Nosemonkey's EUtopia

In search of a European identity

Why no one understands the EU

Hell, I’m supposedly a leading EU politics blogger, and I’ve barely discussed what’s been going on in the midst of one of the biggest crises I can remember the EU facing as the various member states try and work out what the hell to do about the Greek economic collapse.

I thought it was just me being lazy, but according to The Week in Bloggingportal roundup of Euroblogs, not a single one of the 555+ EU-related blogs that Bloggingportal aggregates could be bothered to discuss last week’s EU summit.

Of course, that’s not entirely true. Good old Fistful (one of the few EU-focussed blogs to have been going longer than this place) has been covering the Greek crisis in depth for ages now, and had another lengthy post on Friday looking at how the Greek situation could impact on the Eurozone. Yet even Fistful found little room to discuss the machinations at the EU Summit, preferring to focus more specifically on the economics.

And herein lies the problem. Now that the Lisbon Treaty has been passed, the major areas of EU-related debate have shifted – as they often do, when there aren’t treaty negotiations going on – to the economy.

The only trouble is that there have been treaty negotiations going on for so long now (pretty much continually since the late 90s, with first the Nice negotiations, then the discussions that led to the EU Constitution, then the run-up to Lisbon, and Lisbon again after the first Irish referendum) that most EU-watchers (especially us amateur ones) have become more used to constitutional issues than economic ones. We’ve all been looking at the big *political* picture, not the economic one. (And – let’s face it – most people who are interested in politics aren’t very good when it comes to economics… How many newspaper columnists outside the Business section would you trust on economic analysis? How many politicians not involved with a Finance ministry, for that matter?)

But the EU is, at its most fundamental, an economic body. Yes, you can dispute precisely how it goes about it (and you may be one of the conspiracy theorists who sees the economic aspects of the EU as being a mere smokescreen for the political project), but at the EU’s heart lie vastly ambitious economic projects, from the Common Market and Common Agricultural and Common Fisheries Policies through the Eurozone, Regional Development Funds, even the attempts to cut mobile phone tarrifs and promote the free movement of people. All of these are economic at heart – and even if you are one of the conspiracy theorists, they are economic as much as they are political.

But understanding continental-scale economics takes levels of knowledge, reading, education and understanding that most political commentators simply don’t have . Hell, the very fact that there’s still no consensus on the benefits of the euro shows that – and most people who comment on the euro, even those who have the economic background to know roughly what they’re talking about – don’t have the knowledge of the individual economies and polities that make up the Eurozone that would really be necessary to provide a proper analysis (though Fistful and the Economist’s Charlemagne have good stabs at coming close on occasion).

And so what we mostly do, us EU political commentators, is we try to discuss what’s going on in the EU in terms that are easier to understand. We try to treat the EU as if it’s a country, and EU politics as if its the politics of any old nation state. We try to create conflict – as over the European Council Presidency appointment – and we try to create factions – be they pro-EU vs anti-EU (if you’re in Britain), neo-liberal vs socialist, Anglo-Saxon vs whatever you happen to identify with that’s not Anglo-Saxon (if you’re outside Britain), or whatever.

Part of the reason for this is a desperate attempt to get people interested in a subject that interests us – because so few people care tuppence for EU affairs. But it’s also because we understand conflict. We can explain conflict. We can understand personal, selfish reasons for particular policy positions. They make sense to us, looking at the EU from the perspective of people only used to national-level politics. We don’t all understand economics or interntaional law, and none of us understands the politics of all the individual member states. And so we focus on those things we do understand, and read those into everything the EU does.

But the EU is not a single, harmonious entity, and cannot be simply explained. It is made up of 27 individual member state governments (who all still have to agree unanimously on all major decisions, despite being made up of political parties of all stripes), plus the European Parliament, plus the commission, plus the numerous other bodies that hang around the fringes.

If “the EU” decides to act, it is never for just *one* reason. It is for *at least* 27 different reasons. Unlike with national politics, where policy decisions can often be explained in just a sentence, every EU decision is vastly complex – with large chunks of the decision-making process having taken place behind closed doors in languages that you don’t understand.

In short, we can never hope to understand the EU. It takes more economic knowledge than most of us have. It takes more knowledge of the politics and economics of the individual member states than anyone had. It takes an understanding of all the insane confusion of EU rules, reglations, laws and treaties that can only be gained with a lifetime’s study of international and EU law. It takes insider knowledge of diplomatic discussions and deals that will probably never be revealed.

All we can do is guess – and our guesses will *always* be based on only a tiny, tiny fraction of the knowledge that is needed to get close to the truth. In fact, I can state with utmost certainty that anyone who tells you that they understand the EU is either lying or deluded. No one understands the EU. It is simply too big, too complex, too secretive, too multidisciplinary, too multilingual, too innovative, too unique for anyone to be able to grasp it in its entirety.

This, of course, makes it fascinating to those of use who like a challenge. But it also makes it utterly daunting. To try to explain the EU is like trying to climb Mount Everest. Without oxygen. Or ropes. Or protective clothing. With both arms tied behind your back. At night. In a blizzard.

Little wonder, then, that sometimes the enthusiasm leaves us. Some will quit for good. Others will keep bashing away at it – perhaps deluding themselves that one day they will get it. I intend to keep bashing away at it – but after seven years of an uphill struggle, for now I need a breather while I scout out a new route. This economic crisis in Greece and its reveberations throughout the continent has shown that there are some major gaps in my knowledge of the EU, and I need to fill these in as best I can before I continue.

Back soon, I hope. But in the meantime just remember that *no one* knows what’s going on. Keep that in mind whenever you read anything about the EU and you should do just fine.

24 Comments

  1. The EU may have started out as an economic project, but the euro was all political. The euro is a deeply flawed currency, you should learn more about it. When each country gave up their respective currencies, they gave up their currency sovereignty to coin money. The euro suffers from very slow growth because each country has been reduced to the level of a household or business with respect to funding. They have to compete for their funding like every other business in the market. It was designed by bankers in mind, such as Delors.

    What I’m getting at is that you view California with respect to Ireland or any other state in the EU that use the euro. But with the design of the euro, the market can turn off any country that uses the euro they can never do this with the US or the UK, Switzerland etc. These countries have monoply control over their currencies.

