[SL: it is now compulsory, in order to practice in either England or Scotland, to study European Union Law (I managed to evade it at Oxford, just), which I suspect is misconceived, at least on the part of those who rather like the European Union. It exposes the bones of an organisation so badly run that one is put in mind of what would happen if one ran a community association the same way: a Rugby club, say, or Rape Crisis Centre. No rugby would be played and no women in need would be helped, but a great number of busy meetings where everyone has to agree would be held, and that's about it.
I have never been on the Euroskeptic wing of the Tory Party, so discovering how bad it is, is rather shocking. It has suited us all to laugh at the Common Agricultural Policy and shake our heads at the Euro, but the latter is now so big and so broken that the capacity of anyone in Brussels to make a decision about anything of greater import than how many rolls of stickytape should be purchased for the European Parliament is now routinely called into question.
It is also interesting to encounter people on all sides of politics -- including SNP supporters -- who recognise that if Scotland becomes independent and remains in the EU, it will be a simple case of exchanging one behemoth who wants to bugger with our legal system for another.
The Euro, of course, is the biggest and saddest story -- and the reason I know next to nothing about the ongoing difficulties faced by La Gillard and the Australian Labor Party. It is only through Legal Eagle and Mark Bahnisch that I have learned a few scraps. Here is Lorenzo (his bloggy home is here) on the Euro; he has helpfully put all the information you need in the one place.
Read it and weep.
Lorenzo's piece is over the fold.]
The people who supported the Euro, and particularly UK entry into the Euro, were wrong. Not arguably wrong, not partially wrong; just flatly, unequivocally, completely wrong. Rarely in the history of public policy has one side in a public policy debate been so swiftly, and so comprehensively, vindicated.
A tale of two islands
The debacle is so complete that citing specific evidence seems unnecessary but we merely have to compare Iceland with Ireland. Iceland decided that a small island of 320,000 people had some niche advantage in grand finance. It was hubristic nonsense that went horribly wrong. But Iceland had two saving graces in the disaster. First, it realised that it was far too small to guarantee the banks and did not do so, thereby failing to saddle its taxpayers with enormous liabilities. Second, it was not in the Euro so could let its exchange rate reflect the change in its economic circumstances.
Contrast this with Ireland. The “Celtic Tiger” bought into the nonsense that is land-rationing and suffered the normal penalty of land prices surging way beyond likely income returns as expectations of capital gain fed themselves, helped by cheap credit. (I say ‘land prices’ because houses are large decaying physical objects, it is the land a house is on which shoots around in value.) When it all came tumbling down, the Irish Government made things worse by guaranteeing the banks (who therefore had much less incentive to change behaviour or fix their own problems) saddling the hapless Irish taxpayers with huge liabilities. Ireland was also stuck with the Euro, so could not let its exchange rate reflect the change in its economic circumstances, thus becoming a test case in exactly what was wrong with the Euro. Hence Ireland’s drop in employment has been considerably worse than Iceland’s.
Looking at the graph of 2007 to 2010 changes in employment for OECD countries, Australians can note what a different place we have been in compared to the US and most of Europe: for us, the Great Moderation is still going (particularly clear if you move the start year back to 1959). While any Australian who has been paying attention over the last 30 years can appreciate the useful role of a floating exchange rate as economic “shock absorber”. That is what countries in the Euro now lack.
ECBing downwards
The European Central Bank (ECB), with its trumping focus on maintaining price stability, has made things worse. The point of the Euro was, in effect, a deutschmark-for-everyone, just sign up. The ECB has pursued a policy that makes some sense for the German economy and no sense for anyone who is not. In a weird historical resonance, the ECB is playing a similar role in our period of the Global Financial Crisis and the Great Recession that the Bank of France did in the 1928-1932 period (pdf): driving down expectations of the path of money supply and spending, so having a depressing effect on economic activity—just the thing to make a debt crisis worse (pdf).
Once as tragedy, then as farce
In another weird historical resonance, while many Americans seemed to have thought they were electing a new FDR, what they ended up with is a new Herbert Hoover—someone with a high reputation for intelligence and energy, willing to break from the “stale” patterns of the past, who engages in a lot of activity (pdf) which is either pointless or actively counter-productive while failing to pay attention to the Fed’s disastrous monetary policy. Kevin Baker offered the Obama-as-Hoover analogy early but it is now in some danger of becoming conventional wisdom.
The historical resonances continue, as the Fed has engaged in a mix of passive (and not so passive) monetary tightening intermixed with feeble and temporary easings—the net effect being to drive down expectations of the path of money supply and spending, which encourages people to hold onto money, given falling inflation and economic activity expectations, causing a downward spiral in transactions, pushing the US economy well below its trend growth path. Yet people babble on about inflationary risks, just like the 1930s. (Alas, much of the economics profession seems clueless, the key central banks seem to be running on myths, worrying about inflation is popular, though misguided, even as financial markets have very low inflation expectations, which is not helping asset markets while international prudential bank regulation is set to make things worse.)
