Was European Federation possible at the end of 2008 crisis?

European Federation — a political integration of Europe, seemed to be one solution to the European Crisis. Then again others argue it was doomed to fail.

A political integration is an emotional, cultural and political process. By themselves, these each of these are quite challenging. Secondly, the budgetary/financial discrepancies between member countries had to be resolved in a Federal style — even before a federation came to being. Again a big issue. So was federal Europe possible? It was. In fact, “other things being equal” European people would have had no problem integrating — this time or a bit later. But other things were not equal. The central issue, I think, was the political situation.

The compulsion for political union came at the time of immense political turmoil. What started as a refugee crisis, quickly turned into a religious friction and today Europe sits at a major inflection point. Instead of expanding their identity into a bigger European identity, the citizens are faced with reducing it to exclude some religions, minorities and others-not-like-us. The reductionist forces are winning — radicalisation of european muslims, terror attacks, rise of IS and other thorny issues are shoe-boxing the European identity further and further. Without guidance of able leadership, the mindset will become closed. Hate will once again building up.

There was a massive leadership crisis. A great european leader would have focused on the migrants who were malleable and worked on them. She could have identified the refugees keen to integrate and empowered them to expand the integration process to their communities. Sadly, european leaders tried to shepherd their own population into a forced acceptance of refugees. Like a forced marriage, it was bound to fail. At such stage, we wish we had leaders of caliber. If there was an insurmountable obstacle this is it. The level of politics is shameful.

The fault is also with the people. The pedestrian politics of our times is narrowing our minds into seclusion and hate. That it is so possible in the time of internet and social media is the blight on our humanity. And past 10–20 years have brought the peoples of the world closer through the internet. Our choice, the one our politicians ignore, is to expand our minds. We need to remember that eventually the identities must expand and embrace all of humanity. To expansion, there is no end.

Similar circumstances faced the American a few hundred years back. They expanded themselves into a federation, bet on humanity and came to lead the world. The people of Europe face a similar test today. Sadly, there is no Washingtons, no Jeffersons and no Franklins. Or are there?

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

United States of Europe

In principle, there is not much difference between United States of America (as it was intended) and United States of Europe (as it is perceived as of date). 

1. USA was a federal structure in a true sense. Barring money, national security and foreign policy, not much role was envisaged for the central government. However, just like in the case of USA, USE must be wary of tendency of the central government to start hijacking things to itself. Sometimes there are legitimate reasons for doing so, for example:
1. Inter-state issues of national security and policy. For example, establishing of FBI, DEA etc.
2. Creating economic efficiency. For example, inconsistent laws between states creates problems and there is good argument for center to create a unifying law.
2. Other times, central agency takes up power at times of crisis when collaborated and concurrent action is required by all the states together. Naomi Klein in Shock Doctrine, highlights some of the instances where disaster was used to by-pass checks and balances of the system.

Implication

So I don't see any problem when there exists a possibility of politically uniting Europe. If handled properly, it could be successful. However, odds are always stacked against it. Pursuing it at this moment will be a mistake. I am reminded of the quote, friendship always exists among equals. In today's Europe, there is no equality and hence no friendship.

Aside

If you have enough decentralization, then any aggregation at the top level has little or no effect. It is the centralization that starts creating the problem. It belittles the citizen and magnifies the government. 

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Comparing Euro with US-China - MMT

Edward Harrison points to a Randall Wray post about MMT, sovereign debt crisis in Eurozone.

Randall refers to difference in location of monetary policy, within the sovereign in case of UK and outside the sovereign in case of France (with ECB), leading to reduced risk of default. Randall refers to this as one main source of problems of the Eurozone.

However, Euro area is not the only problem. When it comes to difference between where monetary policy is located and where fiscal policy is located, we have two examples of this model operating currently- Euro model and US-China model. Both are at risk, different risk, but definitely at risk.

In principle, US-China model has a similar monetary-fiscal policy situation to Euro area. US sets the monetary policy and that policy trickles down to set of countries that peg their currencies to US Dollar. I have only used China as representative, in reality many more countries peg their currencies to USD and this group is bigger than the Euro-group.[1]

The issues is if you have given up monetary sovereignty, you are eventually forced to give up broad level fiscal sovereignty as well. So a system where monetary policy is regional, you must have a regional fiscal policy at least at a broad level. It all boils down to congruence between fiscal and monetary policy.

The persistence with this monetary-fiscal distortion polarizes the participants creating a production pole and consumption pole. In case of Euro area, we have Germany and Greece as representative poles. In case of US-China model the respective poles are China and US.

Now the difference is Germany, the production pole, has larger influence over monetary policy[2] in Eurozone while its corresponding pole China, has no say in policy of US. 

In the US-China case, US does not seem to have a problem. But actually it does. The model requires the China-group to keep buying US treasuries. This allows US more monetary policy room but forces these countries to absorb, either through government or overseas investment, this impact. It masks the problems of US till one fine day US suffers a heart attack. Further imagine the policy environment if Greece ran the policy in Eurozone. I won't go into more detail here but suffice to say this model is equally broken.

