Economics

Il Dilemma Economico dell’Europa

Oct 30, 2017 Martin Feldstein

CAMBRIDGE – L’Europa affronta un grave problema. Anche se recentemente l’attività economica si è incrementata, nel momento in cui si verificherà la prossima inevitabile crisi, la zona euro non avrà più le capacità per contrastarla.

Alla Banca Centrale Europea spetta il merito dei miglioramenti economici che si sono verificati negli ultimi anni. In un discorso pronunciato nel 2014 alla riunione annuale dei banchieri centrali a Jackson Hole, nel Wyoming, Mario Draghi, presidente della BCE, ha spiegato che tre cose potrebbero migliorare la performance economica dell’Europa:

un’espansione fiscale da parte del paese che aveva dimostrato la capacità di attuarla (Germania);
riforme strutturali in Italia e Francia;
modifiche della politica monetaria.

Ma Draghi ha proseguito prevedendo che la Germania non avrebbe creato un deficit fiscale e che Italia e Francia non avrebbero intrapreso le necessarie riforme strutturali. Egli ha concluso che la BCE avrebbe dovuto stimolare la crescita riducendo i tassi di interesse, cosa che avrebbe fatto aumentare le esportazioni nette ottenendo un euro più competitivo.

To continue reading, register now.

Subscribe now for unlimited access to everything PS has to offer.

As a registered user, you can enjoy more PS content every month – for free.

Already have an account? Log in

Subscribe to PS Digital

Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.

Subscribe Now

Martin Feldstein

Writing for PS since 2008
130 Commentaries

Martin Feldstein was Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research. He chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. In 2006, he was appointed to President Bush's Foreign Intelligence Advisory Board, and, in 2009, was appointed to President Obama's Economic Recovery Advisory Board. He was also on the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the Group of 30, a non-profit, international body that seeks greater understanding of global economic issues.

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 9 Comments on this article

John Brian Shannon Oct 30, 2017

Hi Martin,

The EU is one sneeze away from economic disaster, and you're right, another financial crisis is sure to happen and the European Union won't have any arrows in its quiver to fight the problem.

Although I remain a huge supporter of the European project (just look at all that has been accomplished there in the postwar era) and of the EU (which has become a little too Politburo recently for my liking) and of the EuroZone -- they will either rise to meet the next challenge (likely an economic challenge, as nobody would seriously think of attacking the EU militarily) or they will be finished -- and Europe will return to being a collection of post-feudal states pursuing their own agendas.

And as we've seen twice in the previous century, that didn't end well.

Therefore, so that we don't get caught up (again) in yet another accidental European war, all stakeholders in Europe's success must try to become *part of the solution instead of part of the problem*.

It's true that the EU was created as a 'trap' to force European countries together rather than apart -- but it didn't work for two reasons -- although it should have.

1) The EU Parliament became too bureaucratic, too remote, too autocratic, and too elitist for all 28 member states to remain fully bought-in to the project.

2) A couple of million refugees showed up (good for German companies, bad for everyone else) courtesy of the Western-inspired and Western-backed Arab Spring and Syrian War.

I could see #1 and #2 coming from a million miles away and I wrote about it on many occasions, saying that one or both could derail the EU project. But nothing changed.

Just when the EU needed a visionary, strong, central, responsive and 'can-do' EU Parliament, it lurched towards becoming the EU Politburo that it is today.

And just when Europe's citizens were praising the great miracle state they helped to create, hundreds of thousands of refugees appeared in countries all over Europe, changing the nature of the continent and making citizens wonder why Schengen couldn't work. Citizens imagined things like; 'Other countries have working borders, does that mean we're *not* a country?'

All in all, as long as the global economy continues to function, the EU will continue to exist much as it has for years, but as soon as hard times reappear they will react inappropriately and excessively.

The one bright spot is increased trade and the new rail link to China, which ran its first train today (October 30, 2017) increased trade will provide more revenue to solve more problems. (Creating an EU Army at this point is a dumb idea, would create more problems that it would solve)

As you say, Martin, were the EU Parliament to double-down on housing, especially for bottom-two quintiles, much domestic demand would result.

Although the EU has been (rightfully) chided for 'low ambition' on occasion, at other times they have proven they can hit a 'home run'.

Let's hope that EU policymakers can create some momentum on this and turn it into something early in the new year (otherwise don't bother, it'll be too late) and all of Europe's stakeholders should be pleased to invest in such a scheme.

When Europe needed the Marshall Plan, the Marshall Plan was there -- creating it a decade late wouldn't have worked.

Now Europe needs a supercharged housing plan for the bottom-two quintiles -- and creating it a decade too late, just won't work.

It isn't the time for low ambition in the EU, now is the time for a massive, Marshall Plan scale plan to build affordable housing for EU citizens in every country, and without favoritism, nepotism, etc.

Let's hope the Europeans are up to the challenge. And I think they will be if they're given enough encouragement and investment by their allies.

Great to read your essays here at ProSyn, Professor!

As always, very best regards, JBS
A new reply to this comment has been posted.
P. Kamath Oct 30, 2017

Can't believe that so many Europeans are paralysed with this mindnumbing hopelessness given Europe has some of best minds of humanity! Why, I wonder!