Euro nausea
As the Euro disaster unfolds, it is worth remembering what is at stake. There are more Euros (banknotes and coins by value) in circulation than US dollars. The Euro is the second largest reserve currency and second most traded currency. The question increasingly becomes, not whether Greece will default, but where the process of default will stop and how much of the financial system is at risk of collapsing as sovereign bonds fall to, and then beyond, “junk” status. With the IMF issuing serious warnings about the global implications. As does George Soros while the co-author of the classic study of financial panics This Time is Different: Eight Centuries of Financial Folly thinks the situation is (fairly but not absolutely) dire.
Now, it is true that Greece is a deeply fiscally dysfunctional polity. But that is the point: Greece should never have been part of a common currency with Germany. There was simply never enough economic commonality among the members for the thing to work (a problem expressed nicely here). But, here’s the thing: the attempt to do what could not be done made things worse. This is not a crisis that the poor Euro got caught up into, this is a crisis that not only has the Euro made worse, it is one that it (and especially the ECB’s management thereof) did a significant amount to cause.
Eurotrashing
Given the scale of the looming disaster, it is understandable that those so thoroughly vindicated in their opposition to the Euro might engage in a bit of gloating and finger pointing. But they have something to gloat about and there is plenty of finger-pointing worth doing.
In the way supporting the Euro was treated as what the “good people” did, with only fools and cranks opposed, we can see starkly the problems of cognitive conformity. There is considerable social science support for the proposition that cognitive conformity leads to bad decision-making. The conformity acts to limit the information available, or used, and the questions asked. If the conformity becomes a matter of mutually supporting status based on marker-opinions (“good and clever people believe x, stupid and wicked people believe y”) then the effect is magnified. Supporting the “European project”, in all its harmonising glory, has long since become what “good people” support and only mad folk and cranks (or worse) oppose or seriously criticise; so even the questions, let alone facts, that the “wicked” opponents cite are to be dismissed. There has even been a certain amount of EU “harmonising” of debate, with lots of Euro-subsidies for NGOs with “useful” opinions and advocacy roles.
It is important not to exaggerate the degree of prescience in those who thought the Euro a bad idea:
Even those of us who thought the Euro was a bad idea didn’t really know it was such a bad idea. If we had really known it would end this way, we could have presented overwhelming evidence in a convincing enough manner to have been able to persuade everyone else it would end this way. And we couldn’t do that. So we didn’t really know it.
A nice statement of Euro-scepticism was provided by Milton Friedman in 2000 (pdf: Pp9-10):
I think the Euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it.
… the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the floating exchange rate gave them one. They have no mechanism now. If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.
Which it spectacularly has. Citing Milton Friedman’s low probability of success would have been sneered at by many of the Euro-virtuous. Yet his skepticism has proved justified and their self-satisfied confidence very not.
The good bits
There is much to admire in the European project. After two disastrous megacidal wars in 30 years, trying to transcend past enmities, and build a common prosperity, is and was deeply worthy. The insistence on being a democracy if one wanted to join “Europe” has done much to strengthen the democratic impulse. The European project has been a very useful means of integrating former Soviet bloc countries back into a (free and democratic) European mainstream.
The bug which is a feature
And yet, there is the democratic deficit, the mad bureaucratic “harmonising” and the unfolding Euro disaster. None of which is remotely necessary to achieve what is genuinely worthy in the European project.
But the democratic deficit, and the consequent inadequate accountability of EU institutions is not a bug, it’s a feature: it is a direct result of the European project’s justifying analysis that the great problem of modern European history is nationalism, so a European identity has to be constructed to replace nationalism. Since nationalism is a popular sentiment, popular sentiment thereby becomes “the” problem. Creating institutions that are not directly accountable to such deficient popular perspectives is at the heart of the European project. The “you keep voting until you get it right” referenda are just a particularly blatant manifestation of the notion that nationalism, which is to say popular sentiment, is the ultimate problem.
As an analysis of the problems of European history, it is crap. (When it is used to wield the example of Auchswitz against the Jewish state, it is repellant crap.) Europeans have slaughtered each other for national reasons: they have also done so for ideological reasons, racial reasons, religious reasons, class reasons. If the problem is reasons to kill each other en masse, there is nothing distinctive about nationalism. (The related “imperialism as racism” analysis is also crap: one cannot find any viciousness that Europeans have done to non-Europeans that they have not also done to other Europeans, often more often and more comprehensively. Slavery and imperialism were not caused by racism, they generated racism as rationalising justification; a way of getting around any difficulties with moral universalism, just as cartelising social benefits generated notions of Jewish blood impurity.)
The great problem of C20th European history was not nationalism, the great problem was unaccountable power. 1914-1919 was the Dynast’s War, as the ruling elites of the Habsburg, Hohenzollern and Romanov Empires sought to maintain their power and authority against the threat of popular aspirations via military success. 1939-45 was the Dictator’s War, as Hitler and Stalin used military power to seize territory according to radically incompatible visions.
