In a wide ranging and insightful opinion in the Wall Street Journal, the always lucid Henry Kissinger makes the point that the EU is first and foremost an idea. It's an inspiring vision expressed as an economic and political union, critically marred by structural weaknesses and political incompetence among member states.
The correct response to Brexit is for EU members to rethink the degree of legislative overhead that Brussels has imposed. Not throw temper tantrums. Many of these rules are needlessly overwhelming and incomprehensible, especially in a technologically connected globalized world.
Brussels and its satellites in members' capitals should begin to undertake a serious effort to unravel the crippling rules that cause so much pain in the lives of ordinary EU citizens. The point of integration is to unleash creativity, remove the barriers to trade, and create economic welfare for all. Let Brexit be the start of such a process.
Wednesday, June 29, 2016
Friday, June 24, 2016
Brexit
Given my earlier posts from 2 years ago, an EU breakup is inevitable. The only surprise is that Britain, and not Germany, took the first step. Germany is Europe's ATM machine and if any country should have left first, it would have been her. Britain was less exposed by not being part of the currency union and less constrained by Brussels' rules and regulations. I won't rehash the arguments but the basic condition for a successful economic and currency union is fiscal discipline among its members. When Greece was included in the union, the seeds for breakup were already sown. The immigration and cultural drivers for Brexit only became salient because of economic flaws in the system. Germany is next, in which case, we are back to multilateral treaties and smaller, more economically homogeneous blocs, like the Schengen. The impact may not be very severe given that global trade and freedom of movement is largely facilitated by technologies not available at the creation of the EU.
Wednesday, February 25, 2015
Continuing saga of the European 'recovery'
Today, the Wall Street Journal reports that the European Central Bank, after announcing the largest quantitative easing program in its history, has problems purchasing the annual $60 billion of public assets it needs to fulfill the terms of the program (see http://on.wsj.com/1A66n2Z).
German bonds, which will form the largest share of total purchases (the QE program requires the ECB to purchase assets by share of European GDP) are hard to come by precisely because they are valuable and no one will part with them on the resale market. There is not enough on the primary market because Germany, being prudent and economically sound, does not need to raise additional money to run an already efficient public sector.
We are left with an ironic situation that only a government (in this case a meta-government) can invent. First, countries that don't need the money are the ones being pressured to take it while those that need the money are too small or risky to be offered enough. Sounds familiar? Second, quantitative easing is designed to re-inflate an economy on a deflationary spiral. But unlike the U.S., the EU is not a country. Economic stability is vastly different between countries in the EU. Hence, the countries mostly likely to heighten consumption from QE, Greece and Spain, are those that created the meltdown through runaway consumption, while those countries most likely to benefit from more consumption (Germany) are unlikely to do so. In part, the German economy is near full employment, so unmet needs are relatively small. As well, the German cultural ethos is biased toward constrained consumption and savings. Hence, the net effect of QE on the strong economies is to swell household and national savings, while that on the weak economies is more risky household and national balance sheets.
Historically, the only way countries have been able to massively inflate spending in a hurry has been a time of war. That's just about as good a case as any for the EU and NATO to escalate its involvement in the Middle East and the Ukraine.
German bonds, which will form the largest share of total purchases (the QE program requires the ECB to purchase assets by share of European GDP) are hard to come by precisely because they are valuable and no one will part with them on the resale market. There is not enough on the primary market because Germany, being prudent and economically sound, does not need to raise additional money to run an already efficient public sector.
We are left with an ironic situation that only a government (in this case a meta-government) can invent. First, countries that don't need the money are the ones being pressured to take it while those that need the money are too small or risky to be offered enough. Sounds familiar? Second, quantitative easing is designed to re-inflate an economy on a deflationary spiral. But unlike the U.S., the EU is not a country. Economic stability is vastly different between countries in the EU. Hence, the countries mostly likely to heighten consumption from QE, Greece and Spain, are those that created the meltdown through runaway consumption, while those countries most likely to benefit from more consumption (Germany) are unlikely to do so. In part, the German economy is near full employment, so unmet needs are relatively small. As well, the German cultural ethos is biased toward constrained consumption and savings. Hence, the net effect of QE on the strong economies is to swell household and national savings, while that on the weak economies is more risky household and national balance sheets.
Historically, the only way countries have been able to massively inflate spending in a hurry has been a time of war. That's just about as good a case as any for the EU and NATO to escalate its involvement in the Middle East and the Ukraine.
Tuesday, November 19, 2013
The Lost Generation
The following New York Times article, http://www.nytimes.com/2013/11/16/world/europe/youth-unemployement-in-europe.html?smid=pl-share, reports that between 28% (Ireland) to 56% (Spain) of youths remain unemployed. We know that long term youth unemployment can lead to a chronic underclass that threatens to undermine societal stability, constrain economic productivity, erode household savings, and extend the working life of the aged. The impact on public health can be severe as spending on health care declines; as do all government programs designed to preserve societal security. The traditional fix of pump priming, which the Europeans have tried in this recession, has not worked. When consumers are pessimistic, no amount of encouragement will get them back into the shops. Witness Japan in the 1990s. The most worrying outcome from this sad state of affairs is the rich fishing ground for organized crime, terrorists, and anarchists.
Table 1: Change in youth unemployment from the year ended June 2008 to the year ended June 2013.
Table 1: Change in youth unemployment from the year ended June 2008 to the year ended June 2013.
INCREASE OF 15+ PERCENTAGE POINTS
INCREASE OF 5 TO 15
INCREASE OF 0 to 5
DECREASE
Greece
58
Spain
Unemployment rate,
ages 15−24
55
50%
Unemployment rate,
ages 25−29
Greece
41
40
Portugal
40
Italy
38
Spain
34
30
Ireland
29
France
25
Portugal
22
Belgium
22
Britain
21
20
Italy
20
U.S.*
16
Ireland
16
France
13
10 The Netherlands
Belgium
11
10
Austria
9
Britain
8
Germany
8
Germany
7
9
U.S.
Austria
6
7 The Netherlands
’08
’13
’08
’13
Monday, April 8, 2013
Passing of an Era
The death of Margaret Thatcher, after that of Ronald Reagan, marks the passing of an era that saw free markets and capitalism foster a global economic renaissance led by entrepreneurship and innovation. Her fierce opposition to the Euro, which partially cost her the party leadership that led to her resignation as PM, proved prescient and may have protected Britain from the worse effects of the current crisis in Europe. The withdrawal from the principles of free markets, individual responsibility, and reward for risk taking in today's political rhetoric is less a repudiation of her ideas and more the lack of conviction driven by popular politics and the relentless need to be 'liked'.
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