And whatever you do, don’t mention the war

by Henry on February 17, 2010

“Paul Krugman”:http://krugman.blogs.nytimes.com/2010/02/17/feldsteins-euro-holiday/, like “others before him”:https://crookedtimber.org/2009/06/02/still-all-quiet-on-the-western-front/, fails to do justice to Martin Feldstein’s perspicacity.

Today, Martin Feldstein suggests that Greece make a temporary return to the drachma, so as to regain cost competitiveness. In terms of the macroeconomics, this actually does make sense. But it’s also impossible; Feldstein needs to read Barry Eichengreen.

What he doesn’t realise is that Feldstein is playing a much deeper game here, and that his fundamental objections to the euro “have nothing to do with macroeconomic theory”:http://www.nber.org/feldstein/fa1197.html

War within Europe itself would be abhorrent but not impossible. The conflicts over economic policies and interference with national sovereignty could reinforce long-standing animosities based on history, nationality, and religion. Germany’s assertion that it needs to be contained in a larger European political entity is itself a warning. Would such a structure contain Germany, or tempt it to exercise hegemonic leadership?

A critical feature of the EU in general and EMU in particular is that there is no legitimate way for a member to withdraw. This is a marriage made in heaven that must last forever. But if countries discover that the shift to a single currency is hurting their economies and that the new political arrangements also are not to their liking, some of them will want to leave. The majority may not look kindly on secession, either out of economic self-interest or a more general concern about the stability of the entire union. The American experience with the secession of the South may contain some lessons about the danger of a treaty or constitution that has no exits.

Obviously, Feldstein can’t write about this in public; Germans have, after all, been known to “read the Financial Times”:http://www.ftd.de/. But perhaps if Greece extricates itself very, very carefully from EMU, and promises (however disingenuously) that it _really, really will_ return to the eurozone just as soon as it can, Angela Merkel will stand down the Panzertruppen she has amassed at the Greek border …

Update: “see also Colm McCarthy”:http://www.irisheconomy.ie/index.php/2010/02/17/a-bonzer-wheeze-by-martin-feldstein/.

{ 52 comments }

1

Tom RR 02.17.10 at 8:41 pm

persipacity?

2

Henry 02.17.10 at 8:49 pm

sp. corrected – I thought it looked funny when I published it …

3

Stuart 02.17.10 at 8:52 pm

Surely the EU only has no exits in the same sense it has no way in, i.e. the circumstances and timetable would have to be agreed over many rounds of diplomatic wrangling, the same way as entry happens. That no has tried to exit yet (as far as I aware), and therefore there isn’t a framework or precedent, does not seem to necessarily imply that leaving would require military force, and suggesting that seems borderline delusional as to diplomatic and political reality.

4

IM 02.17.10 at 9:39 pm

You forget Greenland! Greenland did leave the EU (EC). And the Lissabon treaty does regulate leaving the EU. It provides for up to two years but not more of negotiations.

As a practical matter it will be difficult and I don’t think you can leave the Euro.

5

LFC 02.17.10 at 10:29 pm

This is one case where an economist, namely Feldstein, might have benefited from acquaintance with a piece of the political science literature, namely that dealing with security communities, before sitting down in 1997 to pronounce in Foreign Affairs on the “possibility” of major war in Europe. What’s perhaps more surprising is that Foreign Affairs published this passage, complete with the somewhat bizarre invocation of the Civil War.

6

peter 02.17.10 at 10:30 pm

Since even countries that don’t belong to the EU still have to pay money to the EU for the privilege of not-belonging (eg, Norway), those which leave it would also still have to pay. What incentive would any country have for leaving?

7

Phillip Hallam-Baker 02.17.10 at 10:51 pm

Krugman points out that the problem is that enabling a devaluation is the whole point of withdrawal. So any attempted withdrawal is going to be surrounded by an arbitrage frenzy.

Worse still is the fact that only some of the contracts involved would be signed under Greek law and international courts may not be inclined to enforce contract terms that have been unilaterally modified by the Greek legislature.

