PFM Board
Medium Term Expenditure Framework => Decentralisation => Topic started by: FitzFord on October 27, 2010, 16:17:57 GMT
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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?
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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?
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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
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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.
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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.
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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.
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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.
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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.
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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!
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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.
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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) ......................
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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.
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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.
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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!
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'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
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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?
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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.
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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!
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"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.
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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
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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.
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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...
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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.
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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.
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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.
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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.
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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.
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£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/
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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.
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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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Last Wednesday at dinner in the Tavernata in Tirana where 5 members (4 different nationalities) of the PFM Board happened to be for different reasons this topic was discussed in depth. The conclusion was that if the planning had to be done for this it would have to be so secret and announced as a fait accompli and the likelihood of that happening was zero. The conclusion was that it needed to be fixed - break up was not an option!
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petagny, from this safe distance from your wife, I would argue that you Brits had the good sense not to get involved in the Euro, recognising the systemic institutional weaknesses. (This may, or may not be strictly true, but it is a great answer that would quite likely result in your sleeping on the couch for a few nights!).
I don't think that there is a reasonably satisfactory method of dismantling the Euro zone. The benefits to existing members clearly outweight the costs. The real issues is how to distribute the interim losses until the problems get sorted out. To jump back on my hobby horse (which is bucking like crazy), the road to solution is to privately acknowledge that the institutional systems must be reformed and to have serious discussions outside the glare of media to determine what the systems should look like and what steps, in what order, would have the best prospect/least cost of getting there. This inevitably includes the political/governance system. A workable strategy would have to be crafted behind closed doors and the public discussion managed carefully to ensure that all key players can see the benefits, and promote them to their constituents. I was looking around for a modern Machiavelli until I recalled that I recently read that the original was actually a good guy, possibly writing bitingly (and maybe bitterly) about the then current political environment...
Fitz.
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Fitz,
Bon Chance
http://www.policyexchange.org.uk/
John
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As a start I would send all the European politicians to a two-year sabatical and get us economists in power.
There is an interesting article in the Times Modern section of yesterday (20 Oct Times (of London) by Joe Joseph with front page header "Their guess is as good as yours - why economists can't agree on anything." The header for the article is "It's the economists, stupid" and is not particularly nice to the profession's ability to guide us through the politicians' mess!.
So I guess that is one person who would not agree with your proposition!
If anyone subscribes to the on line edition maybe they could post the link – I prefer some paper in front of me.
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I was hoping fervently that someone would post the Times link. I won't reveal my subscriptions (FT and Guardian) so that I will not be pidgeon-holed, but the Times, unfortunately, is not one of them. But I do think it is unkind to blame economists - who are professionally required to at least appear rational - for the failing of politicians. Politicians have their place, of course, and it is an important one. Among their responsibilities is to interpret the will of the people; now how many of you would want to undertake that? Speaking of politicians and economists, what do you think the most recent agreement/plan that has the world financial markets erupting in relief? Where sre you placing your bets?
Fitz.
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Do yields on Italian government debt sales the day give some idea of underlying market sentiment? I suppose we can at least be heartened that eurozone-leaders do now seem to realize the seriousness of the crisis even if this 'comprehensive' solution might not be the last one. For now I'm still holding on to my dollars though.
Interesting article by Wolfgang Munchau in today's FT, suggesting that the reforms that will be needed to save the euro could be incompatible with the continuation of the wider union.
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And in the same paper today, Willem Buiter's take is that it will be the ECB that finally has to come to the rescue by buying new issues of sovereign debt from insolvent and liquidity-strapped euro-zone members. He says that 'The choice, sometime in 2012 or, at the latest, 2013, will be between a collapse of the euro area and large-scale quasi-fiscal abuse of the ECB.' and 'Using the ECB would be opaque, quasi fiscal, off-budget and off-balance sheet for national treasuries...So the ECB solution will be adopted in the end.' Buiter has always believed that the euro-zone will muddle through somehow. It's hardly an encouraging prospect though, but probably better than the alternative.
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Methinks Petagny's Buiter quote is on track with respect to the ECB.
Chomsky Quote from last Saturday (note the item in bold!)
"Europe is facing quite severe financial problems, that is no secret, that are in part traceable to the relatively human approach towards integrating the poorer countries together with the richer nations. Before the European Union was established and the poorer southern countries like Greece, Portugal and Spain were brought in, there were efforts to made to reduce the sharp differences between the rich advanced countries and poorer ones – so that northern European workers wouldn't have to face competition from an impoverished and exploited working class in the south. There was compensatory funding and other measures, which – of course – didn't eliminate the gap but removed it sufficiently so that the poorer countries could be brought in without a very harsh effect on the rich northern ones.
"Europe is now paying the price of its relatively humane approach and its failure to deal with some very serious problems such as the extraordinary independence of the European Central Bank and its religious dedication to anti-inflation policies – which are not the ones that should be followed at a time of decline and recession. Europe should be doing the opposite like the US where the policies are somewhat more realistic."
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petagny, I am in agreement with the fundamentals of Munchau's analysis but depart on the conclusion. As a non-European that is dangerous for me to do, but I think it is worth the discussion. I have argued that the solution requires a genuine United States of Europe and this is essentially Manchau's view. Where he differs is that he says it will never happen because the non Eurozone members will not buy in. I would argue that this is the best time for them to buy in because they would have the most leverage in bargaining for the systemic changes thay would want. And, I think thay would get most of what they want because they are in the stronger position at the moment. They are not immune, of course, but they are much further from the abyss, and just about everyone knows it. But, more important, fixing the problems in a bargain that saves the union would ultimately strengthen the union both economically and politically. In my view, the real question is if they have the political skills to pull this off. There Munchau may have a better read. Buiter argues that the solution can come within the existing structure. I will read him again, but I am not persuaded.
Fitz.
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Fitz,
Any guess as to what the Greek Prime Minister's game plan is? Seems like he is taking us dangerously close to a Lehman Brothers moment. Is this where technocratic solutions meet with political reality?
Petagny
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This from Larry elliot in the Guardian which seems to explain Papandreou's game plan quite well
http://www.guardian.co.uk/business/2011/nov/01/greece-referendum-eurozone-crisis
"Papandreou, however, has two things going for him. The first is that while 60% of Greeks oppose more austerity (and the wonder is that the figure is not higher), 70% say they want to remain in the single currency. The fact that there is no real appetite for having the drachma back means that a referendum could be won. Electorates are notoriously conservative when it comes to plebiscites: they tend to opt for the status quo, and in this instance the status quo would mean swallowing the onerous bailout conditions rather than taking a leap in the dark.
The second card Papandreou has to play is that Greece is now a bigger problem for Europe than Europe is for Greece. The short-term outlook for Greece is going to be bad inside or outside the single currency, but the balance of risks is different for the other 16 members of monetary union. For them, the calculation is simple: would it be better to cut the Greeks some slack in order to prevent a disorderly default creating a domino effect across the eurozone? Or should they take a tough line, threatening to cut off all support in the event of a no vote? That is what is known as a no-brainer.
