Now Is Not the Time

Today was another ‘crunch day’ in the negotiations between Greece and its creditors in the euro area.  The Greeks have made their proposal.  Now the Economics and Finance Ministers have to make a decision about whether to extend the Greek bailout That decision may require that the Greek government offer even more.  The Greek government is reluctant because it fears betraying the electorate that just voted it into office.  The German government is reluctant to concede more either because it has its own voters to worry about.  It also has to worry about its allies – like Finland, Slovakia, Portugal, Ireland, and Spain – who have supported a hard line on Greece, also for domestic political reasons.  Hence we are at a democratic impasse.  The two sides are close to an agreement, but close is still ‘no cigar’.

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Credibility as a Powerful Idea

As an academic, I am interested in the power of ideas. If ideas didn’t matter, I would probably look for another job. Fortunately, the power of ideas is all around us. This is not a reference to the terrible events in Copenhagen, although I suppose it could be. That was a conference about ideas attacked by people who have a deep fear of the power of ideas to threaten them. Slavoj Žižek made that argument about the Charlie Hebdo attacks earlier this year; his reasoning applies equally well in this more recent tragedy.

The power of ideas I find most interesting at the moment centers on the notion of credibility. The reason this is interesting is credibility can seem so solid at one moment only to collapse in another. I worry this could happen to the euro as a single currency if some accident were to happen and Greece were to leave the euro. This essay is a long way of making a simple point.  Anyone who thinks that Greece can leave the euro without having dramatic consequences is underestimating the power of ideas.

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Central Banking as Politics

Central bank independence used to mean that central bankers would take economic decisions without regard to the political consequences; now it appears to mean that central bankers take political decisions without regards to the economic consequences.  This is a very bad development for macroeconomic policymaking because it is likely to give political momentum to those who oppose the prevailing policy framework.  The result will be a crisis of legitimacy for the central banking community and an increase in volatility and uncertainty in the world economy writ large.

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Hard Bargaining

Italian Prime Minister Matteo Renzi won a big victory this weekend. He threw support behind Sergio Mattarella as candidate to replace Giorgio Napolitano as President of the Italian Republic and Mattarella managed to win almost two-thirds of the votes of the Italian electoral college in the fourth round of balloting. This means that Renzi was able not only to hold together his fractious Democratic Party but also to split Silvio Berlusconi’s Forza Italia on the Center Right and to show the growing irrelevance of Beppe Grillo’s Five Star Movement in national politics. Mattarella becomes President and Renzi is much strengthened as a consequence.

This result was not a foregone conclusion. Things could have ended differently. The Democratic Party could have split, Renzi’s center-right coalition partners could have refused to support Mattarella for President, Berlusconi’s Forza Italia could have held together in the electoral college and then turned on Renzi’s institutional reform agenda, or Grillo’s Five Star Movement could have tried to create chaos in the whole proceedings by introducing a Democratic Party grandee like Romano Prodi or Pier Luigi Bersani. Renzi had to negotiate skillfully to avoid most of these obstacles; he had to be lucky to avoid the rest. Hence the take-away for most Italians is that Renzi has a good mix of cunning and bravery — the Italian word is ‘furbizia’ — to carry the day.

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