No more EU musings

I have recently realised that my posts have become overwhelmingly EU oriented. Although an obvious function of my interests this is a pity, as it has effectively led me astray from the stated intent of this blog. As such, and in order to bring this blog back to its original scope, I have decided to move all of my exclusively EU and € musings to a new blog.

Place du Luxembourg, will be exclusively focused on European affairs, mostly on the politics and economics, but also, on occasion, on foreign relations and defence. I've decided to call it that, in honour of the square in front of the European Parliament Building in Brussels famous as an after work hang out for EU civil servants. Please drop by if you want to continue following as I cover the most recent developments.

Anyway, hopefully this will herald a golden era of appropriate contribution to this blog!

SGP3: Opinions from VoxEU

So the proposals of the European Commission for reforming the SGP have provoked s number of reactions from the good people at VoxEu.org. There seems to be an agreement as to the vagueness of the extra indicators, and their difficult enforcement. The SGP remains a legalistic punishment mechanism rather than a tool incentivising good counter-cyclical fiscal policy. Finally there seems to be dome disagreement about the appropriateness of the debt requiremen, while consensus is still that more can be done to increase ex post credibility of the pact. Wyplosz' "Not yet fiscal discipline, but a good start" : First, he identifies the two prevailing and competing opinions about the failures of the SGP. The "Germans" argue the penalties aren't tough enough, while the "institutionalists" argue that it is the objectives and the framework itself that isn't good enough. Apparently the EC focuses enough on the one but not enough on the second. This might be aided by the creation of a permanent EFSF. He does not consider the debt criterion appropriate but maintains that the way the commission found around the 60% limit is clever. Manasse's view, expressed in his contribution "SGP: Counterproductive Proposals" is much more negative. He criticises the SGP's continued obsession with ex-post punishments as an incentive for good behaviour in food times. He rightly argues that this fixation painfully continues to leave the cyclicality of fiscal positions out of any meaningful discussion. He also finds it difficult to formally impose new limits on debt, which would expose every country to penalties and on the loosely defined "macroeconomic imbalances" causing fragilities. Nonetheless, he praises the introduction of medium-term fiscal plans and the implementation of best practices for fiscal policy across the eurozone. Giavazzi and Spaventa, call the proposals for the SGP empty and useless. For them, the indicators added by the Commission's to help identify unsustainable policy courses are vague, and corrections to them are difficult to enforce. They also criticise the commission for focusing too much on ex post punitive actions against the states, rather than ex-ante preventive steps. Finally they maintain that the biggest problem has been private debt and as such praise the creation of the ESRB.

EU-China: We push them, they push back...

Here's how the much touted EU-China summit ended. So not so well... Now what's next? Do we sanction them and risk alienating them? Or do we just wait it out and alienate our electorates further. It'll be interesting to see how things process from here, but clearly there's no clear cut answer to this problem. China is too big a risk...

Wofgang Munchau on the Chinese Renmimbi Manipulation

If you are interested in what happens in the world, please read this article by the FT's Wolfgang Munchau.It summarises the economic logics underlying the discussions about Chinese monetary intervention. More importantly it argues for a forceful approach to Chinese monetary manipulation. I'm a big fan of his blog, and even if I don't always agree with him, he is always insightful, clear and fair. He mentions an article from VoxEU contributor and Centre for European Policy Studies' Director Daniel Gros, which very intelligently argues for the use of reciprocity in arguing for capital controls, which would be legal, apparently, against the much touted trade wars.I agree with these means, as it seems nothing better exists. However, I believe his analysis may be slightly myopic.

International Cooperation: China-EU Relations

So there has been a lot of interaction between EU and China, as of recently. I'll start with the following article from the Chinese Embassador to the EU, where he praises the Lisbon treaty and it's ability to increase European integration, thus endowing the EU with a new authority and consequent ability in international relations, fundamental to the EU-China foreign strategic relationship (whatever it may be...).

Then we follow with the renewed calls for Beijing to allow the renmimbi to float, which is really to say that the EU and the USA want it to appreciate.

The Chinese on the other hand want to leave it be for fear it'll create chaos, which I'm assuming they fear would be large enough to topple the single party regime.

At the same time the Chinese seem to have requests of their own, involving European countries giving up some of their IMF seats.

What does all this chatter mean?

SGP3: The European Commission initial proposals

The news report from EUobserver The official description provided by the European Commission: In General terms, Strengthening the SGP, The preventive and Corrective measures and Chronology and overview of the new framework of surveillance and enforcement (where they fail to mention the chaos of 2002-2005 and the SGP2 reform of 2005). Finally, here and here are the highlights and the arguments in favour from the European Commission at VoxEU.

Seven EU banks fail stress tests

According to the BBC:

"They include five Spanish banks - Diada, Espiga, Bianca Civica, Unnim and Cajasur.

The other two were Germany's Hypo Real Estate and Greece's ATEBank."

Here´s what the European Commission has to say about it, and here´s what the CEBS (Committee of European Banking Supervisors) has to say about it.

These stress tests and the transparency they endow the banking industry with are relevant to the extent that they decrease asymmetries of information, and the ensuing uncertainties about the quality of the EU´s banks´ balance sheets. They should thus revive investor confidence in EU banks, and the industry, if as expected they are, overall, good.

For those banks who fail to pass these tests, recapitalization awaits; either through a private take-over(Germany and Greece?) or through public lending (Spain?).

