Tag / European integration

by Erik Jones

What’s Wrong with European Economic Performance?

Pessimism is building across the euro area about economic performance. Growth has slowed in most euro area economies, even as inflation remains persistently low and unemployment persistently high. The question is whether to blame this poor performance on external factors or on decisions made by European policymakers. If this is just another patch of bad luck, then the only challenge is to batten down the hatches and ride it out. It would be more worrying, however, if Europe’s economic policymakers have set their economy sailing off in the wrong direction.

The easy answer is to blame the outside world. Growth in emerging markets is slowing. This is not only sapping demand for European exports but also pushing down commodity prices and increasing volatility in exchange rates. At the same time, other major economies are underperforming. The recovery in the United States is quicker than in Europe but it is still too uneven for the U.S. economy to help pick up slack elsewhere. Japan is much weaker. Worst of all, Europe is surrounded by tragedy. The human cost of violent conflict and desperate migration is all too apparent; what is less obvious is the toll on European businesses that have lost access to neighbouring resources, relationships and markets.

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by Erik Jones

The European Political Centre Cannot Hold (But the EU Can)

Europe’s politicians have cleared the last hurdle in accepting Greece’s third financial bailout but the voting was uncomfortable for everyone. The left-wing populist government in Greece relied on representatives from the more traditional centre-left and centre-right to cover for defections from the ruling coalition; the German government used Social Democrats within the ruling coalition to cover for defections from the Chancellors own Christian Democrats; and the Liberal (VVD)/Party of Labour (PvdA) government the Netherlands got extra support from the left-liberal D66 party to add to its slender one-seat majority.

As a result of these different movements toward the political centre – and similar developments in other countries – the Greek government will get the money it needs to keep up with its debt payments and shore up its banks. That is a good thing for anyone who wants to see Greece have a reasonable chance at recovering from this ongoing crisis. Unfortunately, that centre cannot hold. A populist party like Syriza cannot govern easily with the old pillars of the Greek political establishment; Germany’s grand coalition is an historical anomaly; and the result of eight years of close cooperation between VVD, PvdA and D66 was bad for all. So the question is whether Europe’s political centre will splinter before the Greek situation becomes sustainable.

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by Erik Jones

The EU Needs to Admit Mistakes

The European Union (EU) is good at writing rules; what it needs to strengthen the capacity to suspend, ignore, or replace rules that are obviously not working or inappropriate in a given situation. In other words, the EU needs to get better at recognizing when following the rules is a mistake. This is not going to be a popular argument. Rules are supposed to be rules, after all. Nevertheless, it is vital. So long as policymakers lack perfect foresight, they will never be able to write rules that work in every situation. They will not be able to anticipate the conditions for every possible exception either. Hence they will always need some mechanism to recognize and respond to unexpected situations in a timely manner. In case of emergency, break glass. They will also need some way to hold policymakers accountable for any exercise in emergency discretion. Successful innovations will not always be rewarded but they will be accepted and used to improve the functioning of the organization; abuse will be punished. That is – or at least should be – the  measure of political union.

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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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