Notes:

1. Euro as a group, single entity, also has a similar arrangement. Here Euro-group occupies the position of US and few countries peg their currencies to Euro. In addition, Euro is also influenced by its value with respect to USD. It is sort of a complex fractal. We will leave aside these complications for the moment.
2. Apologies to those who believe monetary policy is truly independent. And, of course - there is no Santa Claus - it was your parents all along.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Solving Euro Crisis

Martin Wolf has a column about what IMF must tell the EU leaders. It is a rather generic diagnosis but it got me thinking. Here are my steps to solving a Euro Crisis.

Step 1: Put out the fire 

I borrow from Martin Wolf here. We need the EU leadership to come up with a "credible commitment to halt the contagion". Without this there is no tomorrow. You may read the entire suggestion by Martin Wolf.

There needs to be a credible commitment to halt the contagion, for sovereigns, banks and markets. One possibility would be to guarantee financing of rollover of public debts and fiscal deficits for Italy, Spain and Belgium for 2012 and 2013. That would cost up to €1,000bn ($1,300bn), though even this might be insufficient to arrest the contagion, given its current extent (see chart). The resources needed could come from leveraging the European Financial Stability Facility or from the European Central Bank or both, with the former taking on the risk of loss and the ECB offering liquidity. In the longer term, a conditional eurobond may provide a workable answer, as John Muellbauer of Nuffield College, Oxford, has argued.

Step 2: Create certainty to induce demand

I take it further than Martin Wolf here. He simply states that households must spend. I would go further, and correct the job-side first. The reason households are not spending lie in two categories, first is ability and second is intention. Both are missing. We can transfer a million Euros in each persons bank account and give them the ability but we cannot give them intention.  

Intention needs to be induced and can be induced by bringing certainty on the income side. Once people are confident that they will have income they will start spending. Alas, the political policies do not inspire much confidence.

Here income means income less bare essentials. Bare essentials should include food, basic healthcare and basic transportation. Both healthcare and transportation need to be credible. 

Thus, income can be created by creating, for the short term, jobs that tie-in with the competencies of the population. It means if Greeks are good at mining then create more mines, if they are good at electronics build more electronic factories.

Secondly, we need cost ceilings on food, healthcare and transportation. This will help limit the expense side. 

Long term solutions

For the longer term, multi-pronged approach is required. 

1. We need to improve employability for new-age jobs through training. This goes concurrently with old-world jobs we force them to have. 
2. We need comprehensive reform of entire social system, starting from economy, judiciary, taxation, media and politics.
3. We must take the learning from EU crisis and go for a two-tiered world currency system. This will allow monetary policy and fiscal policy to have equivalence. EU can take two routes, member countries can cede fiscal freedom to EU governments or we can dissolve the EU as a monetary union. Dissolution must be structured and old loans must be marked to new loans in fair manner.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Pricing EU break up using the Soviet breakup

Gillian Tett, my favourite columnist, recently drew parallels between Russian break-up in late 80s and a possible breakup of EU. The general lessons are critical when politicians consider the future of EU. But what I want to point out is a little different.

Today a lot of analysts talk about default of Greece being priced in. Some also say market understands the price of breakup of EU. I would like to see a paper that uses Soviet breakup of mid-80s and then draws up a scenario for EU breakup, in terms of costs, markets and general investment trends. That analysis will be more meaningful. One may deduce a milder process of EU breakup learning from the Russians.

Gillian Tett talks about some differences in institutional infrastructure. She believes presence of central banking, expertise on monetary policy etc. will stand EU in good stead. However, she points out, todays economies are far more integrated than the isolationist (my insertion) Soviets. It is possible we may be effectively pulling the rug from under our feet.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Euro Crisis - A of tragedy of Commons

European Union was evolved to create an unified market. It implied giving away some monetary policy control to reduce the transaction costs (or friction) in trade between Euro countries. It was understood that each country will maintain fiscal health. There were no rules of resolution in case someone didn't. All this reads like problems we encounter as tragedy of commons.

Elinor Ostrom has suggested a few issues with tragedy of commons that are directly applicable to Euro Crisis. There are a number of factors conducive to successful resource management but absent in current Euro-land.

1. One factor is the resource itself; resources with definable boundaries (e.g., land) can be preserved much more easily. Does it mean that the fiscal health should have had boundaries?
2. A second factor is resource dependence; there must be a perceptible threat of resource depletion, and it must be difficult to find substitutes. This was clearly missing - the peoples of Greece, Italy etc, I am assuming, did not believe things will come to this.
3. The third is the presence of a community; small and stable populations with a thick social network and social norms promoting conservation do better - trust. Trust is something that is missing.
4. A final condition is that there be appropriate community-based rules and procedures in place with built-in incentives for responsible use and punishments for overuse. None prescribed as yet.

Here is Elinor Ostrom explaining the tragedy of commons.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.