Author Topic: EU Issues as Decentralization Institutional Design Weaknesses  (Read 2610 times)

FitzFord

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EU Issues as Decentralization Institutional Design Weaknesses
« on: October 27, 2010, 16:17:57 GMT »
The Issues of EU Decentralization – Fiscal Policy or Institutional Errors?

The recent international soul-searching on the causes of the near financial meltdown has not escaped the EU. Suddenly, the notion of multiple politically semi-independent countries sharing a common currency is being called into question both inside and outside of the Europe. Rather than rehash the various arguments that have dominated these discussions, I will focus on one area of concern. Looking at the EU as a model of decentralization, is the essence of the problem rooted in the fiscal policy parameters of its decentralization policy – deficit limits, revenue-expenditure reporting, excessive borrowing and risk-taking? Or are the fiscal parameters essentially sound, and are the institutional framework of reporting, review and monitoring overly lax? If the latter (which is difficult to dispute), is this a consequence of poor design or a result of underestimating the institutional influences that were built into these arrangements? Or both? I will outline the misjudgments that seem to support the latter interpretation.

The EU was/is first and foremost a political exercise, designed to both build a more viable power bloc to peacefully confront a changing world and to ensure, in that context, the economic strength of Europe in this new world order.  As a political enterprise compromises are inevitable, however, some of the compromises inevitably lead to institutional weaknesses. To illustrate this point, examine the effects and implications of two major issues that are current in the EU: immigrants and labor markets and the Greek (and other) threat(s) to the Euro.

Major EU member economies typified by Germany, depend on exports for growth. Competitiveness, in turn, depends on relatively low labour costs. Adequately skilled workers from lower income countries are integral to this growth strategy. However, while their economic contributions are welcome their full integration in to the larger society has not been. Note the willingness of Germany to extend expensive options to reintegrate former East Germans into the reunified Germany, versus attitudes towards Turkish immigrants. The purpose of this analogy is not to make moral arguments – there are other fora for that – but to make the institutional weakness argument. In this case the argument is simple: if the objective is to have skilled labor at competitive costs then the rules of the game should consistent with, and sufficiently robust to assure that outcome. To the extent that they are not, the results will be expensive disruptions that jeopardize the overall objectives. Decentralized developing countries face similar conditions, often at the local government level. In these cases, the question is often: should local governments have the right to select its staff without involvement of a national personnel management body? When national unity is a paramount concern, the answer is frequently, “no”. In other words, the predominant objective determines the institutional design.

With regard to the Greek case, political considerations at the country level led to “misleading” – to choose a polite term – the EU about its adherence to the agreed parameters for borrowing. The institutional question is, was the honour system adequate for ensuring compliance? In traditional decentralized countries, the question of central government oversight of borrowing and debt levels at the sub-national level has always been a vexing one.  Usually, in those cases, the minimum level of strict oversight has been external borrowing. Clearly, the systemic risks to the entire national enterprise have usually been considered sufficiently compelling to override local or regional interests. The EU is not without the technical capacity to design and implement such an oversight system.  Further, the EU was fully aware of the risks to the currency of uncontrolled imbalances. It is difficult to avoid the conclusion that institutional systems fell victim to political sensitivities.

The question for the future of the EU is similar to that of many decentralized governmental systems: to what extent will its composite jurisdictions agree to institutional designs and interventions that limit the room for risky political maneuvering?
« Last Edit: September 07, 2011, 07:59:52 GMT by Napodano »

FitzFord

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #1 on: September 06, 2011, 17:43:50 GMT »
When I first posted on this issue a few months ago there were no takers for this discussion. However, recent comments by some EU leaders and financial authorities (you know who they are!) have been hinting (and more than hinting in some cases) at the need to address these institutional design issues. What do readers think of the various proposals? Which ones seem workable - in the near turn; in the medium term; and the long term? What timeline are associated with "near", "medium" and "long" term?  With regard to your profession experience, what research or consultancy with which you have been associated would suggest the appropriate course of action?

John Short

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #2 on: September 07, 2011, 18:19:08 GMT »
Fitz,

Sitting in not so sunny Northumberland, decentralisation means a somewhat different thing.  Firstly, local government where the cuts will be dictated more by the amount of transfer from the centre – most of Local Authority revenue – than any action by the LA itself.  The payer calls the tune rather than the piper so to speak -the “pain” may reflect the overall funding rather than local government being asked to suffer more than central government (your earlier topic in Decentralisation). 