For example, imagine that company A based in France contracts to buy a widget from company B based in Greece for a million ECU. Greece withdraws from the Eurozone and in the aftermath the new drachma drops to half the value it had at withdrawal.

Is company A still obliged to pay in ECU or can it instead pay in Drachma and obtain a 50% rebate?

Now consider the cases where company B has contracted to sell the widget on inside Greece for 1.1 million Euros to company C which in turn has sold it to company D in Dubai, for 1.2 million ECU.

Unless Greece continues to use the ECU for pre-existing contracts we are going to see wildly differing outcomes as companies A, B, C, D either make unexpected windfalls or fall bankrupt as a result of unanticpated currency fluctuations.

8

ajay 02.18.10 at 9:22 am

ECU? I think it’s been “euro” for a wee while now.
This is, I think, one of the smallest problems – if a company’s signed a contract saying it’ll pay in euros, it has to pay in euros. The contract wouldn’t say “a million euros in whatever the currency of Greece happens to be at the moment of payment” it’d just say “€1 million”.

9

dsquared 02.18.10 at 9:28 am

This is one case where an economist, namely Feldstein, might have benefited from acquaintance with a piece of the political science literature, namely that dealing with security communities, before sitting down in 1997 to pronounce in Foreign Affairs on the “possibility” of major war in Europe

I would agree with this, although where you say “acquaintance with a piece of the political science literature, namely that dealing with security communities”, I would say “a kick in the pants”.

10

Thomas Jørgensen 02.18.10 at 10:03 am

This entire argument about the virtues and flaws of the euro is a prime example of idiocy in oh so many ways. It is of absolutely zero importance at the present time if joining the euro in the first place was in some sense a good idea over all or not. It is *blatantly obvious* that leaving now would be absolutely cataclysmic for Greece as the resulting combined panic, bank run and speculative attacks on their economy would bankrupt them. It would cause less pain all around if Greece were to simply declare sovereign default on its debt, and since doing that would also solve its budget woes.. (no interest payments!)

11

Zamfir 02.18.10 at 11:01 am

I find it amusing that Anglos tend to point to Germany as the potential evil dominator of the EU, while the continent usually sees France in that role.

12

Mrs Tilton 02.18.10 at 11:17 am

Zamfir @11,

Anglos: “Germany is the Evil Dominator”.
Continentals: “No, it’s the French”.

Meanwhile, crafty little Belgium is laughing “MWA-ha-ha”-style in its sleeve.

13

Charrua 02.18.10 at 11:43 am

“It is blatantly obvious that leaving now would be absolutely cataclysmic for Greece as the resulting combined panic, bank run and speculative attacks on their economy would bankrupt them”
That was exactly what I was hearing about Argentina’s convertibility at the beginning of 2001. It was true, but when you can’t get cheaper financing and cutting wages and pensions simply leads to lower tax revenues (via lower private spending) instead of lower deficits and it looks as if you might be in recession for as long as you can see, the unthinkable becomes thinkable.

14

JoB 02.18.10 at 11:59 am

12- I looked out of the window and: no, we’re not. Everybody knows that we are dominated by the AngloSaxon unwillingness to build up a reasonable level of social security. Driving Greece out of the Euro fits that plan: “See you’re unable to achieve political union. Just give up on the Quixotic attempts to saveguard a social model that’s not ‘winner takes all’.”

15

Alex 02.18.10 at 12:29 pm

As someone pointed out upthread, one of the features of the Lisbon treaty is that it explicitly, for the first time, sets up a procedure for exit from the EU, so the entire argument is based on a lack of background reading.