Markets, Information, Communication and the Euro-zone Fiscal crisis

Above you can see a segment from an extremely good article by Carmassi and Micossi which can be found at VoxEU. It is about the chronology of the fiscal crisis in Greece and how miscommunication between the European Commission and Germany may have made a mess. To be honest it should be said that they do survey a very limited and rather biased sample of newspapers (Thompson-Reuters and the FT), but it is a fairly acceptable simplification from constructing a weight matrix for a larger number of newspapers that would provide a rather limited improvement of the explanation. A "must read" nonetheless!

VoxEU and Policies for a Europe in a Fiscal Crisis

VoxEU, that "not-for-profit" beakon of economic thinking, has released a very good eBook on the ongoing fiscal crisis, edited by Richard Baldwin and Daniel Gros. I take the liberty of pasting the table of contents from the link above. If you have any interest in economic policy and the future of the EU, you can't miss this.

---------------------------------------------------------------------------------

The eBook’s Table of Contents

Completing the Eurozone rescue: What more needs to be done? Edited by Richard Baldwin and Daniel Gros

Introduction: The euro in crisis – What to do? Richard Baldwin and Daniel Gros

Drawing a line under Europe’s crisis Barry Eichengreen

The Eurozone needs a political union, or at least elements of one Paul De Grauwe

The Eurozone's levitation Charles Wyplosz

Eurozone governance: What went wrong and how to repair it Jean Pisani-Ferry

The European bicycle must accelerate Angel Ubide

What more do European governments need to do to save the Eurozone in the medium run? Thomas Mayer

The narrative outside of Europe about Europe’s fiscal crisis is wrong Avinash D. Persaud

Rethinking national fiscal policies in Europe Philip R Lane

A credible Stability and Growth Pact: Raising the bar for budgetary transparency Michael C. Burda and Stefan Gerlach

Fiscal policy at a crossroads: The need for constrained discretion Antonio Fatás and Ilian Mihov

Fiscal consolidation as a policy strategy to exit the global crisis Giancarlo Corsetti

German spending is not the cure Alberto Alesina and Roberto Perotti

The long shadow of the fall of the wall Daniel Gros

The EU and Economic reform in June 2010: Not Enough...

EU to publish bank ‘stress tests’

Europe: A tent to attend to

‘Shared sense of direction’ at EU summit

Reining in Europe’s deficits is first step - By David Cameron and Fredrik Reinfeldt

Debt markets in the next two weeks

This article is extremely insightful. However I must disagree with the analogy between Greece and Bear Stearns. This is inappropriate because Greece is getting bailed out, Bear Stearns wasn’t. If anything Greece should be compared to Morgan Stanley who was bailed out.

Moreover, the contagion to Portugal, Spain, Ireland and Italy is similar but on a much smaller scale. When Bear Stern filed for bankruptcy, the devastation was enormous because suddenly reputation was worthless. Therefore markets were unable to know who was in a good financial position and who wasn’t. Bad money crowded out good money which almost brought trading to a halt. In the present situation however markets know that Northern Europe’s credit is good. The doubt is as to whether all of Southern Europe is worse off than its northern neighbours and if so by how much.

Thus reactions are probably extremely exaggerated. Greece cooked its books for some years until it was impossible to hide the mess any longer. Portugal, Spain, Ireland and Italy for all we know have been honest in their reporting. Now of course no one is in a great place right now. Portugal has a private debt to GDP ration above 200% and requires some very fundamental changes in the way its economy works. Spain is going through 20% unemployment rates. Ireland has the EU’s largest deficit this year. So the fundamentals are not quite there, and in the long run it is both predictable and good that the financial markets are putting some pressure on these countries to fix their economies.

I would venture the guess that asymmetries of information between the governments and their lenders are causing the latter to exaggerate the extent of risk that they are exposed to. They are also increasing the effect of rumours and gossip in trading, such as Morgan Stanley's Joachim Fels' argument that the Euro-area is at risk. If this is the case, then things should either get much better or much worse for Portugal, Spain and Italy in the next 2 weeks. On May 12 data pertaining to the first quarter of 2010 about the national accounts of Portugal and the preliminary Italian and Spanish GDP values will be published. On May 19, the Spanish national accounts data will be published and the next day Italy will publish its latest industrial turnover figures.

The dissemination of this information should decrease the asymmetries of information and give a better idea of how solvent these countries are. Of course whether the new data will be favourable to the reporting nations is completely unknown. If it is, sovereign debt yields should shrink. If isn’t, then there might be yet another run on their debts and on the Euro. If the latter occurs, I would expect the ECB to start purchasing national debt on the secondary market in order to limit contagion. This should lower the prices of national debt, while maintaining some institutional pressure on EU member states to reform. All that the ECB has to do is to warn that in the absence of reform it will dump suspicious sovereign debt on the markets, causing a fairly predictable increase in their price.

Until then the markets should continue to behave a bit nervously, at least for another week, unless something new happens, like some oil shock, a or some freak revolution in Greece. Moreover, they will probably go a bit bonkers with the fact that there wont be a clear cut majority in Westminster. The Greek parliament could fail to approve EU/IMF assistance, or the upcoming summit of the council leaders could be either very successful or very unsuccessful in drafting plans for dealing with fiscal problems and reforming the Stability and Growth Pact (Hopefully they'll come up with decent plans for the EMF rather than for an actual European rating agency). Finally some rating agency might downgrade one of these countries yet again. What do you think?