Secondly there are transfers to the devolved Governments (Scotland, Wales and Northern Ireland) based on the “Barnett formulae” which historically may have been based on a notion of need, but nowadays the link is very tenuous, if at all, certainly for one living less than 50 miles south of the border.  (For those wanting to know more about the Barnett Formulae, Prof David Heald (Aberdeen University http://www.davidheald.com/publications.htm ) has written extensively on it.)  Incidentally the formulae has been “disowned” by (now Baron) Joel Barnett. 

You then raise a third very interesting concept of decentralisation in which nation states in the European Union are “decentralised”, but from what?  While the concept of the EU was driven by politics which you acknowledge, the fudging of the economics as part of the grand scheme is now coming back to bite the EU in no uncertain terms.  Is the solution the rewriting the economics (too late?) or ensuring that the politics now ensure that the economics must work?  Perhaps the Constitutional Court in Germany has given the answer today.  So perhaps the payer not the piper may call the tune after all!

John
« Last Edit: September 08, 2011, 18:33:59 GMT by Napodano »

STONE

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #3 on: September 07, 2011, 20:22:22 GMT »
EU as a decentralisation project?  Surely a centralisation project?

I agree with the analysis of inadequate institutional arrangements.  I'm not so sure about the parallels with intra-soveriegn state arrangements.  When it comes to external lending to local governments lenders know that the central government can, will and must pick up the obligation in extremis

Some of the EU borrowers in crisis weren't just hiding the truth from the EC they were hiding it from everyone - lenders, voters, and probably also themselves.  We should remember also that the lenders to EU states had credit committees that approved "sub-prime' lending.  The LDC debt crises of yore were the result of herd behaviour by banks not sound credit risk analysis fooled by dodgy figures.  What value the 60 per cent and 3 per cent if banks lend beyond it?

If a local government really messes up it gets taken over by the centre - is the Isle of Skye - the victim of playing interest rate swap games with wily international bankers - managing its own financial affairs again?

The IMF can't stop country members getting into a mess and it can only help if country members ask for it and if the country member is too big it can't help at all without some political decisions from member countries.

So what should the EC's sanction be?  Cut transfers from the centre for breaching the debt and deficit limits? - fines don't seem to work.  What if a net contributor plays up - say a German Government that over-rides its central bank and every one else and decides an Ostmark is the same as a Deutsche Mark: as I recall it all falls apart and you have to piece it all back together later with some new rules.  I'm sure the Constitutional Court remembers that one.

I was asked by a friend what the process would be for a country leaving the Euro zone.  I didn't know.  When Austria voted in a party that was distasteful to other members all that could be done was to stop talking to it - the EU treaties have no arrangements for forcing a member to leave.  How would a county stop using the Euro?  I guess it would have to start creating a new currency (in, er, secret).  How could it be made to leave? Print a currency for it (in, er, secret?)

So it's politics all the way and we are in a process of re-adjusting the institutional design through politicking. It's Europe - that's going to take some time...  Yes the EU is first and foremost a political exercise and it broke international economic rules when it was founded, but for political reasons it was accepted that we should go ahead as it might be the means to stop us killing each other.

Anyway, just some thoughts.

FitzFord

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #4 on: September 08, 2011, 17:10:30 GMT »
John,

Excellent points! Which leads to one of my favorite arguments on the subject of decentralization: it always is an institutional design problem. You have laid out the reasons - the circumstances are inevitably different in each case, including the economics, history and politics, as well as ethnicities. I remember raising eyebrows in a guest lecture at a university by arguing that the underlying principles are in political economy and thus would be subject to periodic re-design of elements and that it would be beneficial to program regular periods of review and adjustment. My main point was that that would make more manageable and less traumatic if the areas of potential change were identified and the process codified. I think Australia has a built-in process for adjusting some elements. Does any reader know of this and care to comment on how it works?

Fitz.

