Experts, Statistics, and the Future of the Eurozone

At this time of year, it’s common to personally reflect on where we are and where we are going. ‘Year in Review’ columns are traditional products of the commentariat. A fascinating study evaluating the progress that the Eurozone has made in resolving the economic crisis and moving toward a stronger currency union was recently published by the Brookings Institution. Below I discuss the methodology of the study and show how a simple measure in statistics known as the standard deviation can extend these findings, helping us think about where the Eurozone is headed in 2013 and beyond.

The Brookings Survey on Eurozone Progress framed progress in terms of six objectives:

• Building a political union
• Building a fiscal union
• Building a banking union
• Strengthening the role of the European Central Bank
• Strengthening crisis resolution tools
• Addressing the challenge of competitiveness and economic adjustment

Fourteen Brookings scholars evaluated how well the countries in the Eurozone have met these objectives by ranking them on a scale from zero to one hundred percent. This survey is the inaugural installment of what will be a quarterly effort.

The conclusions of this survey are worth reporting in full below:
1. There is a clear consensus that the eurozone is a significant way toward viable long-term structures—the average assessment by scholars puts overall progress at 45%—but there is a long way to go.
2. The most progress so far is in central banking (67%) and sovereign debt crisis support (55%), and the least in deeper political union (37%).
3. There is fairly wide disparity among individual experts which is not surprising given the complexity and subjectivity of the analysis; assessments of overall progress range from 25% to 75%. Full explanations from the experts of their assessments are available in the "survey responses" section.
As the third conclusion rightly points out, we should think about data not merely in terms of their central tendency (in other words, the average), but also in their degree of dispersion. An objective in which there is a great deal of agreement is very different from one in which there is a lack of consensus. Experts can certainly disagree about these issues, so what do we see when we look at how these assessments vary by expert across specific questions? Are there some objectives about which there’s a consensus, and some in which expert consensus is less visible?

To answer this, we need a measure – the standard deviation. The standard deviation measures the spread of data about the mean. In this context, then, it is a measure of the degree of consensus among the experts about progress toward a specific objective.

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For each of the six objectives, I computed a standard deviation. I list the six objectives by their averages from highest to lowest, and by their standard deviations from lowest to highest, or from most to least consensus. These findings appear in the table below.

Objectives ranked by Average
(Highest to Lowest)
Objectives ranked by Standard
Deviation (Lowest to Highest)
Bolstering ECB Bolstering ECB
Crisis ResolutionCrisis Resolution
Fiscal UnionCompetitiveness
Banking UnionFiscal Union
Political Union (Tied)Banking Union
Competitiveness (Tied) Political Union

The ranked order of findings on the left hand side comes directly from the report. The column on the right merely re-ranks the findings by their standard deviations from lowest to highest. Comparing across these two columns, then, tells us more information not only about how well the Eurozone is doing in implementing reforms, but also on where there are disagreements about those assessments.

We can break these down more simply into three groups:

High mean – low standard deviation.
This would include bolstering the capabilities of the European Central Bank, as well as strengthening crisis resolution tools. Respondents gave the Eurozone the highest marks for effectiveness here, and the level of disagreement between the respondents was low. Thus, in terms of ‘firefighting’ capability, the Eurozone seems to have done well compared to the other objectives.

Moving into 2013, it’s hard to see where future progress comes from. A toolkit exists to deal with these problems for Spain, Italy, and Portugal in the form of the ECB’s OMT program, but none of these countries have sought to utilize it.

Moderate mean – high standard deviation.
This group includes the Fiscal and Banking Union objectives. There has been some progress on banking supervision, as member countries agreed to create a single mechanism to supervise Eurozone banks at the December 13-14 EU Summit. (This summit took place after the Brookings report was released.) As the IMF recently noted, there is still a long way to go, including a need for additional rules on deposit insurance and how the new regulatory body will deal with banks in crisis. The price of agreement on banking reform at the December EU summit was that broader progress on fiscal union has been deferred until late Spring next year.

The evaluation for Fiscal Union has a moderate standard deviation, but the scores for Banking Union were even more dispersed. We can better understand why the standard deviations of scores for these objectives were higher by looking at the individual responses. The terms fiscal and banking union evoked different responses among the experts. Some suggested that the proposed system of top down surveillance would not go far enough in the absence of a centralized budget process. Others viewed the extant system as imperfect but politically optimal. As a result, there were differences in these evaluations because the baselines were not consistent.

At the same time, some of the experts focused on the overall inevitability of banking union, while others noted the incremental nature of the progress to date, and stressed that much more work was needed. The fact that these terms invoke very different responses among experts underscores the difficulties in strengthening integration.

Low mean – mixed standard deviation.
The Brookings experts gave the lowest marks in to Eurozone progress in Competitiveness and in creating Political Union, but again, there was divergence here, with much more agreement about the ranking for Competitiveness compared to Political Union. As with Fiscal and Banking Union, the responses to the Political Union reflected an underlying divergence of opinions in what political union ultimately means in practice. Getting national governments to delegate further authority to Brussels in an economic crisis is tremendously difficult. Some respondents pointed to the continued legislative support for bailouts as an indication of the robustness of the EU, while others suggested that the real reforms that are necessary are national ones rather than supranational ones. As we saw in last week’s summit, political reforms continue to move down the agenda, reflecting this broader debate about what more legitimate and accountable EU governance actually looks like.

What does all of this suggest about 2013? First, we’re far too optimistic to think that these problems are going to be magically resolved overnight. Progress within the EU has always been incremental, and the prospect of German elections is going to weigh heavily on the minds of decisionmakers. Second, the ability of these reforms to generate growth over the long run is a wild-card here. This is a question that these respondents weren’t asked, but it’s key to understanding the future trajectory of reform. Unfortunately for Greece, Spain, and Italy, the key to growth is going to be more about implementing structural reform than it is commitment to austerity. This remains a challenge in 2013 because the economic timeframe required to change policies might well outstrip the time horizons of politicians.;
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