EU Issues as Decentralization Institutional Design Weaknesses

[FitzFord]

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.

[John Short]

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?

[FitzFord]

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.

[FitzFord]

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.

[John Short]

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

[FitzFord]

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.

[FitzFord]

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.

[FitzFord]

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
-----
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.
----

[petagny]

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?

[STONE]

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 ...

 

[Napodano]

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)

[FitzFord]

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.

[FitzFord]

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.

[harnett]

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

[STONE]

Thanks Paul, I hadn't opened it previously.  Don't you just love it when these things are sorted out by sleep deprivation?

[harnett]

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

[FitzFord]

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.

[John Short]

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.

[FitzFord]

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.

[John Short]

Yes - and to be honest I was responding more to her incredible smugness!

[Napodano]

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.