“Solving” the problem of European history by creating yet another structure of unaccountable power is not a cure, it is more of the disease.
The British example
Even taking the European project at its public face, the original purpose was to envelop competing nationalisms in a common European non-ethnic identity: which is to say, a new European patriotism. Ironically, the strongest example of this was denied entry at first: the United Kingdom, where a British patriotism attempted to encompass (with varying degrees of success) English, Welsh, Scottish and Irish identities.
The separation of Eire from the United Kingdom, and the revival of Welsh and Scottish nationalism, might well give one pause, given that England and Wales have shared a common monarch and Parliament since 1284 (though the English monarch’s suzerainty dates back to 1163); England and Ireland a common monarch since 1542 (though the suzerainty of the English monarch over large areas of Ireland dates back to 1171); England, Wales, Ireland and Scotland have shared a common monarch since 1603; England, Wales, and Scotland, a common Parliament since 1707; the entire British Isles a common Parliament from 1801 to 1922. All in all, this is a far longer and deeper shared institutional history than the Common Market-come-European Union.
As an aside, Welsh and Scottish attempts to undermine any sense of a common British identity and patriotism could turn out to be a dangerous game, since the English still greatly outnumber them and have never been comfortable neighbours. When backed into a corner, or otherwise seriously frightened or annoyed, they have proved repeatedly to be an angry and vengeful people (think Cromwell in Ireland, Cumberland in the Highlands, starving the Second Reich into defeat and then the new Weimar Republic into submitting to the Versailles diktat, bombing Nazi Germany flat): a cultural trait the Americans have inherited. (If jihadis ever do engage in nuclear terrorism against a US city or cities—even given that there may be good reasons such nuclear terrorism has not happened, yet—the “lose two buildings, take out two countries” response will seem a nostalgic period of restraint compared to what a seriously angry and frightened superpower is likely to do: a highly readable, if dystopian, fictional rendition of such a scenario is Tom Kratman’s military SF thriller Caliphate.)
Even merely in terms of creating a common European identity there are clear problems, as Michael Lind points out regarding the “global patriotism” of secular humanism:
Abrahamic monotheism insists on the brotherhood of man under the fatherhood of God. Darwinism insists at best on the distant cousinhood of humanity. Among humans, nepotistic solidarity can be transferred, with difficulty, to political units larger than the extended family. But national patriotism is much harder to promote than city-state patriotism, and global patriotism may be a bridge too far.
British patriotism proceeded on the basis of enforcing a common language (and hence common cognitive map [pdf, p.9]). A putative European patriotism does not even have that.
Pride going before a fall
Worse, the European project has, from the beginning, been an elite enthusiasm a key selling point of which is a sense of being a member of a moral and cognitive elite. This putative European patriotism is very much an elite patriotism, a mechanism to define oneself as a member of the (virtuous) elite; someone separate from, and superior to, the “vulgar” masses. Hence all the elite “harmonising” games, of which the euro “currency-harmonising” is just the latest and greatest (disaster).
Not a good basis from which to engage the designated “vulgar” masses. Particularly where it involves systematic discounting of their “vulgar” concerns. And, as the voting increasingly shows, said masses have noticed and increasingly resent it (which extends well beyond German voter resentment over the Euro bailouts).
Besides, an elite is as an elite does. The euro crisis has been one long pattern of too little, too late as Eurozone governments struggle to agree. Facing the reality that any successful plan is going to involve debt write-downs has been too hard, though things are apparently now moving that way, with the banks unsurprisingly opposed. Germany is up for expanding the bailout fund but Slovakia has to agree.
Ambrose Evans-Pritchard puts the case with mordant humour:
The only plausible option is for the ECB to let rip with unsterilized bond purchases on a mass scale, with a treaty change in the bank’s mandate to target jobs and growth. This would weaken the Euro, giving a lifeline to southern manufacturers competing with China. It would engineer an inflationary mini-boom in Germany, forcing up relative German costs within EMU. That would be the beginning of a solution, albeit a bad one.
Sorry Deutschland. History has conspired against you, again. You must sign away €2 trillion, and debauch your central bank, and accept 5pc inflation, or be blamed for Götterdämmerung. It is not fair but that is what monetary union always meant. Didn’t they tell you?
The same notion has been expressed rather more sedately by John Lancaster:
During the 21st century, the greatest danger to European stability is Germany’s reluctance to accept its special destiny. If the German taxpayer manages, however grudgingly, to accept that it’s her duty to shoulder the burden, the Euro will muddle through. But it won’t be pretty.
I think the idea is wrong, for the reasons Milton Friedman cited—this is not a “one off” crisis, it is the failure of a misconceived currency union. (Ambrose Evans-Pritchard at least wants to break the Eurozone into its Teutonic and Latin halves. As it is, the Euro is plausibly characterized as a doomsday device.)