At this rate, Pax Americana is receding volunteerly and Pax-Sinica is looks very alluring! So can Europe sit and wait?
- Steve Hurst Oct 31, 2017
  
  With the efficiency of the French, the flexibility of the Germans, the thrift of the Italians and the liberalism of the Spanish what could possibly go wrong. Hint - The power of veto which is central to the EU is inherently undemocratic because there is always someone who wants to veto
  
  'What can you do against the lunatic who is more intelligent than yourself, who gives your arguments a fair hearing and then simply persists in his lunacy?'
  George Orwell
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
M M Oct 30, 2017

The EU/EZ has run out of suckers or countries to fool and no one is willing anymore to join the asylum (EU). There is a say " you did not die, fine, but didn't you see the one that died" and in this specific case, I mean Greece and Cyprus. It is too late for the EU now, the citizens of the European nations have lost faith in the EU project and this is to include the EU Institutions. Whenever there is a crisis, e.g. Brexit, Immigration, Catalonia, Gibraltar, etc. the EU Institutions are nowhere to be seen. It is a corrupt club with no useful purpose. So to talk about fiscal harmonisation or other policies is at best "wishful thinking". The days of the EU project, as we know it, are now numbered.
A new reply to this comment has been posted.
Steve Hurst Oct 30, 2017

The euro is a political creation literally set up as a trap with the idea crisis would force people together. They are indeed working together in response to crisis but at a local tribal level. The chances of solving a politically created problem by economic means are minimal unless there is significant growth which is not due to happen. In fact the continual economic tinkering to ameliorate political inaction just builds more not less problems because it pushes back a political solution to a political problem.

The key card to play is government house building programmes. This stimulates activity, rebalances supply and demand, thereby reduces house prices and therefore living costs, therefore consumers have more disposable money. Governments will reluctantly but inevitably move in that direction. Politically it is a local action for local need. The damage done to equity for some will be packaged up and sold as outside government control. The trick will be to sell it as only affecting a minority then the majority are not bothered.

'All eurozone governments should place fiscal coordination with their European partners high on their agenda...' EZ governments are constrained by their electorate and co-operation is seen as subsidy by voters. Fear of failure inhibits trust and spurs retraction. The problem of a common currency without a federal set up is precisely there cannot be co-ordinated action and a lack of trust by voters means any chance of a federal set up is dead. You end up with schizophrenic political behaviour. The EZ is literally driving itself mad. I don't know why 'An appropriate response' is suggested when it it clear it cannot occur. That in itself is just another indication of the malaise.

There are two major risks in Europe. One is guaranteed, an ageing demographic which will knock activity and put costs up. The other is Schengen failure which will increase logistic costs by circa 2%. If the EZ/EU cannot deal with border security issues - which requires significantly more expenditure than to date and requires Southern and Eastern border countries receiving very substantial cash - then Schengen is highly likely to fail. If the Euro cannot be made to function long term then Schengen is pointless. In every direction costs are due to, or likely to, rise hitting economic activity. Its quite likely small conventional measures taken simply counterbalance growing problems so flatlining and the current status quo continues. If that happens the scope of Central Banks disappears because there is nothing they can do. We are already there. The only solution is political measures.

So-called structural reform is unlikely to solve anything much, as Macron is due to find out, because it cannot be extensive enough quickly enough and does nothing about expectations. It is quite likely to exacerbate social tensions and increase stridency at the ballot box. Macron has to find 20% v Germany and it is not possible in the euro. China's response to external trade issues was to turn inwards and that is France's future. There is some black humour about France having problems with the euro because it is an animal they created
A new reply to this comment has been posted.
David Punabantu Oct 30, 2017