Martin Johnson

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #5 on: September 09, 2011, 10:23:18 GMT »
The EU as a decentralisation project or a centralisation project? Mr Stone thinks the latter as does Mr Short I think (‘decentralisation from what?’). What are the parallels with other previous or current examples of making emerging federation work? There are certainly examples of nation states becoming federated in one way or another and having to deal with fiscal federal relations as a result, but not quite in the same way as the current European project. I understand that Lenin gave Uncle Joe the task of drawing up proposals for the USSR nationalities policy before the dust had settled on the civil war, which ended up providing the framework for fiscal federal relations for three quarters of a century in that part of the world. Very much a case of the politics driving the economics I think. Mind you, I don’t really see the Commission being in a position to deal with recalcitrant states as the old USSR felt it had cause to do pre and post WW2, not for some time in any case.

petagny

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #6 on: September 09, 2011, 10:44:24 GMT »
If the euro is to survive, it seems certain that there will have to be further centralisation in the area of fiscal policy. The question is how to create the appropriate institutional arrangements that don't undermine national sovereignty (too much) and that incorporate some kind of democratic accountability.

The Dutch PM and Finance Minister chipped in on this issue in yesterday's FT:

'..What we propose is twofold, and builds on the ideas already put forward by the French and German leaders. First, we call for independent supervision of compliance with the budgetary rules. Second, we believe that countries that systematically infringe the rules must gradually face tougher sanctions and be allowed less freedom in their budgetary policy.
Independent supervision requires a commissioner for budgetary discipline. His or her powers should be at least comparable to those of the competition commissioner. The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive deficits. The first step is to require the country concerned to make adjustments to its public finances.
If the results are insufficient, the commissioner can force a country to take measures to put its finances in order, for example by raising additional tax revenue. At this stage sanctions can also be imposed, such as reduced payments from the European Union Cohesion and Structural Funds, or higher contributions to the EU budget. The final stage will involve preventive supervision, and the budget will have to be approved by the commissioner before it can be presented to parliament. At this stage, the member state’s voting rights can also be suspended.
Countries that do not want to submit to this regime can choose to leave the eurozone. Whoever wants to be part of the eurozone must adhere to the agreements and cannot systematically ignore the rules. In the future, the ultimate sanction can be to force countries to leave the euro. That will require a treaty amendment and is therefore a measure for the longer term...'

In extremis, the proposal is that the Commissioner would have the power to send back budgets before they went to national parliaments. The proposal seems to vest very significant powers in the hands of a, presumably, unelected official in Brussels.

Still on the theme of centralising fiscal policy making, the German Finance Minister wrote last week (also in the FT):

'...Europe has always moved forward one step at a time and it should continue to do so. This does not mean that fiscal policy in the eurozone should not gradually become more centralised. It should, as long as this process is legitimised by a strong democratic mandate. But strengthening the architecture of the eurozone will need time. It may need profound treaty changes, which will not happen overnight. But the direction is not disputed, and the determination of all member states to defend the common European currency is granted...'

There is at least mention of a democratic mandate here.
« Last Edit: September 09, 2011, 10:46:44 GMT by petagny »

Martin Johnson

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #7 on: September 09, 2011, 10:52:53 GMT »
Following on from my previous post, perhaps a parallel in some ways is with the 19th century federating states in the USA. The economic issues were different, of course, with concern among some member states about what might become of the value of a portion of their ‘capital stock’ should the federal government apply new rules (not that Mr Lincoln was a pioneering anti-slavery campaigner – that only came towards the end of the civil war, by which time the policy was much more useful to the North as a galvanising measure). Ultimately, in a circumstance where states enjoyed a large degree of independence in an increasingly federating environment, some of them did not wish to go down the path of the likely new economic policy. Notwithstanding the common currency, some states did decide to leave the federating project in that case (not sure if they printed the new currency in secret though, although it had become devalued by the end of the war … special circumstance of course, but something for current EU members with dodgy economies to bear in mind before taking the secret printing plunge). Anyway, the main point of this meander I guess is that fiscal federalism cannot be other than both economic and political, with the politics increasingly being asked to trump the economics as federating policies move beyond national borders to incorporate relations between nation states. The tricky bit is to emerge with a workable economic solution that is politically acceptable to all without having to resort to the brinksmanship and beyond of 1860s USA or the more blunt approach of early 20th century Bolsheviks. As Mr Stone says, it’s politics all the way … it might be the means to stop us killing each other. 

petagny

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #8 on: September 09, 2011, 11:53:10 GMT »
It's an awful long time since I read it, but I remember that J. K. Galbraith's book, 'Money: Whence it came, where it went' gives a good account of the monetary history of the USA, including the Civil War period. And the prose is, as ever, so elegant!

