Et Dona Ferentes

by Henry on February 13, 2010

The _Economist’s_ Charlemagne “argues”: that any Greek bailout will have no long term implications for EU integration.

bq. THERE has been a lot of commentary, in the past couple of days, to the effect that Europe is on the brink of a great leap forward in political and economic integration. The theory goes: a bail-out of Greece, accompanied by intrusive monitoring by Eurocrats, would constitute an unprecedented level of EU interference in the fiscal affairs of a member country. … Paul Krugman … finds that logic dictates a swift move towards integration. … I fear I do not agree. Or rather, I think the siren lure of economic logic is blinding a lot of people to the political realities of this crisis. … I have watched the direction of EU travel head firmly away from closer federal integration, and towards a messy sort of intergovernmentalism … I don’t think a Greek default is a big enough crisis to change the political weather in the EU … cannot get that excited about intrusive, monthly monitoring of Greek government spending by officials from the European Commission and European Central Bank, matched by close scrutiny of Greece’s notoriously dodgy statistics by officials from Eurostat. … new territory for the EU … but the International Monetary Fund has been doing this kind of stuff for years. And nobody thinks that when the IMF meddles in the fiscal sovereignty of a country, it means that world government is about to break out …

bq. bailing out Greece is already proving so politically painful for leaders like Mrs Merkel that she would not tolerate any discussion of how such a bailout might take place … a message to voters in rich countries like Germany: do not fear, we are not about to establish a systematic series of transfers to countries in the euro zone … this stuff is toxic politics. … a golden lesson of politics is: political leaders only do really hard and painful things when they absolutely have to. Until then, they would much rather fudge things. … the prospect of a messy, ad-hoc fudge of a bail-out for Greece. … countries … like … Poland … likely to take it rather badly if future convergence flows are diverted away from them, and back to countries that have wasted so much EU cash like Greece … Add to that that newcomers outside the euro zone, like Hungary or Latvia have had to endure horrible austerity programmes in the last two years under IMF supervision, while countries inside the euro zone are to be spared IMF programmes.

But does this really amount to a proper counter-argument? I don’t see any real disagreement here with the basic propositions that (a) EMU isn’t working as it stands, and (b) that the only sustainable equilibrium outcomes here are complete collapse or regearing to allow substantial fiscal transfers (and, insofar as they will do any good, labour market reforms to make increased mobility easier). Saying that politicians will want to muddle through is stating the obvious – but the point is that muddling through is not a sustainable long term strategy. Either the muddling through will be insufficient, in which case EMU will finally succumb to one of the succession of crises that will almost certainly result, or it will be sufficient, in which case it will serve as the basis for a long term shift in the economic governance of the Eurozone towards coordinated fiscal policies and some degree of fiscal transfers in times of crisis, and perhaps more than that. As Adrienne Heritier and I have “argued”:, muddled looking informal deals very often lay the foundations for long term formal institutional changes in the EU.

Finally, the analogy to the IMF doesn’t really work at all. The IMF is not a notably clubby institution, and is particularly unclubby from the perspective of those countries unfortunate enough to need to seek its aid. The EU is quite clubby indeed (Greece will remain on the Council, and in the various eurozone coordination forums), so that whatever the final outcome, it will surely give rise to a lengthy decision making process involving the target countries, those giving aid, and those on the sidelines. This will almost certainly culminate in a set of general institutional mechanisms which applies to all the eurozone countries, including both those countries at risk of default _and_ those which are highly unlikely to get into trouble. That’s the way that the EU works – and this will be a quite significant step towards further integration. Of course – the rescue effort may fail (for example, Germany and Greece’s current spat may reflect irreconcilable political differences) – but if it does fail, so too will the euro project.



Stuart 02.13.10 at 7:52 pm

I think it is possible a third way will last quite a long time – breaking up of EMU/Eurozone seems unlikely in the short term as so much political capital has been expended to get it this far, so if necessary you can see Germany and France in particular (and they will probably be able to push the UK into helping if things get bad enough at some point) willing to take fairly extreme measures to prop up the project if it goes that way. Equally as you say the political situation makes and real move toward federalism unlikely for some time as well, although no doubt crises like these help those in favour of more integration to take further baby steps in that direction, giving good arguments why the EU needs to be more picky and interfering more to persuade countries to keep down debt/deficit levels, etc.