    Just look at Japan with its high public debt, it can always fund itself because it controls the Yen and its interest rate. No country in Europe does.

    The Greece problem is the problem coming to the core, and contrary to popular opinion that wasn’t a solution that was agreed. The market could theoretically drive the Greece interest rate to infinity and would it be acceptable to Greece to pay hugh interest rates?

    Now with regards to Germany, Germany runs a surplus with most other countries that use the euro. The only reason it can run a surplus is that other countries are willing to run deficits. Now that the crisis has hit theses countries are cutting back on their imports and hence reducing their trade deficits with Germany. Which will reduce Germany’s exports and reduce demand for Germany’s exports, which will increase unemployment in Germany. This will come back to bite Germany for their arrogance and rightly so.

    Not every country in the world can run a trade surplus, what Germany wants to do is turn every country in Europe into a version of Germany so we get a situation like follows:

    China – Exporter – Trade Surplus
    Japan – Exporter – Trade Surplus
    Europe – Exporter – Trade Surplus
    US – Importer – Trade Deficit
    UK – Importer – Trade Deficit

    Each country in the eurozone has restrictions on the anount of debt it can run e.g. the 3% Maastrict Treaty. And debt above this the market suts them down. Each of those countries that have trade deicits have hugh private sector debt, they can only reduce these private debts if Germany was willing to run a trade deficit with them, but since the introduction of the euro Germany has squeezed their private sector wages. So in the end its going to lead to a prolonged depression in Europe due to the creation of the EMU.

  2. Thanks for the insightful commentary, nosemonkey. Good point that we’ve been talking constitutional issues so much for so long that we forget talking about *actual* EU policy!

    I thought I knew about the EU until I came to Brussels. After the first week my mind was blown. I’ve completely given up trying to learn everything. It’s a lost cause. It’s too complicated. Too many things going on at once. Anyone who knows everything spends too much time with it, or is studying for the EPSO test. On top of that, at times it can be just horrendously bureaucratic and dreadfully boring.

    Every week I learn something new about the EU. This Friday I met the local Berlemont drug dealers. Nice two chaps, actually.

  3. This text needs a reply that is at least as long…

    Very shortly: I think that with all the policy-fields covered by the EU it is more than an economic Union.

    Traditional media are focused and obsessed with economic news which they reduce to personal conflicts (which shows that it’s not about the economy), but that is only a part of the story.

    So I am glad blogs are trying to show a more broad range of topics that are dealt with in the European Union, fields they are interested in, fields that are important for our daily lives, fields that we can understand more realistically instead of meandering in the field of global economic in which even many experts were wrong over the last years.

  4. Nobody reads, nobody writes, nobody explains, nobody cares, nobody understands … It is all becoming clearer ;-)

  5. Bart, I don’t think it’s fair to tell Craig that he doesn’t understand the Euro when your comment shows a lack of understanding yourself.

    Firstly, you make the statement that the Eurozone suffers from slow growth because governments are forced to compete for funding.

    For a start, this so called “competition” is still present even when a country has its own currency as bond interest rates always reflect – the only thing that the Euro prevents a country from doing is inflating away the debt by running the printing press, but in any case, this is not relevant since your claim was that this loss of control affects growth.

    Now, in order for the loss of sovereign control of a national currency to cause slow growth, that particular nation would need to have an industry that is driven by government investment, which, considering that the EU essentially operates as a market economy is simply not true – the bulk of growth and investment is privately driven.

    Your next fallacy is to assume that markets cannot “turn off” the tap on countries with their own sovereign currency – again, this is not true, the risk premia is always reflected in the yields for government bonds regardless of the currency it is issued in and is perfectly demonstrated by governments who issue foreign currency bonds in addition to their own with the only difference being that the government can choose to inflate away the value of its own currency, however, doing so does massive damage to the credibility of the sovereign (and hence the rates at which it will obtain debt in future) and also does massive damage to the economy; were it the case that Greece still had the Drachma, they would still have the same problem except they would be able to forcibly extract wealth from businesses and households by destroying the value of the currency – whilst this would have enabled the public sector to shore itself up fairly quickly, the private sector would have suffered extensive damage as a result; interest rates for the currency would of course have inevitably shot up, further damaging the ability to expand.

    However, I can understand your criticisms of the one-size-fits-all interest rate policy, although at the moment it stands at a mere 1% and additionally, your claim of slow growth isn’t really true for every Eurozone country, just look at Germany and the UK, we have our own currency and whilst the BoE certainly have kept inflation relatively stable, growth has been muted at best whereas Germany, a Eurozone country has been outperforming us.

    Let’s contrast that with say, Spain or Greece and it seems more likely that their muted growth is more a result of a failure to become more competitive, perhaps with their own currency their government could have devalued the peseta in order to improve competitiveness, although if we go back to the UK where the value of the pound has shot down whilst doing very little to improve exports or our trade balance, I again go back to the probably fact that the issue is not the money but more a lack of viable enterprises to invest in (or for pre-existing businesses, a lack of flexibility in competing with market prices)

    You then say the market could go on to drive Greece’s bond interest rates to infinity… this applies insofar as Greece becoming more or less able to service its debt and credit rating agencies play a significant part in the interest rates that the market charge, which naturally also means that any sort of guarantee from other EU member states will have a dramatic downward effect on Greek bond rates without requiring those member states to shell out a penny.

    Finally we come to the issue of Germany’s trade surplus, which need not be generated exclusively by trade with Eurozone members and can be resolved either by encouraging higher imports or as you say, simply allowing other countries to reduce their consumption of German exports; in either case the issue is yet again not because of the usage of a common currency – on the contrary, by using the Euro the issues of currency exchange costs are gone – Therefore, what you are essentially arguing is that the private sector is incapable of adjusting its prices to maintain a balance with supply and demand and instead should have its hand forced by a devaluation of the currency.