16

ajay 02.18.10 at 12:29 pm

Just give up on the Quixotic attempts to saveguard a social model that’s not ‘winner takes all

The Greek social model seems to be more along the lines of “trebles all round”, to be honest. In terms of inequality, it’s worse than Germany and the Nordic states, slightly worse than France and slightly better than the UK and Italy.
a) its social model is not noticeably different, in terms of outcome, from many other EU states
b) its fiscal model, unlike many other EU states, is based on “deliberate misrepresentation and fraud”. (Eurostat)

17

JoB 02.18.10 at 12:40 pm

ajay, all of that is true about Greece and they are still better than the UK! So why should these AngloSaxon interpretations on the Euro be given lots of credit? What happens to Greece is the consequence of being in the Euro. They will have to change their ways because they are in the euro. It is good that they finally have to change their ways. It is good they are in the euro. The euro is doing what progressives in Europe expected it to do: make more political, fiscal and social union unavoidable. It means that the real question is: will the UK comply to European standards of social security or will they opt for being de facto annexed to the US?

18

chris y 02.18.10 at 12:52 pm

will the UK comply to European standards of social security or will they opt for being de facto annexed to the US?

JoB, have you noticed who’s about to win the next British election?

19

Stuart 02.18.10 at 1:09 pm

JoB, have you noticed who’s about to win the next British election?

None of the above?

20

hix 02.18.10 at 1:22 pm

A good example that much anti Euro writing is based on ugly realpoltik that sees a more unified EU as a threat for US hegemony.

“Meanwhile, crafty little Belgium is laughing “MWA-ha-ha”-style in its sleeve.”

Why does no one take the poor Italians serious. They have the second biggest economy in Europe if one includes the informal sector!

21

JoB 02.18.10 at 1:22 pm

Yep, it is likely the English opt for the Anschluss to the daughterland ;-)

22

ajay 02.18.10 at 2:19 pm

will the UK comply to European standards of social security or will they opt for being de facto annexed to the US?

I don’t even know what this means.
For a start, the UK has higher per-cap social spending than the EU average (in PPP terms), and it’s only half a percentage point below the average in terms of percentage of GDP (26.4% vs 26.9%). You talk as though there’s some massive gulf between the brutal free-market dystopia on one side of the channel and the caring, sharing social democracies on the other. There isn’t.

Second, even if there were, why does that mean that the UK will have to raise spending or leave the EU? What’s the mechanism here? Or are you saying that they’ll have to raise social spending if they want to join the euro? Because the reverse, if anything, is true – the UK risks going over the deficit and debt levels in the medium term if it doesn’t change its fiscal policies.

Third: “anschluss” WTF?

23

ajay 02.18.10 at 2:20 pm

Why does no one take the poor Italians serious. They have the second biggest economy in Europe if one includes the informal sector!

Answer’s in the question, I think.

24

Barry 02.18.10 at 2:52 pm

ajay 02.18.10 at 12:29 pm
(re the Greek social model)
“b) its fiscal model, unlike many other EU states, is based on “deliberate misrepresentation and fraud”. (Eurostat)”

So it’s more of a USA-like system, then? :)

25

LFC 02.18.10 at 3:25 pm

dsquared @9 — “a kick in the pants”
Yes.

26

JoB 02.18.10 at 3:29 pm

ajay-22,

The US spends more percentage-wise on healthcare than Belgium. Still, the Belgian healthcare is better. There is a massive gulf between the UK and the rest of Europe as is clear from almost all European summits from Thatcher to now. Every time there is a proposal for capping day of work or whatever, the UK is threatening to veto. Whence all the fuss in the UK about the over-regulated ways of old Europe if there was not a tendency for the UK to be less regulated? It is a bit better with Brown but for sure under Cameron all bets would be off on any social advance in the community.

They don’t ‘have to’ as a mater of natural law or communitarian law. In my view they ought to – the UK has been holdind back the political and social integration of Europe for 3 decades now & I believe one of these days it is better to agree to disagree and part ways. That won’t happen, I know, but the spirit of the comment is clear. Finally, I don’t think the only UK option as far as the deficit goes is to decrease social spending, they can increase the fiscal responsibility of the City.

On the German word: WTF! is going on with using “WTF” for such a playful remark.

27

Map Maker 02.18.10 at 4:06 pm

“The US spends more percentage-wise on healthcare than Belgium. Still, the Belgian healthcare is better.”

