ECB’s Draghi Resists Pressure to Devalue Euro and Stimulate Growth

Despite pressures from the appreciation of the euro, which had hit a 15-month peak of $1.3711 on February 1, 2013, Mario Draghi of the European Central Bank announced four days later that the benchmark financing rate would be on hold at the record-low 0.75 percent. In making the announcement, he stressed that the worst was over for the Eurozone and that the uncertainties would be gone by midyear. “The economic weakness in the euro area is expected to prevail in the early part of this year. But later in 2013, economic activity should gradually recover, supported by our accommodative monetary policy stance and the improvement in financial market confidence.” Draghi was tacitly undercutting Francois Hollande’s earlier statement that the euro should depreciate so as not to hurt economic competitiveness. A higher euro means more expensive euro-based exports abroad. The relationships between monetary policy, a currency, and economic growth are complex. It would thus be worthwhile to unpack the scenario facing Draghi and Hollande in early 2013.

                         Mario Draghi addressing the World Economic Forum. In resisting pressure to lower the benchmark rate, he increased his financial stature abroad. 

The full essay is at Essays on the E.U. PoliticalEconomy, available at Amazon.

Moody’s: Statist France Lagging in the E.U.

Bashing the French in a major article on their lack of business competitiveness, the Economist was the target of la colère en Paris in November 2012. Just after the magazine’s warning that France could be the next danger-zone for the euro due to relatively high labor costs and unemployment, Moody’s cut the state’s rating to Aa1 from Aaa and kept a negative outlook on the rating. Moody’s cited the state’s economic weakness and the risks to the finances of the state government “posed by” France’s “persistent structural economic challenges.” In this way, Moody’s analysis dovetails with that of the Economist. Both pointed to a sort of impotence in French industrial policy. Moody’s decision excluded factors from the broader debt crisis in the E.U., focusing instead on the French government’s continued “reliance on borrowing to finance generous social-welfare programs” even as businesses in the state were laying-off employees. In other words, Francois Hollande had not gone far enough in his policies to make a dent in the state’s deficit as well as the downward trajectory of French competitiveness in the E.U. Meanwhile, deteriorating economic conditions in the E.U. were effectively closing the window of opportunity on even a one-party government being able to enact substantive reform. I contend that the gap between what the Socialist party could do, given its absolute majority in the legislature, and what it was actually doing contributed to the criticism.

Changes in real GDP in the state of France. A general downward trend-line is apparent.     
Source: World Bank

The full essay is in Essays on the E.U. Political Economy, available at Amazon. 

Full Employment in a Republic: Hollande’s France

Facing an unemployment rate of 10% in his state, with youth particularly hard-hit (23% for those under the age of 25), Francois Hollande of the state of France announced in August 2012 a new initiative for the legislature to pay most of the salaries of tens of thousands of young people hired in 2013. Young Europeans have  been hard-hit by the laborious labor laws that make it difficult for companies to let people go. Some E.U. states, including France, have proposed modest tax breaks for companies that hire people just entering the workforce, but no one is under the impression that such proposals will redress the underlying structural problem.

 Hollande, a Socialist, of the E.U. state of France.            The Telegraph

Fundamentally, there is no guarantee that a competitive market will come to an equilibrium at full employment. Accordingly, government has a legitimate role in picking up the slack, such that ideally any able-bodied adult who wants to work can have a job. In the state of France, the plan being proposed by Hollande in August 2012 would have companies that hire a person between 16 and 25 for at least a year pay as little as 25 percent of the person’s salary (for up to three years). In this way, the state hoped to create 100,000 new jobs in 2013 and 50,000 in 2014.

While managements would doubtless see this as a bargain, the question is whether other jobs would be put at risk given the 25 percent of the salary being paid by the companies. A clever manager might try to increase the proportion of the employees for whom the company must pay only 25 percent. Increasing the proportion would mean letting some non-subsidized employees go. The cost structure assumed could be a basis of sustainable competitive advantage if competitors do not also have such an arrangement. In other words, do government-subsidized jobs in the private sector add much in the way of the total employment of a company (and thus of the economy as a whole)?

