, 22 October). I transposed a course of action which Keynes discussed into one which (I for a moment wrongly imagined) he had advocated. But my mistake has no bearing on the substantial points argued in my article and O’Shaughnessy is therefore wrong to say that it weakened my case. He goes on to express a number of views about economic policy in Germany which also have no direct bearing on the merits or otherwise of the Maastricht Treaty.

Wynne Godley
Department of Applied Economics, Cambridge University