Why? Because the events of past 24 hours have made much clear: the sovereign debt crisis is getting more serious; the markets will remain turbulent; last week's rescue package is a dead letter; the chances of a euro breakup have increased.
All this is pretty obvious. What is perhaps less obvious is that Greece now has immense power as a result of its predicament. It has the rest of the world by the short and curlies."
And here's one from bookmaker William Hill: http://www.williamhillmedia.com/index_template.asp?file=17986
"WILLIAM HILL have slashed their odds for one or more countries to leave the Eurozone and revert to their original currency before the end of 2012 from 5/2 to 11/10 following news of the proposed Greek referendum. ‘Political punters are now betting that at least one country – probably Greece – will be out of the Euro before the end of next year’ said Hill’s spokesman Graham Sharpe.
WILLIAM HILL…ONE OR MORE COUNTRIES TO LEAVE EUROZONE BY END OF 2012 – 4/6 no; 11/10 yes."
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Europe just lost face
From BBC News...
"China's official Xinhua news agency called on EU leaders to persuade Greece to "drop the referendum idea" or help them find a "better solution to their political embarrassment"."
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It will indeed be difficult for Europe to promote democracy around the world if the referendum in Greece is suppressed, but isn't there an important distinction to be made between representative and participatory democracy? Just how would the referendum question be phrased to reflect the different facets and risks of alternative courses of action?
Following on from the previous posts on whether economists are to blame for the crisis, here's a good discussion between George Soros, Howard Davies and DeAnne Julius. Soros thinks that on balance the eurozone will probably not break up, but the cost will be a prolonged depression. Julius forecasts martial law in Greece in the not too distant future! Davies mixes his metaphors.
http://www.bbc.co.uk/programmes/b016bhsr#synopsis
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In partial answer to my own question (see previous post) I just read that Greek constitutional lawyers have advised Papandreou that it would be difficult to have a vote on the rescue package itself and that a vote would have to be on an issue of broader national interest, like euro or EU membership.
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Forgive the revealation of a misspent early liberal arts education, but I cannot help but phase my current questions as follows:
1) does the current Greek tragedy of Papandreou's fall fit within into the category of its original meaning of "the untimely end of an unfortunate, good man"? He can hardly be blamed for creating the circumstances of years of disasterous policies and questionable bookkeeping that brought about the current crisis, and he may have salvaged the best outcome for the long term benefit of Greece. So what is the next act in this part of the play? Any predictions?
2) Does Berlusconi fall on his sword, as his ancient predecessor did, or does he follow another predecessor and fiddle...? The present day assessment being talked about in the New World is that the solution is a "Technicial Cabinet", i.e., one composed of technicians who will devise (and implement?) appropriate policies for a rescue and redirection of Italy before the walls come tumbling down and afterwards handing back control to the politicians. Names are being mentioned for this Cabinet, in whom great confidence are being expressed. How feasible does this appear to you who are closer and more immediately affected by the potential outcomes?
In the New World, by-the-way, the previously-thought successful exercise in debt default in the country that is often touted as most European-like in culture (?) - Argentina - is now showing signs of cracks in that image of success. It seems pretty certain that Government-published inflation rates are hugely fictional, and attempts to publish objective assessments in the country is meeting with criminal persecutions...
Fitz.
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......
2) Does Berlusconi fall on his sword, as his ancient predecessor did, or does he follow another predecessor and fiddle...? The present day assessment being talked about in the New World is that the solution is a "Technicial Cabinet", i.e., one composed of technicians who will devise (and implement?) appropriate policies for a rescue and redirection of Italy before the walls come tumbling down and afterwards handing back control to the politicians. Names are being mentioned for this Cabinet, in whom great confidence are being expressed. How feasible does this appear to you who are closer and more immediately affected by the potential outcomes?
.....
Fitz.
In Italy we experienced this handover to technocrats in the past when there was the storm on the EMS (European Monetary System) in 92-93. At that time national currencies were pegged to a nominal value band but they had the chance to go out of it temporarely. Italy did for a while and then a Government run by technocrats imposed a 6/1000 taxation on all bank deposit accounts.
The point is that these technocrats can contain the contingecy crisis but then the politicans are coming back and need to do the hard work anyway to redress the economic and financial fundamentals in the long term. Italy has proven not to have this type of 'statemen'.
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The local governments fail so the centre intervenes to correct the situation by "appointing" management. Normal local democracy service will resume shortly (after appropriate institutional design strengthening of arrangements 'twixt centre and subsidiary tiers).
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'Allo it's me again
Saw your post Fitz – I don’t 'ave a liberal education neither but I makes up for it by using slack time in the cab and dreams of winning Mastermind* to take me to my copy of Seutonius (NoW history correspondent in ancient Rome I think – certainly poisonous enough) and to a quick SMS or three to Piero-Carlo (me taxi driver mate in Rome who says there’s not much trade there either).
From what I see…. if Silvio is Nero the fiddler (actually ‘lyre’) then it don’t look good for a while.
How Nero got ‘resigned’ all started ‘cos a geezer in Gallia gets rude about his fiscal policy (yeah, really), so Nero gets peeved and tries to get a geezer in Germania(!) to ‘sort out’ the geezer in Gallia. The geezer in Gallia asks his mate in Hispania to help out. The geezer in Germania backs down: two against one ain’t fair. That does the trick for a while: Nero ‘resigns’, but ‘chaos ensues’ (Wiki said that). There’s 3 further changes of government in less than a year: The Gallia geezer takes control and botches it, so the Hispania bloke takes over and then gets ‘redirected’ by Germania. Germania lasts a few months more but then get’s ousted by a geezer that’s dealing with things in the middle east who steps in an’ it all gets sorted.
Now, if Silvio is Nero, then Sarko is the one that’s being rude about his foreign policy; Silvio hopes Merkel will deal with Sarko; but Sarko gets Zapatero (when he’s free) to help; Merkel grumbles but doesn’t want to take them all on; Sarko will look for a better job in a few months and then mess up; Zapatero will have a go; Merkel will (er, invade…) and the praetorins/technos will ask for… er, Blair.
What did Winston say about history lessons?
Seutonius doesn’t do appendices wiv General Government balance sheets for the period so we don’t know how long it takes to get fings sorted out but I see there’s a new currency introduced 200 years after Nero/Silvio resigns.
*(parochial footnote - or Britain’s got Brains as it should be called now that we’ve done away wiv subtleties like ‘knocking opportunities’ )
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Reg,
I suspect that your taxi is not a Ford, and that is a good thing. Henry’s low regard for history (…is bunk!), might have been revised by your explanation, but I would not bet on it. Europe, more respectful of the past, is more hopeful ground to recognize the lessons you are imparting.
Stone,
It is to be hoped....
Fitz.
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So now we have not 1 but 2 technocrat governments, and Chancellor Merkel is talking about strenthening the government of the EU. David Cameron objecting, obstensively because GB is not in the Euro. So far, all going according to the script we earlier discussed. What's next? Is the Conservative PM positioning the UK for greater leverage in the next round of discussion of the Greater Union, or does he truly believe that the UK can stay outside of the currency union as the reach of United Government is extended and deepened? What will be the demands of other players, especially those with less leverage? Is there a realistic alternative to going forward?