The ECB problems are the one size fits all. Take externally the Euro. A look at the Euro reveals the manifestation of the IMF fixed cross-rate system between the US dollar and the Sterling pound. Take the value of one Euro on the 24th of July 2013, which in value terms was equal to US$1.3237 and £0.86067. The cross rate of the Euro of both currencies from the 24th July 2013 values is 1.538, while the US dollar to Sterling pound exchange rate on the same day was £1 per US$1.538. The same 24th of July 2013 image can be seen in an African currency from Zambia, the Zambian Kwacha in which the Kwacha was worth ZMK5.478 per US dollar and ZMK5.478 per Sterling pound which gave a cross rate similar to the exchange rate of the two transatlantic nations. The cross-rates appear day in and day out, in value terms, in many national currencies. This implies that national money markets have the same money market currency liquidity and trade volumes to produce the same cross rates as observed between Britain and the United State of America.
The reality on the ground is that Zambia, Britain nor the EU has the same level and volume of trade to give credibility to the IMF fixed cross-rates. In fact, the demand of the Euro or the Zambian Kwacha against the US dollar and the British Sterling pound and other African currencies in relation to trade, within their money markets, gives exchange rates that are outside the IMF fixed cross-rate system. The crisis of Italy today was epitomised by the former IMF director Mr. Gutt. Mr. M. Gutt the IMF Managing Director at his Harvard University address on the 13th February 1948 noted that the indirect exchange rate of the US dollar to the Sterling pound was £1 per US$2.6 as US$1 equalled 600 Lire and £1 equalled 1,560 Lire, while the direct Sterling pound-US dollar rate stood at £1 per US$4. American found it cheaper buying British goods via Italy. The IMF ruled in favour of Britain as if Italy's money markets had the same inflows as London's money market. What the Euro needs are free floating cross rates. It must be noted that the EU with its Euro is not the first monetary and economic block. The reluctance of the British to relinquish their Sterling pound and to have the sole Euro represent its interests is an historic answer to the EU. In 1949, Britain devalued the pound sterling by 30%. This affected nations that were part of the Sterling Area who used the Sterling pound in international trade and kept it as a reserve currency, much like the way the Euro is used today. This was a major world economic event given that the pound was and still is one of the major currencies in the world. In fact, 9 other countries followed suit then. They were Australia, India, South Africa, New Zealand, Eire, Denmark, Norway, Egypt, and Israel. These countries devalued their currencies by 30 percent but the question that can be asked is " does Denmark, Eire, Norway etc who devalued by a similar margin have the same economic and financial strength as Britain internally and externally in its money markets and trade?"
This is the issue the Euro faces "one size fits all" syndrome. Although Britian devalued by 30 percent that figure has to be converted in value terms. Let's say for example it was £100 million worth of loses. Then to compare this to for example Eire, £100,000 million has to be converted into Eire pounds, let's say it gives I£4,000,000 million and the Eire economy is worth I£1,000,000 per year. It will mean that the Eire economy will for the next four years be in a negative coefficient and be the backwater of the Sterling pounds while Britain will experience a negative coefficient for about a year as time or rather temporal liabilities have been transferred to smaller economies. The same applies to economist notions of inflation rates, budget deficit percentage. Big economies like Germany can have an inflation rate of 10 percent or a budget deficit of 10 percent and expect all EU members to have the same. Yet if the German budget for example was €100 million then 10 percent would be €10 million. But if the budget of a small EU state is just €1 million and the EU demanded a 10 percent budget deficit it would be €1 million. But compared to Germany in real value terms the small EU nation should be running a 100 percent budget deficit if it is to be on the same infrastructure and social development path. The same goes for inflation. The fact about using percentages in or figures in economics means getting the right transformation. It is like saying a bicycle going at 10km per hour on a collision course with a truck going at 10km per hour should both stop each other dead in their tracks. The reality is the truck, bring Germany will overrun the smaller EU nations into poverty and inequality. Then Germany appears as a saviour as it dishes out aid to small EU states and believe the smaller states are living off them. Another aspect is the velocity of the economy in each EU state. For example the German budget may give a velocity of one, while smaller states a velocity of 4 another 16. The assumption that the EU is following a strict budget with no printing of money is a fallacy. In Zambia in 1992 the budget gave a velocity of 4, being every 90 days, which meant an economic year lasted 90 so what had to be done in a calender year had to be done in 90 days. Hence company board meetings occur in 90 days. Then in 1993 a cash budget was introduced as government refused to print money. The velocity of the economy changed to 17. Thus every 21 days government collected then spent, then recollected then re-spent then recollected the budget in a cyclical pattern every 21 days. Prices rose every month to copy the 21 day cycle as people demanded a year's wage as a month's pay. Even when they did get paid government had already spent its value so when they entered shops their wages bounced like an unhonoured cheque as people bought next to nothing. Finally by September the economic value was all spent, government coffers.
How then does the ECB read statistical data?Some thing economists have yet to understand. A calender year does not make an economic unit. The underlying axiom to statistical data is counting systems. Figures may count in hexadecimal (base 16), or Vigesimal (base 20) or Hexavigesimal (base 26) or Pentasexagesimal (base 65) or may change from one base system to another but are all expressed expressed in a decimal system. Take time a second is broken into hundreds, sixty seconds make a minute it's not 100 seconds. 60 minutes make an hour and 24 hours a day. A set of figures may be counting in binary but expressed in decimal systems will appear to rise much faster, but if it is counting in hexadecimal system but expressed in decimal it will appear to rise much slower. Therefore the true nature of statistical behaviour is identifying the counting system with specific counting or "time" frames in relation to other time frames to determine its exact behaviour. Even famous physicist Albert Einstein (1879-1955) in 1926 in a letter to Max Born (1882-1970) when he talked of the statistical nature of quantum physics said, "is certainly imposing. But an inner voice tells me that it is not yet the real thing. The theory says a lot, but it does not bring us closer to the secret of the Old One. I at any rate am convinced that He does not throw dice, (Clark)."
Therefore it is not surprising in that reading financial and economic statistics, especially when they exhibit a behaviour that humans fail to interpret the hieroglyphics, creates a crisis. The crisis has always been a problem associated with the mathematical laws inherent in heterogeneous numerical systems against human built equations functioning in a homogenous numerical system being used to interpret them as not being good enough to understand the higher statistical laws needed to as Descartes said, "perceive all things at once."
A new reply to this comment has been posted.