    Personally, I don’t think this approach will ever work over the long term and the only real solution is to give incentives to the private sector to make these sort of changes itself either by welcoming new foreign investment or adjusting domestic taxation, blaming the EMU (Euro) for a particular country’s economic ills is akin to saying that you should be taking the Bus instead of the Tram because the Tram can’t be steered into a shop window in order to avoid a head on collision; essentially what I’m saying is that by having the ability to avoid one form of damage you simply end up suffering another – with the Tram(Euro) you can only hit the brakes, with the Bus(own Currency) you can either brake(encourage the economy to adjust its prices and competitiveness, cut public spending) or send it crashing into a shop window(devalue the currency, inflate away debt), either way, you will have something to clear up.

  6. Pingback: Links 29 March 2010 « Talking about the EU

  7. Olipro,
    ********
    For a start, this so called “competition” is still present even when a country has its own currency as bond interest rates always reflect – the only thing that the Euro prevents a country from doing is inflating away the debt by running the printing press, but in any case, this is not relevant since your claim was that this loss of control affects growth.
    ********
    Bond interest rates are under complete control of the central banks irrespective of the bond market, the central bank could control the whole yield curve if it wished. A country running a fiat currency does not spend by running the printing press, it spends by crediting bank accounts, which are fiscal operations not monetary operations.
    ********
    Now, in order for the loss of sovereign control of a national currency to cause slow growth, that particular nation would need to have an industry that is driven by government investment, which, considering that the EU essentially operates as a market economy is simply not true – the bulk of growth and investment is privately driven.
    *********
    The bulk of the growth is private driven, but due to the fiscal constraints on the euro countries, they drain the private sector by having a balanced budget or by running surpluses. When a country runs a surplus, and has an external deficit it has to drive the private sector into deficit, and growth can only take place as long as the private sector is going into more and more debt at the macro level.

    With no external sector, by double entry bookkeeping the following equation holds:

    Public deficits=private sector savings
    *********
    Your next fallacy is to assume that markets cannot “turn off” the tap on countries with their own sovereign currency – again, this is not true, the risk premia is always reflected in the yields for government bonds regardless of the currency it is issued in and is perfectly demonstrated by governments who issue foreign currency bonds in addition to their own with the only difference being that the government can choose to inflate away the value of its own currency, however, doing so does massive damage to the credibility of the sovereign (and hence the rates at which it will obtain debt in future) and also does massive damage to the economy; were it the case that Greece still had the Drachma, they would still have the same problem except they would be able to forcibly extract wealth from businesses and households by destroying the value of the currency – whilst this would have enabled the public sector to shore itself up fairly quickly, the private sector would have suffered extensive damage as a result; interest rates for the currency would of course have inevitably shot up, further damaging the ability to expand.
    *********
    Countries that are sovereign in their own currencies never have to issue bonds in foreign currencies. It is true that if a country issues bonds in foreign currencies they leave themselves open to a possibility of default. It is also the reason that the Austrian central bank has a law that prohibits banks from issuing loans in foreign currencies, because if the private sector defaults on these debts the central bank cannot help them. The central bank of Iceland should also have prevented their banks from issuing loans in euro instead of Krona. As I said above the modern central bank has complete control over the overnight interest rate. Every country that has control over their own currencies chooses to issue bonds $ for $, such as Japan. They don’t have to issue bonds.
    **********
    However, I can understand your criticisms of the one-size-fits-all interest rate policy, although at the moment it stands at a mere 1% and additionally, your claim of slow growth isn’t really true for every Eurozone country, just look at Germany and the UK, we have our own currency and whilst the BoE certainly have kept inflation relatively stable, growth has been muted at best whereas Germany, a Eurozone country has been outperforming us.
    **********
    Those countries that have had large growth in the euro area, their private sectors have large private sector debts relative to GDP. The BoE have been performing Quantitative Easing, which is just a swap of assets for reserves in the banking system under the mistaken belief that banks lend out their reserves. Banks do not lend out reserves, they create deposits when they lend. It is not a stimulus package. Germany, France and especially Australia, have provided a fiscal stimulus.
    ***********
    Let’s contrast that with say, Spain or Greece and it seems more likely that their muted growth is more a result of a failure to become more competitive, perhaps with their own currency their government could have devalued the peseta in order to improve competitiveness, although if we go back to the UK where the value of the pound has shot down whilst doing very little to improve exports or our trade balance, I again go back to the probably fact that the issue is not the money but more a lack of viable enterprises to invest in (or for pre-existing businesses, a lack of flexibility in competing with market prices)
    ************
    Spain were running a surplus prior to their economic downturn and were also running a current account deficit at the same time hence they were either running down their saving’s or were driving their private sectors into debt. Greece runs a current account deficit with Germany. It is its major export country, so when Greece cuts back it’s going to reduce demand for Germany’s exports. The market sets the exchange rate of a country’s currency relative to each other, it is a “non-convertible” floating currency, and it is not on the gold standard, so what are the government going to devalue against?

    The UK has consistently run a trade deficit since 1983. Who benefits when a country runs a trade deficit? The country that runs the trade deficit has a higher standard of living than those countries that run surpluses, because the exporting countries are exporting real goods to the UK in exchange for liabilities/pieces of paper.

    *************
    You then say the market could go on to drive Greece’s bond interest rates to infinity… this applies insofar as Greece becoming more or less able to service its debt and credit rating agencies play a significant part in the interest rates that the market charge, which naturally also means that any sort of guarantee from other EU member states will have a dramatic downward effect on Greek bond rates without requiring those member states to shell out a penny.
    *************
    If Greece had its own currency like Japan, it could ignore the rating agencies. Moody’s downgraded the bonds of Japan to A2, or one grade below Botswana’s, this was at the same time that Japan was a major donor to these countries. What did Japan do, it ignored them. It is an absurd situation we have with the euro. The euro countries have put in hugh guarantees for their respective banking systems and the market hasn’t twigged that if they can’t sell their bonds how can they provide a guarantee to the banks. When it does figure it out, you could have a crash of the payments systems all over Europe akin to the US in the Great Depression. The governments cannot help each other out in the euro area because the market will attack each of them.
    ************
    Finally we come to the issue of Germany’s trade surplus, which need not be generated exclusively by trade with Eurozone members and can be resolved either by encouraging higher imports or as you say, simply allowing other countries to reduce their consumption of German exports; in either case the issue is yet again not because of the usage of a common currency – on the contrary, by using the Euro the issues of currency exchange costs are gone – Therefore, what you are essentially arguing is that the private sector is incapable of adjusting its prices to maintain a balance with supply and demand and instead should have its hand forced by a devaluation of the currency.
    ************
    What I’m saying is that theses countries are going to have to have internal devaluations, if it gets pushed too far we could easily get a Fisher debt deflation that the governments have been trying to avoid for the last two years. I don’t think the people will stand for this because the social consequences are enormous. I don’t think its possible in a democracy and they may say its not worth it and default anyway.