One might also consider the matter of France’s deficit. Under E.U. law, it cannot exceed 3.5% of the state’s total economic output. Hollande’s strategy going into office was to offset the additional spending with a tax increase on the rich, yet even in anticipation of this some rich French were relocating to Belgium, a state with lower income taxes on the rich. California, which at the time also had an unemployment rate of just over 10 percent and a youth rate of 23 percent, also suffered from a budget deficit and a proposal by Brown to increase taxes. Unlike France, however, California faced no federal law limiting the deficit. In this respect, the E.U. was already a more consolidated federal system than was the U.S.

In short, the problem of individuals undercutting a policy for the whole is evident. A company’s manager seeking to take undue advantage of subsidized labor is like the rich person who seeks to avoid paying higher taxes by going to another state. To be more effective, government policy needs to figure out how to minimize such opportunism that is at the expense of the whole. Thomas Jefferson and John Adams both assumed that a virtuous citizenry is required for a republic to work. In the cases both of France and California, reaching full employment and achieving fiscal balance in the government may well come down to whether the respective citizenry does not try to exploit the requisite government policies.

It could even be said that a society or civil contract that is disvalued in the face of widespread opportunism deserves to fail.  Managers use “corporate citizenship” as window-dressing, yet without any sense of obligation to anything beyond the company. Doubtless there are rich people whose motivation to minimize even taxes they can pay dwarfs any sense of staying put and riding out the storm with everyone else (i.e., we are all in it together). If we are not all “in it,” then there is no We, as in We the People.

Source:

Sylvie Corbet and Sarah DiLorenzo, “French Government Offers to Pay Most of Young Hires’ Salaries,” The Huffington Post, August 28, 2012. http://www.huffingtonpost.com/2012/08/29/french-salaries-young-hires_n_1839663.html?utm_hp_ref=business

The West Crawling on Syria

Those who laud the efficiency of the market mechanism are particularly wont to point to the slow mechanizations of government machinery. Cautiousness along with a subtle bias in favor of the status quo may be the culprit. For example, after perhaps a year of urgings by Western governments for Assad of Syria to step down, finally a lone governor of a large E.U. state ventured to say that his state would recognize Assad’s opposition as the legitimate government of Syria. “France asks the Syrian opposition to form a provisional government — inclusive and representative — that can become the legitimate representative of the new Syria,” Francois Hollande was quoted by news agencies as saying on August 27, 2012 during a speech at the Élysée Palace. “France will recognize the provisional government of Syria once it is formed.” It is perfectly reasonable to ask whether the statement would make any difference in Syria.
 

Part of the reason why European states formed a union was because a united front would have more power both economically and politically. Were the E.U. Parliament to offer to recognize Assad’s opposition as the legitimate government of Syria, the announcement would have more punch behind it. This is why the American states consolidated their foreign-policy power at the union level. Simply put, the world would be more likely to deem it as important.
 

Beyond the question of whether the E.U. should take on a greater role in foreign policy (the union does have a foreign minister) is the matter of why Western governments were so reluctant (or slow) to recognize Assad’s opposition as the government of Syria. American officials had stated that Assad had lost the right to rule because his government had turned on so many Syrian civilians in killing them. The recognition of another government is more or less implied. Why not make it official? Why hold on so to the status quo, even after it has been deemed to be illegitimate?  Put another way, why must so many people be killed before even an implied step is taken?
 

Strategic concerns typically weigh heavily in the formulation of foreign policy. The possible reactions of China and Russia were no doubt salient in the calculations of the foreign policy experts at the time. Even so, it seems that too much cautiousness (i.e., avoiding even a low-probability negative reaction) goes with the calculating orientation itself in the formulation of foreign policy, which can be at the expense of common sense. If Assad was no longer held as the legitimate ruler of Syria, it follows that some other person or group could (and should) be recognized as legitimate. Furthermore, that such recognition would trigger Russian military retaliation should have been regarded as a stretch at best. The result of the excess cautiousness is that Russia and China were essentially able to proclaim the status quo as the default (a default whose legitimacy had been explicitly refuted in the West).
 

Put another way, the desire not to rock the boat even just a bit by paddling can be self-defeating if the boat is filling up with water. The mechanism by which Western governments formulate and implement foreign policy may be too mired in statecraft at the expense of not only common sense, but also the human rights of a people elsewhere in the world.
 

