Forthcoming debate on Europe

Munk Debates will hold a debate under the slogan ‘The European Experiment Has Failed’. Niall Ferguson and Josef Joffe will argue that it has, and Peter Mandelson and Daniel Cohn-Bendit will defend the good other side. Brace yourselves, the EU debate of the year is coming!

The teaser from Niall Ferguson is already rather irratating: “For more than 10 years, it has been the case that Europe has conducted an experiment in the impossible.” Not sure what he means, but as a historian he should know that the dominance of the nation-state is a relatively short and recent episode in world history and that the domain of the possible often proves to be surprisingly vast.

Here is some (highly selective) background on Niall Ferguson: link, link. Felix Salmon has an entertaining post on the forthcoming debate here.

Europe’s Growth: An Optimistic Perspective

‘Europe gets a solid ‘B’ for its economic growth and an ‘A’ is within reach’.

That was the evaluation given by Indermit Gill, Chief Economist for Europe and Central Asia at the Wolrd Bank, at the annual Jean Monnet conference hosted by the Leiden University‘s Institute of Public Administration. The assessment summarizes a 112-page overview of a 500+ page new report prepared by the World Bank on the past and future of Europe’s economic growth. Mr. Gill presented some of the conclusions of the report and discussed his vision of the challenges facing the European economies. The overview of the full report is well-worth reading – it is quite accessible for non-economists and richly illustrated. In this post we want to take up just a couple of issues that seemed especially salient to us.

The report points out that by the late 2000s, the ease of doing business in South Europe (Greece, Italy, Spain, Portugal) has plummeted below the levels of the Central and East European countries. This is remarkable if we remember that 20 years ago the CEE countries still had state-led planned economies. Many people imagine that setting up a market economy requires just cutting state interference and then the market would grow on its own. But this is hardly the case – in fact, the establishment of a market and the right environment for doing business requires a huge effort in state-building. Installing the rules and regulations conductive for business growth is by no means an easy achievement, and the CEE countries should take the credit they deserve for that.

In the questions and answers section, Dr. Gill pointed out that while the low labour mobility in the EU has not impeded the working of the European ‘convergence machine’ (a very apt metaphor used in the report to describe how Europe has been helping poorer countries to grow and converge with richer EU member states), it is a problem for the eurozone. Inside the eurozone, as the monetary policy instruments are removed from the toolbox of governments, one way to compensate for the imbalances that have occurred since the eurozone is not an optimal currency area, is to allow labour mobility. Without it, the balances become even more glaring. The implications for the current policy of many European governments of restricting immigration cannot be clearer.

Another finding emphasized by the report is that the EU is a huge trading partner for the whole world, but also that a large part of trade happens inside Europe and among European partners. This was presented as the strongest pillar of the European economic success and it’s worth remembering that it is, by and large, an achievement which can most directly be linked to the Single market established by the EU between 1986 and 1992. Again, if any political leaders would seriously consider what their economy would look like without the EU, it’s worth relaying the comment of Dr. Gill, that there is no such thing as a successful small closed economy in today’s world.

Antoaneta Dimitrova and Dimiter Toshkov 

 

Delors attacks non-socialsit EU leaders

Former Commission president Jacques Delors has attacked several current European politicians over their leadership of the Union. Euractiv reports:

Delors said that in recent years, the European method had been “disguised”, marking a return to the 1814-1815 Congress of Vienna, and to the “cynicism” of nationalistic power play.  ”If we go this way, it means that someone wants to kill Europe, that it should not exist and should not have existed in the first place,” he said.

Delors goes on to put the finger on José Manuel Barroso, Angela Merkel, Nicolas Sarkozy and Van Rompuy among others. The attack is beyond any doubt ideologically motivated: at the same event Delors advocated  an European Socialist Alternative representing “an offensive of Social Democracy in the broader sense” (as quoted by Euractiv). The transformation of Delors from the ideal-typical technocrat leading the apolitical European Commission to a visionary ideologue of Eurepean socialism is quite remarkable indeed.