    ************
    Personally, I don’t think this approach will ever work over the long term and the only real solution is to give incentives to the private sector to make these sort of changes itself either by welcoming new foreign investment or adjusting domestic taxation, blaming the EMU (Euro) for a particular country’s economic ills is akin to saying that you should be taking the Bus instead of the Tram because the Tram can’t be steered into a shop window in order to avoid a head on collision; essentially what I’m saying is that by having the ability to avoid one form of damage you simply end up suffering another – with the Tram(Euro) you can only hit the brakes, with the Bus(own Currency) you can either brake(encourage the economy to adjust its prices and competitiveness, cut public spending) or send it crashing into a shop window(devalue the currency, inflate away debt), either way, you will have something to clear up.
    ***********
    You can give as much incentives as you wish, the private sector deficits are hugh and they are trying to deduce their deficits at the same time as the governments. You have to look at the whole financial sector balance approach. The private sector cannot de-leverage at the same time while the country is running a current account deficit. What is needed for Europe is a European government that will spend for the states, you can reduce taxes which I advocate but because of the Maastricht rules the government will run into the 3% deficit limit. It is a nightmare and if its not sorted the next crisis will be bigger than this one probably in the next year.

    Sorry for the length of this post.

  8. Then why would you argue so staunchly for it, if no one(including you) understands it? Why blindly support and go along with something you don’t understand???Seems highly illogical.

  9. mirakulous, you completely miss the point.

    Clive is saying that nobody completely understands the EU, he’s not saying he doesn’t understand it at all. take your fallacious anti-EU rhetoric elsewhere.

  10. What are you his lawyer?? I’m sure he can speak for himself.

    My rhetoric is fallacious? Cuz you said so? I say yours is! What then??
    You see how speculating and judging others before you know where they stand, leads to nothing constructive?? Should we get rid of freedom of speech while we’re at it, since it seems to bother you and you want people to move it on out of here?!
    I never claimed he doesn’t understand it at all. But it takes 1 aspect of something as important as the EU not to understand, to throw everything off track. So, again I ask, then why blindly argue for something and follow it even if you don’t understand just 1 aspect of it? That sounds just as dangerous, as you don’t know what that aspect will lead to. If you have an answer for this then, by all means. Otherwise, let Clive answer it himself if he cares to.

  11. Mirakulous – I have seven years’ worth of material here to say my “support” for the EU is anything but blind. And I can think of precious few occasions where I have argued “staunchly for” the EU in any case. In fact, most of my belief in the benefits of the EU stem from the weakness of the arguments of those who think the UK would be better off without it – that’s how I came to be loosely pro-EU in the first place.

    Nor is my “support” fo the EU total. I am in favour of the general principle of a gradual economic/political coming together of states and communities while being highly critical of certain aspects (notably the Common Agricultural Policy) – and remaining entirely undecided on some areas where I lack the knowledge/understanding or where there is insufficient evidence (notably the advantages/disadvantages of a single currency) to make up my mind.

    Much as this post is arguing about the EU as a whole, my take on the EU is much more complex than you seem to think.

    Bart/Olipro – interesting discussion, in places over my head (largely due to insane tiredness) – cheers! Will continue to digest.

  12. Do I need to quote what you originally said? if you want to retract your original statement and reword it so that it doesn’t heavily imply that nobody understands anything about the EU whatsoever, be my guest.

    Otherwise, my statement stands, your comment was fallacious because it sets up a fallacy of Misleading vividness – I.E. that since some of the EU’s operations aren’t fully understood none of the EU’s operations are understood.

    So by your words, you are implying that if we/the layman don’t understand something in its entirety, it’s dangerous and should not be supported – a lot of the public don’t understand and likely never will hope to understand the Large Hadron Collider, does that mean that also should be scrapped because it’s not something everyone can grasp?

    I also think that a lot of the “secret” things that may or may not go on within the EU equally apply to national governments and international agreements independent of the EU, however, nobody is calling for an end to the G8 summit or national government (apart from the usual extremists of course)

  13. Clive, fair enough. I much better like it when you answer for yourself, as you do yourself justice, rather than when someone else takes the cue for you.

    @Olipro.
    Does the large hadron collider have an immense impact on the quality of life and well being of citizens?? How are you comparing the EU to the LHC? The policies of the EU, and the politics of it, are fundamental to the rights of the citizens of europe, and how their life will evolve in the future. The LHC is something that only a small percentage of scientists have a stake in (id say 0.1% of the EU population).Great analogy genius!

    The G8 doesnt take binding decisions and force them upon any member. It is more of consulting group that reaches decisions on consensus. Not surprisingly, although Obama didn’t achieve much in Copenhagen, nothing got imposed on the US. The G8 doesn’t have a common legislative framework and integration like the EU members do. And let’s not even get into common interests, common currency, common defense policy, etc.Once again, great analogy!

  14. Mirakulous – You say “The G8 doesnt take binding decisions and force them upon any member. It is more of consulting group that reaches decisions on consensus”

    Arguably, the same is true of the EU – or, at least, of the European Council. “The EU” can’t do anything that the European Council doesn’t like; the European Council is the governments of the EU member states; therefore the EU can’t do anything that the member states don’t like. (And yes, of course there will always be minor legislation/regulations that individual governments don’t like – but they’ve still signed up to the general principle of the EU – and all substantive changes still, even post-Lisbon, require unanimity.)

    In other words, the G8 comparison’s entirely valid.

