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...

It's starting to become silly...

It is starting to feel silly. Here are my latest findings on silly witted ( to not call him perceptively utterly uneducated on European matters) David Cameron, and they are pearls of ignorance. Please check it out(here, here and here). In his efforts to sound tough on the EU Cameron seems to go out of his way to say all the wrong things. Either that or he is serious about repealing most of EU legislation in the UK since Thatcher. Might as well do the right thing and use the provision of the Lisbon treaty to leave the Union, and join the EEA. It is getting to the point where the costs in terms of attrition caused by UK membership are outweighting the benefits from its contributions... The UK on the other hand will be giving up actually economic wealth for emotional benefits of being a stubborn naughty boy. Sure lets vote for the guy!! What's really bad is that the media really does a terribly bad job in the UK when it comes to covering the EU and they get away with it.

Lisbon Treaty and the road ahead

So it turns out that the Lisbon Treaty really is going to come into force (here, here and here), probably by the end of December or January, latest in February of 2010. That's nice! It means that the decision making in the EU will be simplified, that the European Parliament will have a stronger voice in that decision making, thus reinforcing (albeit only marginally the EU electorate would say) the democratic legitimacy of the EU. This will be done by decreasing the threshold for the approval of directives (EU legislation approved by the European parliament and by the European Council, tantamount to ordering countries to pass legislation that achieves a certain end, leaving it to the countries to find out what the most appropriate way is). Countries will be given a de jure opportunity to leave the EU and individual citizens of the EU will be able to present petitions to the European Union, for the proposal of new legislation. The EU will get 1 representative for foreign policy (and security BTW...) with rather wide ranging powers, although he will not be the boggey man that Eurosceptics would make him/her out to be. He will be no where near the president of the USA, but more like his secretaries of state or defence. Nonetheless there will be nothing resembling an imperial presidency of the EU, along USA lines. Indeed, the role of the permanent president of the council of the EU is still very much unspecified and there seems to only be some consensus that his or her influence will be shaped by whoever becomes the first permanent (only 2 and half years mandate renewable only once). Thus if a Blair type becomes the first president, he will try to shape it into some wide ranging position. If however a Juncker type would take over it would be a more discrete political role, building consensus and setting the agenda, which would be a good idea. As a matter of fact all that this treaty really does is to give more coherence to European institutions, and decrease the noise around the voice of Europe (by simplifying decision making and defining the division of labour within the EU better, once we'll know what the president does). Member states are still able to make a fuss, to posture and more importantly, to defend their constituents' interest.However, and until the next generation of EU treaties comes along, they will not be able to freeze European integration; at least not without a far reaching support for their position. Hopefully, by providing this new framework for decision making it will allow the EU to be a more determined government. Hopefully by decreasing the threshold for legislating it will make the EU more responsive to political concerns. "Hopefully", because there's a ton of things to take care of and the end of this constitutional soap opera eliminates a most distracting excuse. As Barber puts it, now is the time to turn to the daily business. Here is a prior discussion and beneath are some ideas: Fiscal policy - The SGP (stability and growth pact which regulates the size of deficits <=3%) is likely to be a rather deficient tool, although only the recovery from this economic crisis will tell. How can the EU sort its fiscal policy out? It needs to decrease fiscal deficits, while allowing for a system where in the face of economic contraction, it allows for deficits to rise in order to permit tax smoothing. The present SGP permits such a thing to happen, but it has three problems and one advantage: first, it is likely to be too lax, there are too many excuses for running a deficit. Secondly, it is a system where the states police themselves. For anyone who knows human nature and anyone who's studied delegation (eg: to central banks) or principal agent problems, it is obvious that humans very easily tend to follow an atomistic, myopic short termist behaviour, and as a whole or as a group we should not be trusted to regulate ourselves, as there will always be an incentive to break promises ex post. Moreover due to alliances in the EcoFin committee it has created an environment where legislation is not applied equally and where smaller countries endure and larger countries do what they please. Finally, the present arrangement of the SGP does not have much in the way of (European) parliamentary supervision. This may be right (given that national budgets are scrutinised by their respective national parliaments) or not (given the fact that there are externalities and spillover effects from one country's budget to the next), however somebody ought to seat down the economic thinking heads and figure out what could be done to make this process better and then someone ought to seat down the political thinking heads and ask them to figure out what the best course of action in order to approve that preferred process. The advantage that the SGP has is that it is flexible (enormously so). At the moment this has been good. Keynesian economics are very useful during a crisis. However, once the economy picks up it will be interesting to see whether the EcoFin committee will be able or even willing to coerce member states to decrease their deficits. A concluding remark on fiscal policy should say that in the present context of recovery economics it is better to run a little too high deficits than to run too little ones. Pollution - I know little about this, other than that if we don't decrease carbon emissions we'll cook ourselves to death like frogs and that if we don't find a sustainable and reliable way to diversify our sources of enegy, Russia will eventually reprivatise it's industries along national lines and we won't be able to do anything about it except pay the natural gas bill at the end of the year. (this is a very far fetched scenario until Russia develops anything close to a sustainable form of economic growth and development based on anything else than exports of raw materials) Foreign policy - Will the HRUFAS be able to create a better more coherent and far reaching foreign policy for the EU? Will there be a coherent approach to USA, Latin America, China, India, and (most doubtfully) to Russia? Will some countries prefer to abandon their diplomatic missions abroad and delegate this task to the EEAS? Or will it become more and more apparent that the national diplomatic missions are fundamental lobbies for the maintenance of contracts and export agreements from smaller European nations to non EU states. Will this mean that the nations will further decrease their diplomatic missions and specialise them in their trade targets? On another topic, how loud will the HRUFAS be in the defence of Human Rights? Security and Defence policy - What will happen to European military and security cooperation? One of the biggest problems is that different EU states have different weapons and military gear. This means that in the unlikely even that we go to war, French and British pilots will not be able to fly each others planes, or operate eachothers tanks. It decreases the size of the market and thus the economies of scale that can be derived from it. This is caused by the fact that military industries are still considered to be strategic national industries and that despite their security cooperation, European states still want to be able to develop armament independently of the USA and of each other. The biggest military contractors are german, british and belgian companies which face some competition from Belgium (I think) and Sweden ( or scandinavian conglomerate). Moreover, the majority of these industries have a monopoly-monopsony type of relationship with their national governments. Will we finally get a proper European procurement? Only if one way or another, these industries are given some protection, ie only if the EU and the national industries are able to come to an agreement where profits are not threatened and job losses are minimised, while countries still feel comfortable and safe in their defence. There is thus a triangle of interests, which must be protected in order for military integration to happen: National security - profits to investors in the arms industry - workers in this industry. What will the HRUFAS do? We shall see...

