European Politics

John Quiggin and I have a “piece”:http://www.foreignaffairs.com/articles/67761/henry-farrell-and-john-quiggin/how-to-save-the-euro-and-the-eu on the eurozone mess in the new issue of _Foreign Affairs._ The piece is subscriber-only, but we’re allowed to post it (in Web format) for six months or so on a personal or institutional website. Accordingly, the piece can be found below the fold. The piece was finished some weeks ago, but I think it holds up quite well.

Four things worth noting. First – I suspect we would put our argument that the politics are more important than the economics even more strongly in the light of current events. It looks as though demonstrations against the austerity agenda are beginning to take on a European dimension. In addition, a dimension of the politics that we did not discuss – the rise of nationalist resentments in countries that are on the giving rather than receiving end of loans-linked-to-brutalism – has come more obviously to the fore with the success of the True Finns in the recent election.

Second – Paul de Grauwe has a “new paper”:http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Discussion_papers/Governance-fragile-eurozone_s.pdf which points to a complementary mechanism through which monetary union plausibly damages political legitimacy at the national level (although his discussion is largely framed in terms of the economics).

bq. Once in a bad equilibrium, members of monetary union find it very difficult to use automatic budget stabilizers: A recession leads to higher government budget deficits; this in turn leads to distrust of markets in the capacity of governments to service their future debt, triggering a liquidity and solvency crisis; the latter then forces them to institute austerity programs in the midst of a recession.

Third: the Daniel Davies qualification. We refer to BIS data on bank holdings in the article – but as we specifically note (and as dsquared has pointed out in comments here and elsewhere), this data is biased by tax avoidance wheezes and similar. It is plausible to infer that e.g. German banks have some considerable exposure to PIIGS from the way that they are behaving, and the numbers are the best that there is, but they should be treated with caution.

Finally – the piece is written in the rhetorical style of US policy articles. This differs from that of blogposts and academic articles, in that it encourages emphatic claims rather than cautions and caveats, and self-assurance rather than social-scientific humility. Please read accordingly.

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Both recommended:

First: Kevin O’Rourke’s “more general take”:http://ineteconomics.org/sites/inet.civicactions.net/files/BWpaper_OROURKE_040811.pdf (PDF) on the trilemmas facing the eurozone.

bq. What we have seen instead is a series of ineffectual moves on financial regulation, and now a complete unwillingness to confront the European banking crisis head-­‐on. Rather than promoting pan-­‐European growth strategies, the institutions of the Union have been enthusiastically promoting pro-­‐cyclical fiscal adjustments in the periphery, even as they insist that heavily indebted governments repay private creditors of private banks in full. Not only is the policy incoherent, making sovereign default more likely on the one hand, while preaching austerity on the other; the insistence that taxpayers rather than investors pay for bank losses is also setting the stage for a potentially very damaging confrontation between core and periphery taxpayers. The political consequences of this are unknowable, but in Ireland, just three months after the troika’s intervention, the political party that had been dominant since the 1930s was annihilated at the polls, with the radical and Eurosceptic Sinn Féin now sniffing at its heels: and this in one of the most conservative, and Europhile, countries in Europe. What three or four years of the current policy mix will do is anybody’s guess.

The paper is particularly interesting in its focus on the _politics_ of Eurozone governance, which does not get nearly as much attention as it deserves. John Quiggin and I have a piece forthcoming in _Foreign Affairs_ which talks to the medium-term consequences of institutionalized austerity at the European level – O’Rourke’s piece provides a good general take on the same set of issues, as well as discussing topics (class and distributional divides) that we don’t get into. The paper is being presented at INET – there is much other interesting looking material available “here”:http://ineteconomics.org/initiatives/conferences/bretton-woods/agenda.

Second, Kate McNamara’s more “topical piece”:http://www.foreignaffairs.com/articles/67710/kathleen-r-mcnamara/can-the-eurozone-be-saved arguing that the European Union needs to take the plunge and become more like a state.

bq. In the eyes of markets and skeptical observers, the European Union is more than an intergovernmental organization but not yet a state. When the European Union bickers and dithers, the markets have no idea what may happen. The euro is the only single currency in history that has not been tightly linked to broader state- and nation-building efforts (often following wars, during which military action required budgeting and taxation). Although the euro is an extraordinary peacetime achievement, it suffers from a lack of supporting political institutions that can make broader macroeconomic policy. The European Union needs to change that and move beyond the structure of its current economic and monetary union — which were seemingly designed for a world in which private and public actors never over-borrow and financial markets never question their ability to repay — to real political and economic cohesion, something international markets would recognize as parallel to a nation state.

As she recognizes (and O’Rourke argues too) there is little enthusiasm among European leaders (let alone publics) to make this jump. This obviously generates normative objections (some perhaps fundamental) as well as practical ones. But equally, it is not at all clear that the European Union can survive as it is, as a kind of ungainly half-way house between an international organization and a genuinely federal system.

So after an attempt to close down Philosophy at Middlesex and cut Philosophy at King’s College London, now the Philosophy Department in Keele is threatened with closure, together with Keele’s Centre for Professional Ethics. You can read all about it here. I really can’t help but wonder: “Who’s next?” We earlier reported here on plans to cut funding for the humanities and the social sciences at the EU-research spending level.

I think the tendencies are clear. If you are teaching/doing research in a field/discipline that can not easily show (quantitatively, please!) to policy makers & bureaucrats that you will make a significant positive contribute to economic growth, your very existence is at stake. Never mind that you’re opening up minds, teaching logic or the arts, passing on history to the next generations. Either someone on the market should be willing to pay for what you’re doing, or else you are at mercy of the benevolence of your government. The University as a public good? That’s an old fashioned idea from premodern times, obviously.