    So, more to the point, is the national government one that OliPro also made. Why no complaints about politicians from Yorkshire sitting in Westminster passing laws that impact on Devon?

    But in any case, if you’re going to dismiss any analogy because it’s not *exactly* like the EU, you’re just being silly. Because *nothing* is exactly like the EU. That’s the whole point. It’s unique and unprecedented. All anyone can do to explain it is say “it’s a bit like this, in some respects”.

    Also – cut out the childishness, there’s a good fellow? It undermines your argument and lowers the tone. Cheers.

  15. But the G8 doesn’t have a parliament where each member country gets represented. The EU members have so common policies and most of them share a common currency and have given up some of their national sovereignty to Brussels. The G8 is nothing like this, and has none of these components. I really don’t see how this analogy stands at all.

    Sure, I agree, nothing is like the EU, but typical federal states with proportional representation are somewhat similar, and they’re based on the same fundamental principles of representational democracy. The G8 is a place where in theory the leader of italy is equal to the leader of the US and yet they don’t even have to reach a conclusion on any topic. But in the european parliament germans aren’t equal to luxembourgers, and like it or not things get voted on and passed. A federal state is much more similar to the EU, than G8 is…way more!!

  16. I’m not sure quite what comparisons *will* satisfy you, as you do seem very keen to miss the point. The G8 was mentioned by OliPro in passing, nothing more.

    You’re looking for ways in which they are different – and quite evidently there are lots of those – but there are obviously ways in which they are similar as well. Just as there are obviously similarities between the EU and a federal state. And the EU and a CONfederal state. And the EU and regular nation state. And the EU and an English county council. And the EU and a knitting circle, for that matter.

    This is the whole point of analogies – they make certain aspects of something clearer, but are not meant to be perfect comparisons. If you take *any* analogy seriously and start to pick it apart, it doesn’t work. That’s in their very nature.

  17. Sorry, didn’t mean to be an obstructionist. Just expressing my opinion.

  18. testing if italics and bold work

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  19. Bart, I’ll abbreviate your responses, anyone else reading can scroll up to view the exact paragraphs I’m addressing

    “Bond interest rates are under complete control of the central banks irrespective of the bond market…”

    Bond interests are not under the complete control of a Central Bank – if it wishes to manipulate bonds it will come at a cost of price inflation, a weaker exchange rate or more probably both, the BoE’s QE operation which was largely spent on purchasing Gilts in order to maintain the inflation target proves this, the pound has maintained its inflationary target and also dropped on international markets. my statement of “running the press” was figurative, obviously they do not print money, it takes too long, it’s easier to just edit a database entry on a computer, the effect however is no different.

    *********************************************

    “The bulk of the growth is private driven… With no external sector, by double entry bookkeeping the following equation holds: Public deficits=private sector savings”

    Why does a balanced budget/surplus have to mean draining the private sector? If public expenditure is reasonable, there is no reason for this to be true. Similarly, a net external debt is reduced if the country is running a budget surplus; the “surplus” is simply a short-term measure of the country’s trading whereas the “external balance” is the running total. Regardless of this, draining the private sector will not solve a deficit. You seem to be confusing trade balance with sovereign debt, the way to reduce a trade deficit is to get the private sector to increase exports(or rather, increase imports of money) or reduce imports(decrease exports of money), the way to reduce the govt deficit is to cut spending or increase tax receipts (either by raising rates; “draining” the private sector or undertaking measures to bring in new/more industry) whether this drives the private sector into deficit depends wholly on its ability to improve trade (or avoid govt measures).

    Your equation holds with no external sector, however, there IS an external Sector, Eurozone countries don’t only do business with people in their own countries (nor indeed do Eurozone countries only do business with other Eurozone countries) and therefore, it makes your equation irrelevant unless we take the private sector to mean the private sector of the entire world since evidently the public sector deficit could be flowing out to any number of other countries and not necessarily EU ones.

    *********************************************

    “Countries that are sovereign in their own currencies never have to issue bonds in foreign currencies…”

    Sorry but this is just not true, there are many countries in the world that issue foreign currency bonds due to a lack of appetite for the sovereign currency, and various other reasons (for example, Hungary does it) – what you stated is relative, not a universal truth and could only ever be possible if a country were able to be 100% self reliant and do absolutely no trade with anyone but itself since then it could of course use the central bank to finance all of its debt as that money will never leave the country and hence you can maintain a circular flow… well, the other option of course is to put controls on the movement of your currency as Iceland does but this comes at a huge cost.

    Moving onto your claim that Central Banks (like to) ban foreign currency loans in order to allow them to help borrowers facing default; this is totally and utterly false, it’s not the central bank’s job or ability to bail out borrowers by meeting their obligations for them – the reason it bans foreign currency loans is because if they become popular, the central bank loses its ability to control asset prices and hence inflation, due to the fact that asset prices are becoming inflated by inflows of borrowed foreign currency. This has effect has been seen recently in Hungary and the only remedy for the problem is manipulation of exchange rates, which most countries simply can’t do because they don’t control the movement of the currency.

    You are almost right about one thing, governments that have a stable currency, economy, social and political system that is internationally trusted will of course not need to issue fx bonds because of that trust, however, that is not a luxury all countries have.

    *********************************************

    “Those countries that have had large growth in the euro area, their private sectors have large private sector debts relative to GDP. The BoE have been performing Quantitative Easing…”

    You don’t seem to know what QE actually was, the BoE issued 200Bn in new money – almost all of which was used to purchase Gilts on the open market, I doubt this did much for bank balances as Gilts are highly liquid and are considered as good as cash reserves (for obvious reasons) a very small portion of the QE money was spent on direct purchases of commercial paper and corporate bonds, however the total that was spent on that was a mere 2%.

    As for banks not lending out reserves; the total a bank can lend out depends on how much it has in reserves, the larger its reserves the more it can lend – nonetheless all banks maintain roughly the same tier ratios, it’s only when there is a massive influx of non-performing or bad loans that problems are created as these are counted directly against the reserves. You are right however that it’s not a stimulus package… stimulus is the job of the government and the government either needs to raise debt or spend its surplus (if it has any) in order to fund whatever stimulus measures it feels are necessary and again, a lack of sovereign currency does not bear this.

