Category / Weekly note

by Erik Jones

The Trouble with Transfer Unions

The European Union is starting a big debate about fiscal federalism. There are many questions involved. The one I want to focus on is whether a Europe-wide fiscal arrangement with common transfers would help smooth economic performance across participating countries while at the same time helping them to converge on similar levels of income per capita. The line you often hear is that this is how federal transfers work in the United States: rich states like New York and Massachusetts bankroll poorer states in the south and west of the country both when times are tough and in order to foster the whole of the U.S. economy.

In reality, the U.S. federal transfer system does not work that way. The richer states in the north-east of the country get more federal transfers per capita than the poorer states in the south and west. The reason is that the U.S. federal fiscal system was designed to support people as individuals (or households) and not as clusters or places on the map. Moreover, that design reflects important differences across state and local governments. State governments that believe in more redistribution tend to get more redistribution; state governments that do not believe in redistribution tend to leave people to fend for themselves. In this sense, state sovereignty and democratic legitimacy are powerful influences even when the ‘states’ in question are U.S. states rather than national states (or Member States).

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by Erik Jones

Countries Do Not Borrow, They Are Bought

A lot of the criticism of peripheral countries in the euro area relies on an implicit comparison with households or firms. The argument goes like this: these countries borrowed excessively after they joined the euro at the end of the 1990s in order to live beyond their means and then got in trouble when they could not pay back the money. This argument is usually directed at the public sector in countries like Greece and Italy, at the private sector in Ireland and Spain, and at both the public and private sector in Portugal. These countries have all received their comeuppance and–like any firm or household in a similar situation–they now have to live within their means.

This analogy between countries on the one hand, and households or firms on the other hand, is misleading if not completely wrong. The reason is that countries do not ‘borrow’ in any conventional meaning of the term–at least not under normal circumstances. When things are going well, countries do not fill out an application with various lenders. They do not have to provide a business plan or show any bank statements. They do not offer up collateral or enlist the support of co-signers. These things only take place once a country gets into trouble and needs some kind of international bailout. ‘Borrowing’ for countries in a conventional sense means that something bad has already happened; it is the symptom and not the cause.

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by Erik Jones

Sustainable Integration as a Reponse to Mario Draghi’s ‘Imperfect’, ‘Fragile’ and ‘Vulnerable’ Union

When Mario Draghi was asked on Thursday (16 July) whether the recent crisis surrounding Greece had made the monetary union more vulnerable, he gave an astonishingly frank response. Draghi denied that the discussion about Greece made the union more vulnerable; nevertheless, he admitted that:

this union is imperfect. And being imperfect, is fragile, is vulnerable, and doesn’t deliver all the benefits that it could if it were to be completed. So the future now should see decisive steps on further integration.

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by Erik Jones

Rationality, Emotion, and the Future of Europe

This is a big weekend in the history of European integration and it is likely to be a defining moment for ‘Europe’. That significance is easy to miss. The urgent often overshadows the important. And this weekend reeks of urgency. The Greek government has listed the reforms it can deliver in exchange for financial rescue. It has also described how it would like that rescue to unfold. Now the Eurogroup has to decide whether these proposals are sufficient for the start of fresh negotiations. In doing so, Europe’s politicians have to wrestle with arguments rooted in rationality and emotion; they have to weigh the costs and benefits of yet another Greek bailout package while at the same time dealing with the frustration and bitterness that arose during the last set of talks (not to mention the last five years of bailouts).

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by Erik Jones

The Choice for Europe

The Greek referendum has left the Governing Council of the European Central Bank (ECB) with a political choice that it should not have to make. The ECB will need cover from Europe’s political leaders no matter how this plays out. As with most important choices, this one will make some people very unhappy. We should expect to see opposition emerge both in the media and in the courts. Worse, the choice that the ECB has to make will unfold in stages. It involves a series of decisions and not a simple one-off commitment. That means Europe’s political leaders will have to insulate its central bankers from opposition for the foreseeable future and probably until long after the immediate crisis has passed. Finally, this is a choice that will define Europe’s future; not only will it tell us precisely what it means to be a member of the euro as a single currency, but it will also set a precedent for how much solidarity national governments should expect to receive and to offer.

