Thursday, November 27, 2014

Europe’s Zero-Sum Poison

BRUSSELS – Whenever a society regards its problems solely through the prism of distributional disputes, its chances of solving them diminish greatly, because the “us versus them” mentality distorts analysis and blocks solutions that would unambiguously improve the overall situation. Every policy choice is perceived as a zero-sum game, whereby a gain for one group is necessarily a loss for another group. The very notions of trust and progress vanish.

We have seen in the past the extent to which such conflicts – between rich and poor, landlords and industrialists, or capital and labor – can hamper development. We are seeing today in the United States how entrenched antagonisms result in a stalemate on tax and budgetary matters. And there are many examples of failed economic reforms that fundamentally boil down to the same zero-sum logic.

But that logic is nowhere as salient today as it is in Europe. Since the euro crisis began, almost three years ago, there has been a continuous struggle between two readings of it.

The first interpretation emphasizes the eurozone’s policymaking shortcomings and the reforms needed to remedy them. The second highlights individual eurozone countries’ failings and the costs that they impose on their neighbors. Until now, a rough balance between these two interpretations has prevailed. But the second is increasingly gaining the upper hand.

In northern Europe, public opinion is increasingly exasperated by what many view as an attempt by the south to rob it of its savings. A recent letter signed by 160 German economists claiming that the European Union’s plan for a banking union was little more than an attempt to make Germany pay for Spanish mistakes is revealing in this respect.

The economists largely overlook the problem of financial fragility that a banking union is supposed to address, claiming instead that there would be no problem if governments simply stopped intervening in banking crises. And they overstate the risk that a common deposit-insurance scheme could turn into a massive north-south transfer channel.

In turn, southern Europe is getting angry. Italian Prime Minister Mario Monti recently decried the emergence of a European “creditocracy” – governance by those who pretend to be on the giving side of Europe – and pointed out that, contrary to widespread perception, Italy is not relying on anyone else’s support. (Italy is indeed contributing to support other crisis countries, so, objectively, it is still a creditor). If the mild-mannered Monti speaks in these terms, what can we expect from the new breed of populism that is bound to result from the southern European crisis?

Admittedly, Europe’s increasingly divisive zero-sum thinking is not entirely new: the EU is accustomed to distributional disputes, and the lengthy budget discussions (which take place every seven years) are typically acrimonious affairs. But, until now, policymakers could contain controversies to the usual political give-and-take of taxation and cross-country transfers. The problem with the current debate is that distributional disputes now contaminate the entire policy spectrum.

One man saw this coming. American economist Martin Feldstein wrote in 1997 that monetary union would create conflict within Europe. At the time, he was derided and regarded as an entrenched opponent of the European project. Unfortunately, his insight was correct: European countries today are at loggerheads not despite the common currency, but precisely because of it.

History suggests that international disputes over debt and transfers are a serious danger. In the 1920’s and the 1930’s, representatives of European states devoted countless meetings to resolving them (at the time, mainly German reparations). Despite US goodwill, they were unable to overcome their differences, and let the reparation problem degenerate into a poisonous financial conflict that contributed to much worse.

But conflict is not inevitable. Many societies have proved able to overcome a zero-sum mentality and project their perceptions of national interest into the future; Europe must find in itself the ability to do the same.

An important lesson from how countries address internal disputes is that the attitude needed does not require overlooking distributional issues. Successful societies do not stop having arguments about who benefits or loses from taxation, redistribution, or regulation. But they do not let distributional issues take over the entire debate. They are able to separate efficiency or stability issues from distributional controversies.

That is the lesson that Europe must learn. It must recognize that it is bound to live with distributional disputes, and that it must find ways to address them. But, even more important, it should contain the scope of these disputes, and avoid becoming mesmerized by them. Doing so requires courage, vision, and trust – qualities that are currently in dangerously short supply.

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    1. CommentedGary Marshall

      Hello Mr. Ferry,

      Wonderful. How to say nothing in 400 words or less!

      The problem is very simple. Some governments are better at spending money than others. In Europe, the EU Euro nations all use a particular type of money that none can just print. So to fund a deficit means going out into the financial markets and actually borrowing the money.

      Now why should German taxpayers fund the profligates? Their banks injudiciously have funded them for a long time. Now must German taxpayers be forced to fund them as well.