    *********************************************

    “Spain were running a surplus prior to their economic downturn and were also running a current account deficit at the same time hence they were either running down their saving’s or were driving their private sectors into debt…”

    You seem to suggest that devaluation is the only solution; if Greece’s prices come down then equilibrium can be restored that way and Germany is not the only trading partner available to Greece therefore if it can raise trade with other partners, no change in its business with Germany is necessary – similarly, I doubt Germany would suffer much from a reduction in demand from Greece even if it did happen. Not to mention that if we enter the hypothetical scenario of Greece still having the drachma and devaluing, that’s still going to reduce demand for German exports because they will be more costly, the only real difference here is that the government is reducing prices instead of the private sector doing it itself… I also fail to see the relevance of the gold standard in all of this, if anything an international gold standard would be closer to the Euro in its machinations.

    *********************************************

    “If Greece had its own currency like Japan, it could ignore the rating agencies. Moody’s downgraded the bonds of Japan to A2, or one grade below Botswana’s, this was at the same time that Japan was a major donor to these countries…”

    Again, issuance of a sovereign currency does not automatically mean you can “ignore the rating agencies”, it depends very much on the country and what capital controls that country is able to feasibly implement, additionally, Greece’s problem is not comparable to Japan; Japan had the issue of a collapsed and now languishing economy but with significant domestic savings, Greece’s problem is the unsustainable deficit of the government and not much in the way of savings.

    As for the market not buying Euro bonds, that statement could only be based on the assumption that the only ones financing the Eurozone are entities that are outside of it, which clearly isn’t true and hence there is no way demand for bonds could suddenly dry up like you’re describing – Finally, the governments can *EASILY* help eachother out if they wish to, the blockade is purely a political one and evidently one that Germany wants to address already.

    And by the way, Botswana is considered a success story of Africa, heck it even beats other parts of Asia, if you’d said Zimbabwe it’d have meant something.

    *********************************************

    “The UK has consistently run a trade deficit since 1983. Who benefits when a country runs a trade deficit? The country that runs the trade deficit has a higher standard of living than those countries that run surpluses, because the exporting countries are exporting real goods to the UK in exchange for liabilities/pieces of paper.”

    Again, a fallacy, just because a country is running a surplus does not mean in any way shape or form that it automatically must have a lower living standard, it can easily be the case that it has a booming industry whilst the deficit country does not, in fact, if you want proof, compare the standard of living in Greece to Germany.

    *********************************************

    “What I’m saying is that theses countries are going to have to have internal devaluations, if it gets pushed too far we could easily get a Fisher debt deflation that the governments have been trying to avoid for the last two years. I don’t think the people will stand for this because the social consequences are enormous. I don’t think its possible in a democracy and they may say its not worth it and default anyway.”

    Ok, now you’re kind of getting the idea, however, your statement of there being the possibility of a Fisher debt deflation is impossible since that would require very weird things to happen right across the Eurozone – namely for there to be massive differences in the cost of finance and assets in different EU countries which could never be the case because private entities would simply obtain finance from the lenders in countries that have these low interest rates, although this doesn’t merit further discussion because it’s simply absurd.

    *********************************************

    “You can give as much incentives as you wish, the private sector deficits are hugh and they are trying to deduce their deficits at the same time as the governments. You have to look at the whole financial sector balance approach…”

    if the country has a current account deficit, clearly a de-leveraging of the private sector would reduce the current account deficit if they are net importers (or at least the rate of decline). However, you are right that this issue could be solved by the creation of a supranational fiscal entity. Nonetheless, whether or not a country violates Maastricht is really a concern for EU politicians to whine over, if a country crosses a little bit over 3% it’s not going to suddenly cause the yields on their bonds to go mental (nor the ECB for that matter), it’s about debt sustainability more than anything.

  20. quick typo correction: where I wrote “the government either needs to raise debt or spend its surplus (if it has any) in order to fund whatever stimulus measures it feels are necessary and again, a lack of sovereign currency does not bear this.” – the last 4 words should actually say “does not bear on this”

  21. Olipro,

    Japan has had complete control over interest rates for the best part of 20 years with no inflation insight. The dominant influence on prices in the near term and for years to come will be the deflationary influence of high unemployment. Price can be divided into two components, cost and profit margin. For sustained inflation to take hold it depends on rising costs. The two primary components of cost are labour and imported material costs. But labour costs are the dominant factor for sustained inflation and with chronic high unemployment for years to come depressed internal demand will keep wages under control with bouts of deflation and suppressed business activity. QE involved the CB exchanging non-or low interest bearing assets reserves) in exchange for longer-term higher yielding securities. This resulted in lower longer-term rates than otherwise might have been the case. The lower borrowing might or might not alter aggregate demand, but then again it deprives the private sector of an interest earning bond thereby also contributing to deflation.

    The reason I mention the printing press is because some people believe that a central bank can monetize the government debt always. They can’t because they will lose control of the overnight interest rate. The Treasury could instruct the CB to control the yield curve if it wished, but it lets the yield curve float.
    *********************************************

    Why does a balanced budget/surplus have to mean draining the private sector?

    If you take the economy as a whole, in any accounting period total income must equal total expenditures. And also total saving out of income flows must equal total investment in tangible capital in any accounting period. Individual sectors of the economy can be in surplus or deficit but taken as a whole the sum of the sectoral financial balances must equal 0.
    E.g., if you divide the economy into 3 sectors:
    the domestic private sector which includes business and households
    the government sector
    and the foreign sector, the following accounting identity must hold

    Domestic Private Sector + Fiscal Balance + Foreign Financial Balance=0

    It is impossible for all 3 sectors to net save i.e. run a surplus at the same time. One sector has to issue liabilities. This is where the Maastricht Rules come into play. Governments in the euro area have to either run a balanced budget or a surplus as Alex Weber said the other day. Take Germany and Greece for example. Both countries have the same Maastricht rules. For any growth/trade to take pace one of their private domestic sectors has to go into debt or run down their savings. Germany earns a surplus by selling exports to Greece, so if Germany is earning a surplus by national accounting rules Greece must be in deficit. If a current account surplus is sustained, then both the German government and the private sector can save i.e. run a surplus. But that growth trajectory cannot be maintained for long because the private sector in Greece cannot keep going into ever larger and larger deficits to stimulate growth. So, the private sector decides to save now and Greece cuts back on their debt and tries to de-leverage which causes reduce tax revenue for the government and unemployment starts to rise. The automatic stabilisers kicks in and the government deficit starts to increase. Germany shouts that your breaking the Maastricht rules, the ECB says it won’t accept Greek government debt from Greek banks and so it goes. So either Germany starts to consume more and buy Greek exports because the government and the private sector cannot reduce their debt at the same time. It’s like pushing on a balloon and if its not sorted the whole thing could burst and there will be a total collapse in trade. Yes, Greece could find someone to trade with that is not in the euro area, that will help them reduce their deficit, but not all countries have this option.