What Western Leaders seem to think of David Cameron

According to The Guardian, Nicolas Sarkozy is "insensed" by Cameron. He"upsets" Angela Merkel who finds him "untrustworthy" and José Luis Zapatero ( prime minister of Spain) does not seem to be very impressed either.Finally, and probably most importantly for the British audience, Barack Obama finds him to be a political "lightweight", according to the magasin "New Statesman". These are the results of Euroskepticism. Why? Because it makes no sense to be a Euroskeptic and hold on to old rationales based on the old assumptions that European nations were absolutely sovereign, independent and able to do as they please. These logics make no sense nowadays, as no single European state able to stand its ground against the influence that can be projected by China, USA, India or Russia. The vision of the UK held by Cameron seems to be an abyss defined by a misled belief in his country's ability to remain a political island. He may prefer to become the 51st state of the USA. I don't think is such a good idea. Alternatively, if he so prefers, he could become yet another member of the EEA (European Economic Area), abide by the majority of EU legislation and have no say in it.

The Scope of Future European Integration

Here's and interesting article from the New Statesman, It describes how the Obama administration has been a bit iffy about the prospect of a euroskeptic conservative government in the UK. It repeats some of the points that I have made here about how this new government is either going to have to revise its position on the EU or start to consider the implications that these positions have in terms of the cooperation it can expect from it European partners. Could we be heading towards an era of freezing European Integration? It seems to me that this scenario is very likely. Why? Because there are only 5 policy fields left for the EU to expand its power to, and they are all quite tricky: 1)Fiscal policy 2)Integrated Foreign and Defence policy 3)Decent European Military Hierarchy 4)Decent home affairs 5)More adequate proportionality in EP elections (this is what 6)Clear structure of power within the EU (What is legislative and what is executive?! After Lisbon, where does the power lie?MSs or EU?) Following Alesina Angeloni and Etro 2001, (the first link from here, at psu.edu ) and Alesina Angeloni and Schuknecht (2005) (here) in that the EU should operate in policy areas where there are externalities and economies of scale, a view supported by EU citizens according to the analysis of their preferences conducted by Cerniglia and Pagani 2007 (graph 2, Slides 35-37) , there is a very good argument to be made about the need for 1), 2) and 3). 1) Fiscal Integration This is by far the trickiest one although the most obvious one. The economic concern is with the externalities arising from asymmetric shocks within a monetary union. As figure 1 below shows, when France and Germany both have their currencies (Franc and DM) if there's an asymmetric economic shock both nations have both monetary and fiscal policy tools to adapt to it and cushion the fall. In that case, if France suffers a contraction and Germany an expansion, due to some increase in german productivity, which steals French jobs, at first the Aggregate Demand (AD) of Germany expands and that of France decreases.