FitzFord

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #9 on: September 09, 2011, 16:05:02 GMT »
The US is perhaps the best known modern example of a group of autonomous governments agreeing to create a centralized entity of which they would be parts - in other words, creating a centralized state and government of which they would be decentralized states with specified levels of autonomy. It has done reasonably well so far, although no one could pretend that that solution has been perfect and should not be improved. (Another version of my previous argument that these arrangements will always be works-in-process). Would it not make sense for the EU members to acknowledge that this is the direction in which they are heading and establish a specific process and timetable to achieve this? Perhaps this would facilitate clear, realistic discussions of what viable institutional arrangements would be acceptable to members instead of appearing to pretend that there are no cataclysmatic issues that cannot be resolved within the current framework? Imagine that the EU is our client, what should we advise them to do?

Fitz.

John Short

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #10 on: September 09, 2011, 18:17:04 GMT »
Need to know which is the primary function - political or economic?  Once that is known we might have a chance of guessing the advice.  Imagine the client - 27 PMs, MoFs, Parliaments, Opposition - that would drive anyone to drink.  Ah it's Friday evening and there are two games of rugby on the box - (not RWC) ......................

Martin Johnson

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #11 on: September 13, 2011, 07:10:31 GMT »
The US has indeed done reasonably well so far, but that is on the back of close to 250 years of negotiation, experimentation and implementation, not to mention the catastrophe of a civil war to sort out some of the politics, as noted above. I think Fitz is on the right track, however, in taking the approach of asking what we as practitioners would do if we were asked to advise. But John Short does hit the nail on the head when he alludes to what the client might be in practice. I suspect the historical perspective provided by the US experience does reinforce the point that the economics and institutional arrangements will take a back seat to political objectives and negotiation at least until the politics have been sorted out, agreed and stood the test of time - after which federating institutions will almost certainly come to the fore. From a historical perspective, the current difficulties over sovereign debt in Europe, and things associated with it, may very well prove to be just one part of getting the politics sorted out. I wouldn't like to guess the overall timescale before European federating arrangements can be thought of in a manner similar to those in the US.

FitzFord

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #12 on: September 16, 2011, 15:26:14 GMT »
We may not have to wait for a couple hundred years for a central government in the EU after all. From an institutional economics perspective, the EU has already signalled that it can mobilise an effective central government. I believe that in performance and results terms it would appear that Merkel and Sarkozy are now fulfilling that role. Comments?

Fitz.

petagny

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #13 on: September 16, 2011, 16:35:47 GMT »
Only in the sense that what they decide to do in the next few days and weeks is critical for the economic future of the EU (the fallout from mismanaging the euro crisis will hurt non-eurozone members as well as members). And they do probably still have it in their power to rescue an increasingly dire situation. But they seem to be frozen like rabbits in the headlights of their forthcoming national elections, unable to take the bold action required.

This is what Tim Geithner has been quoted as saying today:

'What is very damaging from the outside is to see not just the divisiveness [in Europe] in the broader debate, about strategy, but the ongoing conflict between the governments and the central bank and you need both to work together to do what is essential for the resolution of any crisis.'

And

'Governments and central banks have to take out the catastrophic risk from markets, they have to definitively remove the threat of…cascading defaults [and avoid] loose talk about dismantling the institutions of the euro.'

Geithner has apparently been told off by the Austrian for suggesting that a fiscal stimulus from the stronger eurozone members is required. This is consistent with the view of the German Minister of Finance who has recently expressed the opinion that austerity (for all countries) is the only way out of the crisis: a direct route to economic depression and guaranteed sovereign defaults!

Reg

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #14 on: September 28, 2011, 17:39:16 GMT »
'Allo it's me again.
I 'ad that Boris Johnson in the back of me cab the other day (private reason apparently)  we was nattering about this and that and I asks him are the Greeks going to be able to come to the Games next year.  He reckons yeah.  So then I asks him what if I get a Greek mayor or somesuch in the cab an' 'e wants to pay me in euros should I take them or what? So Boris says something about beware Greeks begging lifts ('untamed wit' I finks) but that didn't get me very far.  What I'm worried abaht is them printing dodgy euros (I'm always taking euros from people - cos I can set me own exchange rate and use 'em when I visits Pierre Charles and Piertro-Carlo.) Can they print dodgy euros?  Anyway that gets me thinking and so I asks Boris if we in London can set up our own pound or better still get everyone one else in the British Isles to use Euros and we just use pounds in London ( we'd get a better exchange rate for the 'olidays) - all we have to do is set up an exclusion zone like we have for cars in London - might want to extend it a bit to pick up where I live  seems like we 'ave to decentralise in the right places.  Boris mumbles something about hacking cough so he can't answer.  Anyway just so you don't get me wrong I'm a bit worried about other mayors from countries offering dodgy currencies.
Cheers, Reg

Martin Johnson

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #15 on: October 03, 2011, 07:57:07 GMT »
Reg, I am confused? Will you be accepting drachmas instead? Maybe the Euro is even dodgier than I thought or you know more than you are letting on!

