EU Issues as Decentralization Institutional Design Weaknesses

[John Short]

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!

[FitzFord]

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.

[John Short]

Fitz,

Bon Chance

http://www.policyexchange.org.uk/


John

[John Short]

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.

[FitzFord]

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.

[petagny]

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.

[petagny]

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.

[harnett]

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."

[FitzFord]

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.

[petagny]

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

[harnett]

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."

[STONE]

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"."

[petagny]

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

[petagny]

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.

[FitzFord]

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.

[Napodano]

......
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'.

[STONE]

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).

[Reg]

'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’ )

[FitzFord]

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.

[FitzFord]

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.

[petagny]

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?

[FitzFord]

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.

[FitzFord]

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.

[petagny]

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.

[FitzFord]

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.

[John Short]

EB = SB = USE.  Discuss.

[FitzFord]

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.

[John Short]

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?

[FitzFord]

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.

[John Short]

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!