I agree in the long term in has to go one way or the other, but as people live longer it also takes longer for the following generations who grow up with close European integration as normal to gain the balance of votes against the more conservative older generations, so I wouldn’t be surprised for it to be decades before the status quo is seriously changed (unless there is a crisis beyond the capacity of the members to withstand).


ejh 02.13.10 at 9:33 pm

unspeakable is the economic pain you bid me renew


bert 02.13.10 at 10:32 pm

Your headline means you believe the current crisis is a Trojan horse for fiscal union?
Or maybe, from an Irish perspective, you welcome it. Something other than short rations for dinner, forever.

I think you’re underestimating the built-in EU tolerance for ad hoc compromise, pasted together with bullshit. Remember the strict Maastricht limits on sovereign debt? 3% annually, and 60% cumulative? They’re black comedy now — distant roadkill in the rearview mirror. We now seem to be looking at a series of loans, each with strong conditionality attached, each designed to keep the lights on in Greek hospitals until the markets calm down. By design, as with an IMF program, great emphasis will be laid on how unpleasant the whole thing is for the recipients of the loans. A year ago, after police killed a young boy, Athens spent a couple of weeks on fire. Expect more flames this year, and if you own Greek property get insured quick.
Don’t put money on the Greek government surviving.
And don’t rule out a default.
To believe that a formalised system of fiscal transfers will emerge out of this is, I think, to overestimate German enthusiasm for rewarding profligacy and for punishing the Protestant ethic.

Granted, you’re careful to talk about fiscal union as a long-term destination. But on that timescale we’re all dead. I think Charlemagne (who’s generally interesting, is often right, and is mercifully a world away from the unpleasant ToryBoy who writes the Economist’s online Europe.view column) is right that it’s not remotely on the cards at present.


Substance McGravitas 02.14.10 at 4:30 am

Now the financial markets have turned on Athens, and Greece’s neighbours fear they could be next

No one is trying to spin the figures now. Not in Greece, where savage cuts have been ordered by Brussels in order to reduce a budget deficit now standing at 12.7%, more than four times the official euro limit; and not in the country’s southern European counterparts, where the fear of a domino effect stalks the indebted governments of Madrid, Rome and Lisbon.

Last week’s GDP statistics revealed that all four economies experienced zero or negative growth in the final quarter of 2009. Having spooked the eurozone by betting heavily against Greece, the markets may be limbering up to test the fragility of Club Med as a whole. For a region that used the euro to play a successful game of economic catch-up with the likes of Germany and France, and where powerful trade union movements are determined to protect the social welfare legacy of the good times, it is a fearsome prospect. It is also a remarkable reversal of fortunes.


bert 02.14.10 at 4:03 pm

‘Contagion’, rhymes with ‘Lehman’.
Yes, I get that.

But I’m slightly surprised at the eagerness with which the Guardian is embracing a bailout. Presumably they think that this is public debt, funding public services, and therefore good.
Set aside for a moment the moral case against shielding Greece from the consequences of past actions (a record that goes beyond profligacy to embrace epic incompetence and rank corruption). Consider instead the following hypothetical question: if a trader borrows at 1% to fund a purchase of Greek debt that returns 2%, but is fully protected from default risk at taxpayer expense, what should his end of year bonus be?

Willem Buiter sets out the case for keeping default a live prospect inside the eurozone.


Gabe 02.14.10 at 6:42 pm

Thanks Bert, that Buiter column is very good. There is also a huge incentive for Germany/ the EU to delay bailing out as long as possible to avoid being seen as the instigator of the inevitable cuts in services in Greece. I get the impression that not everyone believes EMU is already under threat to that great an extent (and that a devaluation might be helpful), so there is no pressing need to use radical solutions as yet.


John Quiggin 02.14.10 at 8:35 pm

There’s some interesting stuff in the NYT about the way in which Greece and other countries used creative financing methods to hide the growth in indebtedness. The key idea was to mortgage future revenues in return for an upfront payment, which is the essence of privatisation, when considered as a fiscal expedient. Not surprisingly, Goldman Sachs play a prominent role.


Henry 02.14.10 at 8:53 pm

Bert – like you I would be startled to see a formalized full fiscal union style system of transfers emerge from this, except in the very long run . I do think that we are going to see an initial ad-hoc response involving some emergency transfers, that will lead, after committees of Wise Men etc and perhaps another crisis or two, to a semi-formalized set of rules regarding domestic spending, plus a semi-explicit set of guarantees for eurozone states. This will indeed be a further step in the integration process – whether it is a _desirable_ step is of course a very different question (which is what spurs the implied Timeo Danaos bit in the title). You’re right that the EMU debt rules proved a shambles – but I also don’t think that the eurozone can easily tolerate repeated crises, and they are baked into the cake according to the current recipe – Greece isn’t going to be the last one. Finally, I agree that Charlemagne is an excellent writer, much though I disagree with him on various stuff (and I have another post in mind picking an argument with him on something else entirely).