Upcoming EU Debates and Reforms

I'm going to do something everyone loves and no one is good at. I'm going to try to predict what the next big debates in the EU will be given what little information we have now. My logic is that future reform will follow the same path as previously and as such will be economic and intergovernmental crisis driven, with a bit of a functional institutionalist steering. I propose that two main policy areas will be discussed and that one major institutional issue will be raised. The first two refer to economic governance and to defence. The latter reffers to the possibility of a dual presidency of EU institutions under the same president.

1) POLICIES

a)Economic Governance: This is the perennial EU reform, caused by some ongoing crisis, and typically is path dependent, in that it is the latest step in European economic integration. Looking back at the Greek crisis which has spawned it, one is faced with the fact that this was almost inevitable. The geographical proximity of European countries and the transaction and transportation costs of the mid 20th century tie European countries to each other through trade, despite Political and security fears. These in turn motivate the ECSC(1951) and the CAP(1960), which then lead to the Common market. This increased level of integration increases intra-European trade, which leaves national producers more exposed to competition.unable to restrict access, national governments turn to artificially increasing competitiveness through exchange rate manipulation. This then causes a number of attempts from high productivity countries to control the others. Alternatively in order to avoid a race to the bottom in exchange rates countries decide to cooperate and coordinate their exchange rates. Independently of the mechanism, increased trade brings the need to coordinate exchange rates and so in 1979 is born the Exchange Rate Mechanism (ERM). Incidentally the main lines of EMU are first proposed a decade earlier in the Werner Report of 1969. From this and the subsequent imperfect agreements it is only a matter of time before those imperfections are made evident by speculative attacks. This, supported by enlargement, the profits that it brings and the impetus it gives to further integration and the countries adapt their interactive institutional framework, perfect the common market into the Single Market and inevitably implement the Euro. However this is still an imperfect setting and requires fiscal integration and delegation to give the monetary union more credibility and shield the member states from speculative attacks.

b)Defence: This is the latest in a number of articles which seem to me as though they indicate a certain willingness to move towards a much more integrated defence system for the EU. First I noticed Italy had been pushing for this (here's some more info), then obviously so did France, (and France again), as well as Germany (and again here). It seems natural. The USA is repositioning itself in light of the emergent powers in the East, looking at India and China as the next big partners/opponents in the geopolitical scene. It is also in decadence (not the one that makes your country disappear, but the one that makes it close a couple of military bases around the world and rethink cowboying around the world in the future.). So it must make some savings. Russia wont invade Europe, despite CEECs fears. Energetic disputes are mostly regional beyond the interest and influence of the USA. At the same the EU is very stable within itself, so the USA don't need to worry about developments here. It's not just that we are too many to deal with. Obama does not come to Europe because he doesn't need to.Thus the USA start pushing for a NATO which is less dependent on their own expenditure and ask us Europeans to share the bill. I don't like war and war-related business but this is an argument I have some difficulty arguing against.

However there is a more fundamental reason for the EU to integrate it's military organisations better, Economies of scale. Basically, as this article argues, and as should be apparent to anyone aware of the EU's non super power role, we spend almost 9 times as much as the Chinese in the military yet we get absolutely no value for money. The extent to which there must be duplication of efforts must be ridiculous for a block of countries who will never fight against each other again. Plus if we all get together, we are bigger, and as economics tells us, bigger markets bring higher levels of specialization which in turn creates higher efficiencies. This is a typical case of being able to get much much more for the same amount of money. Plus if integration in the defence sector takes place, the European defence market becomes a monopsony of procurement with all the advantages that creates for bargaining power for the EU and for all the specialization it creates in the supply side. The obvious downside to this is that we'll create a bigger and newer interest group with more nefarious interests. I mean the last thing we want is a militaristic Europe 100 years after the first world war. So maybe it should be so that this further step in defence integration should follow fiscal integration thus allowing the EU to buy a veto in the administration of war related businesses. In this sense the Germans and the French could sell their shares in the EADS to the EU. Either way something ought to be done to at least try to prevent this sort of development from taking place. After all, it would be a pity to have to continue to follow the USA's initiative. Wouldn't it be amazing if the next internet-like invention came from Europe rather than the USA? (and yes I know the first version of the web came from CERN...).

I don't know how long all of this will take, but it shouldn't be much longer. How long will largely depend on the UK and on the next period of persistent economic growth. The UK is the EU's largest spender on defence. Without it France would have to prop Germany up more than what it might like to. The UK would provide the necessary tie breaker. Finally in order to go through this process it is necessary to have two things: Democratic support and the economic resources to pay for it, so getting out of the crisis would help. It seems to me that the momentum is there. All that's missing is an opportunity.

2)Dual Presidency

Here and here are some discussions of the possibility and implications of merging the roles of the Council and of the Commission presidents. On the face of it, it is not a particularly bad idea. It would decrease the number of Mr/Mme Europe, which seems to have become a major embarrassment for post-Lisbon EU. But is it really such a good idea?

