European Politics

Things Continue, `Till they Don’t …

The end game for the Germans, and the rest of Europe, in terms of resolving the current Eurozone crisis is pretty straightforward. There are four ways to deal with a financial crisis: devalue, default, inflate, or deflate. For any country in the Eurozone who transferred private debt from the banking sector to their public balance sheets, and thus blew a hole in their debts and deficits, neither inflation nor devaluation were options. That leaves default, which pushes the costs onto bondholders, or deflation, through domestic wages and prices via the public balance sheet, which places the costs onto taxpayers. For a host of reasons, as guardians of the Eurozone, as an inflation-averse savings-culture, we would expect the Germans to prefer austerity to expediency, and force deflation, but there are real and obvious limits to any such strategy, which is what I have found puzzling since the crisis began just over a year ago.
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After nearly a half century, the “Germany through Europe” bargain, intended to help Germany overcome the political and cultural legacies of World War II, has unraveled. In just a few years, Germans have demanded a rebalancing of the European budget, strict rules governing monetary union, have pushed Eastern European member states into the hands of the International Monetary Fund, and balked at a quick bailout of Greek sovereign debt. In short, the European free ride on the German economy is over.

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Kevin O’Rourke, quoted in extenso

A friend of mine has just sent me this link, in which Sarkozy is saying that it is unreasonable for us to maintain our low corporate tax rates while seeking financial aid from Europe:

“I deeply respect the independence of our Irish friends and we have done everything to help them. But they cannot continue to ask us to come and help them while keeping a tax on company profits that is half (what other countries have),” he said.

For a more inflammatory version of the same argument, by an influential French economist, click here. And I was struck on my last trip to France by how ordinary people there are making the link between the Irish bailout and our ‘dumping fiscal’.

There are lots of obvious counters to all this, but I think the more important point is that such responses are inevitable, given the European response to the crisis to date. As two recent articles point out (here and here), the real cleavage in Europe is between European taxpayers and bank creditors (with the ECB being a third interested party, as another body which could help to fill the holes which have emerged in the European banking system). But since the powers that be are ruling out bondholder haircuts and quantitative easing, the only cleavage we are left with in practice is the one between core and periphery taxpayers.

Of course ordinary French and German taxpayers are going to be angry at lending their money to an insolvent state with lower tax rates than their own. Why wouldn’t they be? Of course ordinary Irish taxpayers are going to be angry at having to pay for high interest loans designed to bail out foreign banks. Why wouldn’t they be?

And while ordinary Europeans get angry with each other, with unpredictable political consequences, capital walks away scot free.

It’s worth expanding the argument that I suspect Kevin is hinting at with his mention of ‘unpredictable political consequences.’ We have seen a lot of analysis from economists which points (correctly) to the inherent contradictions of the Eurozone’s shambolic crisis management strategy. Much less attention has been paid to the political fallout which is considerable. The bailout strategies seem almost purpose-designed to corrode popular legitimacy both in the states giving and receiving funds. If the prospect of a politically viable European Union isn’t quite dead yet, it’s haemorrhaging on the operating table, and the surgeon clearly has no clue what to do. We will be running a seminar on Germany and the EU next week – I have a short piece in it which talks to this at greater length.

Gideon Rachman wrote a somewhat arch article last week, suggesting that the US should give Julian Assange a medal for “inadvertently debunking decades-old conspiracy theories about its foreign policy.” I wasn’t really convinced by his argument (I am far from sure that he was fully convinced himself), but this Bloomberg piece perhaps suggests a more convincing justification.

Novaya Gazeta, the Moscow newspaper controlled by former Soviet leader Mikhail Gorbachev and billionaire Alexander Lebedev, said it agreed to join forces with WikiLeaks to expose corruption in Russia.

Julian Assange, founder of WikiLeaks, which publishes secret government and corporate documents online, has materials specifically about Russia that haven’t been published yet and Novaya Gazeta will help make them public, the newspaper said on its website today. “Assange said that Russians will soon find out a lot about their country and he wasn’t bluffing,” Novaya Gazeta said. “Our collaboration will expose corruption at the top tiers of political power. No one is protected from the truth.”

