Thursday, March 29, 2012

The Art of Law

I have to say I'm getting pretty fed up with all this talk about the American Health Care Mandate litigation. Like the French presidential election, I wish it was simply over, no matter who wins. The whole thing has ruined my dear Volokh Conspiracy, which used to be such a pleasant place for procrastination back when they still talked about things other than broccoli.

But there's one thing that has fascinated me greatly, over the last few days. Now that the hearings actually took place, the ACA-case became such a big story that even non-lawyers had to start talking about it. And by that I don't simply mean people without law degrees, but rather people who don't usually go anywhere near the law. And what's interesting is that these people have all been saying pretty much the same thing:
We know, or I think we know, that a single-payer system — in which the government collects taxes, and uses the revenue to provide health insurance — would be constitutional. I mean, I don’t think the court is about to strike down Medicare.
Well, ObamaRomneycare is basically a somewhat klutzy way of simulating single-payer. Instead of collecting enough revenue to pay for universal health insurance, it requires that those who can afford it buy the insurance directly, then provides aid — financed with taxes — to those who can’t. The end result is much the same as if the government collected taxes from those under the mandate and bought insurance for them.
Yes, the system is surely less efficient than single-payer, both because it’s more complex and because it introduces another layer of middlemen. That’s what happens when you have to make political compromises. But it is in no sense more interventionist, more tyrannical, than Medicare; it’s just a different way of achieving the same thing.
That was Krugman talking, but others have said essentially the same thing: If we can achieve the result we are now achieving without offending the Constitution, how can the Health Care Mandate possibly be unconstitutional? How can the constitutionality of the mandate depend on whether Congress "said the magic words"?

Now, normally I'd be the first to decry the excessive formalism of American legal thinking. I did it only today on the Volokh Conspiracy in a conversation about a Texas law that outlawed taking people's photograph without their consent for the purpose of someone's sexual arousal. But in this case the argument goes too far. More importantly, it reflects a fundamental misunderstanding about legal reasoning. (Which is why I am fascinated by it despite my loathing for all things ACA.)

In legal reasoning, form matters. It's not just about the result reached, but also about the steps one took to get there. A legal ruling can be overturned on appeal, followed by the lower court holding for the same party again, only to be upheld on the second try. (Cf. last week's Ireland v. Commission in the General Court, where the Court held for Ireland for the second time, despite having its first attempt annulled by the CJEU.) We ask more of our law makers, executive branch officials and judges than merely that they get the result right. They have to follow the right steps as well. Just because a bill was always going to be a slam dunk in the Senate, that doesn't mean that parliament gets to dispense with the vote altogether. Just because an executive agency has wide discretion to take whatever decision it thinks is appropriate, that does not mean it doesn't have to give reasons. And judges can't just do the right thing without explaining what exactly gives them the right to do what they did. Just like courts can't just ignore the statute of limitations just because it seems like the right thing to do, legislatures can't simply enact a law that they have no competence to enact. What they're doing has to match one (or more) of the competences conferred upon them by the Constitution. And under EU law, they even have to say which one at the time of enactment. (The Americans are more flexible in this regard.) Procedure matters, form matters. In legal reasoning, thankfully substance does not reign supreme.

De Nederlandsche Bank

De Nederlandsche Bank is an institution that is so venerable that we Dutch people still write it with the pre-1934 spelling, i.e. with "sch". It was founded by King William I in 1814, right off the boat before they'd even gotten around to writing a definitive constitution for the new kingdom. And in 198 years, they've never let us down, until perhaps now.

Despite the fact that he came in from my alma mater, I was not unequivocally thrilled when Klaas Knot became the new president of the DNB last year. After all, it looked suspiciously like the government had gone out of its way to find the one pro-austerity financial economist in the entire country to fill the vacancy left behind by Nout Wellink. And, true to their word, the DNB are the only voice in the Dutch public policy landscape where economists of weight are advocating a strict adherence to the EU norms. Fortunately, they published an eight-point list earlier this month, listing the reasons why they feel this way. So much the easier for shooting them down...