      Perhaps those nations should change their behaviour? Maybe they should stop squandering large sums of money on helping people stay away from the labour force, or investing in worthless green technology?

      Maybe the colossal squander of other peoples' money should cease in favour of something better. Maybe lower taxes might spur more worthy industry and less of the other kind.

      See, if a government requires $100 billion to operate including funding all these wasteful programs, it could slash taxes and borrow the deficiency from those same people. But people do not like to see their money wasted, so government would have to cut back on its squander. If government expenditure drops to $60 billion, then the nation is wealthier by $40 billion, and with low tax rates will thrive all that much more.

      Pretty simple. But not one economist can get his head around this because it means discarding his beliefs in the benign and enriching influence of big oafish squandering government.


    2. CommentedMark Pitts

      The US is following very much in Europe’s footsteps. A major issue in the US campaign concerns taxing the truly rich.

      But who cares? According to the CBO, the annual amount of new tax money raised by the Buffet Rule for example would cover just ¼ to ½ of 1% of the annual deficit. Perhaps significant symbolically, but the issue really has no practical import for the country as a whole.

    3. CommentedGuenter Krause

      It is no doubt difficult for the public to learn
      something from the advice of economists.
      Mr. Pisani-Ferry is a good example:
      He writes about the German economists who
      critised the EU plans as
      ".. they overstate the risk that a common ... could turn into a ... transfer channel"
      To overstate implies to overestimate.
      Given that only God knows the true risks and everybody
      else has to use their best knowledge, such absolute statements as "overstate" could themselves only be true after talking to the Creator.
      Maybe everybody should be more humble when using
      billions and trillions of other peoples money.
      Or provide proof of divine insider information.

        CommentedGuenter Krause

        Antoni Jaume,

        I concur in so far as you
        mean bankers and not Germans.
        Unfortunately, given that big
        risk incurring banks are no longer permitted
        to go bankrupt, neither their shareholders
        nor their "managers" will receive adequate
        In Germany, German banks for decades
        have managed unpunished to squander the savings
        (aka annual export surpluses) abroad as

        CommentedAntoni Jaume

        «Maybe everybody should be more humble when using
        billions and trillions of other peoples money.»

        Starting with Germans. After all those who allowed the credits, assigned themselves hefty sums for their wiseneness in doing so. Facts are they did not deserve them, no need to involve any divinity. Will they return their ill-gotten gains?

    4. CommentedRocio L. Barrientos

      As Einstein said: We cannot solve our problems with the same thinking we used when we created them.

      If zero-sum thinking was used to create the problems, well it is time to think outside the box, and give other kind of "thinkings" a try.

      Visiting Niklas Luhmann's writing would be a start...

    5. CommentedZsolt Hermann

      I fully agree with the author that as long as we look at the world in a fragmented, polarized, "we versus them" manner we will never solve either the Eurozone or the global crisis.
      We evolved into such a global, interdependent system that this present attitude means every time we take, we take from somewhere, someone else, creating conflicts, unhappy scenarios each time we move a finger.
      And in this respect it is irrelevant what we try to do with financial, economical or even political institutions, it is our perception of reality that we need to change first.
      We can only solve our catch 22 situations, the dead end we have driven ourselves into when we start viewing the whole world, the whole of humanity as a single, united, highly interconnected network, where the benefit of the individual directly depends on the benefit of the whole.
      In fact this system already exists as we can see from countless publications and the daily events of the crisis, but we still try to exploit these connections for self benefit.
      Thus instead of the superficial, cosmetic "solutions" we are deploying at present in fact simply digging ourselves deeper into crisis, we need to study, understand and use the global, integral system the right way, adapting ourselves to it, rather than trying to twist the reality around us to our own selfish needs.
      This simply cannot work as we are not above the system but we are parts of it.

        CommentedEdward Ponderer

        "European countries today are at loggerheads not despite the common currency, but precisely because of it."

        Nuts in a bag -- banging up against each other. Indeed so, but it doesn't have to be. Some education on our truly interdependent reality and some soul searching could -- must -- turn the situation around.

        Excellent observation Mr. Hermann, I just hope that you are heard.

    6. CommentedFrank O'Callaghan

      The distributional problem is much deeper. The wealthy within the peripheral countries are not investing. Nor have they paid their fair share of the burden so unfairly cast on Europe's poor. They have taken their often ill gotten wealth out of the periphery. There is an urgent need for austerity at the top with expansion at the bottom.