The turmoil that struck Italian sovereign debt and bank equity markets on Tuesday, 29 June, is a stark reminder that the potential for another crisis is real, even if not imminent. Important parts of the firewall that separates banks from sovereigns remain incomplete – and central bankers remain vulnerable to political influence as a consequence. Two recent books help illustrate why. One, by former Cypriot Central Bank Governor and Leicester University Professor Panicos Demetriades, reveals the limits of central bank independence. The other, by University of Denver Professor Rachel Epstein, explores the interaction between banks and markets.
It is no secret that the economics profession is struggling to learn the lessons taught by the recent crisis. Two new books show where that thinking is headed. The End of Theory, by Richard Bookstaber, emphasizes the importance of focusing analysis on the world as it is, rather than on a more formal universe that is easier to model. Adaptive Markets, by Andrew Lo, explores how much we could benefit from learning to tap the potential of modern finance.
International regimes for the management of inter- and intra-state conflict only work when they can operate in a stable regional security environment. International mediators can have the most skillful negotiators, the most credible ‘honest-brokers’, the most attractive incentives for peaceful reconciliation, and the most sophisticated political institutions for power sharing, but they are unlikely to succeed without the determined support of Great Powers and so long as there are other powerful actors in the region who encourage one side or the other to resort to violence. Moreover, this is an enduring feature of international relations; it was as true during the interwar period as it is now that the Cold War has ended. Security is a nested condition that policymakers and diplomats create from the outside-in and not from the inside-out.
Something happened to Europe after the fall of the Berlin Wall and it affected both sides of the continent. That ‘something’ was not simply a diffusion of western ideas, policies and politics to the East. The former communist countries of Central and Eastern Europe underwent a profound transformation, but to say that they became ‘normal’ – and by saying that to mean they became more ‘western’ – would be an exaggeration. Such a statement would also overlook the impact of ideas, policies, politics, and people that spread from East to West. The history of Europe since 1989 is a story of ‘co-transformation’. It is also more contingent than teleological. Things did not have to wind up as they have – which is good, because there are many things about Europe that we should work hard to change.
Oxford University Press has published two new books on the political economy of the euro area that should be required reading. One, by C. Randall Henning, explains why the International Monetary Fund has become a central actor in the stabilization of the euro area; another, by Waltraud Schelkle, sheds new light on what the single currency has to offer both in its current form and looking to the future. My reviews of both books are below.
Economic governance is in the eye of the beholder. The French want discretion, flexibility, and effective crisis management; the Germans want rules, discipline, and effective crisis avoidance. The euro as a single currency reflects both tendencies. There are aspects of Europe’s macroeconomic framework that are flexible and responsive (like the European Central Bank) and aspects that are more rigid and formulaic (like the ‘six pack’ and ‘two pack’ of policy coordination procedures that strengthen the ‘Stability and Growth Pact’). The challenge for Europeans is to find a sustainable balance. Too much of either tendency is not only unacceptable to one side or the other in the Franco-German partnership, it is also unlikely to work in stabilizing either the euro as a single currency or the European Union as a political project.
The United States is not the only country where the consensus on central bank independence is in trouble; central bankers across the formerly communist world are facing sustained political challenge as well. The difference in the formerly communist world is that central bank norms, practices and policies never fit as well in the institutional context of regimes in transition and the consensus spread only weakly outward from the central banks themselves. This is the argument Juliet Johnson makes in her brilliant book on the role that central bankers played in the transformation of the post-communist world.
Central bank independence is under attack. This is true particularly in the United States. When the dust began to settle on the presidential primaries in spring 2016, three of the four leading candidates – one Democrat and two Republicans – supported legislation to audit the Federal Reserve (or Fed) and to compel it to follow a rigid and transparent rule for changing policy in response to changes in a limited range of macroeconomic variables. The reason has a lot to do with the same populist resentment that swirls around global trade. And while the Fed has not received the attention given to the trans-Atlantic Trade and Investment Partnership, for example, it is arguably just as important.
Italy is a country where the past, present and future are all jumbled together. Moreover, the juxtaposition is intentional. When they redid the main street in Bologna, for example, the workers lifted out an old fragment of a tramline from the last century. The trams have long since been replaced by busses and the metal rails were peeking through, only poorly covered by tarmac. The city decided to replace the tarmac with new stone paving slabs and so it was necessary to remove the old tram track. Once the stone was in place, the workers cut two groves and fit the pieces of rail back into place. This way, the new road does not completely cover the city’s past.
The referendum campaign on whether Great Britain should remain a member state of the European Union (EU) or leave is in full swing. Campaigners for Britain to ‘remain’, including Prime Minister David Cameron, insist that the British government has successfully renegotiated its relationship with the EU. Those who want Britain to ‘leave’ insist that the opt-outs Cameron won are insignificant and untrustworthy; whatever the British government may say, the bureaucrats in Brussels are plotting a ‘super state’ that will usurp British sovereignty.