I’ve been reading Evgeny Morozov’s forthcoming book on how the Internet doesn’t release magically sparkling freedom-and-democracy ponies that transform autocracies into thriving civil societies etc, which has an interesting discussion of Russia. As Morozov notes, there is relatively little active censorship of the Internet in Russia. Instead, authorities rely on friendly websites that they can rely on to pump out useful disinformation. They can also lean on Russian’s widespread (and partially justified – if I had been the victim of Sachs, Shleifer & co’s experiments in creating a market in a vacuum, I would not have warm fuzzy feelings myself) distrust of information and policy prescriptions from the West, to prevent alternative accounts from leaking through from international media. The result is a country where the government is usually able to shape public debate with a high degree of success. Alternative viewpoints are not so much censored as shouted down.

But Wikileaks – precisely because the US government hates it so vociferously – arguably has much better street-cred than any number of Western-funded civil society grouplets. It doesn’t look like anyone’s idea of a US front group . The plausible result is that Russians may be more inclined to trust it than foreign funded media, or, perhaps, domestic news sources which are too obviously biased in favor of the government.

None of which is to say that such trust would be entirely justified if it is given. Precisely because Wikileaks seems independent, it is likely to present irresistible temptations to e.g. intelligence agencies as a laundry-shop for information and disinformation. Nor, for that matter, is Lebedev devoid of political self-interest. But if Wikileaks succeeded in either becoming a major news source in itself, or of transferring some of its legitimacy to news sources which relied on information from it, it would help inject a little diversity into Russian public debate. Not that the US government should be giving it medals still – this would obviously be self-defeating. But to the extent that the US wants to see some opening up of kleptocracies like Russia, it might, in the long run, tacitly end up preferring a world with Wikileaks to one without it.

A group of scholars at the Freie Universität in Berlin is distributing via E-mail and their website alarming information about downsizing of the EU research funding in the Humanities and Social Sciences. The EU is currently drawing up its 8th framework program, in which it decides how to allocate its money – to which fields, for what type of research, what the conditions are, etc. Apparently it is not only a matter of less money going to the humanities and social sciences (which, to the best of my knowledge, is already a small percentage of what the other sciences get; sadly I forgot the exact figure, but —from the top of my head—less than 20%). In addition, the ‘impact’ or ‘valorisation’ discourse/ideology seems to take hold here too, since according to the information which is spread by the scholars from Berlin, EU funding for the humanities and social sciences would be earmarked for more applied research, and to research that contributes to the competitiveness of the EU on global markets.

It’s the last week of term at my University, and I happen to have a heavy teaching load this term, which means I have no time to properly check this out. So consider this as the mere spreading of information and the opening up of space to discuss these issues in greater depth by those of you who know more about this, and/or have currently more time at their disposal to investigate this. I’ll invite some EU research directors to join the debate.

Live at Eurointelligence. An extract.

The reaction to the news that Irish taxpayers are to be squeezed while foreign bondholders escape scot-free has been one of outraged disbelief and anger. At the start of last week, it was possible to make the argument that ‘burning the bondholders’ was irresponsible, since it would inevitably lead to contagion, and the spread of the crisis to Iberia. That argument has at this stage lost all validity, since contagion has happened anyway. Besides, the correct response to the possibility of contagion was never to engage in make-believe, but to extend taxpayer protection to other Eurozone members as required. Swapping debt for equity in a coordinated fashion across Europe would show ordinary people that Europe is on their side; but like the PLO of old, the European Union never misses an opportunity to miss an opportunity. It could have provided a means of kick-starting a new post-crisis growth strategy based on investment in the infrastructures we will need in the future; instead it has transformed itself into a mechanism for forcing pro-cyclical adjustment onto countries that are already sinking. It could have led the way in reining in an out-of-control financial sector; instead it now embodies the discredited principle that banks must never, ever, default on their creditors, no matter how insolvent they may be.

I’m a bit surprised not to have seen anyone making this point, but one obvious consequence of the current situation in Ireland is that European integration (to the extent that it is driven by Treaty change) is dead for the foreseeable future. New Treaties – if they are to be passed, not only require unanimity, but have to pass through two veto points.

First, they have to get a majority vote in a referendum in Ireland. This is thanks to a legal ruling (the Crotty ruling) that Treaty texts which have constitutional implications (which any Treaty involving significant further integration obviously would have) require popular assent in a referendum. Given popular anger at the way that the bailout has been structured, I imagine that the chances of Ireland voting ‘yes’ to any new European initiative are close to zero.