Not that those outside the EU should sneer too much. Elites throughout the Western world have shown enthusiasm for the global export (and thus domestic importing) of the democratic deficit via “internationalisation”. While Australian federalism has increasingly been corrupted by the use of the “Brussels model”, where the Council of Australian Governments (COAG) agree on policies by processes that evade democratic accountability through “common agreement”. The Brussels model is very attractive in its lack of accountability sold via a sense of being members of a virtuous elite united in noble purpose. Which makes the Euro debacle a warning that extends even beyond its possible economic implications.
For the Euro debacle is not some mysterious affliction, it is a failure that arises directly from precisely what is wrong with the “actually existing” European project: inadequately accountable institutions engaged in projects which fit elite convenience and sense of status while ostentatiously dismissing critics. The Euro failure is the failure of self-satisfied, insular and hubristic elite networks whose level of self-satisfaction is directly connected to their collective ability to ignore the inconvenient; to what Clive James called, in a different but similar context, “inexhaustible resources of inattention”.
But what is the European project without that motivating sense of elite superiority? A European, democracies-only WTO? Which would be worthy, but not nearly so elite-useful. The Euro will be a double failure if this prolonged debacle still leaves European elites hiding behind their own self-satisfied hubris.
67 Comments
I have been a Laborish person since my very early teens, but I was astounded to see that attitudes to the EU had become a matter of partisan identification when we moved to the UK. Thus it was assumed if you were Labourish you liked everything the EU did, and if you were Toryish, you hated everything the EU did. As an outsider, I really couldn’t see why this was. As far as I was concerned, the EU had some good aspects, and some bad aspects (as with everything).
One bad aspect I recall distinctly was when they ruled on proper size of apples. All the English were outraged because one of their favourite apples, the Cox’s Orange Pippin (a horrid little apple if you ask me) was ruled to be too small to be an apple, and the Dutch were outraged because their favourite apple, some nasty big floury thing, was ruled to be too big to be an apple. Now, personally I didn’t like either the very large apples or the very small ones much, but gosh, if people want to eat them, they should be allowed to do so. Don’t try and require apples to meet some kind of Platonic ideal apple. So the EU has always had some silly rules.
Anyway, I’ve never been that convinced by the joint currency; not from the beginning. I must confess that part of this is probably nostalgic – I love different currencies; how boring is it when everyone has all the same? But part of it was pragmatic too – I just couldn’t understand how such a large bunch of people made up of so many different countries could all have the same currency – but then I thought maybe I’m missing something, and surely all those experts know better than me? Hmmm. According to this, maybe my simplistic view was right after all (out of the mouth of babes ‘n’ all that).
LE@1 As a general principle, a view on monetary matters one shares with Milton Friedman has a reasonable chance of being correct and an excellent chance of being arguable.
As for the post, I may have showed my outsiderness by capitalising the euro. And it should read, in “the bug which is a feature” section, that ‘the great problem of modern European history is nationalism’.
There is a lot of great commentary around. This post (scroll down to the version in English) on the gold standard’s lessons for the euro points out that the countries which had problems with the gold standard during its 1873-1895 deflationary period included Greece, Italy, Spain, Portugal: the same countries which are now having problems with the ECB’s tight money policies.
A paper which helps explain why we are getting the historical resonances I point to in the post with the late 20s early 30s is a paper by Barry Eichengreen and Douglas A. Irwin on who went protectionist in the 1930s and why (pdf).
Just as a lot of the problem now is people reacting to the stagflation of the 1970s so the problem then was people reacting to the post WWI inflations, including the notorious German hyperinflation. People were/are so worried about returning to past problems they created/are creating serious current ones by inappropriately tight monetary policies.
My favourite anti-Euro quip is from economic historian Peter Temin, who once pointed out that there was greater market discipline across the countries that now largely comprise the Eurozone in the mid-second century AD than at any time before or since. Temin, by the way, is probably the world’s leading expert on the economics of the Roman Empire.
I must admit I capitalised the word ‘Euro’, not you, Lorenzo — it is capitalised in all our course materials, and when referring to a noun as currency, it ought to be capitalised — hence USD, AUD, Yen, Yuan, Franc, Sterling etc. People who don’t capitalise it are being trendily illiterate.
SL@4 That’s interesting, because economist bloggers tend not to capitalise it. It isn’t in the Wikipedia entry either.
Peter Temin is a fine economic historian: I noticed that Irwin’s paper on whether France caused the Great Depression that I linked to in the post acknowledged helpful comments from Temin–he wrote a well-known book some years ago about monetary transmission and the Depression (Did Monetary Forces Cause the Great Depression? New York: W.W. Norton, 1976).
Lorenzo thank you for a very comprehensive overview, the links from which I’m still wandering through. But a couple of comments up front about some of the issues canvassed.
The single currency impeding state responses; Western Australia, Texas, seem to operate without this advantage – and both are within a federation of states. The difference, or at least one difference in their federations is a commonality of culture, and the lack of a pre-existing national state over which Europeans seek to impose their unweildy union.
I think this, together with the insane subsidy/protection given to agriculture, and now, or imminently, the financial industry, added to what seems at times regulation for regulation’s sake are more directly at the root of Euro problems.