A decrease in output will create a decrease in government revenues. If the government does not wish to incur new debt (for example because it already has too much debt, or because it fears that this will crowd out private investment), then there's always the monetary policy tool. What the French Central Bank can do is to decrease the value of the French Franc, by starting to sell it on its own in international markets. This will do nothing about the productivity of French workers, but it will make their produce seem nominally cheaper in comparison. This, however, is a pretty crappy approach to international economics and is the type of thing that sparks trade wars, leading countries to levy tariffs. An alternative "solution" is to create inflation. This does nothing for the productivity of workers, once more, nor does it help with the nominal value of their produce. However it implies a real depreciation of the currency. France and Germany had several problems with nominal depreciation of the Franc partially as a consequence of the 1968 protests and Italy became famous for its use of inflation which led to the "mile lire" problem. Both solutions are described in figure 2, and both cause a shift from asymmetric shock equilibrium point 1 to the original (+ or -) equilibrium point 0.

A solution to this type of problem is to guarantee that competition between countries is conducted fairly. This being the EU it makes sense that this principle would underlie the Common Market. As a result there is indeed no better way to avoid trade disputes than to establish the Euro. However there is a problem. Competition is all nice and good, but its sucks to be the sucker who can't compete. In this case, if there is no national monetary policy, how can governments help their industry and its workers, when they face an asymmetric shock? Only by taxing or by issuing debt. Taxes will decrease disposable income and thus decrease consumption, which may be both good and bad (though in this case it is certainly bad because it will decrease demand which will lead to ever less production and thus the cycle perpetuates itself) or it can cause a flight of capital from the country (if corporate and financial revenues are taxed), which will lead to a decrease in investment, which in turn will cause a decrease in GDP. In the end the people who suffer are the workers who are much more bound to their country than money is. Debt is at best damaging (if by going to the financial markets, governments will take investment resources from the more efficient private sector and thus crowd it out, leading to a decrease in the rate of growth) and at worst impossible (if the original debt is so high that no one will buy new government debt for fear that it will not be able to pay it). Both options are possible, but a third one is more attractive economically: Fiscal Federalism. Fiscal federalism is here proposed from its redistributive point of view, not from a fiscal competition perspective (of the "Race to the Bottom" type). Thus what I mean is very simple(Honestly I dont mean anything... DeGrauwe does). If Germany suddenly makes more money, the EU takes the revenues that it is able to collect from Germany and redistributes a larger chunk of its revenue to France. Thus it is possible to move from point 1 back to poin 0 (+ or -) without needing exchange rate manipulation. However, it is necessary that Germany be either coerced or willing to transfer it's excess revenue to France. An easy way to do this is by endowing the EU with the ability of levying its own taxes, as it is likely that "Germany" will be tempted to refuse to contribute to the "lazy" "French" (Keep in mind that "France" and "Germany" are hypotheticals. They are country A and country B). This situation is made even better if instead of considering a 2 country union one considers a 3 country system. Where the cost of the asymmetric shock on the lagger can be spread through more than one partner. A third alternative (which is really a variant of the second one) refers to the advantages of being able to borrow money as the EU and spread the risk to all 2, 3 or (as in real life) 27 EU member states rather than having the country suffering the economic contraction carry that burden alone. This however would impose a cost on the future growth of all EU Member states rather than just on the growth of France, as the EU would have to pay the debt, but once spread out, this would not be so bad, and more importantly, it would increase FDI to the EU, rather than to a single country, meaning that this would then be targetted once inside the EU. The last alternative goes back to cooperation and sees France issuing debt, but having Germany being its major purchasor, thus ensuring that interest rates are low and thus that the debt servicing costs of France in the future will not increase dramatically. However this implies that Germany wants to help France but is unable to do it (electoral concerns anybody?). It's possible, but if I was "France" I'd like not to have to rely on "Germany's" good faith. An integrated system, where more powers are delegated to the EU is not a bad idea, although certainly it is not the only idea. 2) Integrated Foreign and Defence Policy The Lisbon Treaty, by creating the High Representative of the Union for Foreign Affairs and Defence (HRUFAS) and the European External Affairs Service (EEAS) goes a step further in terms of delegating more foreign policy and defence powers to the EU. However it all seems a bit unclear. What will be the new nature of the relationship between the foreign policies of the member states and the EU? Is the HRUFAS going to be another Solana, or will the budget give him or her some discretion? Is it going to be like the secretary of state in the USA? It's hard to tell and the whole thing was designed to be uncertain until 2012, the deadline set for the EEAS operational start. Either way, to act the HRUFAS is still dependent on the agreement of the EU member states who decision making will not yet be included under the purview of the Qualified majority voting procedure. From this point of view it may be easier to create further integration in this field than in the fiscal one, as it could simpify require that the decision making process be reformed to QMV. However there's also the issue of conflicting interests between national foreign policies and the EU's. The final step would require either that the Member States give up the priviledge of conducting foreign policy, or that their credibility as actors in this field would be permanently disrupted. However where there is an agreement there will be a Mr Europe, who will even be in charge of Intelligence sharing, though not gathering. The directors for this sui generis unit will be very coveted places. 