[via Georgi Gotev]

On a somewhat related note, here is an animated map of the changing ideological landscape in Europe since 1948.

 

Alternatives to the Euro

Over the last week, two alternatives to the euro have emerged:

1) Iceland is considering to adopt the Canadian dollar;

2) Greek citizens have started their own cashless local currency – tems.

Strong rhetoric in Brussels leads to inflexibility at home

International news in the last couple of days are full of reports about the pending need for austerity measures and budget cuts in the Netherlands. What stands out are the numerous reminders that it was the holier-than-thou attitude of the Dutch government with respect to other euro member states that contributed to the hardened stance of the European Commission now. “We think that the Netherlands is one country that has been very vocal when supporting the reinforcement of our fiscal surveillance rules,” Amadeu Altafaj, European Commission economy spokesman, said in comments  e-mailed to Edward Hugh on March 7. “So it’s absolutely normal to believe that the Netherlands will apply this same approach to its own fiscal policies,” he added.

As the Guardian put it in an interesting article, citing our colleague Paul Nieuwenburg, ‘the air in Brussels is thick with stories of pots and kettles’. There are considerable moral and political dilemmas for the government as the coalition partners try to come up with new budget cuts that spread the pain between the constituencies and supporters of the different parties. One  clear consequence of the strong rhetoric used by the Minister of Finance on Greece and on budgetary discipline in general in Brussels is that now the Dutch government cannot easily ask for some flexibility in balancing the budget over time.

What I find interesting here, next to the political dilemmas involved in holding together the minority government and negotiating the cuts, is the question of professionalism. The professionalism of an administration is defined, among others, by its ability for strategic planning, which includes anticipation of factors that may affect the economic and political aspects of policy making over a year or two or even longer. The level of Dutch mortgage debt has been known for several years and the question how sustainable it is has been raised by economists quite often in the last two years. The lack of anticipation that makes the Dutch government appear unprofessional now cannot be attributed to the civil servants and the economists of the Central Planning Bureau (CPB), since they are known to be very good at strategic planning and  policy evaluation and they appear to deliver data and work that is as reliable as ever. Another possible explanation is that an administration can only be as professional as its leadership and the good work of an organization can be damaged by erratic leadership. It could be that the Minister of Finance  has  been carried away by his own rhetoric, by the strong statements on other countries finances that he has become famous for in these crisis times. The consequences of populist rhetoric appear to include less than professional policy making…

The increasing use of intergovernmentalism: asymetric information and increased transaction costs

A series of lectures under the title “Post Lisbon Challenges to Europe” started on 10 February, as part of Leiden University’s Honours College and our Jean Monnet Centre of Excellence programme. The first lecture, by Tom de Bruijn, former Permanent Representative of the Netherlands to the European Union, offered some important insights into the changing dynamics of decision making in the EU, related to the themes that we have explored since the start of this blog.