If you think I’m exaggerating, read the EU agenda on the modernization of the Universities, published by EU bureaucrats in 2006. I think what we’re witnessing now, is that this agenda has touched the lowests levels of execution, and that the financial crisis is seen as a great opportunity to push it through. A tiny bit of this ‘modernization agenda’, like the stress on international mobility of students and teachers, could be explained by the goals of creating multi-national understanding and hence contributing to peace. But the rest of that agenda regards the university primarily (perhaps solely?) as an instrument for the economy. We had better become more worried, and we had better started to create a counter-discourse to this narrow economistic paradigm then. What I see around me, and what I see developing that hasn’t been fully worked out yet, worries me a lot.

I posted recently on The paradoxical politics of credible commitment, noting the excellent analysis of Gordon Brown’s politics by Sebastian Dellepiane.  He argues that the Labour government did not make the Bank of England independent simply in order to defuse City suspicions of them. This self-binding policy was also in fact enabling, because it made it possible for Brown to adopt a classic Keynesian economic strategy by about 2000.

The Euro started out as a self-binding credibility-gaining mechanism for Eurozone member states. But the Euro also turned to have an ‘enabling’ side to it. It contributed to new kinds of instability by facilitating the extension of cheap credit and by permitting increasingly risky lending practices to spread throughout the European financial system, in Germany and France as well as in the weaker peripheral economies.

This has led me to think some more about the relevance of the logic of credibility gains in the current European crisis.

The self-binding austerity politics now under way in the Eurozone also has some paradoxical features. The crisis has produced an explosion of fiscal deficits and an accumulation of sovereign debt. The ECB favours fiscal austerity to restore stability, and so does German public opinion. This means that every other member state must adjust to low demand conditions and domestic deflation. But while Gordon Brown’s self-binding monetary policy proved to be enabling, Eurozone governments’ self-binding fiscal policy might be seen as self-disabling, because it involves commitment to a strategy that may prove self-defeating. There are two reasons for this.

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Congratulations to Belgium, which holds since midnight the world record cabinet formation after the elections now exactly 250 days ago. Being the founders of surrealism, the Belgian people decided to celebrate this with people’s parties in open air, especially a big one Gent. The poster says ‘steun onze helden’, that is, ‘support our hero’s’, but this should be interpreted as ironically as possible. The people organising and attending these parties are fed up with the Belgian politicians who are unable (or unwilling?) to form a coalition and govern the country. If you want to see another piece of Belgian surrealism, watch the Flemish comedian Geert Hoste giving an interview to CNN in which he comments on the situation and the festivities.
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Stephen Walt writes a “quite odd post”:http://walt.foreignpolicy.com/posts/2011/02/15/can_ir_theory_predict_the_future_of_the_euro on realism, liberalism and the future of the euro.

bq. Over the past few months, however, German Chancellor Angela Merkel and French President Nicolas Sarkozy have been negotiating a joint proposal for deepening economic coordination within the EU (and especially the eurozone) in an attempt to solve some of the problems that produced the crisis in the first place. … Not only does this question have obvious implications for politics and economics in Europe itself, but it also raises some fundamental questions about IR theory and might even be a revealing test of “realist” vs. “liberal” perspectives on international relations more generally. Realists, … have been bearish about the EU and the euro since the financial crisis, arguing that European member states were more likely to pursue their individual national interests and to begin to step back from some of the integrative measures that the EU had adopted in recent years. … By contrast, “institutionalists”:http://www.newsweek.com/2009/07/31/europe-defies-the-skeptics.html, and EU-philes more generally, have suggested that the only way forward was to deepen political integration within Europe. … So what we have here is a nice test of two rival paradigms, and students of international politics should pay close attention to how this all plays out.

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We won’t know for some time yet whether we are living through a game-changing period in which a dominant economic paradigm is replaced by something else. We don’t yet know what the catchy label will be for it.

Yet some of our conventional notions about how states manage market expectations have already been upended in recent times. One of these concerns the politics of credible commitment, which doesn’t always work the way we think it should.

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bq. _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”:http://www.irisheconomy.ie/index.php/2011/01/13/divide-and-conquer/

A friend of mine has just sent me this “link”:http://www.reuters.com/article/idUSPISDCE7QE20110113, in which Sarkozy is saying that it is unreasonable for us to maintain our low corporate tax rates while seeking financial aid from Europe:

bq. “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”:http://www.liberation.fr/economie/01012306493-le-scandale-du-sauvetage-des-banques-irlandaises. 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”:http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=3002&tx_ttnews[backPid]=901&cHash=c374cd2038 and “here”:http://www.independent.ie/opinion/columnists/david-mcwilliams/david-mcwilliams-citizens-must-fight-rise-of-european-bankocracy-2492637.html), 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”:http://www.ft.com/cms/s/0/61f8fab0-06f3-11e0-8c29-00144feabdc0,s01=1.html#axzz182N9peXP 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”:http://www.bloomberg.com/news/2010-12-22/wikileaks-joins-forces-with-billionaire-lebedev-gorbachev.html perhaps suggests a more convincing justification.

bq. 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.

bq. 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”:http://www.amazon.com/gp/product/1586488740?ie=UTF8&tag=henryfarrell-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=1586488740 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.”:http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2973&tx_ttnews[backPid]=901&cHash=484db55c3a An extract.

bq. 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”:http://www.eurointelligence.com/index.php?id=581&L=&tx_ttnews%5Bpointer%5D=1&tx_ttnews%5Btt_news%5D=2507&tx_ttnews%5BbackPid%5D=898&cHash=9a95444282 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.