bert 02.14.10 at 10:16 pm

There’s already a fair bit of fiscal transfer in current EU policies. The structural funds, for instance, are allocated to each according to need, from budget contributions collected from each according to ability. They’ve always been very careful to make their assessment of who’s eligible under which of the various Objectives on a region-by-region basis, because of the political trickiness of nation-to-nation transfers. The CAP, also, has shifted towards pure income support (you don’t hear about butter mountains and wine lakes these days, because they’re not doing the old-style price support to the same extent they used to). I guess this reinforces your point about the EU being an accumulation of previous compromises, subject to periodic bouts of formalisation and rationalisation.
Of course, compared to the combined national budgets of the member states, the EU budget is minuscule.

John, Edward Hugh blogged about that NYT article here, drawing an explicit link with the off-balance sheet sleight of hand that’s at the core of the PFI. He links to this roadshow presentation (pdf!) from a few years back — page 5 suggests Greece is the least of the problem.


VV 02.14.10 at 11:30 pm

The discussion of PFI/PPP is quite misleading in the Edward Hugh blog post.
He writes:

a) they assume a certain level of headline GDP growth to furnish revenue growth to the public agencies committed to making the payments. […]

b) they assume growing workforces and working age populations […]

c) they assume unchanging dependency ratios between active and dependent populations […]

The mainstream use of PFI/PPP is to finance the creation of infrastructure via the receipts from use of that same infrastructure: fund roads by selling future toll receipts, for instance. In that case, while some assumptions regarding said revenue need to be made, the risk is with the buyer: if fewer people use the road, they don’t recoup costs fast enough.

That is quite different from selling the receipts to a new road to pay this month’s civil service salaries… Am I missing something?


P O'Neill 02.15.10 at 1:00 am

In that case, while some assumptions regarding said revenue need to be made, the risk is with the buyer: if fewer people use the road, they don’t recoup costs fast enough.

Irish PPPs, with terms likely taken off the shelf from PPPs in other countries given the pathetic appraisal capacity in Ireland, include minimum usage guarantees for the private provider e.g. guaranteed minimum traffic on a toll road — if actual traffic falls below, government pays the difference. The provider still cares about the upside variables, which will be related to demographics. But all the downside risk is dumped to the government.


Henry 02.15.10 at 4:26 am

bq. There’s already a fair bit of fiscal transfer in current EU policies. The structural funds, for instance, are allocated to each according to need, from budget contributions collected from each according to ability.

I am not in my office and so can’t look it up, but my vagye memory is that the structural funds were introduced as a kind of re-redistributive policy – the UK, even before the “I want my money back” saga, was displeased that it got very little from CAP, and pushed for the structural funds to help out the folks oop North as a means of getting some dosh sent back their way.


bert 02.15.10 at 9:35 am

1975: Following the accession of Denmark, Ireland and the United Kingdom, the European Regional Development Fund (ERDF) is created. It aims to assist those regions affected by industrial decline, and to counterbalance the significant financial support allocated to the agricultural industries of the Member States. The ERDF also introduced, for the first time, the notion of ‘redistribution’ between richer and poorer regions of the Community.

Thanks, Henry. I have a new answer for the perennial “what have the Brits ever done for Europe” question.


bert 02.15.10 at 9:36 am

VV — You describe a PFI project that creates a brand new asset with its own income stream under which the government takes on no ongoing liabilities. You’re correct that for a finance ministry keen to shift public debt off its books, this would be a poor choice.


stostosto 02.15.10 at 9:45 am

Krugman pummels the euro construct:

It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.

Basically the argument is, Euroland wasn’t and isn’t an optimum currency area.


Kenny Easwaran 02.16.10 at 1:07 am

nobody thinks that when the IMF meddles in the fiscal sovereignty of a country, it means that world government is about to break out …

I was under the impression that participants in the “battle of Seattle” and further anti-globalization activities did think something like this. And certainly you see it in the conspiracy theorists of the right as well, who think there’s a secret plot to build a highway from Mexico to Canada and take away our gold or something.


Zamfir 02.16.10 at 11:18 am

And certainly you see it in the conspiracy theorists of the right as well, who think there’s a secret plot to build a highway from Mexico to Canada and take away our gold or something.

That doens’t make any sense. I thought that black helicopters were the minimum requirement of such scenario, so why would they need a highway?

Comments on this entry are closed.