This is not to suggest that the Australian federation has totally solved all regulatory, legal, subsidy problems – look at the proposed mining tax for example – but we started from a ‘federal vacuum’ 100 years ago, whereas Europe started with many independent-minded states 40-50 years back.
Just observations, not disagreements at this stage.
Actually, SL, I don’t believe any of those, except of course the acronyms, should be capitalised. 20 years ago perhaps but not today – I never capitalise ‘dollar’, nor for that matter yen, yuan, renmibi, franc (nor is it correct to do so in French), pound, rouble, dinar, lira, etc.
Nor should you, people who do so are being anti-trendily fustily wrong in like manner to those who randomly scatter whoms about their writing.
Lorenzo, great peice.
Kvd, not sure that applies, have you ever suggested to a Westralian that they lacked a pre-existing State at Federation? Texas did, of course, but Massachusets? Virginia? New York?
Commonality of culture from Carolina to New York? Really? What part exactly?
I think the problem is the Euro project’s hijacking by obsessive compulsive Eurocrats seeking to impose beautiful central harmony on all they behold, basically, all in the best traditions of a Euro socialism, coupled with a didactic and painfully civil law court.
Whereas Australia, the US and Switzerland were all full Federations with specifically defined and limited Federal powers and directly elected Federal governments, the EU is basically the equivalent of the COAG and the Department of Premier and Cabinet running the show.
Patrick, to whoms this applies:
re WA or Texas, or any of them; was simply putting them in the position of a Spain or a France vis a vis the Commonwealth/European Community. Of course they were or had a pre-existing state.
Commonality of culture: far more so than Greece and Ireland; or even Holland and Austria. I take your point that there are differences between US states, however these are not ‘reasons.for failure’.
I agree with your last two paras (re COAG role, Jim Belshaw has an interesting piece mentioning this point) – but my comments were directed to reasons for failure more than itemising differences, failed or not.
And I hope you and whom you’re with have a nice day or days as the case might be
kvd@6 The short answer is that there is an issue. The production profiles of Australian States are sufficiently different that economic shocks do register differently in the different States. This is even more true in the US.
What makes it workable are the countervailing factors.
(1) Mobile labour force. People move in response relatively easily. Australians are a notoriously mobile workforce (both between firms and between places). So, in the absence of a currency response, you get labour flow responses.
(2) Common rules: this lessens the degree to which economic shocks have varied impact.
(3) Common welfare arrangements: areas of changed welfare demand receive it accordingly: this compensates for the differential impact.
(4) Common risk pool: Commonwealth bonds effectively average the general risk out across taxpayers. So, States doing comparatively well risk-subsidise States doing comparatively badly. This also compensates for the differential impact.
In the EU, the differences between members countries is much larger than between US or American States and the countervailing factors are much less. They are basically left with (4) doing all the work and doing it very, very explicitly in special arrangements. Hence all the fun we are now observing.
That should be “US or Australian States”.
Well that’s two people who have totally misunderstood my point about states successfully federating – so it must be my fault.
I thought I had said that the act of federation (leading into a single currency) is not a reason per se for the failure of the European Union. Rather that they started too late, from entrenched and wildly differing national cultures – and even then, they may have been successful if not for subsidisation, and over-regulation by an unaccountable bureaucracy.
I totally agree with Lorenzo@9 – except to note that none of his points 1-4 require or would be enhanced by separate currencies for the component states.
I think we all agree that
– the problem was nothing to do with federating per se.
– over-regulation is a problem.
– under-representation/inaccountability is a big big problem.
– lack of regulation (i.e. the primacy and ‘direct effect’ of the American ‘Commerce Clause’ and our s90 and 92s is also a big problem).
I think that Lorenzo and kvd agree that cultural differences are a problem. I don’t necessarily.
I think you all underestimate the cultural differences across the US, for starters (although obviously these were less at the time of federation, they were still dramatic – let’s not forget that four score and seven years later they were at each other’s throats!). I also think that cultural differences are dramatically outweighed by the factors we agree on.
I simply don’t understand what agricultural subsidies have to do with it, deplore them in principal as we doubtlessly all do. On balance I would have thought them more likely to be a vehicle for cohesion?
Finally, I may be alone in blaming, to no small degree, Europeans themselves. Anglos simply wouldn’t have created this stupid EU thing and would have been less likely to a) hide from voters at every turn and b) ran it like a haven for banana republics.
Germany is primarily to blame for this last, the Economist speculates that they may now be deliberately prolonging the crisis in order to force the kind of structural changes they now realise they should have insisted on from the outset, rather than letting the Mediterranean countries in for sentimental reasons.
And it seems like only yesterday that the Euro was set to kill the Greenback and be King of the World.
The EC has been far too open to countries that aren’t up to the standards of the powerhouses that they join. A lot of Europe is medieval. Anywhere out of Catalonia in Spain. South of Naples in Italy etc. Eurocrats are far too Utopian.
willing to break from the “stale” patterns of the past,
Yeah it’s the number one marketing strategy in politics. I’m different, I’ll change things, change you can believe in; yak yak.
there was greater market discipline across the countries that now largely comprise the Eurozone in the mid-second century AD than at any time before or since.