Source:

Kareem Fahim and Rick Gladstone, “France Says It Would Recognize Provisional Syrian Government,” The New York Times, August 27, 2012. http://www.nytimes.com/2012/08/28/world/middleeast/rebels-claim-to-shoot-down-syrian-helicopter.html?_r=1&ref=world

 

 

Incremental Change in the E.U.: A Banking Regulator

 The E.U.’s European Council, which represents the union’s state governments, agreed at the end of June in 2012 to make the federal bailout fund directly available to banks. Spanish banks had been seeking 100 billion euros. Counting the bailout funds as debt of the state rather than as bank debt would have further increased Spain’s relatively high borrowing costs. Counting the bailout funds as bank rather than state debt can be viewed as an instance of the E.U.’s “direct effect,” wherein the federal level can directly affect E.U. citizens and their private associations.  This distinguishes the E.U., by the way, as an instance of modern federalism, from the old foedus (i.e., treaty), or confederal (“alliance”) type of federalism as evinced by the American Articles of Confederation. 

The complete essay is at Essays on Two Federal Empires.

France’s Hollande: Standing Above His Party’s Legislative Victory

In the 2012 election of the E.U. state of France's legislative Assembly following the election of Francois Hollande to replace the deeply unpopular Sarkozy, “the Socialist Party won 280 seats and two allied parties won another 34, giving the parliamentary bloc 314 seats — considerably more than the 289 needed for a majority in the National Assembly. The Greens, who are part of the government, have another 17 seats, while the far left won 10. Former President Nicolas Sarkozy’s center-right Union for a Popular Movement won 194 seats and its allies another 35 seats, bring the total to 229 seats, a sharp drop from 304.” The typical analysis ensuing from this result concerned the added strength that Hollande would have in pushing the E.U. toward balancing austerity with stimulus spending. The Prime Minister, Jean-Marc Ayrault, said the government would work to fix public finances and reduce unemployment. “The goal is to shift Europe toward growth and protect the euro zone from speculation,” he said. “The task before us is immense.” At least the Socialist Party would not have to deal with other parties on the left that are less pro-E.U., as the Socialists had established an absolute majority in the state’s Assembly.  However, the Socialists did not have the three-fifths majority needed to make changes to the state constitution, such as shifting more governmental sovereignty to the E.U. (federal) level. At the time, the E.U. was at a precarious place in not having enough sovereignty to safeguard the euro.

Interestingly, during the evening of June 17^th as the election results came in, Hollande stayed out of the media spotlight. It was the prime minister, Jean-Marc Ayraunt who spoke for the Socialist Party. He spoke along with the leaders of the other parties and several candidates (both winners and losers). Hollande’s absence was notable because it suggests that it might not be wise for a figurehead to be perceived as being too partisan; unlike party leaders in a legislative body, a governor or president represents the republic as a whole, and thus the public (rather than partisan) good. Hollande was smart to spend the evening preparing for (or travelling to) the G-20 meeting en Mexique le lendemain. Standing apart from the temptation to publically celebrate the victory of his party, he put himself in the future position of being able to credibly claim that agreeing to shift more sovereignty to the federal level is en l’intéressé de la France. In other words, resisting the temptation to engage in partisan displays can translate into political capital that a figurehead can use to facilitate a shift in the constitutional design of governance. Moves on this scale are fitting for a figurehead who is oriented to the big-picture rather than to trying to win on every issue.

Source: 

Steven Erlanger, “Socialists’ Victory in France Buttresses Hollande’s Power,” The New York Times, June 17, 2012. 

Merkel’s Fiscal Box in the E.U. Debt Crisis

Germany was ruling out any substantive shift in its approach to Europe's debt crisis despite a rising chorus of opposition to Berlin's austerity policies that reached a crescendo in the elections in Greece and France on May 6, 2012. On the following day, Merkel “rejected the notion that Europe was on the brink of a major policy shift after Socialist Francois Hollande defeated her fellow conservative Nicolas Sarkozy and Greek voters punished ruling parties who slashed spending to secure a foreign bailout. . . . Merkel herself made clear that, while there was scope to discuss tactics, the overall strategy EU leaders committed to by agreeing a compact on fiscal consolidation was ‘not negotiable.’”[1] That seems a bit presumptuous, considering that the “fiscal pact” had yet to be ratified in enough of the states to go into effect.

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

1. Noah Barkin and Stephen Brown, “Germany Austerity Policies: Berlin Unmoved by Votes in France, Germany,” The Huffington Post, May 7, 2012.