Fitz.
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One of Harnett's recent posts refers to a blog by Ed Harrison that neatly summarises the alternative to not going forward (at least as far as the 17 eurozone members are concerned):
http://pfmboard.com/index.php?topic=5044.msg15657#msg15657
What about the non-eurozone members? I see no alternative to different gradations of membership. Switzerland is often quoted as a country that gets many of the benefits of membership without being a member. Is there room for different levels of membership on a permanent basis? Not according to the treaties as they stand, but might this be a concession that Cameron tries to extract for not holding a referendum on any treaty changes Germany might come up with in the area of fiscal policy in order to save the euro?
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There is no doubt in my mind that the alternative to resolution is disaster for just about everyone. My view is that the ECB by itself, even with a US Fed Reserve or Bank of England mandate - which it does not now have, will not be able to pull these chestnuts out of the fire. It seems to me that even some very bright economists like Paul Krugman (I read his pessimistic piece in the NYT - http://www.nytimes.com/2011/11/11/opinion/legends-of-the-fail.html?_r=1&emc=eta1) are reluctant to concede that the political framework will need to change in order to give the technical instruments to even get a chance to work. Because failure is not a realistic option, I find it difficult to believe that the leaders of EU countries and affiliates are not preparing their negotiating strategies. Or am I an wide (or wild?)-eyed optimist?
Fitz.
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Here is one more voice predicting the (likely) end of the E. U. He is Nieall Ferguson, a Harvard professor who first predicted the collapse of the EU in 2000 in an article in Foreign Affairs, with Larry Kotlikoff. Has anyone seen any analysis that demonstrates the error of the perspective of which I have been guilty - that there are more net benefits existing or available to the EU members as a result of taking the Union to its logical next steps of a proper central government under institutional arrangements that I think I outlined earlier, than in leaving the Union? (If I didn't actually outline them, I can easily be nudged to do so!). I am relying on well recognized self-interest to save the day; someone with the requisite data could readily demonstrate with rigorous analysis, that there are enough benefits of various kinds to allocate satisfactory shares. It is difficult for me to believe that the individual countries are not already doing the calculus necessary for the negotiations. Am I being too optimistic (about rational self-interest) or not pessimistic enough (about bone-headedness)?
Here is the link to article in today's Washington Post: http://www.washingtonpost.com/opinions/why-eu-collapse-is-more-likely-than-the-fall-of-the-euro/2011/11/17/gIQAuY6wZN_story.html?wpisrc=emailtoafriend
(If this doesn't work, you can email me and I will use my privileges to email it directly to you).
Fitz.
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Ferguson seems to be predicting the end of the EU of 27. There could be a much tighter EU of the remaining eurozone members though. What he says is not inconsistent with my gradations of memberhsip. Countries like the UK could have some sort of associate status with no place at the top table.
As far as self-interest is concerned, I would expect the pressure to come from German manufacturers, if there is any sign of the crisis going critical and the euro going over the brink (for the moment the . Just think of the damage to competitiveness of a (much) stronger German (or northern bloc) currency! After a visit from the top brass at Mercedes, VW, Siemens, etc. one can hope to see Chancellor Merkel's attitude to quantitative easing by the ECB and eventual introduction of a eurobond to soften quite quickly (she is an astute politician after all and knows that jobs=votes).
Having an Italian head of the ECB is going to prove problematic though. He has to show himself to be more of a monetary conservative than the Germans and not to be favouring his own country in any way, i.e., by supporting unlimited purchases of Italian bonds (which as George Soros sets out in today's FT is the only short-term remedy). Draghi has already started setting out his tough stance, but when push comes to shove he will surely not be ready to preside over the death of the currency over which he is now in charge. He will have to turn on the taps! Wolfgang Munchau (see also today's FT) argues that the legal impediments to this may not be so great so long as it is in pursuit of a monetary policy objective, i.e., bringing long term interest rates down to a predetermined level.
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petagny,
I would argue for a different design feature for the new EU. Let's call it "Performance-Based Priviledges" (PBP). In this approach there would be less/ or no need for an associate status which has the disadvantage of potentially leaving the best performers off of the top table and thus is a disadvantage for the system as a whole. Within the system, there would be say, 4 tiers (not more, maybe 3, but not less); the top performers, based on agreed criteria, including governance and not limited to simply economic growth or size, but a more subtle and comprehensive set of indicators of sound management within existing constraints - would have more freedom of action and more overall responsibility in the Central Government; the poorer performers would have less scope for unsupervised action, but would have more access to assistance that would be designed to help them improve their management. (I have looked at some of the devils in the details and believe they could be exorcised). The aspect of this approach that attacts me is that it is primarily incentive-based and any punishment is more subtle in a systemic sense, and more self-inflicted in the public perception. As a result, its principles could be more easily accepted and the real fights (and devils) would be in the details.
Fitz.
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EB = SB = USE. Discuss.
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John,
I thought that it would be interesting to google your formula in the hope that I would find a printable and possible useful interpretation or starting point for a response. It is remarkable what this turned up in the 25 pages (there seemed to be no end) that I clicked through. Included was a pornographic site (which I didn't visit) and an Oxford Diocesan Guide use. I did find one that might have been pertinent. It was an Oracle.com download on "onfiguring Trading Returns". Would you care to give an elaboration that is printable for the eyes of those of delicate disposition (say, members of the Oxford Diocese!).
Fitz.
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EB Euro Bonds
SB Stability Bonds
(which the proponents are giving as another name for EB)
Both announced yesterday and followed up today as the solution to the European crisis
USE United States of Europe
Germany is resisting on the grounds that it will have to underwrite them as it does not believe that the necessary fiscal and structural adjustment will be carried out by those that need to. (Incidentally there is a lot in the UK papers (last Sunday Times and today’s Times) on the success of Ireland's fiscal and structural adjustment - albeit at a cost in terms of increased relative poverty and migration).
If the formulae work, where will the capital of USE be? Surely not Brussels?
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There is a fascinating story in today's Washinton Post: http://by170w.bay170.mail.live.com/default.aspx?wa=wsignin1.0#!/mail/InboxLight.aspx?n=1082308166!fid=1&fav=1&n=914475735&mid=9868d0d0-1796-11e1-8ff5-00237de4a69c&fv=1. It focuses on tax evasion in Italy, but includes a table with all the EU countries, all of which have higher levels of tax evasion as a percentage of GDP than the US. I was flabbergasted. Italy is actually about the median at 21% between Bulgaria at the top with 32% and Switzerland at the lowest at about 8%. In the US, the estimate is 7%. (The chart is part of the attachment). Perhaps someone from the Revenue side of the PFMBoard could enlighten us about what would be considered an efficient rate of evasion as a percent of GDP? I must say that I am becoming more enthusiastic about my proposal for a USE (thanks for the explanation, John!). Let me explain why. A couple of years ago, as part of a paper, I reviewed the extent to which performance measurement of government departments in the OECD was used in the determination of resource allocation to these departments. I learned that almost all OECD countries spent a significant amount of public resources on performance measurement. A-hah! So how do the results affect the allocation of resources between Ministries/Sectors? The answer turned out to be that the impact is - ZERO! As in NADA! (By the way, the EU is using performance measurement in at least one developing country aid program, to determine how much funds they get!). But to return to my original focus - tax evasion - I think that there is a lot of opportunities for consultants and academics out there, should the EU actually becomes USE. Let us suppose that one of the performance standards by which countries would be categorized is tax efficiency. Years of work defining appropriate conditions would ensue!
