National Ownership is Moral Hazard

The grassroots politics that policymakers accept as necessary for success in the domestic context is viewed as a top-down failure in any other country. The question is whether these two views of reform politics are reconcilable. The answer depends upon two things. One is how much you see politics as a process of give and take between policy advisors, politicians and voters. The other is how much you trust politicians in other countries. Unfortunately, the debate in Europe right now is much more about trust than about process.

When you talk to politicians about the best way for foster reforms in their own country, they stress the importance of national (or local) ownership. First you get the people to give priority for action, then you build consensus on what should be done and in what order, and finally you work out some acceptable formula for sharing the costs. It is a long and painstaking process that requires a lot of effort at the grassroots level.

When you talk to politicians about why reforms they have demanded in other countries have failed, they stress the problem of moral hazard – which is when, through their action or inaction, one groups imposes costs on another or accepts risks they cannot absorb. People do not like reform, they tend to pick and choose among the measures on offer rather than accept the need for a coherent program, and they refuse to accept any share of the costs. That said, moral hazard is above all a failure of national leadership. To avoid moral hazard, you need decisive, determined action at the national level.

Let’s start with the process issue. Policy advisors outline what should be done in an ideal world of abstract models and probabilistic simulations; politicians explore what can be done given the ‘real-world’ divisions that exist between organized groups in society; and voters not only have the power to accept or reject the politicians but must also live in the day-to-day world that results from the success or failure of reform efforts. If you focus on deliberation and solidarity in the interaction between these three groups, then reform is a process of consensus building that filters broadly-accepted (or acceptable) values through powerful interest groups using the ‘best’ ideas available but accepting that compromise is inevitable in order to make things work. If you take the extreme technocratic view that it is possible to design policies in an abstract world that only need to be implemented to improve the situation on the ground, then ‘reform’ is more a process of politicians imposing the best solutions policy advisors can offer on powerful groups while at the same time selling the necessity for sacrifice to the electorate.

Mystery solved. Politicians pay more attention to the need for deliberation and solidarity in the domestic context and they give greater attention to the ‘best’ policy advice for everyone else. You might say, cynically, that this is because they care more about their own re-election than the re-election of politicians in other countries. But that cynicism ignores the reality that politicians are often motivated by strong, heart-felt beliefs. This is true particularly when what policy advisors now model as best practice for other countries is something that politicians managed to stumble (deliberate, negotiate, cajole) their way into domestically in the past.

Consider the case of German labor market reform. There are many ways to tell the story. You can tell it as a burst of inspired leadership at start of the 2000s that culminated in the famous Hartz reforms or you can tell it as a process of trial and error that stretches back into the 1980s (if not earlier), punctuated by concessions made in the interests of creating a German economic, monetary and social union prior to the political unification of Germany. Moreover, either story can be re-litigated or reinterpreted in light of subsequent events. We can argue about whether it was really necessary for German politicians to take so long and make so many concessions or whether a more deliberative and inclusive process would have proved more effective.

What is less open to debate is how German politicians would have responded if foreign policy advisors had tried to take over the labor market reform process or if foreign politicians had pushed them to move faster than they were ready to undertake reforms. Fast or slow, German politicians owned the pace of the reform process as much as they owned the content. For better or worse, so did the German people. Moreover, this is true despite the powerful influence that German economic performance has on conditions in other European countries. The fact that the unique pattern of German unification fed into the European exchange rate crises of the early 1990s and that the fiscal concessions made during the labor market reform process in the early 2000s had an impact on other countries is less important than the fact that Germany came together and held together throughout this lengthy process. Foreign politicians may have grumbled, but none thought to force German political leaders to attempt reforms that the Germans themselves viewed as politically impossible. No one talked about Germany’s ‘moral hazard’ either – or, when they did, they were quickly shut down. [Here I am thinking of some of the more over the top concerns expressed about German unification.]

The reconciliation of national ownership and moral hazard is easy if you can have confidence in the good faith of politicians. This is where we return to the trust side of the argument. So long as politicians are working to promote deep and meaningful reforms through deliberation and consensus building (which is what national ownership entails), politicians in other countries can suspend their concern about moral hazard. The problem arises when confidence in that good faith evaporates. Unfortunately, that is the situation we find in Europe.

When national politicians in countries like Greece, Portugal, or Italy argue that they need more time and greater flexibility to undertake deep and meaningful reform, they are making the case for national ownership; politicians who hear these arguments in other countries — not only Germany — immediately suspect moral hazard. As a consequence, they try to take over both the pace and the content of structural reforms, using conditions on aid and the rules for European economic policy coordination as leverage. Such efforts are likely to prove self-defeating. Reforms undertaken without national ownership are both less successful and subject to reversal once the pressure is lifted. Here you might look at the current situation in Portugal.

Efforts by foreign governments or international institutions to impose both the pace and content of reform in a country under duress tends undermine trust as well. The countries pushed to undertake reforms resent the hypocrisy of politicians in other countries demanding the impossible and, in turn, those politicians demand reform see any resistance or foot-dragging by the politicians asked to implement the changes as confirming their suspicions about moral hazard.

Politicians pushing for reform in other countries are right to be suspicious. National ownership is a form of moral hazard because the costs of consensus building in domestic politics often spill over onto other countries. But the advocates of national ownership are right as well. If the goal is deep and meaningful reform, the pace and content must be acceptable to powerful interest groups and the broader electorate. Accepting the possibility of moral hazard is the price we pay for national ownership. This requires trust. But that trust is in everyone’s self-interest – because the alternative is pushing the countries of Europe ever farther apart.