N’uk.
Well that’s all very interesting Patrick@12. Sometimes I’m amazed by how a simple compliment on what remains a very good overview (Lorenzo’s post), plus a passing observation on one issue (single currency, and its ills) can become the source of angst.
I am to blame for mentioning agricultural subsidies; I simply see what is now to come with bank ‘reorganisation’ as yet another subsidy – of the inefficient, by the powerless, for the benefit of… no one really. But I won’t die in a ditch for that opinion.
On cultural differences, SL is always (always!) banging on about eurolaw, but the point remains that a common code of law is pretty basic to any cohesive society. We are yet to achieve same in Australia, but in Europe, how do you reconcile (and I’m exaggerating) a suspended sentence in one jurisdiction, and your left hand being removed in another for the identical crime? And I dunno about ‘the Anglos’ being above any similar sort of eurostupidity; but just maybe look at the past years of Labor rule. A shining example of open, accountable government, not.
Haven’t read your Economist link; still wading through Lorenzo’s – but I do remember reading some months ago that maybe this time Germany will now achieve what she failed to do 70 years ago. Or is it verboten to suggest such a thing?
kvd some points well made although the one about chopping off hands escapes me
The Economist article is a little more subtle than that!
I am doubtless over-reaching on the Anglo point but Anglo-style separation of powers and laiieez-faire presumption in law-making would surely have served better.
P@16, I’ve now read your Economist piece, and I must say the two points I took away were these:
Mr Schauble saying: “The vast majority of financial transactions do not serve the real economy” – with which I absolutely agree, and
The UK and US rejection of a financial transactions tax – something I’ve mentioned several times before over the months as being a possible additional source of government revenue paid for by the ‘players’ who are at the base of all this instability. But the UK is worried about loss of ‘business’.
I regard that as short sighted – it’s potentially a very significant fiscal initiative which if enacted globally could assist in digging all of us out of this mess. Where’s Tony Blair when you need him; weapons of mass discussion are needed
Yes, good point about COAG, kvd. I hope Jim Belshaw turns up in this thread, actually.
P@12 If the Economist piece is accurate, the Germans are being deeply stupid: the sort of higher stupidity that German policy has some historical pattern for.
Pschologist Philip Zimbardo on time perspectives:
It is Catholic countries (plus an Orthodox country, Greece) which are having all the debt problems. And debt is all about attitudes to the future. Remembering that these are also the countries which, on the same future-orientation problems, could not hack the gold standard (see the link at my 2).
If a major political movement in Italy wants to divide the country into two, on actually quite rational grounds, then integrating Europe to the level required is not going to work. Particularly not on such dubious grounds.
kvd@15 A different path to dominance notion has been raised. Another expensive failure methinks.
On Anglo differences, I would point out that the UK was the only major European country not to buy into the euro. Also, Americans tend to find the EU structure inherently repellant. There is something to what Patrick is suggesting.
kvd@17 On financial transactions tax, I am always dubious at proposals to raise transactions costs, capital taxes tend to have particularly high deadweight costs and the real issue is good prudential regulation.
P@7 The cultural and political diversity in the US is much greater than people often credit. In some ways, wider than in the EU. They do at least have a common language and a common institutional history. Of course, they also had a nasty Civil War and nowadays have some very bitter culture wars. (Though I am taken by Matt Yglesias’s take on the latter.)
What Krugman said.
“The cultural and political diversity in the US is much greater than people often credit. In some ways, wider than in the EU. ”
Oh please.
For some reason, France falls into the ‘Protestant’ camp economically. I suppose that’s what state mandated atheism does for you; makes you a defacto Protestant.
But then, their banks hold almost as much Greek debt as the Germans do…
M@21 I was echoing a point that Eric Jones makes in his Cultures Merging: that the US is more ecologically variant than Europe and regional divergences on attitudes to public policy are generally greater than between European nations, something concealed by a common language (p. 138).
M@21 And yes, his ‘Catastrophic Stability’ post is a particularly good one by Krugman.
Good morning, SL@18. I think in any entity – club, country or supra-national body – the critical issue to survival and effectiveness is recognition of and management of difference. A Federal system with its division of powers is one way of handling difference.
Despite its name and the claim to be an economic and political union, the EU is actually a Federal system. Whether it’s a good one or a bad one is a different point. One of the reasons why it’s interesting to compare federations is that they are so different.
In both Australia and the EU, the centre is trying to build power. In both cases, there is an appeal to things like the need for common standards etc. An EU apple may be an Australian food standard or a poker machine regulation. In many of these areas, an EU observer would find the operations of Australia’s COAG very familiar because the centre doesn’t have direct power; action requires agreement among jurisdictions.
Problems arise in all entities when the desire for central control, the requirement to be uniform, clashes with fundamental difference. If the clash becomes too great, the entity may fail.
