Cameron to Van Rompuy: No Negotiation on E.U. Budget

Just days before the House of Commons debated whether Britain should secede from the E.U., Prime Minister David Cameron and his deputy, Nick Clegg, met with Herman Van Rompuy, President (or chair) of the European Council, to discuss Cameron’s threat to veto any proposed seven-year E.U. budget that is higher than the previous budget (allowing for inflation). The European Commission had proposed a 5% increase over the current budget, setting the stage for a clash of the titans across the federal and state levels. The British refusal even to negotiate on the federal budget exposed a major vulnerability in the E.U. itself just as it was being relied on internationally to protect the euro from succumbing to the systemic risk of Greece or Spain defaulting.

The complete essay is at Essays on Two Federal Empires, available at Amazon.

Anti-Federalist Britain: South Carolina on Steroids

If Douglas Carswell, a member of the House of Commons, had his way, Britain would secede from the E.U. before Prince Charles could say, “hip hip!” Carswell's Private Member's Bill, submitted for debate in late October 2012, would repeal the European Communities Act (1972), by which Britain became a state in the former European Economic Community in 1973 (after France had vetoed Britain’s first request). Although Private Member’s Bills rarely become law in Britain, merely having a debate on whether to have a referendum on the question of whether the Kingdom should secede from the empire-level union would stir the pot. The Prime Minister, who was on record in support of not pulling out of the union, but for only economic reasons as his state had been benefitting from the large common market. So even if Carswell’s effort is ultimately unsuccessful, even such a revolt by Tory back-benchers could undercut David Cameron’s power in the midst of a languid economy in the state.

The complete essay is at Essays on Two Federal Empires, available at Amazon.

PM David Cameron of Britain at the European Council. Is he onboard?     AFP/Getty

The U.S. Sues Bank of America: A Spanking or Slap-on-the-Wrist?

In late October 2012, federal prosecutors in New York formally accused Bank of America of “carrying out a scheme, started by its Countrywide Financial unit, that defrauded government-backed mortgage agencies by churning out loans at a rapid pace without proper controls. In a civil suit, prosecutors seek to collect at least $1 billion in penalties from the bank as compensation for the behavior that they say forced taxpayers to guarantee billions in bad loans.” The guarantee can be considered a moral hazard, in that Bank of America (or Countrywide) was not the party on the hook. In other words, the mortgage service company had an artificial incentive to produce mortgages riskier than would otherwise be the case because they would be guaranteed by another party (i.e., American taxpayers).

The full essay is at "U.S. Government Sues Bank of America."

Political Risk in Systemic Risk: Finnish Pensions Err in Debt Crisis

Finland became a state in the European Union in 1995 and adopted the euro at its birth in 1999. In terms of population, the state is between Wisconsin and Minnesota, both of which are states in the United States. The Finnish culture prizes saving as well as paying-off debt on time. As the Wall Street Journal put it, the Finns are more German in this sense than are the Germans themselves. It is easy to understand, therefore, why the Finns would not have been excited about the write-offs in Greek government in 2012. The Finnish cultural attribute here is an ideological proclivity. Such a value-system so deeply held can even eclipse or interfere with an otherwise unfettered risk-return trade-off presumed to be part of the market mechanism. Just as the risk-return investment-pricing froze rather than adjusted upward with the leap in risk in CDOs and the related insurance swaps that occurred on Wall Street in 2007 and 2008, the decisions of Finnish pension fund officers in the wake of the European debt crisis to pull out of Greek and Spanish bonds rather than simply to demand a higher rate of return, given the higher risk, likely means that the market mechanism itself freezes rather than functions at levels of high risk (or when risk is increasing dramatically). In other words, the theory of the laissez-faire market, which Adam Smith never advocated, has a serious flaw that is reflected in the mechanism in operation when there is a spike in risk. Un prix ne marche pas quand il y a beaucoup du risque. The free market mechanism in the investment market tends to freeze up rather than re-price instruments whose risk is quickly increasing to a significant degree.

