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.
On 21 August, I was invited to talk about the importance of ‘walls’ in a European context at an annual socio-cultural-political event called ‘The Meeting’ in Rimini. I sketched these notes as an aide for the interpreters who were supposed to render my unique version of the English language into fluent Italian. My host, Paolo Magri, insisted that I speak in Italian instead. What followed was probably more authentic as a set of off-the-cuff remarks using my one hundred and fifty mangled Italian vocabulary words, but it may not have delivered the full message. My central argument is that we should be wary of identity-based political mobilization. Any politician who wants to mobilize ‘us’ against ‘them’ is not your friend. That is as true in the United States as it is in Europe. Alas, Europe’s history with that kind of politics is a tragic one. Let’s hope we don’t have to experience it again.
To understand what impact the Trump Administration will have on European economic performance you have to start by re-examining the lessons of the past. Almost 50 years ago, Richard Cooper published a ground-breaking book in the United States called: The Economics of Interdependence. He conceived this book during the early 1960s while he was working as an economic policymaker in the Kennedy and Johnson Administrations, and he developed the argument as part of a high-level study group within the Council on Foreign Relations. These details are important because the message Cooper had to communicate was controversial, particularly coming from a member of the foreign policy establishment. No country, he argued, not even the United States, can ignore how other countries react to their economic policies. The problem is not good diplomacy (or good manners). It is structural. If policymakers ignore how other countries react to what they do, then they will never achieve their objectives – because the reactions of others can do much to offset any benefits a discrete policy action may deliver. Indeed, a country will be worse off going it alone than working with others. Compromise and cooperation are always better than having countries set their economic policies at cross-purposes.
The Belgian economist André Sapir used a background paper for the September 2005 informal summit of the European Union’s economic and finance ministers to make a provocative claim about the European social model: Europe’s heads of state and government do not need to choose between equity and efficiency or between a welfare state and a market economy; with the right reforms to welfare programs and market institutions, it is possible to have both equity and efficiency at the same time. The British held the rotating presidency of the Council of the European Union and were quick to take up Sapir’s challenge. The quest to achieve both equity and efficiency moved to the heart of efforts to relaunch the Lisbon Strategy and to re-energize the European project. Unfortunately, these efforts were soon overtaken by events.
The Italian government passed a series of decrees yesterday to allow Intesa San Paolo to buy the healthy assets of two small banks from the Veneto region – Banca popolare di Vicenza and Veneto Banca. The state will move the distressed assets into a ‘bad bank’ for orderly liquidation. This action closes a chapter on the Italian banking crisis that started in late 2015 when regulators made it clear that the two small Veneto banks needed more capital. Over the intervening period, investors threw good money after bad as the banks continued to haemorrhage deposits and mount up non-performing loans. The government did not want to step in because it did not want to impose losses on large depositors or junior bond holders. Ultimately, though, the situation for the two institutions was unsustainable. Now we know what the solution looks like. The question is what we learned from the process. The short answer is that Europe’s banking union is still dangerously incomplete.
As candidate, Donald Trump made a number of comments about the utility of the North Atlantic Alliance and about the virtues of European integration that left many in the establishment scratching their heads. When he was elected President of the United States, Trump did very little to soften his tone. On the contrary, the Trump White House floated the names of potential ambassadorial appointments who talked about the transatlantic relationship and the European Union in even more disparaging tones. Of course, this could all be marked down as campaign bluster and the hiccups that come with any transition into office. Other more seasoned politicians and diplomats have challenged Europe to do more for NATO and many have expressed exasperation with the transatlantic partnership. Former Defense Secretary Robert Gates and Assistant Secretary of State for European Affairs Victoria Nuland are two obvious examples, but the list is a long one. Nevertheless, the positions taken by Trump with respect to Europe both as candidate and as President are unusual enough to warrant putting them into context.
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.