I am on the fence on this. I think that there's that argument in favour of it, but are the roles really compatible? The only example of this is the present situation of Lady Ashton. She's a servant to two masters: The commission of which she is a vice president and commissioner for foreign affairs, and the Council of which she is the president of the committee for foreign affairs and defence and security. How is she handling it? Well it's still a bit early to tell, but she's struggling. The problem to me seems to be that the Commission is an executive body, who is fairly political, and follows or leads the parliament, which is also political. The council however is intergovernmental. Might there be some conflict of interests? Not forcefully and actually this position could actually help put an end to the rivalry between the two institutions. But it would have to be well done... Whoever would be in charge would have to have a lot of staff. Though I would add that in good truth it seems to me as though the best arrangement would be the one where all council "committees" are modeled after the Commissariates and the European Parliament's committees so that the council's meetings are all presided over by the relavant comissioner. Finally, I do agree that at one point or another, the concentration of power will be such that the president of the EU position should either be made to be directly elected or so that the relevant politician must be a member of the lists of the majority party in the European parliament. Both would have political legitimacy, but the latter would do so with added simplicity. It would only require the addition of a small number of articles redefining the role of the president of the commission as closer to the role of the prime minister of a federation (say Merkel or the Prime minister of Canada, India or Australia), to ensure that the candidates would be apparent to everyone, thus forcing him/her to actively campaign. The fear here is that if there is no such transparency incentive, then we may end up with no apparent leader during the campaign, leading to the president being chosen ex-post in the corridors rather than ex-ante or during the voting, as is supposed to be the case.

So what do you think?

Government run Ponzi Schemes - Call the IMF!!

So, aside from the brief and recent comment posted yesterday, I haven't written much lately, which is good. It means I have a life. :) However, I think I ought to write something about this whole Greek mess, so as to at least have a reminder of these troubling times for the future. I have five comments about this mess:

First, why on earth is any country allowed to finance the payment of debt itself with more debt? Greece is (today) struggling to pay its debts, so it borrows to pay the debts. Why do markets even lend it the money, given the rather poor growth prospects that Greece is faced with?... It's likely that they have lent some money to Greece at lower interests in the past which now require more lending to get paid. Therefore the idea is that high interest yielding debts pay for low yielding debts. As long as lenders believe that Greece will pay, they keep on lending. So the risk really is to get to a point where Greece loses credibility, because then it will no longer be able to borrow. (this is a bit messy...). As a friend of mine reminded me, this cannot technically qualify as a Ponzi Scheme, because there are no asymmetries of information as the people purchasing Greek bonds are aware of the state of Greek finances and the implications. Indeed it is possible that the Greek government might be the one being defrauded…

Secondly, it is interesting to see the aggressive comments coming out of Greece, about German WWII reparation payments and about Anglo-Saxon media and financial conspiracies... It’s evident that the first two are political manoeuvres to confuse the electorate and shift the blame from the present government to other people. Nonetheless, I must say that the financial conspiracy does carry some weight. I’m not saying that there was any wrong doing. I’m just saying that there is enough evidence to make me believe that it would have been interesting to investigate whether there was collusion between the major lenders to Greece, the last time that it issued its debt. This idea is motivated by the fact that someone recently brought to my attention the fact that although the German bund spreads on Greek debt went up massively the last time they issued debt, the demand for it was massive. This would imply that lenders had estimated an increase in the risk of Greek defaults, but still found them to be attractive enough to want to purchase them. Because the Greek government really needed the money, its demand was rather flat, and inelastic. If there was collusion between the major financial players, then in real terms they would have behaved like a monopolist, supplying cash at an interest equal to their marginal revenue, not their marginal cost. So to go back to the beginning of this paragraph, I’m not saying that there was any wrong doing. I just think its natural to investigate whether the collusion that seems to have taken place was natural, tacit and logical or whether there was some type of explicit agreement between some of the financial actors. Both situations are possible, but only the first is legal.

Thirdly, it was interesting to read Eichengreen's article about why the Euro will not collapse, due to market arbitrage (ie: if Greece was to leave the Eurozone, firms would know that it would devalue its currency, and as such would move their assets abroad before this, so as to not have them devalued) and to practical concerns of paying machines and cash dispensers, as well as the cost and time of producing the new currency itself.

Fourthly, one thing that is becoming more talked about is the consequence of the default for other EU member states as the interdependencies in the EU financial sectors might mean that Greece defaulting on its debt would destroy the assets of some other member states financial institutions. (As illustrated in that article: This in turn would freeze lending in EU markets as markets once more become unable to distinguish between good assets and bad ones, as they did when Lehman fell. This might cause companies to go bankrupt, because they are dependent on some type of lending from the financial sector, and to consequently fire more people. Depending on the size of these interdependencies, we could either have a little glitch or another financial crisis on our hands. Lovely...

I must say that in light of all this, and particularly in light of the stupidity of some greek politicians it might actually be better to bring in the IMF. At least that way the Greeks will stop blaming other Europeans. Moreover I don't think Germany is in the mood to help a country where a government official says something like what the Greek deputy prime minister said and the government does nothing. (Actually I wouldn't be surprised if on the eve of a German led bail out, he would be fired or retire for “personal reasons”, that most political of euphemisms…) "Let the IMF let loose the Washington consensus dogs of war"

A less interesting situation, but one which takes me back to my Varieties of Capitalism days, is the understanding of why people are protesting in the streets of Athens. On this issue, there are two interesting paths to explore here. The first one is that Greece probably lacks a substantial export sector other than its shipyards (which is not little, but probably not overwhelming). This in relation to other insights on labour force reactions to economic policy and industrial relations makes me feel that the default position for labour is protest, not refrain. If it was, then Greek workers from exporting industries would protest against the protestors (for that sake the same would apply to Danish workers when Denmark joined the Deutschmark area). The other thing is that myopic self interest really is a strong force. I mean, Greece is really in a mess. If it does not tighten its belt, it will really have to default on interest payments of its debt. This would bring about a number of painful consequences, where the little business existing in Greece would leave, thus increasing unemployment, and decreasing wages, which is basically what the EU is asking Greece to do. The difference is that business would not leave if Greece did it without defaulting on its debt. However, public functionaries don't really seem to care much about that... I may sound cruel and cold, but the truth is that Greece has no alternative. One way or another it will have to decrease wages. The choice is between the process, ie whether it wants to be coerced into doing that by basic economic mechanisms or whether it decides to do so voluntarily.