The EU’s problems here are somewhat greater than Australia’s because of the EU’s expansion. This widens difference. On the other hand, the level of effective centralisation in Australia is far greater than in the EU, creating its own problems in managing difference.
The euro is an interesting one. After all, it’s not all that long ago that the conventional Australian wisdom was that NZ really needed to give up its currency and adopt the aussie. NZ was, the pundits argued, just too small to have its own currency!
Still, because of time I might pick the euro up in another comment.
Reading the article, & many of the posts, I could not help but be struck by the thought that you could substitute Anthropological Global Warming, in place of EU or euro, & the whole thing would make just as much sense, & the same responsibilities awarded.
I do look forward to reading the same article, in slightly form, when the catastrophe that is global warming policy has replaced the EU policy as the subject
The cultural and political diversity in the US is much greater than people often credit.
Perhaps why so many of them know so little about their own country.
A@26 Oh yes. When you add social separation to geographical diversity, the effect can be quite intense.
I got sidetracked into a parallel post – http://belshaw.blogspot.com/2011/10/federations-eu-and-lessons-for.html
L@19 re financial transactions tax: I see today in the SMH a summary article headed “Shares pile on $90 billion” but more particularly I would ask that you briefly look at the top20 by value which I rough-add as $4bn – and not an initial capital raising between them, just ‘place your bets before the ball stops rolling’ sort of trading.
Now, never mind the rest of the ‘real’ market, or futures, or cfds, or other exotics – just consider a minor impost of half a per cent on $4bn. Daily. On an industry more akin to the TAB, and closely related to the root causes of all this market turmoil.
Then consider why it is that DEM, for instance, might more equitably have to ‘pull in her belt’.
Or is it 40 or 400 bn? The figures are too big for my fingers
Sorry, just been reading about the BoE’s ‘solution’ aka QE2 (which is not a ship) – where they may print the odd UK500Bn. So thinks – social services cost savings: why not knock out 1/100th of that in folding readies, and give them all a raise?
H@26 I’m quite sure everyone here saw the parallel, but the common view seems to be that Arthritic Gentified Wombles are beyond polite discussion.
re my @31: the sum of the top20 is $11308873696 according to Excel, and ‘five basis points’ – i.e. 0.005% – thereof is $56544368.48 so I make that $56.5M potential ‘transaction tax’ for the day’s trade, for the top 20 stocks, ignoring all other forms of trades.
Which is my excuse for further posting to note that ‘Gentified’ should be read/corrected as ‘Gentrified’. Carry on.
five basis points is .05%
Patrick@35, you may be right, mea culpa.
kvd30-34: on financial transaction tax, my question would be why no country has done one. Governments are usually pretty keen on revenue sources.
h@26: you may well think so, but I could not possibly comment for fear of creating yet another “thread of doom”.
JB@29: nice post. The refusal of the EU to learn from the experience of other federations (and I agree entirely: Australia, Canada, the US, India, Malaysia, all provide useful lessons) is one of the striking features of it.
Said refusal was particularly noticeable in the EU Constitution-drafting exercise. The attempt to “lock in” a whole set of policies (PART III: THE POLICIES AND FUNCTIONING OF THE UNION of the draft Constitution was 247 pages!) was so utterly antithetical to how the constitutions of functioning federations worked but also so utterly typical of what is wrong with the “actually existing” European project.
Beyond my understanding also, Lorenzo. Leaving conspiracy theories aside, I can only assume that to be efficient it would need global co-ordination – which prompted my disappointment noted @17 above with the UK and USA (non-)response. The idea is not new, as I expect you know.
Also, I agree with your comment re Jim Belshaw’s very readable comment/summary.
H@26:
” I could not help but be struck by the thought that you could substitute Anthropological Global Warming …”
Don’t Mention The War(ming)!
Mel, I did laugh at that.
Hasbeen @ 26: we have agreed never to discuss that issue on this blog again after some comment threads of doom.
More on my point (4)@9, Slovakia is being recalcitrant:
Working out why Slovakia is being recalcitrant is not hard:
It just gets worse and worse, doesn’t it?
Incidentally, many EU bodies have this unanimity rule (I really should dig out my EU textbook and tell you which ones), so it’s almost as though the various institutions were designed to be held to ransom.
Great post, Lorenzo. As a conservative (small c) I have felt that the direction (every closer union) Europe has been heading for the last 20-ish years was all so much idealist political dreaming, completely divorced from realities across the EU territories, and the single currency the biggest, worst manifestation of it.
What SL missed out in her intro …
was how much it is all costing… so add to SL’s analogy, “… but a great number of busy meetings where everyone has to agree would be held, and the community associations would vote themselves ever-higher fees [note 1] for which they never properly accounted [note 2].”