3)Clear European Military Hierarchy It would be interesting to see if any crazy world event will push the EU to fuse the present armies of its constituent nations and create a structure of power whose legitimacy is derived from the states, but whose authority lies at the centre of EU institutions. More on this in the future as I will look at the path that led the USA to where it is today. An interesting approach in the future will be to try to better understand the roles of the EU and NATO, and how these organisations interact. 4) Justice and Home Affairs: can we have an EIAS? The Lisbon treaty also proposes the extension of Qualified Majority Voting to issues pertaining to what is known as Justice and Home affairs. This is interesting and may imply a bigger move towards integration than the creation of the HRUFAS and the EEAS. To what pertains to intelligence gathering it may also be interesting to see what ensues. Will it be possible to reform Europol from a facilitator of intelligence into an active law enforcing and intelligence gathering force? Theoretically I would say Yes, but it's very unlikely that such a think would be done in the open and it is more likely that there will be a push to put a vague clause somewhere in some upcoming treaty which would facilitate the creation of this service. The implications for this would be imense and would imply an increase in the Staff of the EC similar to the one proposed for the EEAS. It is possible that we will end up with an European Internal Action Service (EIAS) to replace Europol. 5)True Proportional Representation This is an issue which was raised by the German supreme court in its hearing regarding the constitutionality before German Basic Law of the Lisbon treaty. One of the comments that it made was that the EU could not be considered to be a democratic body as the European Parliament seems to give more weight to Luxembourguish citizens than to German ones, as it over represents them in this legislative body. I honestly favour the system that the USA have where one chamber represents the interest of the states equally while another represents the interest of the citizens equally. This however is impossible given that in Germany it seems that even when representing the states, the principle of equal proportionality between constituents and representatives must apply. I could be completely wrong, but I don't think the present state of affairs works to Germany's Magistrates liking. I believe that sooner or later if the EU truly is to be seen as legitimate, it will have to do something about this, but we are likely to procrastinate. This is one of those very unattractive issues which resemble too closely the institutional debate that has been going on for 10 years now and that I hope will culminate in the ratification of the Lisbon Treaty. This is something likely to take as long, as reforms require unanimity and none of the small states is going to willingly vanish into legislative irrelevance. 6) Clear institutional Hierarchy and the Democratic Deficit I believe that this reform will cause a bit of a confusion as to who is in charge. Will it be the President of the European Commission? The president of the permanent Council? The rotating president of the Council? The HRUFAS? It is all a bit messy and uncertain, and in this case it would be nice to have clarity and avoid too many turf wars and competition between the institutions. Due to the lack of democratic legitimacy of a lot of the institutions, it is normal and necessary to create competition between officials so that they themselves keep track of each other, thus ensuring transparency and accountability. However there's a point after which this becomes unviable and starts create executive and legislative bottlenecks. Could it be that these inefficiencies if left unchecked would create an environment where by the renewed authority of the EU would cause the elections for the EP to become more relevant and thus endow the president of the European Commission with more legitimacy and leverage over his or her European national peers? Who knows... 7) No enlargement, no deepening Looking back on European integration it seems that contrarily to common belief, not only does enlargement not deter deeper integration, it actually seems to trigger it (Common Market and UK, Cohesion funds and Spain, Greece and Portugal). In the absence of any pending enlargement (and Turkey is certainly not pending, though if you ask me, my generation will be happy to take it on board) it is unlikely, coetris paribus, that there will be any movement towards deeper union. However, as the Balkans will join, it is likely that a lot of these policies will emerge as necessary (particularly fiscal support in the guise of structural aid and the EIAS in order to manage corruption and criminality arising from those new member states). Obviously this is contingent on Cameron and Klaus not ruining the party... Despite the fact that according to these articles European integration should proceed within these fields, is it really possible that it extends that far? And at what speed? I won't try to look into my crystal ball, but I can venture a guess: Excruciatingly slowly, as everything else in the EU. Remmember it took 30 years between the Werner Plan and the Introduction of the Euro. If that seems to be indeed the minimum time frame for big change, then yes we do indeed seem set for a freezing of (the deepening part of) European Integration.