OK … but I think Hershey Chocolate Bars are much better than the bitter blocks of coffee/cocoa grounds that the belgians call chocolate bars. Better? All a matter of taste …

28

Barry 02.18.10 at 4:14 pm

Map Maker, usually these healthcare judgements are made from statistical outcomes, not personal tastes.

29

ajay 02.18.10 at 5:31 pm

There is a massive gulf between the UK and the rest of Europe as is clear from almost all European summits from Thatcher to now. Every time there is a proposal for capping day of work or whatever, the UK is threatening to veto.

OK, but a) that’s a gulf in terms of what they think the EU should be doing, not a gulf in terms of generosity of social spending
and
b) is that better or worse than doing what other member states do and signing up to EU rules which they have no intention of following?

30

JoB 02.18.10 at 5:51 pm

ajay@29- It is a gulf in terms of wanting social and political integration vs not wanting that. I have no issue with the UK not wanting it; I do have an issue with the UK – & the US, because that’s the reality – wanting to avoid the rest of us achieving it. As I said, it is precisely because of the Euro that we see the pressure on Greece to own up to the rules. That’s not a bad thing, it’s a good thing.

As to the social spending: the merit is not in spending, the merit is in getting the social measures implemented. The UK, as you indicated yourself, isn’t very good at that and therefore should not give lessons. The reason imho is that the UK focuses to much on spending (under the pressure of the traditional left) and not enough on regulation of a labour market. The latter can be quite effective without spending a single, ehr, pound.

31

JoB 02.18.10 at 5:52 pm

Also: what Barry said.

32

hix 02.18.10 at 6:23 pm

“OK, but a) that’s a gulf in terms of what they think the EU should be doing, not a gulf in terms of generosity of social spending”

Somehow the UK is just fine with inequality increasing measures on an EU level.

33

alex 02.18.10 at 7:52 pm

Meanwhile, OT, but shock, horror, stop the presses, Tom Friedman talks sense:

http://www.nytimes.com/2010/02/17/opinion/17friedman.html?em

Can the End Times be far away?

34

Salient 02.18.10 at 8:38 pm

stop the presses, Tom Friedman talks sense:

Let’s all take bets on why Friedman introduced the phrase “global wierding”

a) because “global climate change” is too dour
b) a taxi driver told him “man, this weather is weird”
c) of course it’s weird; it’s science!
d) because coinage is his game
e) ?

The Times also wishes to issue a correction: the end of the Friedman article reports that “Maureen Dowd is off today.” This line is actually supposed to print whenever Maureen Dowd makes asinine and unsupported statements about What Women Think[TM]. The Times regrets the error(s).

35

Oliver 02.18.10 at 9:01 pm

If anything, German public opinion wants Greece thrown out of the Euro.

36

Doug M. 02.18.10 at 9:58 pm

German public opinion wants Greece /punished/. There is a remarkably strong public consensus on this point.

People keep coming back to the fact that Greece lied, then lied again, and then lied once more. Why this is so enraging is a reasonable question. It might be, say, one part self-interest, one part Germans having higher standards, one part German devotion to the European project, and four parts cultural/racial bias against greasy, deceiving Mediterranean types.

But whatever the reason, it’s a real issue. German public opinion is pissed at the Greeks. So any action by the German government is going to be very, very cautious, and the word “bailout” will not ever be used.

Doug M.

37

Chris E 02.19.10 at 11:37 am

As to the social spending: the merit is not in spending, the merit is in getting the social measures implemented.

Except that one could argue that these measures have mostly helped the indigenous population and concentrated inequality amongst more recent immigrants; hence the unhappiness of French of North African descent or Germans of Turkish descent.

38

JoB 02.19.10 at 12:06 pm

37- Are you suggesting that the continental tradition not to allow local sweat shop like labour conditions is the cause for the integration problems on the continent? Because that is exactly the Anglosaxon stance with respect to any an increased European socio-political integration. The preference for lower minimum wages and the non-regulation of labour conditions doesn’t, imho, have a lot going for it comparing the facts in US & UK and those in continental Europe. I am hearing a lot that the AngloSaxon countries are doing a lot better on immigration and integration. Maybe that’s true (although I’m sceptical about it) but even being true does not mean it is correlated to labour law.