In his lively and thought-provoking presentation, Mr. de Bruijn talked, among others, about the differences between intergovernmental and supranational methods of decision making in the post Lisbon EU. This is a theme that has been at the core of the literature on European integration and there has been so much ink spilled on it in studies discussing what supranational and intergovernmental means, that it has been a pleasant surprise that the speaker not only brought a new angle to it, but also highlighted the differences in decision making after Lisbon and the economic crisis. In particular, he drew our attention to the actors involved in preparing decision making and treaty changes when these are discussed in European Council setting, as it has been so often during the last couple of years. In contrast to the supranational or Monnet method, where the Commission not only prepares but also takes care to distribute in advance draft proposals for any important policy measures or new initiatives, under the ‘new intergovernmentalism’ as we could call it, of (crisis) decision making in the European Council, member state representatives may not receive information about new proposals or initiatives much in advance. This is especially true of new initiatives that are prepared by one or two member states, often, as we have seen in the last two years, France and Germany. Member state representatives such as the permanent representatives, must then seek new ways of preparing crucial European Council meetings and informing their Heads of State and government what will come to be discussed. The formal task of preparing European Councils rests of course with the President of the European Union, currently Mr. Herman van Rompuy, whose abilities and expertise have been praised highly in a recent article in the NRC Handelsblad and have been also evident in a recent interview for Dutch television to be watched here. Mr. van Rompuy, however, despite his great personal qualities, does not have at his disposal the resources which have been developed at the European Commission, a body devised since the outset of the European Communities to be both a centre of expertise and promoter of the common interest, including the interests of the smaller member states. The President of the European Union does not have similar mandate or staff. Thus it is not surprising that Mr. van Rompuy – and any other President of the EU that would replace him when his mandate is up – would need to rely on the resources of the member states, in terms of new policy proposals. In the case of recent European Council decision making, these are, most often, France and Germany. In terms of the work of Permanent Representatives and anyone involved in preparing decisions at EU level, this means that they must develop and mobilize contacts in the most important European capitals to be informed and prepared for decision making in the new intergovernmentalist setting. Mr. de Bruijn suggested that such an adjustment has already taken place in order to anticipate decision making for example underlying the so called Fiscal Compact treaty (Treaty on Stability, Coordination and Governance TSCG, to be found here) which has just been signed by 25 EU leaders in the margins of the European Council of 1-2 March 2012.

Our speaker did not need to spell out the implications of these different ways of preparing decisions  in great detail. Under the new intergovernmentalism, the agenda is unclear, it is more difficult to obtain information on the proposals to be discussed (unless the member states putting something for discussion decide to distribute documents in advance) and any information obtained may be even unreliable or misleading. Therefore it is more difficult for leaders to prepare their negotiating positions carefully and democratically. This is especially true for smaller member states and, I suspect, even more so for new member states with small or inexperienced diplomatic staff.

New member states may lose the investment in administrative capacity made before accession to the EU. It is one thing to have created good systems for coordination of EU affairs and linked them to the Commission and COREPER, it is another to start looking for contacts in Berlin and Paris so that you can find our what will be on the table at the next summit. I am reminded of the well-known argument from the institutionalist literature that institutions exist to save transaction costs in bargaining and to help participants obtain information that is crucial for strategic decisions. Compared to European Council decision making, under the ‘normal’, Community method procedure , the European Commission saves transaction costs and provides reliable information for all member states, even Euro skeptic ones.

Going further beyond the scope of what Mr. de Bruijn said, it is obvious that this new intergovernmentalism is a less transparent and accountable way of making decisions although those in favour of intergovernmentalism would argue that legitimacy at the EU level is obtained through the democratically elected heads of state and government anyway, so there should be no problem. The question is however, which heads of state and government? Even if the German and French administrations prepare well thought out decisions  to be put on the table by the Franco-German tandem, which, if any, member states get informed in advance? How much consultation is possible before the heads of state and government meet for their notoriously long European Council sessions? No wonder European Councils have become so long and time-consuming. In such settings, a disproportionate role is given to the Head of State or Government negotiating on the day… or night, as it may be. We better hope we are all represented by Super(wo)man.

PVV-promoted report on the euro deceives

The Dutch Freedom party (PVV) has presented this week a report, prepared  by the UK consulting firm Lombard Street Research, which argues that the euro has cost the Dutch economy billions. Here are some of the claims :

Growth of Dutch GDP has slumped from its pre-euro rate, as well as falling well short of growth in comparable non-euro countries, Sweden and Switzerland…
Had GDP growth in addition matched the Swedish & Swiss experience the extra consumer spending would be a further €15bn, €900 per person per annum…
Sweden and Switzerland were high savings surplus countries like Germany and The Netherlands, but they retained their own currencies and policy freedom – and the benefits were large…
While Dutch growth more than halved following the euro’s birth and Germany’s already slow growth became more sluggish, Swedish growth was unaffected in 2001-2011 compared with 1991-2001, and Swiss growth accelerated. Only wishful thinking could absolve the euro from blame. [emphasis mine]

As anyone can verify with publicly-available data, the statements above are highly misleading and the opposite of true.  For the analysis that follows I pull the necessary data on GDP from Eurostat. GDP is estimated at market prices in millions of euros (at prices of the previous year) and I take the percentage yearly change [here is the actual file I use].