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

Predicting Future Events in Political Risk Analysis: On the European Debt Crisis

Political risk assessment is a nasty business in that the future has a stubborn habit of not wanting to be too predictable. Even though tomorrow displays a remarkable tendency to be similar to the world of today—the status quo enjoying the right of default—forecasting future events is notoriously difficult. To use statistics to nail down probabilities may actually involve considerable luck. Not even the stature of the person making the predictions may be decisive, after all. I have in mind the predictions of Alexei Kudrin, the former Russian finance minister, on the European debt crisis and the euro.

                                                             

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

Euroskeptic Spoilers in the Council: Two-Tracks as a Solution

During its meeting in October 2012, the European Council decided to move forward on the legal underpinnings of a banking supervisor at the ECB. The position was officially accepted at the next meeting in December. The position was designed to be responsible for overseeing the banks in the states that use the euro. Some of the debate between state leaders at the October meeting involved when the supervisor would be up and running. The issue of timing was particularly relevant and indeed pressing at the time because federal bailout money would flow directly to banks only once a supervisor is in place. To the extent that Spanish banks desperately needed additional capitalization to cover their bad debts, the ability of the Council to come up with legislation for a supervisor position in a timely manner—the upcoming German election notwithstanding—was crucial to stabilizing the market not only in the E.U., but internationally as well. The Council's members can be subjected to critique in this respect.

The complete essay is at Essays on Two Federal Empires, available at Amazon.

Is the Commission Blackmailing Britain?

In October 2012, the Daily Online reported, “Brussels officials are threatening to hit Britain with millions of pounds in fines in retaliation for pulling out of pan-European justice and crime policies.” It is the element of “retaliation” that was particularly provocative in the state known for its outspoken Euro-skeptic element. The E.U. cannot afford such an atmosphere to foment. Moreover, the dual-track trajectory should be fostered rather than retarded by the E.U. Government, due to the very different notions of the E.U. among the states.

The complete essay is at Essays on Two Federal Empires, available at Amazon.

2012 Nobel Peace Prize Winner: The European Union

In the modern world of organizations and the members who inhabit them, it perhaps makes sense that the Nobel peace prize would go to a government rather than to a particular official thereof. One immediate problem was figuring out which officials in the E.U. would accept the award. Martin Schulz, the president of the European Parliament, immediately issued a statement indicating that his institution expected to be part of the award ceremony. Herman Van Rompuy, president of the upper chamber, and Jose Barroso, president of the E.U. Commission, could also be said to have had legitimate claims in receiving the award on behalf of the E.U. itself. The absence of an “overall” figurehead in the E.U. is likely a result of Europe’s unhappy experience with “one man rule.” Indeed, the E.U. itself can be said to be a check on such nationalist excesses. In this regard, the peace prize provided Europeans with a change to catch their breath and take in the big picture amid an austerity/debt crisis.

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

A "Bronx Upbringing" Out-of-State: Tolerance in a Federal Empire

Typically, the American empire is assumed to refer to the hegemony of the U.S. in the world. “Imperialism,” in other words, is thought to refer to a major power imposing on lesser ones around the world—the influence being directed externally. I contend that the United States of America is itself an empire, even apart from its external influence, as the Union is composed of republics having distinctive cultures and on the scale of early-modern European kingdoms (e.g., United Kingdom, Switzerland, the Netherlands—which had been “international” in medieval times).

The complete essay is at Essays on Two Federal Empires, available at Amazon. 

Conflicts of Interest: Relying on a Wall Street Bank’s Safeguards

In October 2012 the Wall Street Journal reported, “the Financial Industry Regulatory Authority is examining how major investment banks and brokerage firms define and manage conflicts of interest between themselves and their clients.” Prime facie, defining and managing such conflicts between oneself and others can be regarded as itself a conflict of interest. It is perhaps a bit like the wolf negotiating with itself on its new job guarding the hen-house. I suspect that the regulators were going too far in attempting to translate “regulating” into managerial terms. The Journal goes on to ponder, “Will the first systematic look at conflicts on Wall Street in years make a difference for investors?” In my view, investors have good reason to be skeptical of the FIRA’s “manageralizing” approach.