The world for the last month and a half

So the last post was... December 5, 2009. What's happened eversince? 1st: Greek statistics are useless aparently. So much so that the EU might end up with audit powers! 2nd: The commissioners have all more or less lined up before the european parliamentary committees. The Bulgarian nominate got kicked out after the Socialists decided to show they could bark and the rest were not ready to see if they could bite as well. The issue was incompetence and political malpractice for not abiding to the rules. In the end there were documents showing that everything was fine. Then again if Greek statistics suck, I can see why some people might not have given much credit to the document. Ultimately it's irrelevant, the issue was political I guess... 3rd: Oh yes, the Copenhagen summit on carbon emissions and the survival of the planet. Let's hope we don't depend on it. If there's something that we can learn from it it's that the developing world is quite strong. Not only that but it would seem to me as though the developed world and the under developped world shared a common wish (though for different reasons) that there be emission reductions. However the developing world seems to be quite powerful these days. More over it might be interesting to reconsider the BRIC (Brazil, Russia,India and China) and replace it with the BASIC (Brazil, South Africa, India and China) as this article argues. 4th: Russia and Belarus exchanged pleasantries over oil, but Europe has so far had a warm enough Winter. 5th: Governments and firms are having to pay a lot for the money they want to borrow, probably because of the risk associated withlending to countries who are facing high deficits and have little prospects of enormous economic growth. (high interest on sovereign debt and on corporate bonds, implying low demand and high supply of bonds) 6th: 2 huge earthquakes have devastated Haiti. In an already poor country infrastructure (what little there was) was more or less completely destroyed. 200 000 people died. The world nonetheless seems to have united in a pledge to help the country. In related news, Sweden has donated less money to that country than Angelina Jolie or Brad Pitt. I hope this means more about Brangelina's commitment than it does about Sweden's, or Poland's for that sake. On a more personal note I've been absent because I have been working on an upcoming article to be published by the European Public Choice Society, on the dynamics of Fiscal Federalism and whether and when there is a "Race to the Bottom". The conclusion is that there is, but the revenues of the subnational polity must be independent of transfers from the central national state. Moreover the policy areas on which this competition occurs cannot enjoy a lot of visibility or relevance to the electorate. When the article will come out I'll put some extracts here. Thats all for now. Hopefully I'll be able to write something more soon.

Lagarde seems more enlightened...

The FT has a nice little report on David Cameron and the EU, here. Moreover, here's what Damian Chalmers has to say about selective EU law. How would he deal with the incentive for time inconsistent promises from the national council and the resulting conflict of interests. The problem is the same as the one face in the implementation of the SGP in the Eurozone: The people who are expected to carry the burden of rules (ie to be punished by them) should not, alone, be the ones expected to ensure that they are well implemented. If everybody can chose what they want, than everybody will be selective. If Damian Chalmers logic applied, the Single market agenda would have never gone forward. Trade-offs are the costs of functional coordination. Without the CAP and regional policy, there would not have been enough support for the single market. I believe however that Damian Chalmers does actually have a point, although the 15 meter rule about the fireworks is not a bad idea and would do a good job at protecting people, if people are stupid enough to want to violate it, then for god's sake, do it. There's just too much human stupidity for governments to contain. However if anyone is to decide which EU laws are constitutional or not, it should be the ECJ. My EU law is a bit rusty, to say the least, but doesn't the ECJ already do this, deriving its power from article 230 TEC? If so would it not be more appropriate to just add a provision in one of these treaties, stating that EU law is supreme over national law, except on those matters whereupon it affects aspects of national culture which do not disrupt higher goals of EU law, or something like this (what I mean is to make a law which would ensure that competition in the single market is not disrupted and that EU integration is not disrupted, but that if a silly amendment is included which disrupts national cultures, if these are harmless, where these national, cultural practices are harmless there is no reason to create conflict, and impose rule from above). Thus I propose that instead of Chalmers proposal for national EU law review councils (which FYI is what parliaments already are...) the ECJ ought to fulfil its role of judicial review, possibly aided by a treaty provision which ensures that harmless national cultural practices should not be disrupted. Then again blowing up in a fire work accident does seem harmful enough. Then again, what do I know... He's a EU law specialist! Finally, Christine Lagarde, French foreign minister has very interesting insights on the financial crisis, discretionary fiscal policy, automatic stabilizers, and on the effects of competition between China and the EU (although I assume competition of an economic nature, one is left to wonder whether her comments may also apply for foreign and military affairs) and how it may stimulate stronger cooperation between EU member states.

Mr Herman van Rompuy, President of the Council of the EU

This is why Van Rompuy might be a good president of the Council of the EU. Summary: Consensus builder; from a small, core EU country; Why does this matter? Because the EU does not need a big ego. The EU system is not about one country or institution imposing its will but rather about the ability of political actors to reach consensus. This is obviously a problem for a country like the UK, used to majoritarian decision making typical of its FPTP electoral system. Tough luck though. You can't accommodate 27 different countries by giving them a president that tells them what to think. A Belgian might just be the best thing that happened to the EU. After all, if you can manage Flemish and Wallons, that's probably as good a practice for a EU job as there is. Regarding Turkey? No worries. He is not the only one with a word on the issue as the HRUFAS also has a vote on the matter. Regarding Van Rompuy's ability to stand up to Hu Jintao and Obama, I believe that the weight of 500 million EU citizens and 13 trillion $ of GDP ought to do the trick. After all the EU is the biggest trading partner of both of those countries.