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by Erik Jones

Broken Europe

The Greek referendum is postmodern and I don’t mean that in a good way. The question is an ‘empty signifier’. No one can understand its literal meaning and that literal meaning is no longer relevant in any case. So you can think of referendum as a big symbol that you can fill with whatever you want; hopes, aspirations, worries, and disappointments all fit in nicely. Moreover, there is no reason any one person has to interpret the question in the same way as anyone else. On the contrary, politicians will try anything to find a hook that will pull you to their side of the issue. No wonder Greek society is evenly (if deeply) divided. Is the glass half full or half empty? Is it really a ‘glass’? What is ‘it’? Even the response assignments are counter-intuitive. According to the government, you vote ‘no’ to have a brighter future; according to the opposition, you vote ‘yes’ if you fear the unknown. What’s more the process itself is controversial. Greece’s detractors decry this whole exercise as a cynical manipulation; for Greece’s supporters, it is a celebration of democracy.

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by Erik Jones

The Janus-Faced Mandate of the European Central Bank

Eighteen of the nineteen Eurogroup finance ministers met Saturday night to discuss what to do about Greece. What they agreed – according to both their official statement and to the press statement released by Eurogroup president Jeroen Dijsselbloem a couple of hours later – is ‘to complement any actions the ECB will take in full independence and in line with its mandate.’ They also agreed, on behalf of ‘the institutions’, ‘to provide technical assistance to safeguard the stability of the Greek financial system.’

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by Erik Jones

The Longer-term Consequences of Greece Exiting the Euro Would Be Expensive and Divisive

There is a debate right now between those who argue that the single currency can more easily survive a Greek exit from the euro than it could have in the past and those who argue that it will be a shock to the markets similar to the collapse of Lehman Brothers in September 2008. That debate will only end if the crisis abates or there is a natural experiment. The differences between the two camps are irreconcilable.

There is less discussion of what would be the longer-term impact of Greece exiting the euro. Optimists argue that the euro will emerge as a more disciplined union because member states will know that they will not be bailed out. Pessimists warn that Europe will stagger from crisis to crisis as market participants turn on weaker member states as soon as the first sign of trouble. This seems to be a stark dichotomy and yet it is not.

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by Erik Jones

Lessons to Learn (and Not to Learn) from the Greek Crisis

Europe’s heads of state and government held an emergency summit on Greece at roughly the same time that European Commission President Jean-Claude Juncker unveiled a report he drew up with support from the Presidents of the European Parliament, European Council, European Central Bank, and Eurogroup for ‘Completing Europe’s Economic and Monetary Union.’ This juxtaposition is only partly coincidental. The ‘five presidents’ have been working on their report because the ongoing crisis in Greece makes it clear to all that there are still important gaps in the architecture of the single currency. Greece is not, however, the only reason many regard further reform of European institutions for macroeconomic governance as inevitable.

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by Erik Jones

Why the New U.S. Trade Agenda Is Such a Hard Sell

Trade policy is in trouble in the United States right now primarily because it is not ‘trade policy’. Instead, U.S. President Barack Obama has framed his trade agenda around parallel agreements on regulatory cooperation that should make it easier for transnational enterprises to distribute their manufacturing processes across national borders without facing redundant regulatory requirements or losing control over intellectual property rights. This regulatory cooperation is a good idea and yet the devil is in the details. Unlike a more ‘traditional’ trade negotiation over tariff schedules and market access, both the aggregate and the distributive consequences of this type of agreement are more subtle. Worse, the language used to describe both the process of negotiation and the agreements themselves is largely impenetrable. Worst of all, these are negotiations where fundamental principles are involved.

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