The full essay is at Institutional Conflicts of Interest, available at Amazon.

A Separate “Eurozone” Budget: Two-Track Federalism

A separate E.U. budget of €20 billion, 0.2 percent of the GDP in the “eurozone” of the E.U., was proposed in the midst of the debt crisis to be spent in E.U. states that have adopted the euro. At the time of the proposal, the budget for the entire E.U. totaled around €130 billion, which was just over 1 percent of the E.U.’s GDP. While adding 0.2 percent to a federal budget that is just over 1 percent of GDP might seem insignificant to Americans, one might recall the first century of the U.S. (through 1860, and then from roughly 1870 to World War I), when the U.S. budget as a percent of GDP was roughly the same as a percent of GDP.

The complete essay is in Essays on Two Federal Empires, available at Amazon. 

The US Govt Budget as a percent of GDP      

Source: Gordon Tulluck

Homer on Heroic Leadership in Business

Can a merchant be a hero?  A manager in the grips of the business-leadership fad, which began in the 1980s, might reply, “yes, of course.” A hero in the corporate context is said to be a “champion,” “servant leader,” “coach,” or “visionary leader.” Hero and leader are typically conflated in society, moreover, without any real thought on whether heroes are necessarily leaders. A hero might rescue a damsel in distress without having any followers. It could be countered that Odysseus in Homer’s Odyssey is both a hero and a leader on his journey. However, of such a hero-leader, being a merchant would be excluded. Describing the attributes of Homer’s notion of the hero figure is instructive, for while the characteristics seem especially oriented or applicable to merchants, Homer takes pains to exclude the business caste from Odysseus’ heroic leadership.

Odysseus leading his men.  A business likeness?     Source: Maudandoscar.org

Material from this essay has been incorporated into The Essence of Leadership: A Cross-Cultural Foundation, which is available at Amazon. 

Different Unemployment Rates in E.U. States: Stretching Federalism Too Far?

For August 2012, the unemployment rate in the E.U. was 10.5 percent, which translates into 25 million Europeans without a job. In the U.S., the comparable rate was 8.1. These figures mask the huge inter-state differences in both unions, especially in the E.U. What impact do they have on the respective federal systems? 

                                 

                                                               E.U. Unemployment Rate.    Google

The complete essay is at Essays on Two Federal Empires, available at Amazon.

Poor States in the U.S. and E.U.: A Drawback of Federalism

The state-debt crisis in the E.U. has had the unfortunate effect of exacerbating the prejudice in the northern states against the poorer southern states. The people in the latter states are purportedly lazier or more corrupt (e.g., Greece’s patronage system). Historically, it has even been thought that the warmer climate makes people less industriousness. Faced with this long history of prejudice, it is difficult to assume that shifting more governmental sovereignty from the states to the Union will somehow make Europe one big happy family. In other words, federalizing more competencies is unlikely to make every state economically on par with Germany.

The complete essay is in Essays on Two Federal Empires, available at Amazon.

Report on the Future of Europe: Federalism and Democracy

The report of the Future of Europe Group, released on 17 September 2012, warrants careful consideration by E.U. citizens and their state and federal officials. Beyond the various reforms proposed in the document is the critical notion that not every state need be a part of the enhanced integration (i.e., the additional governmental sovereignty being shifted to the Union from the states). This assumption applies both to the proposals themselves and to the application of a super-majority in place of unanimous consent to future amendments to the E.U.’s basic law. It follows that if the Czech Republic and Britain prefer the status quo, this would not prevent other states from going on to closer union. From an American standpoint, this “dual or multiple track” approach to federalism is quite foreign.

The complete essay is at Essays on Two Federal Empires.

The E.U. flag at the European Commission.