Arnold Kling  

Options for Europe

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I have a hard time getting a grip on the European situation. The economics are complicated enough. But the political issues turn it into a three-dimensional chess game that is too deep for me. Anyway, perhaps this Bruno Leoni Institute analysis (long pdf) can help provide background perspective. A brief excerpt:


We must also note that the trend towards liberalization coexisted--perhaps ever since the establishment of the EU--with an opposed trend towards harmonization. Thus, if on the one hand there was the attempt to defang the interventionism at the national level (as witnessed by the several markets which were partially opened to competition only--or mainly--thanks to the effects of a EU Directive), of the other hand the attempt emerged to integrate the several national regulation--particularly in the taxation realm--as well, to secure a more effective implementation of public policies and to pursue the EU's "general interest." whatever this may be.

One concern is the drive for "tax harmonization." This is discussed in a related paper. Tax harmonization sounds like a good thing (harmony, right?). But I think the thrust of it is to insulate the tax-writing bureaucrats from the democratic process, which is only a good thing if you have faith that the technocrats will be as wise and benevolent as they claim to be

Also interesting is Michael Pettis, who at least tries to think in three-dimensional chess terms about what the various options imply.


Abandoning the euro and devaluing imposes much of the burden on creditors whose assets are redenominated...Forcing down labor costs through unemployment puts the bulk of the burden on workers and the lower middle classes, especially non-unionized workers...Inflation hurts everyone on a fixed income. Middle class people with savings, pensioners, and non-unionized workers are usually the ones hurt the most...Default and debt forgiveness places the adjustment cost on lenders, in this context especially on lenders to the sovereign borrower. Again, it is worth remembering that if a disproportionate share of lending comes from foreigners, they absorb a disproportionate share of the cost...Raising consumption and value-added taxes hurts consumers, mainly the middle and working classes since the poorer you are the higher consumption is as a share of your income, while raising income taxes on businesses puts the pain of adjustment on businesses, especially small businesses who often aren't able to protect themselves. Finally cutting fiscal expenditures mainly affects the middle classes (medical and education) and the working classes and poor.

Keep in mind that the United States faces a similar set of choices.

Have a nice day.



COMMENTS (7 to date)
Sam writes:
raising income taxes on businesses puts the pain of adjustment on businesses, especially small businesses who often aren't able to protect themselves.

I would add that the ultimate burden will fall on the customers of those small businesses through either higher prices or loss of access as the small owners exit.

I would think that the canonically European shopping area (many small shops each specializing in a small part of the food market, e.g., fruits and vegetables; baked goods; raw meat; smoked meat; etc.) would be threatened by this, and that might stoke culture-inspired resistance.

jsalvatier writes:

"insulate the tax-writing bureaucrats from the democratic process, which is only a good thing if you have faith that the technocrats will be as wise and benevolent as they claim to be"

I think actually it's good if you think technocrats will be wiser and more benevolent than voters, which I think is more reasonable to argue.

mark writes:

Given that lenders have creditors too, this statement, "Default and debt forgiveness places the adjustment cost on lenders, in this context especially on lenders to the sovereign borrower" is false. Impacts on any large organization are simply transmitted through its network of relationships to its constituencies.

It is worth noting the feedback loops and circularity in the financial sector's / government's relationships. Each sector is a lender to, or guarantor of, or creditor of entities in the other sector. Duration, interest rates, amounts of the credit extensions may differ. It's just another complexity in what is way more than three dimensional chess puzzle.

Hyena writes:

Do a little of everything. After all, when a bubble bursts it means that you weren't really as wealthy as you thought.

Usems writes:

"I have a hard time getting a grip on the European situation. The economics are complicated enough. But the political issues turn it into a three-dimensional chess game that is too deep for me."

A bit of humility on the blogosphere is a breath of fresh air. I wholeheartedly agree with the statement. There are so many political players that can shift the outcome of these scenarios that it makes prognosticating extremely difficult.

Chris Koresko writes:

Usems: A bit of humility on the blogosphere is a breath of fresh air. I wholeheartedly agree with the statement.

I've gotten the impression lately that for most blog postings there's an inverse correlation between authoritativeness and genuine value. Maybe that's why I enjoy Arnold Kling's writing so much, and feel like I've learned something from it, even though I can't always follow his arguments.

Anyone else? Usems, do you agree with this?

JoeCushing writes:

Who lives on a fixed income?

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