Health Insurance Undersupply

So this is what I had in mind when I said that the purely privatised system of the USA is idiotic.

Once again remember the insurance premium function.

P = (1+a)Lp, where:

a= administrative fee

L=Loss incured when insured event takes place (ie: cost of medical treatment)

p= Probability of insured event occurring

In this case p=1 and therefore there is no incentive for the insurer to accept such a cost, which would imply that the insurance company would charge an insurance premium that would be more costly that the treatment (given that it would charge an administrative fee as well as a margin of profit in the insurance premium). Fully private sector markets are, at least for the time being as idiotic an idea as fully publicly owned markets.

The Size of Fiscal Multipliers

What effect does discretionary fiscal policy have on the size of an economy?

The question asks what is the effect of targeted and supposedly purposeful public expenditure on GDP. This involves looking at public expenditure that is not automatic and thus excludes the effect of unemployment benefits. The fiscal multiplier explains how many €cents are created in an economy as the result of €1 spent by a government.

This study, from the CEPR, proposes a number of ideas. Standing between the studies of Barro (1991) and Barro (2009) and those of Romer (2009), which seem to contradict each other, it argues that the effects of fiscal multipliers are best undestood in light of the environment in which they take place. Thus it focuses on whether the relevant economies are opened or closed, have fixed or flexible interest rates, are emerging or developed, more or less indebted and whether the focus of the fiscal stimulus is investment or consumption.

Multipliers are stronger in closed and developed economies, under fixed exchange rates and if they focus on public investment rather than on public consumption.

Additionally, this article also suggests (page 0, abstract point (2) ) that there is no difference between tax decreases and expenditure increases, which to economic neoliberals distraught would imply that the government has at least as good information about the needs of individuals as these individuals do themselves. It would imply that there is no asymmetry of information between tax payers and their government. This may have to do with the fact that in OECD countries (the sample used) countries do tend to use counter cyclical fiscal policy. This means that government spends money when it becomes the most scarce, ie during economic downturns. In this sense it is easy to understand why it makes no difference to have the government or individuals spend the money. Effectively, the government spends the money purchasing public projects from private companies, which in turn pay their workers, which in turn put their money in the bank who latter loans it to private sector companies, which will use it to efficiently compete in the market (excluding market inefficiencies, which may not be the smartest thing given that during economic downturns, if they are caused by decreases in investment, they will invariably involve the bursting of a bubble which means that at least for a while it is likely that the market will be a bit inefficient as it will be unable to distinguish between good and bad investments). Its basically, keynesian policy. Obviously this should end quite rapidly as soon as the market finds its balance again, as otherwise public expenditure will crowd out private investment.

My only question is really about this issue of cyclicality. I may have missed it, but I don't find any distinction between pro-cyclical effects and counter cyclical effects of the fiscal multiplier... As I said above the answer seems pretty obvious that counter cyclical policy ought to have more of an effect than pro-cyclical policy, but it would be nice to see evidence (a control variable for lagged economic growth or for official recessions).

Arriving late...

So Vaclav Klaus has recently discovered that he needs opt-outs from the Lisbon treaty. This is interesting... He has had 2 years to think about it, to read it and to disagree with it. As this article points out, he has delayed signing the treaty, which has already been ratified by his country's legislature, claiming:

1st- that he would wait until Ireland voted on it in a second referendum

2nd- that his approval was contingent on his nation's supreme court agreeing that the treaty is not unconstitutional (once the Irish approved the treaty)

3rd - on October 8th (yesterday) Klaus asked for the addition

4th - that he would need "an opt out to prevent the heirs of the millions of ethnic Germans expelled after the second world war from filing land claims to regain their confiscated property" (quoted from the previously mentioned article, not from the original presidential communication)

Ignoring for a second the fact that the Czech president is demanding an inexucasable (though apparently by no means irrefusable...) violation of the rights of Germans, which through discrimination violates any principles of equality of Germans and Czechs before the law, he is not actually asking for an opt out, at least not specifically. Unless there is a specific article in the Lisbon treaty addressing this issue, there is no need for opt outs. I don't know where EU law stands on this issue, and I am not even sure that there is any form of legislation or jurisprudence on it. But ignoring this...