(and anyway: the healthcare line in the US is not one of spending more, it is one based on changing the system so as to spend less)

39

Chris E 02.19.10 at 12:47 pm

Are you suggesting that the continental tradition not to allow local sweat shop like labour conditions is the cause for the integration problems on the continent?

No. Merely that support for the social measures you mention is predicated on the tacit understanding on the part of the majorities voting them in that they will not necessarily benefit the minorities. Social solidarity only extends so far.

40

ajay 02.19.10 at 1:06 pm

The preference for lower minimum wages and the non-regulation of labour conditions doesn’t, imho, have a lot going for it comparing the facts in US & UK and those in continental Europe.

Er, the UK signed up to the Social Chapter 13 years ago and, according to the definition used in this article at least, has a higher minimum wage than almost any other EU member state. (The only country anywhere in the world with a higher minimum wage than the UK is Denmark.)

Things have changed since the early 1990s, JoB.

And please stop using the term “Anglo-Saxon”. It’s not only racist in an almost charmingly obsolete 19th-century way (you have to admit that Barack Obama’s pretty swarthy for an Anglo-Saxon leader), and annoyingly vague (does it include Ireland? Australia? Canada? New Zealand? Shouldn’t it at least include Saxony?) but it also assumes a largely non-existent congruence between the US and the UK, assumes that the US runs every aspect of the UK, and ignores their many disparities (which is exactly why de Gaulle came up with it in the first place).

41

alex 02.19.10 at 1:29 pm

@36: you should hear what the Greeks think of the Germans – 1941 and all that, what?

And yeah, JoB, shut the feck up or come back with something that isn’t just tired fact-free blah. We can do that for ourselves, thanks.

42

JoB 02.19.10 at 1:30 pm

ajay, I apologize if anything I say comes over as even remotely racist, and I’ll drop the term you take exception to. But there is congruity between the US and the UK, as also evident for the criticism waged against Blair for being too continuistic with Thatcher – and I do think that Australia, Ireland, Canada and New Zealand have been far more in line with US economic policies because they were even more forced by the invisible hand of freeflowing capital. I would maybe also be less critical maybe if native English speakers assumed less frequently that their perspective was better because they have a better handle of the current lingua franca.

I am sure things have changed since 1990. Personally – against many here – I believe a Blair was sufficiently left wing to mark a difference. Nevertheless, not a sufficient one and the opposition against European regulation of labour conditions has been a quite consistent one. This also means that the UK in your list has a minimum wage per hour whilst the couple of continental countries I checked has 1 per month combined with a stricter regulation of the hours per month.

I am sorry this comes over as personal to you. It is not intended that way.

Chris E, so the social system is superior but tainted by the hipocrisy of the majorities?

43

Chris E 02.19.10 at 2:17 pm

Chris E, so the social system is superior but tainted by the hipocrisy of the majorities?

That depends on your measure of superiority. It is economically tenable at the level it exists because it’s most lucrative provisions are only available to a few, and politically tenable at that level because only those deemed ‘deserving’ are entitled to anything more than a basic provision.

44

ogmb 02.19.10 at 2:21 pm

People of {X} keep coming back to the fact that {Y} lied, then lied again, and then lied once more. Why this is so enraging is a reasonable question. It might be, say, one part self-interest, one part {X} having higher standards, one part {X} devotion to {X’s pet project}, and four parts cultural/racial bias against {Y}’s greasy, deceiving (…) types.

But whatever the reason, it’s a real issue. {X}’s public opinion is pissed at the {Y}s. So any action by the {X} government is going to be very, very cautious, and the word “bailout” will not ever be used.

Anyone discern a pattern?

45

engels 02.19.10 at 2:24 pm

I’m pretty sure ‘Anglo-Saxon’ isn’t meant include Ireland, for fairly obvious reasons.