    Now the UK, US are running deficits and will be for years to come, no matter what the politicians say, if they try to reduce their deficit now they will have the same problem as Greece and their economy could collapse. Greece doesn’t have the option that sovereign countries have like the US, UK, Switzerland etc. have. And the UK citizens don’t know how much them deficits are helping them.

    You do not fund a current account deficit under a fiat floating exchange rate system. The government can spend irrespective of the current account balance. Government deficits are not a problem for the governments of the UK, US etc; they can meet any and all obligations that arise. Or if they wanted to get their citizens to build a school they don’t need to have savings ready before hand to fund the building of the school unlike in Greece.

    [i]Regardless of this, draining the private sector will not solve a deficit. You seem to be confusing trade balance with sovereign debt, the way to reduce a trade deficit is to get the private sector to increase exports(or rather, increase imports of money) or reduce imports(decrease exports of money), the way to reduce the govt deficit is to cut spending or increase tax receipts (either by raising rates; “draining” the private sector or undertaking measures to bring in new/more industry) whether this drives the private sector into deficit depends wholly on its ability to improve trade (or avoid govt measures).[/i]
    ***********
    The way to reduce a trade deficit is to cut back on demand in the domestic private sector. Just look at Ireland no demand in the private sector unemployment 13.1% and rising. And exports are down. And they will probably run a current account surplus by year-end. But the only outlet for Greece is through the current account balance like Ireland. Government deficits are not a problem for sovereign countries that issue their own free floating “non-convertible” currency.

    You are looking at the government deficit and the private deficit in isolation. When analysing one sector you have to see what impact it has on the other sectors. But the only outlet for Greece is through the current account balance, for the private sector to reduce its deficit the German private sector has to reduce its saving or some other country go into a trade deficit with Greece.

    [i]Your equation holds with no external sector, however, there IS an external Sector, Eurozone countries don’t only do business with people in their own countries (nor indeed do Eurozone countries only do business with other Eurozone countries) and therefore, it makes your equation irrelevant unless we take the private sector to mean the private sector of the entire world since evidently the public sector deficit could be flowing out to any number of other countries and not necessarily EU ones.[/i]
    That equation is true for each country whether it’s on a fixed exchange rate system or on a floating exchange rate system. I am taking the private sector to include both business and households. It also holds with an external sector. I know Eurozone countries don’t only do business with people in their own countries, irregardless it is an accounting identity and has to be true. It would also be true if we were trading with Mars.

    *********************************************
    “Countries that are sovereign in their own currencies never have to issue bonds in foreign currencies…”

    [i]Sorry but this is just not true, there are many countries in the world that issue foreign currency bonds due to a lack of appetite for the sovereign currency, and various other reasons (for example, Hungary does it) – what you stated is relative, not a universal truth and could only ever be possible if a country were able to be 100% self reliant and do absolutely no trade with anyone but itself since then it could of course use the central bank to finance all of its debt as that money will never leave the country and hence you can maintain a circular flow… well, the other option of course is to put controls on the movement of your currency as Iceland does but this comes at a huge cost.[/i]
    ***********
    Hungary had their currency pegged to the euro, like Argentina had their peg to the dollar. They are not sovereign unless they break the peg. No currency boards either. A country that issues its own currency is 100% self reliant with regards to their domestic sector. They don’t need to fund anything. Even if there was a foreign sector it doesn’t matter. A currency board requires a nation to have sufficient foreign reserves to facilitate 100% convertibility of the monetary base.
    ***********
    [i]Moving onto your claim that Central Banks (like to) ban foreign currency loans in order to allow them to help borrowers facing default; this is totally and utterly false, it’s not the central bank’s job or ability to bail out borrowers by meeting their obligations for them – the reason it bans foreign currency loans is because if they become popular, the central bank loses its ability to control asset prices and hence inflation, due to the fact that asset prices are becoming inflated by inflows of borrowed foreign currency. This has effect has been seen recently in Hungary and the only remedy for the problem is manipulation of exchange rates, which most countries simply can’t do because they don’t control the movement of the currency.[/i]
    ************
    The reason that the citizens accept a currency is that they have liabilities to the government in the form of tax in the unit of account the euro/dollar/pound. That is what makes the currency acceptable, if they had no liability in the form of tax, other currencies would soon enter the economy and the central bank would lose control of it’s currency, i.e. it wouldn’t become accepted. Look at Iceland, they have to export to get euros to pay back them euro loans. They should never have been put into this situation.

    [i]You don’t seem to know what QE actually was, the BoE issued 200Bn in new money – almost all of which was used to purchase Gilts on the open market, I doubt this did much for bank balances as Gilts are highly liquid and are considered as good as cash reserves (for obvious reasons) a very small portion of the QE money was spent on direct purchases of commercial paper and corporate bonds, however the total that was spent on that was a mere 2%.
    As for banks not lending out reserves; the total a bank can lend out depends on how much it has in reserves, the larger its reserves the more it can lend – nonetheless all banks maintain roughly the same tier ratios, it’s only when there is a massive influx of non-performing or bad loans that problems are created as these are counted directly against the reserves. You are right however that it’s not a stimulus package… stimulus is the job of the government and the government either needs to raise debt or spend its surplus (if it has any) in order to fund whatever stimulus measures it feels are necessary and again, a lack of sovereign currency does not bear this.[/i]
    ***********************
    Wrong, banks are never reserve constrained they are capital constrained. Banks do not lend out reserves, reserves have no say in how much a bank can lend out. Why do you think all them reserves are sitting in the central banks in the US and the BoE? The physical limit on how much credit a bank can create is determined by the size of its capital base. Loans to the government do not require a reserve of capital and therefore the amount a bank can lend to the government is infinite.