Fitz.
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Fitz – a very interesting question. I suppose the issue of tax evasion or indeed too small a take has to focus in the former on two elements – tax policy and tax administration and adding in the structure of the economy to get the third.
There are various posting relating to these elsewhere on the Board– failure (or lack) of tax policy in Ireland and ineffective tax administration in Greece allowing large scale evasion – are two from memory.
The solution is clearly in the design of both to maximise tax revenues while minimising economic distortions. The Tax section on the Board has a lot of material on policy. A recent PEFA publication addresses tax administration comprehensively.
http://siteresources.worldbank.org/PEFA/Resources/Vc-Final-version-May-27-2011-PEFA-TaxAdminFeasibilityStudy.pdf
I suppose the answer to your question is zero or near to zero if policy and administration were designed and implemented effectively!
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Fitz, a very interesting comparison of the grey economies of European countries. They show how perceptions can be wrong: I would not have put UK and France on a par and Germany slightly higher than both. I would have put Romania and Bulgaria as the worst performers though!
I presume the European average is an arithmetic mean and not weighted: the bigger economies tend to perform better.
Improving tax administration and compliance is clearly not going be the way round the deficit problem for the USA. Remember why Al Capone was finally locked up!
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The Wall Street Journal is reporting that France and Germany are looking at ways of speeding up fiscal harmonisation through bilateral agreements rather than lengthy treaty changes.
http://online.wsj.com/article/SB10001424052970204630904577062592535969680.html?mod=WSJEurope_hpp_LEFTTopStories
To quote the article:
'The precedent that euro-zone governments are considering is the Schengen agreement, under which a subset of EU countries scrapped passport controls at their mutual borders. The EU treaty allows countries to engage in "enhanced cooperation" if at least nine countries agree, circumventing the need for a unanimous treaty change among all 27 EU members.'
Also today's FT, Wolfgang Munchau is saying that there are only a few days left to save the euro. So far, the markets are not as pessimistic as him and the euro is up very slightly against the dollar. No doubt the clever money is poised for a quick exit if armageddon should arrive (and the very clever money is long gone). It's a bit like a game of musical chairs, waiting to see who will be without a seat if/when the music stops.
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It's hugely symbolic for these words to have come from a Polish foreign minister yesterday:
'What, as Poland’s foreign minister, do I regard as the biggest threat to the security and prosperity of Poland in the last week of November 2011? It is not terrorism, and it is certainly not German tanks. It is not even Russian missiles, which President Dmitry Medvedev has just threatened to deploy on the EU’s border. The biggest threat to the security of Poland would be the collapse of the eurozone.
I demand of Germany that, for its own sake and for ours, it help the eurozone survive and prosper. Nobody else can do it. I will probably be the first Polish foreign minister in history to say this, but here it is: I fear German power less than I am beginning to fear its inactivity. You have become Europe’s indispensable nation. You may not fail to lead: not dominate, but to lead in reform.'
These words are both an indication of the success of the European project and a measure of the scale of the peril it now faces.
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Petagny,
Thanks very much for posting the Polish Minister's comment, and I think your comment is spot-on. Obama is now weighing in on the world-wide consequencies of EU's failure to act expeditiuosly. (Given the example of the US Congress....). So far, European commentators I have read seem to emphasizing short-term solutions. The loudest voices on the subject of the euro in the US are business interests, and with their usual far-sightedness, also want short-term solutions, as well. Is anyone in Europe articulating a medium-term objective and short-term steps/strategies to slow the rush to a train-wreck while the medium-term strategy is being flushed out and negotiated? If there is not, would the PFMBoard practitioners - from the various topic areas - like to enter the fray? This may be a useful way of diverting frustration as we watch the potential disaster loom larger...
Fitz.
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One for Reg ... it occurs to me that collective deficits in the EU could be resolved through creation of a USE with common language (as well as a central fiscal authority etc.). Dispensing with all that translation .... might save a few forests too. 'Ave you had that Jonathon Porritt in the cab lately ... ?
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Today (Dec 1, 2011) the Washington Post is replete with reporting and discussion on the future of the EU and Euro. Actually the public (ie newspaper) discussion is catching up with our discussion on the PFMBoard - alas, without attribution. As the WP is available online, I would recommend reading today's issue. http://www.washingtonpost.com/ . I also would recommend going back a couple of days (11/29) to Ezra Klein's Wonkbook posting of that day. Among the interesting bits in today's paper are reports on UK's (i.e. Cameron's) position and a report titled in the printed version of the paper "Euro Zone's fate now on the table." On the Editorial pages is a piece by a former Bush II official (on International Economic Affairs), Daniel M. Price, on "Saving the euro and the E.U." which notes that the USA began with the same attempt to avoid a giving real authority to the Federal Government - a fiasco which lasted from 1777 to 1789, before coming to their senses (my editorial comment). This day's reporting and analysis should spark some discussion(?) in Europe ...
Fitz.
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Fitz - it's happening! Slowly but surely we are watching the big guns of Europe move towards fiscal union. Sarkozy last night and Merkel today have prepared the ground for the issuance of some form or other in next week's summit.
Last night Sarkozy talked of a "fiscal compact" and today Merkel said:
"Anyone who, a few months ago, had said that at the end of the year 2011 we would have taken very serious and concrete steps towards a European stability union, a European fiscal union, for introducing such drastic intervention, would have been considered crazy.
Now, this is exactly what's on the agenda. We're almost there. Of course, there are difficulties to be overcome. But the necessity of such action is widely recognised. We're not just talking about a fiscal union but starting to create one. I believe you can't overestimate the importance of this step."
So the devil will be in the detail - what happens if countries' budgets are not deemed satisfactory?
Anyway - at last we see economic and political logic. How can you have a Euro without fiscal (and by implication political) union?
What's more, this may be on time to see no casualties in terms of countries falling out of the €!
Anyway - Fitz, like you pointed out (thanks Daniel M. Price), this is reminiscent of 1777-1789 in the US. Maybe the process to instate fiscal union in Europe will take that long!!!!
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OK, something's happening, but do the players mean the same thing when they talk about 'fiscal union'? Here's Gavyn Davies's take on it in today's FT:
'On the “soft” side of the debate, it is suggested that there was no mechanism in the treaties for fiscal transfers between the strong and the weak members of the euro, so the latter would receive no compensation for the disappearance of their ability to remain competitive by devaluing their currencies, or for their inability to cut interest rates during recessions. Lately, the “soft” side of the debate has added a new argument, which is that the ECB should assume a “lender of last resort” role in government debt markets, thus preventing self-fulfilling runs on sovereign debt. As a broad generality, France tends to take this line.