As for it covering Saxony, you could take that up with the Cambridge University English faculty too presumably.

46

engels 02.19.10 at 2:36 pm

As a UKer I do sometimes get irritated with a certain vein of American leftist criticism (devoted to ‘continental’ social models, philosophy and breakfasts) that assumes that the situation/culture here is identical to the US but imo it would also be mad to deny it doesn’t seem like Airstrip One at times, especially under Blatcher…

47

hix 02.19.10 at 3:25 pm

“ajay, I apologize if anything I say comes over as even remotely racist, and I’ll drop the term you take exception to.”

The term is not racist at all. This comes from the same people that think its fun to invent acronyms like PIGS. Some Americans consider it a harmless rethorical device to throw arround baseless racism acusations. Just a cheap diversionary tactict, an atempt to built up artifical conflicts between the less well off with different ethnical backgrounds to overshadow the real class conflicts.

People that do prefer a market liberal individual outcome reponsibility ideology are at least as guilty off broad generalisations about Uk+former colonies as those that oppose them. Obama, an upper 5% guy with an Ivy league degree that goes arround telling everyone from individuals to countries that it is heir own fault if they are poor.

What kind off odd things is that with some Americans that they have to come up with that confident but you are more racist “defense” when their social system gets attacked. That sucks, because its far from obvious whos more likely to be racist, because its a sensible topic here in Germany and most important because those are two different topics.

48

ajay 02.19.10 at 4:07 pm

I’m pretty sure ‘Anglo-Saxon’ isn’t meant to include Ireland, for fairly obvious reasons.

Why not? They’re English-speaking – at least, as much as the Canadians are. Fifteen hundred years since the landings on the Saxon Shore, they’re probably about as “ethnically Anglo-Saxon” as Britain is – whatever that means at this stage of history – and a lot more so than the US. It’s true that they identify themselves as a Celtic nation and would be irritated to be described as Anglo-Saxon, but so what? No one identifies themselves as an Anglo-Saxon nation but that doesn’t stop the term being used, however irritating it is.

It’s a needlessly insulting term that denigrates pretty much everyone it covers (the British, by implying that they’re just part of a bloc led by the US; the Americans, by linking them to Britain rather than allowing them independent status; anyone who isn’t white in either country; anyone who thinks of themselves as Celtic in either country; etc…) , and it was intended to do exactly that.

Would it be OK to talk about the “negroid economies” of West Africa? Of course not.

49

bert 02.19.10 at 4:18 pm

Whatever your view of Ajay calling it racist, he was exactly right to call it Gaullist.

50

JoB 02.19.10 at 4:58 pm

hey ajay, I may be sorry for hurting your feelings but not that sorry ;-) Also, what hix started to say but definitely not what he ended up saying.

(and no: the cases of Greece and Iceland are not identical; similar maybe but not at all identical)

51

Oliver 02.19.10 at 8:15 pm

@36

And that’s a real problem. Greece won’t agree to an imposed plan worse than the alternative.

52

Peter Whiteford 02.21.10 at 11:14 pm

The concept of “the Anglo-Saxon” like the concept of the “Aryan” is an invention of the 18th and 19th centuries, and “three quarters of English people can trace an unbroken line of genetic descent through their parental genes from settlers arriving long before the introduction of farming” , i.e. neither “Anglo-Saxon” or “Celts”. See http://www.bradshawfoundation.com/stephenoppenheimer/origins_of_the_british.html

More pertinently, the idea that the similarities between the Greek social model and that in Denmark are greater than the similarities between the Danish and the British models is basically preposterous.

Sure the UK has various opt-outs but people in the UK use European law to achieve social objectives more than those in most other European countries.

The latest OECD figures show that social spending in the UK is a bit over 21% of GDP but in Greece it is a bit under 21% – but Greece spends twice as much as the UK on old age pensions, which are almost completely non-redistributive – the replacement rate is uniform across the income distribution.

Despite this much higher spending on pensions, according to the OECD report “Growing Unequal” Greece has the highest pensioner poverty in the EU and about twice as high as the UK.

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