Yet even if somehow the Irish people could be persuaded to say yes to some initiative – perhaps because it put in place a more equitable system of fiscal transfers in the case of crisis – it would have to pass through the second veto point – the German Constitutional Court. The Court has made it clear in recent rulings that it is not prepared to countenance major new initiatives that might e.g. shift responsibility for decisions over fiscal policy to the EU level. In other words – any more equitable system of economic governance is likely to be vetoed.

It is extremely hard to envisage Treaty changes that could get a yes vote in Ireland. It is next to impossible to imagine any new Treaty that could both get a yes vote in Ireland, and survive scrutiny in Karlsruhe. Hence – the process of ‘ever closer union’ through Treaty change is effectively dead. One can imagine other mechanisms of change (drift, policy incrementalism, ECJ rulings) coming into play, but they are unlikely to result in any very obvious changes except over the very long run.

Visiting London briefly, I’m struck by both the drastic nature of the cuts being proposed by the Coalition government, and the bitterness of the response. By comparison, the austerity measures being proposed by most eurozone governments seem both less regressive and more sustainable in the long run, and the demonstrations in response to be much more in the nature of normal politics, with an element of street theatre.

I haven’t had time for a detailed analysis, but a quick comparison of the eurozone cuts listed here, and the measures proposed by the Coalition seems to me to bear this impression out. Maybe it’s just lack of detail in the eurozone list, but (except maybe in Ireland) there seems to be nothing like the mass withdrawal of public services and the focus on punishing the poor for the crimes of the rich that is the hallmark of the Cameron-Clegg regime.

This, again, seems to me to cast doubt on analyses that focus on the role of the EU and the euro. As far as I can see, UK policy is essentially unconstrained by the EU and is driven by the demands of ratings agencies and the financial sector generally. On the plus side, the Bank of England has been more expansionary in monetary policy than the ECB, but it’s been equally supportive of fiscal austerity which is the main problem.

• My intended allusion doesn’t jump off the page as I’d hoped, but UK political and social discussion has, to this visitor at least, a distinct late-70s air at present.

While there has been a lot of interesting work by economists on Ireland’s crisis over the last year, there hasn’t been much on the political economy of the crisis. This piece, written this summer by Sebastian Dellepiane Avellaneda and Niamh Hardiman at University College Dublin, is the best that I’ve seen, and is particularly excellent on the interaction between Economic and Monetary Union and domestic decision-making structures. I’ve patched together extracts Brad-De-Long style into a short quasi-narrative below the fold, but if you are interested, you should really download and read the original piece.

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Most of the discussion I’ve seen of the financial crisis as it affects the eurozone seems to me both confused and confusing. A country outside the eurozone and without the “exorbitant privilege” of being able to sell lots of debt denominated in home currency has three options when it runs into debt trouble: default, depreciation and dependency.

Default is the straightforward solution, but it involves a big loss of face, and unpredictable long-term costs. Depreciation doesn’t directly improve the debt position, since debts are in foreign currency, but by making exports cheaper and imports dearer it helps a country to trade its way out of difficulty, without the need for a reduction in domestic prices and wages. Finally, there’s the option of dependency on an outside rescuer, normally the IMF. This has been the most common solution, but the IMF always demands a price (in terms of policy “reforms”) that makes a rescue only marginally more attractive than default.

A eurozone country doesn’t have the option of depreciation. In return, however, it has two dependency options, calling on either the IMF, or the European Financial Stability Fund. Since the EU would like to keep the IMF out, a distressed debtor can expect slightly better terms from the EFSF.

The default option isn’t affected, except in the same way as any kind of behavior viewed as discreditable affects membership of any club. A government that defaults on its debts might be thrown out of the eurozone, but then again it might be thrown out of the OECD, and the eurozone might expel a member that facilitated tax evasion.

The big question is whether the EFSF will work. That’s certainly challenging, but it still seems like a better bet for debtor countries than going it alone. And of course, there’s more commonality of interest than is often supposed because any bailout benefits the creditors, usually French and German banks

Looking at the Sarkozy government’s attempt at ethnic cleansing of the Roma, The Economist’s Charlemagne had the following observation about

the vociferous protest from the European Parliament. On September 9th it passed a strongly worded resolution denouncing discrimination against the Roma, and singled out the commission for its “late and limited response”. The row thus brings out the contradictions of European democracy: an elected national government finds that its resort to populism is confronted by the European Commission, an appointed body, and by the European Parliament, a distant chamber elected by a minority of voters.