'On the “hard” side of the debate, championed by Germany, none of these factors are given very much, if any, consideration. Instead, the flaw in the treaties is viewed as the lack of an effective mechanism to ensure fiscal discipline in the member states. The Stability and Growth Pact (SGP) was intended to limit budget deficits to under 3 per cent of GDP, and to reduce debt/GDP ratios to under 60 per cent. The treaties contained elaborate procedures to shift countries towards these objectives, but they were enforced only by peer pressure in the Council of Ministers, and they never worked. Therefore the “hard” line holds that new mechanisms are needed to ensure that the budget targets are in fact achieved, and that countries are penalised for failing to hit them.'
The soft argument implies movements to a 'federal' budget like the US. The hard implies binding rules preventing any inter-governmental transfers. We can expect rather different outcomes depending on which side of the debate comes through.
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petagny,
I agree with your assessment. The core issue with regard to long-term success is how errant countries are likely respond to the rules. My inclination is a staged process, with a both a soft and a hard option in place, but the sequencing would be first soft, then hard. Either one by itself has significant weaknesses: the soft option does not by itself deter the worse offenders, the hard option by itself is prone to generate unsustainable hostility without a solution that cannot avoid immediate expulsion. A sequenced approach would apply community moral pressure that would sustain an isolation of offenders and a greater willingness to go to the next step without jeopardizing the cohesion of the whole. The criteria for each step would need to be clear and unambiguous, and that is more likely to be the case if the process appeared clear and fair, rather than either weak or draconian. Finally, that framework would be more likely to be agreed upon, with these conditions. My lingering concern is the absence from the table of the non-euro members of the EU. When are they going to be drawn in?
Fitz.
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Fitz
Drawn to the table or drawn into the €? It appears that Cameron is already making his views known to Merkozy. As for being drawn into the €, I admire your forward thinking! Let's let the dust settle after friday's deliberations before even contemplating that. Surely it's more likely that there will be members who leave the € or are drawn into some kind of € light along the 2 speed thinking that you mentioned. Methinks its going to be a long time before we see the political and fiscal union that a single currency demands, together with an ECB as a lender of last resort, and only then will the likes of UK, Sweden and Denmark etc. be even tempted to join up.
But as Harold Wilson said: " A week is a long time in politics", so watch this space!
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I just love the 'Merkozy' moniker!
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Here's an interesting article in the FT explaining how Germany is already paying for the euro crisis:
http://ftalphaville.ft.com/blog/2011/12/06/782821/how-germany-is-paying-for-the-eurozone-crisis-anyway/
It's based around the following article on the Vox site (already identified by Napodano as a useful resource):
http://www.voxeu.org/index.php?q=node/7391
It addresses issues already raised by Martin Wolf in the FT and also gives an insight into how the ECB works through the decentralised national central banks and the Target2 system. Getting my head around the arguments really makes my old brain hurt, but I think it's important. As I understand it, the argument is that the Bundesbank may be running out of quality assets to sell in order to make loans to the other central banks, leaving the euro vulnerable to speculative attack á la Black Wednesday. The options of selling gold or foreign exchange reserves seem unlikely to be acceptable to the German public. This is the conclusion from the Vox post:
'Up to now, Bundesbank loans have allowed GIIPS central banks to buy government bonds without a corresponding increase in the monetary base of the Eurozone as a whole – ie, without the ECB printing more money (after an expansion in 2008, the monetary base returned to trend growth). Before long, however, the Bundesbank’s stock of domestic assets is going to hit zero, and it is highly unlikely that it will agree to sell its gold or borrow more in private capital markets. At that point, the Bundesbank will not be able to lend more funds to the Eurozone TARGET mechanism. As a result we are heading towards the multiple equilibria zone in which beliefs of a breakdown of the Eurozone are self-fulfilling. In such a situation, market participants may transfer funds from financial institutions in fiscally weak countries to other ‘safe’ countries like Germany. In tranquil times, such transfers can be done seamlessly through the TARGET mechanism of the ECB. However, if a critical mass of agents were to engage in such capital flight away from fiscally weak countries, the TARGET system would be overwhelmed. In principle, a speculative attack could occur within a day, and the ECB would have to assume all of the marketable securities from countries that suffer the speculative attack. Since the ECB has a relatively small capital base, it would not be able to purchase a large amount of assets from countries that suffer the attack.
In Act Two of the unfolding Eurozone drama, the new measures might include the ECB printing more money, the EU announcing the issuance of Eurobonds, or the IMF extending credit lines to strapped governments. The motive of such a policy response is to prevent a speculative attack and induce a shift to the good equilibrium. These actions will buy some time for economic and fiscal reforms to take place. However, as previous experiences suggest, if reforms do not take place, these measures may be very costly to the taxpayer (see Sachs et al 1996).'
Any practising macroeconomists/monetary economists out there who can confirm or pick holes in the above arguments?
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Just for a laugh - courtesy of the Times
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I was hoping that a macro/financial markets expert would respond to petagny's arguments, but so far none has apparently dared to enter the fray. I hope we can induce a response soon, before the questions change again. Today I was enjoying the comic relief provided by harnett, until I read an article from this afternoon's (DC time) New York Times. Essentially, it argues that Cameron has painted himself into a corner where, no matter what happens, Britain loses. Comments? Here is the link: http://www.nytimes.com/2011/12/08/world/europe/britain-suffers-as-a-bystander-to-europes-crisis.html?emc=eta1.
Fitz.
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And I think today's news shows that the NY Times was right. Britain has effectively suffered a self-administered knock-out blow that will banish it to the ante-rooms of influence (forever?) and Sarko got what he wanted while once again exposing 'perfidious Albion'. Pity the EU has misdiagnosed the problem and come up with the wrong solution: apart from Greece, just how many of the countries currently in trouble were actually in breach of the Mastricht criteria prior to the outbreak of the financial crisis? Closer fiscal union, yes! Coordinated fiscal stringency, no! This will not resolve the imbalances in the system (balance of payments/savings), except in the long-run, when we're all...dead. Now, who said that?
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Politocks, politocks, politocks,
Sorry it's late but I have had some non-economocks, friends asking me some searching questions and this is the best I can do late on a Sunday with the school bags to sort out for tomorrow...
Fitzford said it was all politics and he was right. Cameron in a corner - for sure: 'twixt a rock and a hard place with the irresstibles (sic?) and immovables pushing and spinning the swings and roundabouts whilst the slings and arrows are doing what they do. Europe for the Tories is the repeal of the Corn Laws revisited, damned if you don't and oblivion if you do. For Teflon Dave: (John Butcher always said you couldn't put a glove on him - and so that is why he would be Leader - he was right up to that point - he never suggested that events wouldn't mark him, thereafter) this is where it gets a little sticky...