It is becoming obvious that Mr Klaus is wasting time. He is doing his best to postpone his country's approval of the Lisbon Treaty. His behaviour over the last two days is starting to reinforce my belief that he is indeed doing his best to hold the Nice Treaty ship until Cameron comes on board and aborts the Lisbon treaty altogether.

If this is true the Lisbon treaty is actually in a bit of a pickle... In order to convince Klaus to put his name on it, the EU has no sticks or carrots, or at least none that are efficient. Truth be told no one has carrots tasty enough for Klaus. However it may be possible to engage his supporters so that the legislation may be approved by a majority of the parliament, sufficient to over ride his veto. Whether a transition, bureaucratic PM is able to do that is still to be proven, but I doubt that this is something which can be helped at any other level but the domestic one. Assuming that they need a 2/3 majority to over ride Klaus, this government is going to need to convince 7 new MPs (without loosing any of the ones which supported it so as to gain a total of no less than 132 votes) and not lose any more than two votes in the Senate, where it would need a 52 vote majority. (check the number of votes in the house of representatives and in the senate, and the distribution of seats between parties in the house of representatives and in the senate, last table grand total. ).

This lateness may be an advantage to Klaus in delaying this process and gaining time until Cameron arrives, but it is not to the Lisbon treaty advantage. Let's hope those votes won't arrive late too.

The Lisbon Treaty and David Cameron: Ideologies and Interest and What Happened to Portugal

My first exploration of the Lisbon Treaty attempted to give a "what if" view of the future of European integration, in light of what could go wrong and what were possible plots. I briefly argued that one of the reasons for Gordon Brown to stay on as PM had to do with this treaty. I maintain that he must get a hearful from his European counterparts each time they meet him (particularly Sarkozy and Merkel). Probably the actual more immediate reasons lie closer to home. Instead of looking at the interests and behaviour of Gordon Brown, lets do the similar analysis for David Cameron.

Cameron and Klaus, sitting on a tree...

According to this article, Cameron told Klaus that he would hold a referendum if the Lisbon treaty was not yet adopted when he came to power. The question is thus, what is it that providing that information to Klaus means. Logically speaking, Cameron knows (because everyone knows) that Klaus is a Euro-sceptic, who does not like the Lisbon treaty, which he legitimately sees as an encroachment on Czech sovereignty. It is thus legitimate that within some reasonable boundaries of his own perceived long term self-interest, he would like to sink the Lisbon treaty so as to save the nation-state and all that. Taking this into consideration, and assuming that Cameron did too (and wasn't just being candid), his sharing of that information with Vaclav Klaus would have implied that he wanted to sink the Lisbon treaty as well and was effectively saying "hold the boat for another year. I'm coming, we can sink it together and I'll offer my protection and that of the mighty United Kingdom". This all makes sense, and if all agents are rational, without any boundaries or behavioural biases, this is what a politician who wants to sink the Lisbon treaty would have done.

The question however is whether sinking the Lisbon treaty is really in the interest of anyone politician or country specifically, David Cameron and the UK. This issue can have 2 approaches. One focused on the interests, and another focused on the ideologies. My argument is that only when a very specific view of partisanship is taken to outweight other concerns does it make sense to take the approach that I have described Cameron taking.

IDEOLOGIES (PARTISANSHIP)

This issue has to do with clusters of ideas. Ideologies are the personalities of parties. It has to do with how groups of people make sense of the world, in accordance with their interests. Thus rich people who strive under the present status quo support right wing parties which are conservative and normally reactionary. They like the way the world presently works because it made them well off playing under these rules. Poorer people obviously do not support the same party. They do not strive. They do not do well under the present game rules. They want to support a party that stands for change, in the hope that hardly any system will be worst than the present one. Parties represent classes, religious groups, ethnicities, and geographical groups, who are either happy with the present status quo or not.

From this very abstract, stereotyped perspective of the world it becomes fairly evident that new ideas cannot be adopted by reactionary groups. Conservative parties may be able to take new approaches and structure narratives differently, but they will not be able to adopt new ideas that alter the status quo in any way that threatens those who benefit from it. Thus the conservative party is ill fitted to be a natural supporter of European integration. European integration means the erosing of sovereignty by one country to the rest, as all member states pool their resources and coordinate their policies in order to minimise undesired and negative externalities. If the conservative party continues to be anchored in the belief that the UK is better off by selecting bits and pieces of European integration, because it considers it to be an economic project, rather than an all encompassing political and social one as well, it can hardly be an advocate for the project and for a reform of the rules which extends the scope of European integration and facilitates decision making.