It struck me that you could replace “national” with ” Southern state”, “European Commission” with “US Supreme Court” and “European Parliament” with “US Federal government”, and the analogy with Brown vs Board of Education would be just about perfect (except that it’s the Parliament driving the Commission and not vice versa). Then I noticed that Chris had proposed an almost identical substitution in relation to economic policy here.

This is the first time I can recall the European Parliament playing a key role in a conflict between the central institutions of the EU, such as the Commission and a member state. If the Parliament and Commission prevail, as they should, it seems to me that this will change the effective political structure of the EU, in the direction of a federal democracy. I’d be interested in the thoughts of those closer to the action.

Another episode in What David Moles said

Art Goldhammer on the Sarkozy meltdown

The problem is that this statement was a lie, according to Merkel. … astonishing public rebuke, Merkel’s spokesperson …The idea that Sarkozy would simply have invented an exchange with Merkel and that he would have invoked her “total and entire” support without having cleared it with her beggars belief. A president who behaves in this way permanently discredits himself. Plummeting in polls, attacked for human rights violations, chastised by the Pope, sued by Le Monde, and now slapped in the face by Merkel, Sarkozy seems to be coming unhinged, prepared to say anything and do anything to retain his increasingly tenuous hold on power. How long before an open revolt breaks out in his own party?

Matthew Yglesias on Martin Peretz and the university donation business.

It’s really too bad that Harvard has chosen to take this tack. Obviously the only person in this conversation who’s questioned anybody’s right to “free speech” or exhibited a weak “commitment to the most basic freedoms” is Peretz himself. Equally obviously, Peretz’s right to be a bigot does not create a right to be honored by prestigious universities. My alma mater is doing a disservice to their brand and to public understanding of the issues by deliberately obscuring things in this manner. It would be more honest to say that Harvard is a business run for the benefit of its faculty and administrators. The business model of this business is the exchange of prestige in exchange for money. Peretz has friends who have money that they are willing to exchange for some prestige, and Harvard intends to take the money.

I’ve an article on the horrible mess that is EU economic politics in the new Democracy. The bit I’d most like people to take away:

austerity measures will not lead to economic stability. They will never be applied to strong member states, and will fail to address the problems of weaker ones, which are more likely to face problems of overheating in the private sector than over-reliance on public borrowing. They are also extremely crude, and would provide little flexibility for states faced with asymmetric shocks. Most importantly, the emphasis of austerity hawks on fiscal rectitude and nothing but is not politically sustainable. They would reproduce the problems of the early twentieth-century “gold standard” system, in which economies responded to crises with chopped wages and swingeing increases in unemployment. As Barry Eichengreen has emphasized, democracies cannot credibly maintain such a system over the long run. European citizens are suspicious of the EU because they do not understand it. If they come to see it as a set of shackles chaining them in economic squalor and misery, their suspicion will be transformed into positive detestation. EMU cannot survive widespread public loathing. Yet such loathing would be the ineluctable result of enforced austerity programs.

But also (following on from yesterday’s review), you should really read Jacob Hacker’s piece in the same issue on the politics of healthcare reform going forward.

Reformers may have won the war in 2010, but they lost the battle for public opinion: Americans were convinced reform was needed, but not that the federal government should have the authority to make sure it was done right. Reformers cannot afford to lose the second battle for public opinion. Winning it will require organization and narrative. It will also require that progressives coalesce around a broad vision, as they did in the years after the passage of the Social Security Act. That vision should have two sides: the case against insurers and the case for government. … They can begin by resisting insurers’ self-serving entreaties to be freed from the requirement that they spend at least 80 percent of their bloated premiums on the actual delivery of care. … But making a case against insurers is not enough to justify the stronger federal role that is essential. Reformers … should not be afraid … to point out where the law needs to be strengthened, especially when that also means pointing out where private insurers continue to fall short. And nowhere is this more true than when it comes to the public option.

Here comes my long overdue update on the Dutch government formation (I owe you one on Belgium too, but there isn’t much to report, except the lack of progress, and whatever that could be taken to imply). We had elections in the Netherlands early June, and the right-liberals, VVD, emerged as the biggest party. They first tried to form a coalition with the Christian-Democrats (CDA) and PVV, the party of Geert Wilders (in fact, it is not a party, but a ‘movement’: Geert Wilders is the only member and the other people do not have any formal power, and from what we can gather in the media also not much real power.) But CDA refused to enter any talks/negotiations if VVD and PVV did not first come to some rough agreement between the two of them. So that turned into nothing.
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