Alberto Mingardi  

European Union, which steps forward?

PRINT
Koyama on Working Conditions D... An Idea for Someone Looking fo...

An almost invariable mantra of European politics is that Europe needs "an ever closer Union". Political centralization is commonly considered the only way out of the crisis - meaning, first of all, centralization of fiscal policies, as an all-powerful Brussels should be able to (a) put order in the balance sheets of profligate member states (the stick) and (b) put an end to the tax competition that endangers fiscal revenues of high taxed member states (the carrot).

Different perspectives are seldom heard, and often marginalized. Bruegel, a Brussels-based think tank whose supporters include EU member state governments, has now published an interesting paper by Ashoka Mody, Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University.

Writes Mody:

An alternative resting stop on the way to 'a more perfect union' would be based on the recognition of a de-facto decentralisation in Europe. The financial costs of the crisis have been borne almost entirely at the national level; that is unlikely to change in the foreseeable future. The alternative resting stop would, therefore, seek to make decentralisation more robust rather than wish it away. A model would be a monetary union that resembles the United States before the Great Depression. Then there was virtually no system of fiscal transfers and states' fiscal discipline was enforced by a 'no-bailout' commitment. The task for the euro area is to leverage sovereign authority where it exists: at the national level.

Mody's paper is very interesting, and I hope it shall find an audience among the European ruling classes. The debate, he argues, should take place on more realistic grounds:
If a transparent system of transfers is not politically tenable, then a forward-looking euro-area economic architecture surely cannot be built on the premise of continued official loans that will eventually be forgiven
(...) Much of the guiding philosophy today - to render sovereign debt risk-free and to reduce differences in private borrowing costs in different countries - recreates the problems that led to the crisis.

Mody does not oppose a system of fiscal transfers on ideological grounds, but he notes that such a system is very unlikely to come in place, as a preference for maintaining national sovereignty remains strong among European governments and electorates. He also points out that "a fruitless search for integration has costs".

The European debate tends to be schizophrenic: prime ministers always preach "an ever closer Union," electorates react to Brussels' indecisiveness by favouring euro-skeptic forces, Brussels appears as the right place for technocratic fixes rather than for a political come together (as European federalists wish).

Mody's paper aims to suggest a new approach to European integration that focuses on decentralization "to improve economic incentives, the speed of response, and the democratic legitimacy of the Union." According to Mody,

These goals can be achieved by: (a) lightening centralised surveillance; (b) creating market discipline for sovereigns through a credible no-bailout mechanism; and (c) since it is particularly risky to await the construction of a banking union - because of incentives to push the hardest decisions into the future - national authorities should be encouraged to use their national bank resolution systems and pragmatic approaches to close down unviable banks.


Comments and Sharing


CATEGORIES: Eurozone crisis



COMMENTS (5 to date)
Eelco Hoogendoorn writes:

This is so far removed from any thinking that (allegedly) takes place in Brussels, this report is going to be as much of a bestseller as 'free to choose' is in north Korea.

Dan S writes:

This paper just wishes away all of the fundamental problems of being in a currency union without a banking and/or fiscal union. Bailouts weren't done because Germany wanted them, but because the alternative was for Greece to be forced out of the Eurozone, which, don't get me wrong, may be the right thing in end, but would have been chaotic at the time.

"(a) lightening centralised surveillance; (b) creating market discipline for sovereigns through a credible no-bailout mechanism; and (c) since it is particularly risky to await the construction of a banking union - because of incentives to push the hardest decisions into the future - national authorities should be encouraged to use their national bank resolution systems and pragmatic approaches to close down unviable banks."

The whole issue here is that national governments can't handle their banks all by themselves because they can't print their own currencies and they will always run the risk of biting off more than they can chew (as Ireland was forced to do) and suffer a "run" on the country. So if you implement (a) and do nothing to prevent countries from running high deficits, and (b) and (c), essentially telling individual countries that they are left to their own devices, you get...exactly what happened over the past 3-4 years! And I hope we can agree that that's something to be avoided.

Andrew_FL writes:

At the Wilson school, you say? Now that is kind of amazing in and of itself!

ThomasH writes:

Even given the error of forming a monatary union, pointed out by Krugman et al, the present crisis wold not have ocurred if lenders had realized that reducing exchange rate risk increases credit risk.

Mark V Anderson writes:

It is great to have an Italian on this blog, to tell us about stuff outside the U.S. that I never hear about (our very U.S. centric press). I rarely comment on Alberto's postings simply because I know little about the subjects of which he writes. I wonder if that is why he gets few comments -- I assume that most of the readers are from the U.S. and like me pretty ignorant of what's going on outside the country. But at least for me that lack of comments does not correspond to a lack of interest.

Comments for this entry have been closed
Return to top