Bad but the EEA is the reason why this is not scary

Ok! So, Tony barber has the following thing to say: "If Cameron - or, more likely, William Hague, his Rottweiler foreign secretary - causes the relationship to deteriorate too much, then it is certain that calls will mount in mainland Europe for the UK’s departure from the EU. And, of course, there will be many in the Tory party - and the UK Independence party and elsewhere - who will say, “You know what? Why not?” Now I've put forth this idea at least twice, but I'm not particularly happy to get confirmation. I maintain, that if this were to actually take place, that half witted eminence would find himself at the end of a very uncomfortable political and economic environment. But as a UK graduate and a fan of the country, I believe it would be an enormous (but bearable) loss to the EU. And this is where I move on to the next step, and believe that sounding the alarms is unwarranted. The UK may hurl uninformed and bigot insults at the EU, however it can do very little to stop the EU except from withdrawing its contributions to the EU budget (which since Thatcher are not enormous). Otherwise the number of fields on which it holds a veto power is very limited. This is actually where the opt outs from the UK are useful. The EU can't impose its rules on it, but it is also unable to veto those proposed rules. On the other hand, the EU can do a lot of damage. Most of it would be indirect and even passive. Some at least theoretical could be direct and malicious in intent. Lets see: The first category implies by its mere existence the EU could damage the UK, if that country were to leave the union. How? Two interconnected reasons: financial markets and trade. The UK is enormously dependent on the financial sector, whose agentstend to be quite sensitive and fond of the EU (bigger markets=more money!!). If the UK left the EU (to become unassociated with any other European integration project than the OECD and the OSCE)it will be exposed to suddenly having to pay tariffs on exports to the EU. Don't get me wrong, I have no illusion that the EU would lose a lot from it. But in this, as in many other things, size matters and as it stands the EU is a giant in comparison to which the UK is small. Not tiny, not minuscule, not meaningless, but small enough that it would suffer a lot as exports and imports would decrease. Where as Europe would suffer a little bump, the UK would fall down a ravine. As the it loses access to the EU investors will start abandoning it, as products manufactured in the UK no longer have access to the rest of the EU market and are thus more expensive. Who would benefit? Probably Sweden, Finland, Ireland and Denmark who would split the chunk of market share that UK firms would loose, and Paris and Frankfurt who could then become the uncontested centers of European finance. In conclusion to this discussion, this is a situation that can be quite easily understood in the following manner: if, Y=C+I+G+X-M and Y=C+S+T, where Y is the GDP, C is consumption, I is investment, G is government expenditure, X is value of exports, M is value of imports, S is national savings, and T is government revenues, then I-S + T-G = X-M, If the UK leaves the EU, it automatically means that "X" decreases and "I" decreases, which implies, under the "crazy" assumption that the British will not suddenly want to tighten their belts and consume less, that in order to maintain present levels of consumption the UK government will have to start spending more (G increases) without forcefully raising taxes. Conclusion? If the UK leaves the EU, it is forced to run a deficit. Given its present fiscal situation I don't believe that is not quite advised. And remmember, this is all without the EU moving as much as a malignous finger. Imagine if the EU was to become vicious about this: That's unlikely scenario number 2. EU governments and the ECB could do 2 things. First they could start selling UK Treasury bonds, thus causing a decrease of the credibility of the pound. Secondly they could start selling as manny pounds as they hold. Both would be bad, in conjunction ,and with the caveat associated with lack of quantitative data, I would estimate it would be lethal for the UK. But then again, this is not only an extremely unlikely scenario. It is one which could jeopardise the EU. A trauma for the UK, the back days of the George Soros created monetary crisis are still a vivid memory for the Brits. However this was caused by bad governance which brought about an inevitable event. The close pegg of the pound to the Deutchmark, with open financial markets and no capital controls, was according to the "unholy trinity" of exchange rate agreements, doomed to fail. Germany stopped helping the UK buying pounds because otherwise it would be sunk with the it. What I am proposing here, simple though it may sound is pure evilness in terms of economics and completely abhorrent to the consensus typical of the concerns and approaches of the EU. So really I cannot contemplate a reality where Scenario 2 comes into being. But then again, my imagination is limited while the realm of possibility is infinite with decreasing probability. It would take the coincidence of an enormous amount of human stupidity for matters to reach this climax. This really is an apocalyptic vision as far as economics is concerned. In consequence I propose that if the UK is to make too much of a fuss, the other members of the EU ought to ask it to leave the area. In so doing they should stir some much needed debate at home which at least should highlight the arguments above. If the government responsible for this antagonizing mess is not booted out of office and the UK actually choses to pursue this line of action, then a much less complicated alternative, that in my opinion is becoming much more optimal for all parts concerned, would be for the UK to leave the EU and join the EEA. The EEA is the European Economic Area, heir to the European Free Trade Agreement, and has such illustrious members as Norway, Lichtenstein and Iceland and the other 27 members of the EU, who set the rules of economic activity. Basically non EU members of the EEA have to abide by the rules in order to get access to other European markets, but do not have a word in determining those rules. Everybody gets the economic benefits, the UK does not have to follow any "Foreign" or "European" encroachment on its (nominal political) sovereignty rules while the rest are able to happily pursue political integration. Finally, Spain will still receive its fair share of drunk British tourists. Why would I still prefer the UK to stay in the EU? Because despite its most childish of attitudes towards the project, there is a place for the UK, as long as it is a constructive and honest partner. Skepticism is not a bad thing and the EU is a huge undertaking one which benefits from the occasional slowdown and brainstorming which such a partner could stir. However it is a fragile project and it is dangerous to undermine it with ignorance and nationalist slur. Either way I still wonder where this will all have led to in 10 years time...