.... And what about them mayors in Scotland (mind you .... I've never heard of a scottish mayor ... what do they call their civic elder burghers up there?), will you be accepting some of their Scottish pounds when the olympiads arrive?

FitzFord

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #16 on: October 07, 2011, 19:39:33 GMT »
Slovakia, a relative minnow in a sea of much larger fish, is now threatening to lead the school into a net of deeper problems. Recent discussions in the press in the US are beginning to focus on the [unsustainable] disconnect between the financial system of the Euro zone and the political system that [does not] exist(s) to resolve what is essentially a political problem. Despite the [consensus] view that the political system is managed by a fairly typical aggregation of political personnel and constituents, I really would recommend that our European practitioners dust off your resumes and join the public fray. No one is safe in this environment and hence no one is disconnected. Where would you start to steer this ship away from the edge of the world?

Fitz.

Napodano

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #17 on: October 07, 2011, 20:32:49 GMT »
As a start I would send all the European politicians to a two-year sabatical and get us economists in power.

European politicians look to me like Hosni Mubarak in Egypt: he was making a sequence of patetic TV appearances during the revolution, not beeing able to be 'ahead of the curve' and we all know how he ended.

More concretely, I would go for an orderly default of Greece (even though that seems too late now). The situation there is clearly not sustainable!

FitzFord

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #18 on: October 10, 2011, 15:03:25 GMT »
"Europe chose a single currency without considering what its economic governance might have been, without considering the harmonization of fiscal and economic policies...So now it's up to us, in the midst of this crisis, to tackle those problems." - Nicolas Sarkosy, October 9, 2011.

Now, do you believe me? Of course, he left out the political dimension, but this public acknowledgement from a key player is a good start.

Fitz.

Reg

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #19 on: October 12, 2011, 01:50:16 GMT »
Yeah right, I had that Stig in my cab and he said a lot - good bloke- didn't get it all but he said he'd written something for the average bbc reader that should make it simple...
http://www.bbc.co.uk/news/business-15110053
Cheers, Reg


Reg

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #20 on: October 12, 2011, 02:09:58 GMT »
Martin, Sorry I confused you.  What date on the drachmae? (wasn't specting that woz you?). Scottish notes?  My Granny (well one of them) was scottish so wot's the prob? Don't think all elected chief executives of scottish local government bodies are called buggers - maybe procurers or somesuch?  Reg.

STONE

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #21 on: October 12, 2011, 02:34:25 GMT »
Fitzford,  Interesting quote. (whence?) Begs the question: who is/was Europe? (sorry HK).  You are right though; it's good to see a key politician wise up to his responsibilities 'ere Napodano sends in the dismals (job for DSK, n'est-ce pas?, as PM not President, bien sur).  Was Sarko using the Royal 'we'? Anyway, let's hope the Slovak Parliament understands the question second time around...

FitzFord

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #22 on: October 12, 2011, 14:52:47 GMT »
Reg, Stig is the leader of my clan (the Institutional Economists). He was at the WB during my time and he actually is a nice guy as well as smart. For our colleagues who did not read the piece you provided the link for, I would enthusiastically recommend it.
Stone, the quote was from the Washington Post story of his meeting with Chancellor Merkel. No report as to her views on this particular item. I will try to resist commenting on other personalities mentioned.

Fitz.

petagny

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #23 on: October 12, 2011, 16:11:15 GMT »
And here's a view of Germany, which is a critique of policy advice offered by the Economist:

http://www.voxeu.org/index.php?q=node/7059

The analysis of the fundamental problem is important - deep-seated structural imbalances leading to huge balance of payments problems - but the 10 point remedy would probably make Stiglitz freak! Recipe for a depression?

As Martin Wolf points out in the FT today, there are always two sides to adjustment. Arithmetically it's just not possible for everyone to be a saver.