The depressing thing for me is not merely the looming disaster that is the euro (or Euro), i.e. the single currency. Whichever way that pans out, it’s going to cost everyone on the planet a bundle of money: I’ll be able to afford it: many millions will directly suffer hardship as a consequence of the euro bungling. No, what I find most depressing is I can conceive of no way to kill the monster that is the EU. There are too many vested interests in perpetuating it: politicians in every Euro-zone country know there’s the possibility of a highly-paid sinecure position within the EU awaiting them, so as a group they are turkeys (riding the gravy-train) but who are never going to vote for Christmas. And it’s this lack of democratic control I resent the most. (The farce that was ‘keep holding referendums until you get the right result (and then stop)’ just summed it all up for me.)
[note 1]
http://www.google.com/hostednews/ukpress/article/ALeqM5hwwxSufEsxuyZjT2qCDHoz59Qyow?docId=N0822341317998620324A
[note 2]
http://www.civitas.org.uk/wordpress/2010/11/10/eu-accounts-not-signed-off%E2%80%A6-for-the-16th-consecutive-year/
Kvd, Lorenzo was being tongue-in-cheek, for example Sweden has done one, which is why they won’t be doing this one. Per Anders Borg, the Swedish Minister for finance:
Pace John Le Carré, that really would be Paris Game Berlin Set London Match.
wow, the html went nuts…someone? help?
Patrick, I think I’ve fixed it… sometimes the BBC does that when you post a link, it pinches little bits of its articles and tries to distribute them rather randomly through your code.
CB@43 Thanks. Thanks particularly for the EU budget-auditing link: it is a notorious feature of the EU that it cannot get auditors to sign off on its budgets.
P@44 I have forgotten about the Swedish case, so thanks for the link.
In the category of “things one would prefer not to have said”, I bring you (pdf) Robert Mundell, Nobel laureate for monetary dynamics and optimal currency areas:
It is part of a debate with Milton Friedman: (the debate is a great read, which I commend to folk).
Australians are also not likely to agree with Mundell’s comment that:
Update on Slovakia: a leader of the Party voting “no” on the bailout asks a very good question:
I guess he could use various spurious arguments like the comparative cost of living, then fall back on something like ‘do you want to be totally f*cked this week, or in six months’ time?
Kvd: in the words of a British comedian: You’re a bad man but I like you.
Now the euro has brought down a Government in Slovakia, and the Greek bailout is back for another round of negotiations.
As Nick Rowe has pointed out, the lack of a lender of last resort is proving a problem.
Or the Slovak could say, I’m already pretty fucked, I’d rather completely fuck you in the prospect that my kids might not be so fucked?
Blog Admin: how come Patrick gets to use such fruity language when the other day on the maps thing I used b-gger in an entirely acceptable Australian colloquial sense and got binned?
Or do you also grade on artistic merit?
obviously the latter
KVD, the ways of our spam bin are unknown. I have no idea what its criteria are at times.
LE@56 well that’s alright then. So long as you are following the normal rules of human existence I have no problemo
Market Monetarist bloggers have just about universally praised Clark Johnson’s short and accessible paper taking apart six myths about (US) monetary policy in the current debacle.
I agree, it is required reading if you want to understand our current circumstances.
Getting back to the eurozone, this excellent guest post by Henry Kaspar explains how important economic adjustment is.
If you reduce your unit labour costs, investors conclude you can grow out of your debt problems and your borrowing costs fall (Ireland, and to a lesser degree, Spain). If you do not, they get nervous and your borrowing costs rise (Portugal and Italy).
Sclerotic, massively over-regulated labour markets are at the heart of much of Europe’s problems. They make having children more expensive (since women’s capacity to work and raise children is greatly reduced), reducing fertility rates helping to create seriously adverse demographics. They waste human resources, driving down revenue and up welfare expenditure. They encourage Muslim alienation.
But protecting job-incumbents (including government bureaucratic job-incumbents) remains the political winner, so European labour markets mostly continue to be over-regulated disaster areas.
The euronews is getting surreal. Now we have the notion of Chinese eurobonds.
Intrade has the odds of at least one country exiting from the euro hovering around 50%.
Intrade has the odds of no country exiting from the euro hovering around 50%
I love alternate interpretations
sure, kvd, but if you read that back to yourself it isn’t exactly an optimistic statement!!
kvd@62
Not a great endorsement of a solid future either way
Patrick, after months of despair, gloom, and the sky is falling, I find it amazing that the ‘positive’ spin I put on it could be so high. And if you look deeper into Lorenzo’s Intrade reference you will also see markets quoted on “by Dec 2012, one of Greece, Portugal, Ireland, Italy will default” – or words to that effect, (maybe Spain was in there too). The “chances” are somewhat low; ranging up to 10%
Conclusion: who knows? Lorenzo’s “not a great endorsement” is absolutely correct, but that’s all that can be reliably said, imo
China has come to the rescue. A G20 behind the scenes agreement creating absolute pandemonium in the markets – “announcement was delayed as leaders dealt with more pressing matters”.
(and ps, and by the way, Lorenzo’s intrade helicopter has reduced altitude to 46. )
kvd@66 So, the Chinese are finally pandering to the French
This post explains the eurozone crisis in 8 graphs. The various levels of debt indulgence are quite clear. The ECB’s tight money, so tight spending, so tight income, policy is a bit less so.
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