According to these numbers, between 1991 and 2001 the Dutch economy grew on average by 6% and by an average of 3.5% for the years 2002-2010 (after the introduction of the euro). The respective figures for Switzerland are 4% and 3.2%, and for Sweden 3.8% and 1.5%. The report compares the Netherlands to Sweden and Switzerland but ‘forgets’ to mention Denmark which is also outside the Eurozone and has an economy comparable to the Dutch one. The Danish economy grew on average by 5% in the period 1991-2001 and by an average of 3% afterwards. Let’s recap: The average Dutch GDP growth after the introduction of the euro has been greater than the GDP  growth  in Switzerland, Sweden, and Denmark during the same period. In other words, using this measure of economic health, we can say that since the introduction of the euro in 2002 the Dutch economy has outperformed  the three comparable European countries which didn’t adopt the common currency. Now read again the claims from the report cited above and compare.

The argument of the report might be interpreted to imply that only the change in GDP growth before and after 2002 is worse in the Netherlands rather than the absolute level of GDP growth. Although this would be a very different claim, let’s see if it holds. The change in the GDP growth for the Netherlands between 1991-2001 and 2002-2010 is -2.5%, in the case of Sweden it is -2.3%,  for Denmark it is -2%,  and for Switzerland is -0.8%. So growth slowed in all four countries, the relative reduction in the speed of growth is very similar in the Netherlands, Sweden, and Denmark, while Switzerland has kept roughly the same level. The decrease seems greatest in the Netherlands (by 0.2%) but this is not really surprising given the very high 6% average growth in the period 1991-2001.  Actually, what’s so special about 1991 as a starting date of the comparison? Nothing, of  course. If we extend the reference period a little and start in 1987 instead of 1991, the Dutch decrease in GDP growth is no longer the biggest: the decline in the growth rate for the Netherlands is now 2.3%, while for Sweden it is 3.1%. Again, to recap, the non-euro Swedish economy experienced  a bigger slow-down of its GDP growth than the Dutch economy  after the introduction of the common currency. Which seems to be exactly the opposite of what the report claims.

Finally, let’s see a graph the puts all this together:

Obviously, only Switzerland’s growth has managed to escape unscratched  from the crisis (so far) but the experience of both Denmark and Sweden shows that countries outside the Eurozone have not been immune to the effects of the crisis. [Note how the figure on page 5 of the report conveniently omits all non-euro countries, implicitly suggesting that the decline in GDP concerns only the Euro-area.]

The slowdown of GDP growth in the Netherlands is not unique, it is very similar in size to the slowdown in non-euro economies, and, most importantly, the Dutch average GDP growth is still the highest among the four countries compared here. What is the effect of the introduction of the euro on any of these is very hard to tell.  But the statement that ‘Only wishful thinking could absolve the euro from blame’  is grossly misleading, and the statement that  ‘Swedish growth was unaffected in 2001-2011 compared with 1991-2001′ is plain wrong.

I find it hard to believe that the simple points made in this post have escaped the research institute which has produced the report so warmly embraced by the PVV. On page 1, Lombard Street Research declares that this ‘report is intended to encourage better understanding of economic policy and financial markets.’ Selective use of data, incorrect inferences, and bombastic claims based on molehills of evidence hardly serve this goal. Politically-motivated pamphlets dressed as scientific reports hardly serve the debate about the future of economic policy in Europe as well.