If one assumes a utility function (U) based on two variables, taste(P) and output(Y), U=U(P,Y), where satisfying ones political taste has intrinsic value which increases utility through P, then it is possible to explain David Cameron's behaviour and willingness to give a signal to Vaclav Klaus regarding his willingness to support the demise of the lisbon treaty. It's basically his position. However as this article and the other argue, he does not seem to have a lot of security in his choice, which would indicate that the partisan channel is not the root cause. It would seem rather that the explanation should be found in opportunistic, electoral reasonings.

ECONOMIC (SELF) INTEREST

This section deals with Y and it's potential variants. Y may be an expression of the interest of the politician or of the country/economy.

Country

From a purely economic self-interest point of view the Lisbon treaty does more damage to small countries like the Czech republic than to the UK, by decreasing the majorities needed for approving EU directives and other forms of European legislation. The connection here is that the EU is another arena for countries to conquer markets and wield influence to conquer more markets. This in turn would be reflected When a super majority is needed small countries play a bigger role in vetoing. When a smaller majority is needed, smaller countries loose out. Table 1 provides game theoretical measures of power within the different voting procedures of the EU and shows clearly that there is a decrease in the influence of smaller countries as the years have gone by (0 is minimum and 1 is maximum). So the UK's interests are overrepresented in comparison to smaller states (FYI, this is not unfair. The Lisbon treaty deals with one of the issues that was brought up by the German Supreme Court, which has to do with equality of representation. It failed to recognise the European Parliament as a democratic institution because it said that it attributed more influence to some countries (e.g. Luxembourg) than others (e.g. Germany). the UK may be more powerful in terms of relative votes than before. But this should overall make the system fairer).

My point however is that Cameron would be smart to try to get all the help and all the friends inEurope that he can get. Particularly when his partners in France and in Germany are also conservatives giving him an easier time finding overlaps than if the PS and the SPD were in power in France and Germany respectively. If he informs Klaus that he'll veto if Klaus holds it out until 2010, then he'll be held accountable by french, spaniards and germans. The UK is in dire fiscal straights. He can't lower taxes and lowering expenditures in a downturn is not very popular (despite the IMF and the Washington consensus). With limited room at home he can't possibly alienate European partners and if he is intelligent he has realised that the UK does not play in the same league as the US, and would therefore be intelligent to not expect much help from that side of the Atlantic (China seems to be the US's most relevant partner at present. It has a similar scale and holds a lot of US bonds and is responsible for a lot of US trade deficit).If bad luck strikes and the UK needs help (as its situation as a small open economy, on the world market, exposes it to), its good to have more friends than few.

Individual

Whoever is to blame for the demise of the Lisbon treaty is not going to make friends anywhere in Lisbon. Now that's ok for Klaus and Kaczynski. They are at the zenith of their careers and can't possibly conceive of doing much more of relevant in the upcoming years. They have well established cronies who'll support them (either for fear of friendship, but certainly with respect). Stopping the Lisbon treaty should not be a big problem for them. Without ignoring internal political bickering, they can claim to be of a line of politicians who actually believe that the Lisbon treaty is a step too far. They don't like the idea of moving from one sphere of influence (USSR) to another (EU), and have made it clear that that's the way they see it. Cameron on the other hand is not that kind of politician. He is not in power, though him and everyone else rightly assume that he will soon enough be. More importantly he has never been in power and has a very limited number of cronies who need him. He has friendships but is rather inexperienced (this article actually gives the idea that particularly regarding Europe, the Conservative party seems to have several important players) . He probably has all the money that he is allowed to have and has done a good job at keeping friends close and enemies at bay. However he lacks the political ability of Peter Mandelson and the historical political stance of Margaret Thatcher. He will suffer the same shortcoming that Tony Blair had when he came to power, without many of his skills (Jack Straw, Peter Mandelson, Gordon Brown, New labour etc). He does not propose a revolution (despite many efforts, labels and rebranding of the conservative party) like Tony Blair's New Labour. He is not going to win because he has new ideas. He is going to win because the other guys will have been at it for 13 year, which has given then enough room for mistakes (Iraq, Financial Crisis). However he is not even able to fully benefit from these blunders, given that they were really caused by a refocus of Labour around the centre and even to the right which was successful by its ability to appeal to and steal conservative votes. Quite simply, Cameron for all his youth and charisma is inexperienced, poorly connected internationally, ideologically dull and the upcoming leader of a big European country but small international player, in the middle of a severe economic crisis, lucky enough to oppose 12 years of political leadership from his political adversaries. And this is not an insult: luck and charisma may be more empty of content but probably go a longer way to win an election than does substance and experience. So he is not Klaus (old ideas, a lot of experience) and he is not Blair (new ideas, but little experience ) either.