FitzFord

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #24 on: October 13, 2011, 17:13:33 GMT »
petagny, This was an important contribution from my perspective, as it introduced me to another source. I cannot quickly evaluate the argument as I am not familiar with the details given as a basis (which are interesting and potentially useful), but they provide an interesting counterpoint to the more widely circulated technical analyses. However, the proposal does not fully explore (or perhaps, fully explain) the implications of the costs and their distribution. As it is certain that there will be significant costs, what are the institutional systems and processes that will manage this process. I suspect that that these cannot be handled as comfortably as the note suggests, within the framework of the reformed ECB as he proposes. Has there been a response to his note? Can it be posted?

Fitz.

petagny

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #25 on: October 13, 2011, 18:03:03 GMT »
Fitz,

I can't find any specific response to this particular article, but Prof. Sinn seems to have been setting out similar arguments elsewhere and here are two firm counter responses (from the same person):

http://economicsintelligence.com/2011/06/25/the-dirty-tricks-of-hans-werner-sinn/

http://economicsintelligence.com/2011/06/09/wsj-disparages-hans-werner-sinn-and-i-have-to-defend-him-partly/

Basicly refuting Sinn's claim that lending in Germany is being crowded out by Germany covering the external imbalances of weaker members.

This may be the case, but it does not get around Martin Wolf's more fundamental argument that if Greece is to save its way to redemption then someone else, i.e., Germany, has to save less and consume more.

FitzFord

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #26 on: October 13, 2011, 19:42:13 GMT »
petagny, Very useful clarifications. My instincts were nudging me to a position that the argument he was putting forward could not be so straightforward a case, as these issues of money supply, demand and management are rarely straightforward, but as I was focussed on internal machinations and on the design, impact and mangement issues, I was anxious to find out if I had missed a critical argument. My cynicism has been restored! To return to the crux of my concern, this reveals one more facet that is institution based and a possibly predisposed outcome shaped the underlying analysis.

Fitz.

John Short

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #27 on: October 19, 2011, 05:28:31 GMT »
£250,000 up for grabs from Lord Wolfson to come up a roadmap for an orderly break up of the €.  Aimed at academic economists but methinks may be a nice earner for Reg as he waits in the line for a fare - maybe he should frequent the university areas and pick a few brains, but then again he may get too many opinions so best stick to his own ideas. 



http://www.policyexchange.org.uk/
« Last Edit: October 19, 2011, 13:11:42 GMT by John Short »

petagny

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #28 on: October 19, 2011, 07:16:40 GMT »
Brits sticking their noses in where they have no business or sensible contingency? I'm inclined to the latter: it seems certain that even in the darkest recesses of the Bundesbank this possibility is not being considered in any technical detail, because if news leaked - kerboom!

'Orderly breakup' seems almost impossible - would Lord Wolfson be happy with 'least disorderly'? He has apparently said himself that it's possible that no plan would emerge and 'That in itself would be quite revealing.'

At a technical level, wouldn't the most orderly (or least disorderly) breakup be for Germany, the Netherlands, Austria, Finland and Luxembourg to leave and form a strong euro block? Probably not politically feasible though.

One commentator, Ian Bremmer, in yesterday's FT suggests that Germany will never leave the eurozone (nor will Greece) since the political and economic gains are too great:

'When Germany joined the eurozone, it came with a price: abandoning the D-Mark for the euro. Happily, it turned out the price was a prize. The political benefits of the current situation are clear – Germany can shape fiscal integration on its terms, even if it comes with a steep price tag. Explaining this to the German public will not be easy, and it will be a long and winding road to European fiscal health. But this road goes through the eurozone – and Germany will pay top dollar for the driver’s seat.'

This in part answers Fitz's question about who picks up the bill. In the end, Bremmer thinks the Germans probably will, but on their own terms and after a lot of muddling through.

As for the costs of breakup to Germany, I read last week that UBS economists have estimated a 25% drop in GDP, mostly because their new currency would sky-rocket and their export driven economy would collapse.



petagny

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Re: EU Issues as Decentralization Institutional Design Weaknesses
« Reply #29 on: October 19, 2011, 08:40:49 GMT »
A colourful reaction to the news of the Wolfson prize from my (Dutch) wife: 'Who do you arrogant fxxxxxg Brits think you are!'; 'Mind your own bloody business.'; etc.

My 'only trying to be helpful' and 'we're all in it together' only seemed to cause the atmosphere to darken further!

 

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