So, a Tory PM dealing with a Mittel-Europa wanting to pursue a Karolingan desire for further centralisation (sorry Fitzford I still don't agree with your view that the EU is about decentralisation - one of us is making a categorical mistake, and if I'm wrong I"d be happy!) he can only say no. Why? Well he's a leader of the Tories - broad church them, like may other parties. In a no win situation you minimise damage. 26 of 27 want to say yes. To what? Sorry. We should have read the Maastricht treaty (that's all JB asked!) and understood what 3 and 60 meant and, er, ....yes ,well... we should therefore have had a strategy for going from > 60 and>3 to to <60 and <3 (can't find the less than or equals sign) without civil strife over an "acceptable" rate of pension benefit decilne and/or embarrassing lack of aircraft carriers in the southern/eastern Mediterannean.
Do you need a further treaty? Well yes perhaps, if you have some Augustinian vision of the virtue of having the the willpower to embrace fiscal chastity but will naturally procrastinate unless otherwise guided by Rome or some higher authority (see Holy Roman Empire reference earlier). Dave is a Reformation child and so has worked out that damage limitation involves: keeping George's (hair) shirt on; keeping Liam-the-peeved happy (despite starvation of the peasantry of our Isles); hoping that the Confederation of British Industry will take the view that a solid work ethic and an exchange rate of 1.17 will keep them focussed; praying that Nicolas and Angela set up house together in Aachen/Aix la Chapelle; hoping that everyone else will decide that another Treaty is not worth the effort and that Maastricht will do; and let's see what Olympian bread an circuses do in 2012.
Back to those school bags...
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Stone, Your posting was delightful and penetrating as usual. I do want to clarify my position, however, before pecking on the wounded bird trying to fly wingless. When I classify this situation as an institutional failure of a decentralization system, I am arguing that what the EU has been trying to do since its inception is to reap the benefits of a system of governance for which the real world historical model is one of a decentralized state ala the United States of A. whose origins were quite similar. The typical model is a monolithical state that devolves powers to its parts, but there have been other models where smaller states have agreed to come together to make a larger entity (Hungary?). The EU enterprise, I maintain, will not succeed in this partial framework it has adopted, or any jerry-rigged version of it. Now the enterprise may well fail because the partners cannot be pursuaded to play nice (because they have such different views and/or objectives/ or cultures) but they can only succeed by adopting a model where there is an overseeing authority that can exercise independent, collective power in a way that is within accepted rules. This does have something to do with politics....writ larger than each member's. Of course, any member, or group of members, may choose to cut off their noses(s) to spite their face(s), but that does not change the principles necessary for success. However, to return to our current tragi-comedy, I am attaching links to a few items that appeared in the Washington Post this weekend. I won't send the one (or did I already?) which reported on Sarkozy's snub - the ignoring Cameron's outstretched hand as he left the big meeting. (When will the children play nice?). There is another that I will try to find and send tomorrow:
http://by170w.bay170.mail.live.com/default.aspx?wa=wsignin1.0#!/mail/InboxLight.aspx?n=1632639276!fid=1&fav=1&n=1593866566&mid=fbc24393-243e-11e1-97ea-00215ad96bc4&fv=1, and
http://by170w.bay170.mail.live.com/default.aspx?wa=wsignin1.0#!/mail/InboxLight.aspx?n=1632639276!fid=1&fav=1&n=1593866566&mid=c8312417-243e-11e1-b308-00237de3e47e&fv=1
Fitz.
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Could this be David Cameron's 'Falklands moment'? One poll yesterday put 62% of the British people behind his decision and 19% against (I didn't see what the exact question was though!). As Mrs Thatcher found, and the pollsters will no doubt have reminded Cameron, if you're going to make the population suffer economically beyond the current electoral cycle (which the recent pre-Budget address confirmed), you need a substantial distraction. If this is that moment, it will certainly be less costly in terms of lives lost and since Britain probably couldn't actually defend the Falklands just now, it's probably better to have left that particular sleeping dog lie.
I wasn't aware of the rejected handshake. It seems like a perfect moment though, with both sides looking good in the eyes of their respective electorates.
Alex Salmond's (leader of Scottish National Party) reaction this morning is interesting. Could this be a move that splits two unions, one with a somewhat longer historical track record than the other?
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Fitz,
While the goal of USE may be analogous to the present USA, the starting point is somewhat different in that there are nation states that stretch back before 1492 and some of them may have been democracies (of sorts) or fighting for their independence from a dominant power. The motivation or lack of, for a USE may be somewhat different from the motivation of the fledgling states for a USA.
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Is Salmond searching the Holyrood archives for a copy of the Auld Alliance?
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Possibly a case for new topic but this can stay here for now...
As I understand it the new EU accord will allow the EC to review national budgets and ask for them to be reviewed. Now I guess that could mean an Office for Budget Integrity to be established in Aachen/Aix la Chapelle, of course. But it would be good to know how that will work in practice. The IMF does this with lots of countries, but that's not the right model. How does the USA deal with dodgy budgets in its member states?
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I do hope it is not as today's editorial in the Guardian has it....
... threats of "automatic consequences" for any government that falls foul of the rules. Picture Tony Soprano reincarnated in Frankfurt and you're not a million miles off"
after all what historical resonance would Frankfurt offer?
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US states can and do go bust. I'm not sure there is federal oversight of their budgets - wouldn't that be unconstitutional?
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Are the lenders to those states required to reassess their coiffures?
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After this explosion of gallows commentary, I will delay serious discussion from this side for at least one more day. But, here the news is more of the same; the markets and the analysts in the US aren't buying the current "solution", despite their fervent wish to have something to hang unto.
A quick answer to the question about the US Fed Gov reviewing the States budgets: they do not, but there are rules to which they must broadly adhere - States do set their own detailed rules - and can lose out on considerable Federal funds for specific, often jointly financed items, if they do not. It has been some time since a State has needed a Federal bailout - I can't recollect any, but US financial history isn't at the forefront of my fading memory. California is going thru' a difficult time a the moment, and there is no discussion of a Fed bailout. Tha means that States that create a mess generally have to clean up much of it themselves. Federal resources are always available to States for addressing natural disasters of a significant scale.
Fitz.
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Fitz,
Thanks for that - I'll lay off the gallows. I am genuinely interested in what this all means in practice and hope you can refresh you memory and so inform us as we grapple with what central government oversight of sub-national fiscal policy entails. California in difficulty would be an interesting case but if it reached epic proportion would the dollar tremble? Would Dakota sign up to harsher vigilance just to prove it was "Communautaire"? Would New England say no?
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If this is David Cameron's Falkland's moment (as I suggested in an earlier post), it seems to have happened entirely by accident. The Foreign Office seem to be briefing against the PM and putting the events of early Friday morning down to a completely botched negotiation by a bunch of amateurs, i.e., the Treasury! If so, Cameron's grandstanding looks like being costly (even if it's an electoral crowd-puller): the backlash is already starting with some papers reporting that pressure is mounting for the British chair of the economics and finance committee in the European Parliament to resign. One can understand why!