Regarding Europe it seems that he has no ideas except those of his party. Not ever having experienced it, he really doesn't seem to care enough to stand up for what he believes (stand up against his party's dominant euro-sceptic fringe, or with his party against the EU). He is torn between William Hague, Liam Fox and Mark Francois' Euro-scepticism, and Malcom Rifkind and Ed Llewellyn Europhilia.

Conclusion

In conclusion, Mr Cameron is in a bit of a pickle. If he helps sinking the Lisbon treaty his and his country's interests will be pushed far to the back of European discussions, thus marginalising British interests among its most important partners. If he seems to be anything less than indignant with the Lisbon treaty, he'll loose support from his party. Thus Mr Cameron's utility function does not so much depend on P as his P seems to be equal to zero (he couldn't really care less). However, his Y seems to be informed by other people's P as well as by the Y of the UK. U=U(P,Y)=U(Pc,Yuk), where Pc is the dominant partisan position of the conservative party that the Lisbon treaty is evil, and "Yuk" is the economic benefits of the UK from not crushing the treaty, which should be a reflection of good governance by Mr Cameron and hopefully ensure his dominance in British politics for a while, thus ensuring his own income.

Of course there's the ideological issue brought up previously, but that only precludes David Cameron from staying quiet, if he feels like Klaus. If he is personally indifferent to Europe which I actually think he is (if for no other reason that he would have otherwise made a lot more fuss about the 2nd Irish referendum, and about the treaty itself), then it would be smart for him to not put his words into action. If as I think, he is only playing the field, trying get the support of Euro-sceptics which are abundant in the UK, but who do not prioritise the EU very much, then its better to seem against the Lisbon treaty but to not stand in the way, than to strategise about how to bring it down. Badmouth the treaty and the European bureaucracy all you want, but don't start signalling other players something which you don't seriously want to happen.

The UK, with all its opt-outs and its European size has a lot to gain from this treaty and David Cameron has a lot to win from being perceived as reluctantly having to accept the Lisbon treaty as a fait accompli resulting from the bad policies of his predecessors. He gains very little from being the guy who destroyed 10 years of European integration efforts.

I would like to finish with a colourful warning. I am Portuguese and can base myself in my country's experience. Portugal was a great Empire, once upon a time. We gave the Western world Africa. We uncovered Japan, the Americas and found new paths to India a to a rich commercial route when Europe's path was blocked by other geopolitical entities (Ottoman Empire of Suleiman). We made a lot of money, failed to invest it properly and progressively became a footnote on the westernmost edge of Europe. We were stuck in a locked political system with dominant reactionary views of the world and entrenched in our past glory. We watched the cue pass by. Our greatest ally (UK) robbed us of our colonies (1890: the pink map). We lost. That is what will happen to England if it does not understand its place in the world and the fact that its interdependencies lie with Europe. It is not an empire. In a global economy no one is isolated and no one is an island. It is a major player in an internationally integrated economy and solidly represents the interests of 10% of Europeans. That's less than 0.1% of the world.

Lisbon after the Irish ratification

It may have been the financial crisis and the intervention of the ECB, the redundant and legally binding commitments made by the other 26 countries that the EU would not attempt to conscript Irish youths into a European Army nor would it force irish women to perform abortions, or the galvanization of the private sector (at least Intel,of all ppl, and Ryan Air made clear their support for the Lisbon Treaty), the lack of major blunders by public officials or the fact that Declan Ganley got thoroughly defeated in the European Parliament elections (which must have made him loose face and interest). Regardless of what the causes were, there is one less obstacle to the implementation of the Lisbon treaty (a brief description here and the actual text here).

There are only 5 things left to do. The treaty has been ratified by all the member states. The next step is Presidential assent (where this is still needed: Ireland and Czech republic). The last step (according to the information on wikipedia, which states that the Polish president Lech Kaczynski has given it his assent) is then to deposit it in Rome.

In conclusion there are two steps left. First, the presidents of Ireland and of the Czech Republic still need to sign the laws. In the case of Ireland this is a mere formality which should not take long, given the President's outspoken support for the Lisbon treaty. In the Czech Republic Vaclav Klaus will take his time. As this article puts it, there's a legal challenge against the treaty (the second such challenge actually) brought by 17 Czech senators. Finally Ireland, the Czech Republic and Poland still need to deposit the treaty in Rome.

This could be done in 5 hours maximum. It's ridiculous, and a testament to political bickering, that it may take all the way to December before anything relevant happens.