    [i]You seem to suggest that devaluation is the only solution; if Greece’s prices come down then equilibrium can be restored that way and Germany is not the only trading partner available to Greece therefore if it can raise trade with other partners, no change in its business with Germany is necessary – similarly, I doubt Germany would suffer much from a reduction in demand from Greece even if it did happen. Not to mention that if we enter the hypothetical scenario of Greece still having the drachma and devaluing, that’s still going to reduce demand for German exports because they will be more costly, the only real difference here is that the government is reducing prices instead of the private sector doing it itself… I also fail to see the relevance of the gold standard in all of this, if anything an international gold standard would be closer to the Euro in its machinations.[/i]
    *****************************
    That’s my point the euro has fixed exchange rate system just like the gold standard. There is no government for the whole of Europe like in the US. In the US the states are cutting back on their spending but the federal government is deficit spending, so it’s not as bad. Each country in Europe that uses the euro is like the states in the US with their own treasury. They are cutting back but there is no system in place to allow them to de-leverage. I think the US government spends 13% GDP, in the EU its only 1% GDP.

    [I]Again, issuance of a sovereign currency does not automatically mean you can “ignore the rating agencies”, it depends very much on the country and what capital controls that country is able to feasibly implement, additionally, Greece’s problem is not comparable to Japan; Japan had the issue of a collapsed and now languishing economy but with significant domestic savings, Greece’s problem is the unsustainable deficit of the government and not much in the way of savings.[/i]

    Japanese savings have come from the government itself deficit spending. Borrowing=Savings. It is impossible to have savings (deposits), which is not balanced by a similar amount of debt. That is why a wealthy community is also a highly indebted community. That is why you can’t have more saving and less debt, its impossible because all money is debt. The savings that a business uses to finance it are created at the moment the loan is drawn down. Savings does not finance investment, it’s the other way around investment brings for its own saving. I=S.
    **************
    [i]As for the market not buying Euro bonds, that statement could only be based on the assumption that the only ones financing the Eurozone are entities that are outside of it, which clearly isn’t true and hence there is no way demand for bonds could suddenly dry up like you’re describing – Finally, the governments can *EASILY* help eachother out if they wish to, the blockade is purely a political one and evidently one that Germany wants to address already.
    And by the way, Botswana is considered a success story of Africa, heck it even beats other parts of Asia, if you’d said Zimbabwe it’d have meant something.[/i]
    **************
    I’m not saying that buying Euro bonds could dry up; I’m saying that there will come a time when Greece refuses to pay the interest rate that the market wants. They need a fiscal authority above them all to deficit spend. That Botswana story is true, and Japan ignored them like every other country that issues its own currency could. Look at the US, UK saving rate at the moment, where do you think it has come from, it is increasing and the government deficit is increasing.

    [i]Again, a fallacy, just because a country is running a surplus does not mean in any way shape or form that it automatically must have a lower living standard, it can easily be the case that it has a booming industry whilst the deficit country does not, in fact, if you want proof, compare the standard of living in Greece to Germany.[/i]
    *********************************************
    Not a fallacy at all, compare the material living standard in the UK /US to Germany. Your living in the UK the Germans are exporting their cars, machinery etc to you. They are not consuming them themselves. They are exporting real goods while the US/UK sends them paper liablities. Which country is doing all the work? Germany.

    [i]Ok, now you’re kind of getting the idea, however, your statement of there being the possibility of a Fisher debt deflation is impossible since that would require very weird things to happen right across the Eurozone – namely for there to be massive differences in the cost of finance and assets in different EU countries which could never be the case because private entities would simply obtain finance from the lenders in countries that have these low interest rates, although this doesn’t merit further discussion because it’s simply absurd.[/i]

    [i]if the country has a current account deficit, clearly a de-leveraging of the private sector would reduce the current account deficit if they are net importers (or at least the rate of decline). However, you are right that this issue could be solved by the creation of a supranational fiscal entity. Nonetheless, whether or not a country violates Maastricht is really a concern for EU politicians to whine over, if a country crosses a little bit over 3% it’s not going to suddenly cause the yields on their bonds to go mental (nor the ECB for that matter), it’s about debt sustainability more than anything.[/i]

    I’d say the market will discipline the governments before the 3% deficit limit is reached.

  22. It would be a terrible thing to understand the EU. After all, if we did, then we wouldn’t get to criticise it so much, and often – so pointlessly.

    I have this one friend who, the only thing he knows about the EU is that there was this article in the Daily Mail five years ago about how all loaves of bread are going to be smaller, because of EU regulations. Since reading that, he’s been vehemently anti EU, although; as far as I’m aware, he’s still pro-bread.

  23. Kid – I remember that one. Wrote about it at the time – you may like to direct your friend there…

  24. I am agreeing with large parts of your comment but I’d like to add a few things:

    “If “the EU” decides to act, it is never for just *one* reason. It is for *at least* 27 different reasons. ”
    I would not say that. member states can have similar reasons to agree to somethings, so substantially less than these 27 reasons can be the case. At the same time of course, you have to consider the supranational institutions but thats another story of course.

    I happen to agree with your basic assumption, that EU politics is very complex and not clear cut at all along simple conflict lines, but while nation states are much more united and less diverse they are normally tremendously simplified as well. If you know them really well, you’d discover that they are a lot more complex than what one would believe. Just take Germany, what is Merkel afraid of currently? It is loosing support of the majority in an institution that has quite some resemblance withthe Council of ministers. In Germany the Bundesländer have substantial powers and an important position. You have various demographic groups and interests, also various cultures …

    Yes, I know there is a clear difference in scale in regards to the contrasts compared to the EU as such but aren’t those simplifications on national level also artificial and only a barely sufficient tool to help understanding what is going on there?