The Lisbon Treaty, National Politics and the potential backlash

The Lisbon treaty is an annoying little monster which may be messing around the normal path of domestic politics... This is the case in the Czech Republic, Poland, Ireland and the UK. In the latter, this may be particularly strong. I'm not sure about this and it is only a hunch. However, if only on the surface of it, the story takes turns which seem to plot to make me believe I am right. Here's what we know:

If Gordon Brown had called an election just around the time he came to power, he would have probably won it. At least so everyone said in the summer of 2007. Certainly he would have had a better shot at it than what it seems he will in june 2010. He was deemed as politically unable for not having done so. I really ought to know more about British politics, but I think that the Lisbon treaty might have had something to do with it. Could it have been that Brown feared having to address the issue during the election and that that would have exposed the issue and made it more salient raising even more problems for the EU? Could it have been the looming financial crisis which kept on growing? Could it have been the bad polls? its hard to say... It also hard to understand why no one has yet made a decent leadership challenge. Really Brown is a fairly lame duck prime minister. Many things would change if the Tories came to power, though may be not as many as people would want to. Anyway, may be I am not cynical enough, but one thing I do suspect would happen would be a referendum on the Lisbon treaty, which if the media and the last European elections are at all representative would result in the reversal of the British position on the Treaty. This would make a mess for everybody. Who is holding the boat for labour? I believe it is Peter Mandelson, who was a EU trade commissioner and is just about the only person aside from Miliband with a decent knowledge of politics and of the influence of the EU, and most, likely no significant ambition for the premiership. Could he be protecting Brown in order to protect the EU treaty, or could I have the causation all wrong, and despite rivalries, he is protecting Brown in order to aid himself and as a result that protects the EU treaty. Its difficult to untangle these causalities, but the matter of the fact is that at this stage the UK is an extremely important player.

Nonetheless, I must say that if Ireland rejects the Lisbon Treaty for a second time there really isn’t any precedent to throw around. Normally countries and treaties get a second chance, but not a third. It is either unnecessary (because their vote does not stop others from moving forward: Norway, Sweden, Denmark) or undesired (because national politicians refuse to call a second referendum: France potentially the Netherlands too). There's never been talk of a third referendum. Not even now. The idea is that Ireland will pass the referendum. There is no plan B.

So now we know when Ireland will hold its second referendum: 2 October 2009. In the most optimistic of scenarios, Ireland approves the treaty, the Czechs and the Poles deposit their treaties in Rome sometime before the British election is held and then no one cares any longer about what happens to Gordon Brown. But what if either or all of these 3 things happen:

1)What if the Poles decide to delay the deposition of the treaty?

2) What if the Czechs decide to delay the deposition of the treaty?

3) What if after the treaty is passed in Ireland, the House of Commons withdraws support from Brown and the election does not happen in June 2010, but in January? What if everyone else does everything right, but Brown is kicked out too early?

If any of these things happen, on retourne à la case zero as the French say...And here is where it gets interesting. Imagine that either one of these countries fails to ratify the treaty and effective puts an end to the process, with 5 years waisted in meetings, votes and referenda and no advancement made... Can you imagine the backlash? Whoever makes a mess out of this won't get a thing from the other countries, particularly from France. the one who has a better chance is Ireland, but still there, if the treaty fail, Sarkozy is going to beat the Taioseach into a gruesome rotten peach for not campaigning better. It won't be pretty. If it's one of the two Eastern European countries, they will be so heavily pounded they will be sorry for joining the EU... The same applies for England who might actually decide to do that, under Cameron.

So what happens then? European academics like to say that countries join because of each other. The UK joined because the EEC(read France and Germany) was growing faster. This made Ireland and Denmark join too, because they were heavily dependent on the UK for trade. This coupled with the fall of the Soviet Union also incentivised the rest of Scandinavia to join in. Would Denmark and Ireland leave if the UK left and become simple members of EEA, like Switzerland and Norway? Would Sweden and Finland also leave?

que sera sera

German Ruling on the Lisbon Treaty's Constitutionality: Legitimacy and Shared Sovereignty

Interesting days for European Integration...

Ireland sets a date for its referendum (2/10/09), the German Supreme Court ruled on the constitutionality of the Lisbon treaty ( check here for the full but only preliminary version of the ruling. BTW kudos must go to the German Supreme court for publishing its rulings in English as well as in German) and I, for lack of imagination and choice, seem to continue to engulf myself in the economic effects of budget deficits and their implication in the analysis of the credibility of the Stability and Growth Pact (SGP). It's fiscal policy analysis with budget deficits, cyclical budget deficits (the potential output version, please...) and their determinants and their effects on Repo rates, flying all over the place.