In the meantime, this is the most straightforward account I have come across of why the measures taken last week will not, of and by themselves, solve the euro crisis.
http://www.ft.com/cms/s/0/c2ce6cd4-24a3-11e1-bfb3-00144feabdc0.html#axzz1fe5KqPkt
In the article, Stephen King says
'The eurozone deal will fail because it offers no explanation of how, precisely, the German current account surplus will be recycled if the southern European nations head down the path of fiscal righteousness.'
Place your bets on how long into the New Year it will be before the next crisis meeting!
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Stone, I am not yet able to give you a constitutionally correct answer as that will require some more research. What I can say is that the Federal Government would be willing and able to bail out a State if it was necessary, but I suspect that it would be at the request of, or with the consent of, the State. California is such a major part of the US economy that it would certainly affect the dollar through the repercussions; it is for that reason that I believe that there is room for intervention. The other 2 speculations are intriguing...
petagny, thanks , I am sure from all of us, for this link. Rarely are the explanations so strightforward and cogent.
What would the winner get if we created a pool for this bet you propose?
Fitz.
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Stone,
Took a couple of days, but here is a summary of the US situation and a hint of some differences that the EU would have to confront is there was to be a US of E. First, the basic position of central-states budget: the Federal Government has no direct control over the budget of States, however, the Feds contribute approximately 40 percent of States resources, most of it tied in some manner. States could not fulfill their functions without these resources. Second, most states have in their own constitutions (not a Fed imposition) a requirement for balanced budgets; California has fudged that. Third, there is much greater integration of the State economies and the National economy; this is facilitated by Fed regulations and absolutely no legal constraints on labour mobility. The EU would need to either adopt similar (not identical, of course) policies or institute policies and systems to accomplish something similar, to the extent that integration is considered to be in the collective interest.
To all,
I have been trying to resist asking the following question in the interest of not seeeming to be taking sides, but I think it truly is a legitimate question: It appears the Chancellor Merkel would rather have essentially fixed rules dictate the behavior of EU member countries, rather than have governing bodies, working within agreed broad principles and parameters with measureable consequencies, determine how to accomplish the ultimate policy objectives of growth, relative stability, and consumtion, determine how best to achieve their objectives. It this regarded as a reasonable proposition?
Fitz.
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Will this fan the flames?
http://www.project-syndicate.org/commentary/feldstein43/English
But their wine was very good over the past few days.
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John,
I agree with you on the wines, and in general I agree with Feldstein's comments, except the statement that political union is not necessary. I do not believe that 17 individual countries and cultures can be expected to exercise ongoing discipline effectively within the current environment. That is asking too much, but maybe Feldstein has a Germanic view of discipline. There is only one or two Germanies among the 17 and I don't like the odds. Who wants to predict the timing and substance of the next crisis within this crisis? Shall we have a prize for the winner? If so, what?
Fitz.
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Italy - down the drain by end January. Its growth package will act against its austerity package and the markets will walk, next time it tries to enter the bond market the rate will be above tolerable levels (whatever they may be at the time) - too big to fail so who will bail it out or will anyone?
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The mood in the US with regard to the EU crisis seems to be changing - towards the worse. The emerging - probably temporary - consensus appears to include the view that the value of the Euro will stay in the range of 1 eu:$1.23 - $1.26, but more pertinent to our ongoing discussion is the rationale, apparently related to the parallel new issue of Hungary's impending violation of the integrity/independence of its Central Bank, that the EU is not going to be able to hold together. What I find disappointing, however, is how much of the focus still remains on the economic issues (the usual short-term anxiety) rather than on the broader questions we have been discussing about the overall institutional system, including governance across the (incomplete) union. What is the current view in Europe?
Fitz.
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I see that The Economist has both the initiation of a debate on Britian's EU membership and a piece on the development of the US Central Bank. What are your views on both these items? On the piece of the development od the US Central Bank, my response is: I think that the conclusion misses the point. The fact that it took 2 tries to get the Central Bank right does not mean that it was not necessary, and helpful to economic stability even in its imperfect formulation. Among the differences to today's EU crisis is that the international monetary system is now much more integrated both in its parts and as a whole. It is crucial to have a system that is built to these new specifications, now. Do you want Model T Fords on a superhighway?
Fitz.
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Attempting to get cross fertilisation from two popular boards - this and the current Fireside Chat with Matt - the latest post by Matt with reference to his article (Il)logics of Federal Budgeting would suggest that the model of the fiscal approach of the USA is definitely not one for an emerging USE as I understand Fitz to be promoting - or is Fitz just illustrating how the USA has dealt with a unified currency for quasi- independent Sates within the Federal structure? Nevertheless, a USE would have to have a budget system that addressed fiscal issues that the USA Federal budget clearly does not, judging from Matt's article.
http://faculty.cbpp.uaa.alaska.edu/afgjp/PADM601%20Fall%202011/(Il)logics%20of%20Federal%20Budgeting.pdf
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John,
I was not advocating the USA system for the USE as I am a firm believer that you design to the circumstances. Then you make institutional rules that fit the situation. The nature of the system that I think would work better for the USE is closer to what I gingerly mentioned early in the discussion. That had tiers, with specific responsibilities and privileges associated with each tier, and rules for moving between tiers. On an abstract basis (ie. without reference to circumstances) I actually think that the Australian system is the best designed, thought thru', and operated (that should start an argument!), but I wouldn't necessarily recommend it to any other country, as is, and I definitely don't think it would work for the EU. My basic USA/USE conceptual link is that the experience of the former in trying to manage multiple States' finances without a Federal Government is instructive for the EU. I think the principle for Federal Gov't holds.
I agree with you on the Matt/Fireside discussions....more, more, more!
Fitz.
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The new EU treaty, absent 2 - Is this building a Federal system without acknowledging it publicly? I have only seen the headlines. Will someone who has examined the details, advise us, please!?
Fitz.
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I plan to introduce a new topic shortly (and would encourage anyone with another burning issue to raise it), but I couldn't resist asking if you have read Goerge Soros' piece in the New York Review of Books. I would recommend it as providing a particularly interesting perspective and approach to solutions - short and long term.
Fitz.
NB: you can find the article at http://www.nybooks.com/articles/archives/2011/oct/13/does-euro-have-future/?pagination=false
Quote
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To resolve a crisis in which the impossible becomes possible it is necessary to think about the unthinkable. To start with, it is imperative to prepare for the possibility of default and defection from the eurozone in the case of Greece, Portugal, and perhaps Ireland. To prevent a financial meltdown, four sets of measures would have to be taken. First, bank deposits have to be protected. If a euro deposited in a Greek bank would be lost to the depositor, a euro deposited in an Italian bank would then be worth less than one in a German or Dutch bank and there would be a run on the banks of other deficit countries. Second, some banks in the defaulting countries have to be kept functioning in order to keep the economy from breaking down. Third, the European banking system would have to be recapitalized and put under European, as distinct from national, supervision. Fourth, the government bonds of the other deficit countries would have to be protected from contagion. The last two requirements would apply even if no country defaults.
