Euro Update (13) – Delusions of Intergovernmentalism

In the following lines I shall proceed with a rant about the vices of intergovernmentalism. This might sound as pseudo-intellectual jeeberish talk about the nature of European integration, but I think I do quite well at not being too boring or pedantic. I certainly do my best to avoid plagiarisms and cliches. So I try to stay away from the “J’accuse!!” type of references, and go straight to the point. You should know, however, that this rant is motivated by a pointless, insufficient, non campaigned for, wasteful proposal coming our way, from the hallowed walls of the German Chancellery sometime in the early days of March. Time your clocks!

The German proposal basically has all the problems of the SGP, because these are interesting solutions with a weak support. The players of the game cannot be the same as its referees. Economists call this a prisoner’s dilemma. Even if it is in the interest of the players to cooperate with each other, they will not do so. More specifically, this is what you would call a tragedy of the commons. The tragedy of the commons is a problem whereby because some resource is the shared property of a number of players, no one internalises the full cost of the consumption of the resource. This leads to overcomsumption, which depletes the resource at some point in the future. The resource here is the common market for financial assets denominated in Euros. The lack of rationing of the shared interest rates set by the ECB, throughout the Eurozone,  (I have mentioned before that each country can charge progressive marginal taxes on the emission of debt and stocks by banks and firms) has brought this problem. Every next unit of Euro denominated debt created by one country, decreases the total pot of available funds to tap. If this externality is exponential, then there’ll be a point (30% debt, 100% debts, insolvency, illiquidity or what have you) after which the damage of each unit will have explosive effects. To avoid this, we need to find a credible solution, that allows for easily observable compliance and non-compliance and that clearly identifies who is responsible for what. We should also make whatever monitoring mechanism be very regular in the hope that it’ll decrease the factor by which national governments discount the cost of future deficits and debt. We need balanced budget rules, enforced by the European Commission and the European Court of Justice, constitutionally enshrined. If need be  (and there will obviously be some need for it) the EU can acquire at that moment a federal budget of the size it sees fit for the purposes at hand.

I’m going on about intergovernmentalism because this manner where countries try to cooperate and regulate themselves is theoretically unsound and empirically a failure. Yet, we hold on to its designs. Throughout the ongoing sovereign debt crisis member states of the EU have been guilty of being in denial of their limitations. Greece denied to the point of fraud. Ireland denied to the tune of a banking bail out. Portugal denies its lack of competitiveness. In the mean time, Germany continues in denial about its responsibility in this whole mess, and together with France it is in denial about their perceived influence. Finally, the European Commission will deny its arrogance and the Council as a whole will deny its fecklessness. The only thing no one denies is that they are afraid, an rightly so.

Germany’s banks were irresponsible, not just to their debtors by lending them too much money for low return projects, but also to their shareholders and creditors. France and Germany may be engines of European integration, but the European car doesn’t need too many countries to push the break pedal and bring the car to a halt. The crime of the Commission is a crime of omission. It was the only institution of the EU which knew for a fact that things weren’t working. It knew the fundamental economics of the Euro were disfunctional in the absence of a EU-wide federal transfer union. It had to know that the successive violations of the SGP and its inevitable reform in 2003 were dooming us to disgrace. The Council in the mean time was aware of these criticisms but its members were too stuck in the past to understand the critical implications of this moment. The Commission had the vision, but lacked the will and the constitutional means. The Council had the means but not will nor vision. And after all this time, after all the praises, the advises and after successive economic catastrophes, both institutions are basically still in the same policy place.

I blame the Commission. As the truly European body, it has a political responsibility and a moral obligation to put up more of a fight. If it cannot do anything else, then it can shut itself down and stop initiating legislation or simply quit as a symbolic political gesture. It can make some noise! It can Campaign! It can actually take a stand and fight for what it stands for. It can argue its case to the peoples of Europe. They are not stupid! It should stomp across the Union and argue the case for a federation of nation states better than the other guys are at defending the sacrosanct nature of the isolated nation stated! Capture our imagination and inspire us! Is it really asking so much? Is it not their job description?

I started this blog with a number of pompous posts about the nature and stages of integration and reform. I hate to see I was right. I would hate to also be proved right about the consequences to laggards of evolutionary political economy. The sad thing is that for all of our social, economic and political complexity and our so called cultural sophistication, we cannot sort out a problem that the pastoral Maasai solved over 150 years ago.

Note: In case it was not clear, I’m not saying that I do not believe in intergovernmentalism. I clearly do. And it’s not as if I dislike it. On the contrary. LAcking an internationally democratic society, intergovernmentalism between democratic governments is clearly the next best thing. But it takes time, too much time.

This entry was posted in Banking, ECB, Euro-zone Update, European Interdependences and tagged . Bookmark the permalink.

3 Responses to Euro Update (13) – Delusions of Intergovernmentalism

  1. Pingback: Blog & Support » Blog Archive » The Week in Bloggingportal: Where the hell is Ashton?

  2. Pingback: Euro Update (16): Mario Monti and the feckless Franco-German Pact for Competitiveness | Place du Luxembourg

  3. Pingback: Euro Update(17): Eco-Fin Council – From EFSF to EMS and Portugal | Place du Luxembourg

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