Here's an interesting article about the German ruling and it's potential consequences. I haven't yet had the opportunity to read the entire ruling and I doubt that I will have the time until September, but based on this article, here's what I its seems to say:

1) That sovereignty rests with the state according to article 23 of the Basic Law

2) That the European Parliament is not a genuine legislature

3) It clearly states what policy areas should not be covered by European Integration, one of which is fiscal policy (ie:fiscal policy is national not European)

I know nothing of Common or Civil Law, much less of the specificities of the German Basic Law, but here's what one can make out.

1) seems to be self evident in explanation, ie: sovereignty rests with the national state because it is said so in the German basic law. The ruling does not specify that all sovereignty rests with nation-states, but only specifically in Germany and as far as stated by article 23 (which for lack of knowledge I will just assume that it is absolute within the boundaries of common sense, ie: as absolute as it is permitted and more or less customary in a developed liberal democracy). This is interesting because all that seems required to change this is to change article 23 of the Basic Law. If it is changed in a manner that ensures that sovereignty can be "pooled" or that recognises European legislative mechanisms as not jeopardising German sovereignty, it shouldn't be much more difficult to solve this problem in the future, than to get the necessary super majority to change the German Basic Law. I don't know why probably because of Munchau's sentence: “Power may be shared, but sovereignty may not", I keep on remembering that sentence I heard about the competing views of the EU. Proponents say that the EU pools resources while opponents claim it uproots sovereignty by sharing it with other nations, and allowing them to have a say in their decisions.

This then brings us to the second point, the EUs lack of legitimacy. I will limit the discussion as the court itself did to input legitimacy, as only that rightly seems to make sense in judicial decisions (however the Chinese would probably like to see this included, at least if they want to legitimise their state on anything else than brutality and raw ability to keep u quiet...). 2) is justified on an interesting basis. One point that keeps on creeping up is the fact that the EU legislative process is not legitimate because of the electoral rule guiding the European Parliament and the assignment of seats. There seems to be a problem of "electoral equality" (II.cc). This is interesting... I've spent the best part of the last 2 years trying to learn about the EU its perks and its problems and I swear to god this never showed up... at least not in any relevant manner. The only time I heard a discussion about it was during the discussion itself of the Lisbon treaty where the Polish president or his brother wanted an electoral rule that accounted for the dead poles of WWII... The courts talk is in exactly thr opposite direction. The other two problems of legitimation are indeed more common. the complainants argue that the Commission is not a representative body, that there is no European political competition and that the commission's monopoly of power to initiate legislation is unconstitutional. I wonder what the court has to say about all this.

I still havent come accross the reason for the different reasons of all policy areas. However it seems plausible that the court goes through all of them individually and at length.

For the decision it really gets interesting only from heading "C", which is about half way through the paper. But again, I'll go through it later.

Finally I must say I do like the mess that it might have created with the SGP and how there might be some problems coming up...

Here's what's interesting: Munchau complains that everybody is cheering that the Lisbon Treaty can be ratified, but nobody realises the constraints that have just been put on future European integration. I believe that this is true, but quite irrelevant for now. The truth is that right now the priority is to get the treaty ratified. It's been 5 years, closer to 6, everyone is fed up with this and its about time to get things moving! We keep on talking about process, not substance, and really process, unless it is corruption, bores people. It's too technical, too confusing. (I just witnessed this today when I tried to explain to a friend the application process for jobs at the EU). Anyway, to go back to the point, European and National officials just want to get this over with. The motto is: "tomorrow, we'll worry about tomorrow". This approach is actually benefitted from this ruling and its meanders. As a matter of fact it helps that someone came along and said: "listen, the EU has problems. It's decision making is not ideal and actually parliaments ought to have a bigger say. Moreover if you want to delegate more powers, to the extent that a delegation of legitimacy will occur, you can't do through the back door. The UK and France won't simply leave one day the UN security council and be replaced by a EU rep due to backstage plotting. If you want the USE (the united states of Europe), you have to do it right. You have to change the constitutions and to properly address issues of where sovereignty lies." Specifically this helps the case of pro-Lisbon in Ireland a lot. Here's a ruling from a pretty pro-European country, saying explicitly that the Lisbon treaty does not delegate power in all those policy areas which spooked the Irish electorate, with images of Irish soldiers fighting and dying for Italy (god forbid), while their one-night-stands were forced by Brussels to abort their unwanted children, and their unwanted children were taught Esperanto in school, so that they could fill up their Esperanto European tax revenue form. According to Cerniglia and Paganni (2007: 12-14), there is a pretty decent match between present delegation of policy areas to the EU and the preference of Europeans for such delegation. Actually, it would seem that there is even some room left for further European integration in defence, humanitarian aid, the environment research and development and foreign policy. But I lose myself... The point here is that this ruling may help the cause of the Lisbon treaty for the reasons that Munchau thought it would hurt European integration. If only the Irish pro-Lisbon side can get properly organised and if their dumb politicians can shut it, we might get a chance to have this thing over and done before David Cameron comes to power and messes it all up for everyone (him included)...

As to the rest, I'm sure that the nation state will be as less fashionable in 25 years as it is today in comparison to 25 years ago...

BTW, another interesting issue for me is the idea repeatedly (6 times) stated of "the will of the people". This is interesting for someone like me who has studied political economy for a while because we get used to talk about majorities and minorities, not "the people" and much less "the will of the people". Obviously I suppose that it is implied in the courts language that "the will of the people" is proxied by "the will of the majority of the people". A Rousseauian reminiscence...