All this would cost money. Under existing arrangements no more money is to be found and no new arrangements are allowed by the German Constitutional Court decision without the authorization of the Bundestag. There is no alternative but to give birth to the missing ingredient: a European treasury with the power to tax and therefore to borrow. This would require a new treaty, transforming the EFSF into a full-fledged treasury.
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Here's an article from the Independent suggesting that the universal austerity drive required to implement the fiscal compact will not work (and that the euro will not survive in its present form): it's not that fiscal responsibility is not important in general, but its not addressing the real problem of structural imbalances in the eurozone and across the board fiscal austerity is likely to make it more difficult to get out of what could become a downward deflationary debt spiral.
http://www.independent.co.uk/news/world/europe/the-experts-view-on-the-euros-future-it-doesnt-have-one-6298180.html
Here are a few key quotes from the economists/financiers/politicians interviewed:
Danny Blanchflower:'The fundamental problem that has not been addressed is that there is no growth plan for Greece. Even if you give them a new loan they have no means of paying it back.'
Gerard Lyons: 'And when you identify the wrong problem you get the wrong solution. Europe does not have a debt problem, Europe has a growth problem. Debt is high, but a debt problem can be contained by growth. If you address it from the beginning as only a debt problem then you get the wrong solution.'
George Soros: 'The trouble is that the cuts in government expenditures that Germany wants to impose on other countries will push Europe into a deflationary debt trap. Reducing budget deficits will put both wages and profits under downward pressure, the economies will contract, and tax revenues will fall. So the debt burden, which is a ratio of the accumulated debt to the GDP, will actually rise, requiring further budget cuts, setting in motion a vicious circle.'
Alistair Darling: 'A policy of austerity alone will not work – especially a policy of austerity which is imposed from abroad and decided upon by judges rather than elected politicians.
'People elect Governments democratically – you may not like the result but for the most part you’ll put up with it. But if economic policy has been imposed it becomes pretty nigh intolerable.'
The last point by Darling is important as illustrated by the Greek reaction to the German proposal over the weekend that the ultimate say on its fiscal policy be handed over to a technocrat in Brussels. How do the Irish feel about other Europeans getting sight of the budget before their own parliament? Can the eurozone states really be expected to pool sovereignty to the extent necessary to make a common currency work?
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I was wondering through the OECD Journal on Budgeting when I came across this from Teresa Ter-Minassian's paper FISCAL RULES FOR SUBNATIONAL GOVERNMENTS: CAN THEY PROMOTE FISCAL DISCIPLINE? OECD JOURNAL ON BUDGETING – VOLUME 6 – No. 3 – ISSN 1608-7143 – © OECD 2007
"Fiscal rules cannot be a conduit to fiscal discipline if political commitment is lacking; nor can they remedy poorly designed systems of intergovernmental fiscal relations. Fiscal rules, also, are not the only solution to improving the incentive structure faced by local politicians. However, under certain circumstances, these rules can provide a useful policy framework. The most effective rules seem to be those based on a broad political and social support. This underscores the need for a substantial investment by economic policy makers in educating the political class and the public at large, both before launching a fiscal rules framework and after its implementation, to foster adequate ownership by the society at large."
It then goes on to cite some country cases about how misbehaviour by sub-national governments is sanctioned ...
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The new EU treaty, absent 2 - Is this building a Federal system without acknowledging it publicly? I have only seen the headlines. Will someone who has examined the details, advise us, please!?
Fitz.
Fitz,
If you refer to the 'balanced budget treaty' I suggest you read two posts made by Marc Robinson on his blog, of the series 'the devil is in the details'
http://blog.pfmresults.com/wordpress/?p=143
http://blog.pfmresults.com/wordpress/?p=147 (attached is the text of the treaty)
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The consistency with which every "interim" measure or adjustment of fiscal rules have been largely - and quickly - debunked by technical analyses, has me wondering, yet again, if Germany and France, who are leading this exercise, have privately decided that these "solutions" are really only to buy time. Now Chancellor Merkel and President Sarkosy are forming a open cross-border political alliance for the latter's re-election campaign. You colleagues who are in Europe would have a better handle on this - what is the end game?
Fitz.
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My Apologies: I could not resist posting this link from the New York Review of Books.
http://www.nybooks.com/blogs/nyrblog/2012/feb/07/we-people-how-save-european-democracy/
Fitz.
PS. I am trying to speak to Roy Bahl directly (Email don't necessarily reach him if he is traveling) to invite him to participate in the 4Fs discussion.
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And I can't resist posting this!!!!
http://www.guardian.co.uk/world/video/2012/feb/22/greece-debt-relief-animation-video
hands up all those who are reassured ;)
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Thanks Paul, I hadn't opened it previously. Don't you just love it when these things are sorted out by sleep deprivation?
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Well things have gone a little quiet recently so I thought I'd spice up the spring with a video from Susan George: Maastricht to the new Fiscal Treaty - certainly puts the EU's decentralisation v centralisation into some kind of focus! Critiques of her argument please!!
http://www.youtube.com/watch?v=Eb4LY3BeBHY&feature=player_embedded
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harnett, as Instigator in Chief I wanted to wait for other comments before jumping in from across the pond, but apparently no one else seems willing to take on the formidable lady. I found her views, as presented, a mixture of plausible history, an interpretation of popular response to various events and options that has a certain credibility, but overall she does not propose a credible assessment of how to generate a meaningful solution. In all of this I sympathize with her. While I strongly suspect that there is a plausible mixture of arrangements and policies that would carefully parse the various interest that are at play, it is almost impossible to debate them in public with everyone shouting at once. This does encourage less than transparent and democratic processes to generate agreement. The backroom of Elders, who may understand how to put together an agreement, will invariably be unable to resist the temptation to lean heavily in the direction of concentrating decision-making power perpetually in the proverbial smoke-filled rooms. Wise men and women who have both a historical perspective and a vision of a truly workable future have not yet appeared on the horizon, so I expect the continuation of the least bad, temporary solution. Actually, I suspect than in that, Susan George, may agree with me.
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It is a pity that she has ignored the lax policy regimes and even laxer regulatory regimes that were in place that led to the collapse. It is also not possible to ignore inadequate tax administration in some countries that failed to pay for the expenditure that was being demanded. Perhaps if those were in place the deficit and debt targets might have had a chance though the one cap fits all exchange rate that was a political rather than economic creation has to bear the brunt of the inability to adjust to the new realities. If one is in a straightjacket, difficult to escape.
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John, The only modification I would make to your analysis is that the political creation is unavoidable, but that especially conditions the need for the institutional safeguards to manage the circumstances that would enforce sensible regulation and administration. Then well crafted economic policy would have a chance to work.
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Yes - and to be honest I was responding more to her incredible smugness!
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This is an administration notice:
This topic is becoming too long, eight pages. I suggest we lock it as PART1.
The next member who wants to continue discussion on this topic, should start a new topic with the name 'EU Issues as Decentralization Institutional Design Weaknesses - PART 2'.
Thank you for your understanding.