1. The Debt Crisis cannot be resolved with unlimited new borrowing
Taken at face value, this is a silly thing to say. Of course it can be. There is no reason why the national debt should not rise, rise, and rise still further, as long as GDP increases quicker still. In its explanation, the author talks about increases in debt ratio without explaining why a temporary increase in the debt ratio is bad in the middle of the worst crisis in 80 years.

2. Growth helps, but is not enough to get rid of a high government debt
OK, that's the other half of the argument, so I'm not sure why they split this into two points. In any event, it is wrong. All you need is growth > core deficit as a % of GDP, and time. Here is also where they refer to the infamous Reinhart & Rogoff study, the shortcomings of which are already discussed in many places all over the internet, including here. (Read my lips: Post Hoc Ergo Propter Hoc.) Much better studies, that attempt to control for various reverse causation, etc. issues, have been done by Romer and Romer, for example. (In this blog post by Krugman, where he explains what last year's Nobel Prize was all about, he links to some useful examples.) As for the "unprecedented nature" of having a government debt this high, forgive me if I'm not particularly worried as long as we're still below the debt ratio we had for every single year of the 1990s.

3. Structural reforms are necessary in order to improve the growth potential of the of the economy, but are not a complete alternative for deficit reduction
My apologies for the awkward use of the word "complete" there, but this word is exactly what's wrong here. Structural reforms have nothing to do with short term growth at all. You don't abolish the deductibility of mortgage interest payments or reduce the generosity of unemployment benefits in order to fix the economy now, during the current depression. You do it it in order to improve the economy 5, 10 years down the line. Deficit reduction and structural reforms are completely unrelated topics. (Except insofar as that a crisis is a terrible thing to waste.)

4. Deficit reduction reduces growth in the short term, but this effect is relatively small for the Netherlands
Oh, OK, so we're reducing growth in the middle of a depression, but only by a little, so it's no biggie... (Whether the idea that the bulk of the effect is dissipated due to reduced imports makes sense I'm not sure. I'd have to think about that some more.)

5. Consumer confidence benefits from budgetary consolidation
Never mind the horrible jargon here, but Really? Really? You think that consumers care about whether the government's budget balances rather than whether or not they have a job? (Or whether their relatives, friends and neighbours do?) Why don't we put that to the test: show some consumers a news report that a new budget deal has been struck that involves a balanced budget and, say, 100.000 government layoffs. See what that does to their confidence.

6. Violating the budget rules is not a solution
I'm pretty sure that's not actually an argument. The explanation refers to the PIIGS, which isn't much of an argument either.

7. Financial Markets follow the Netherlands carefully
Yes, if we were downgraded from AAA to AA+, we'd all be dooooomed. But seriously, if we'd ever get downgraded far enough for it to matter, so would everybody else in Europe, and in that case we'd have problems no matter how much deficit reduction we decided to implement.

8. Budgetary sensitivity and large guarantees require a low government debt
Here, finally, do we reach an argument that makes sense, more or less. The problem is that those guarantees have already been given, and no amount of deficit reduction will reduce the blow if they are called up. Shaving one or two percentage points off the debt ratio doesn't really do much good if you're going to get hit with a 20%-point guarantee. As for the sensitivity of the Dutch government's budget deficit to changes in economic growth, that seems like an excellent reason to avoid ruining the economy still further, even if it is only by a little bit (cf. point 4, above).

This Week in Luxembourg

This week in competition law, the Grand Chamber may or may not have overruled an important part of Akzo v. Commission. They held that in the zone between Average Total Costs and Average Incremental Costs (?) abusive price discrimination may be shown even in the absence of exclusionary intent. (To be precise: “it is necessary to consider whether that pricing policy, without objective justification, produces an actual or likely exclusionary effect, to the detriment of competition and, thereby, of consumers’ interests”.) Post Danmark v. Konkurrencerådet Cf. my earlier blog post.

Poland apparently went a bit too far in encouraging generic medicines. Such products still need a marketing authorisation even if they are in all respects identical to products that are already on the market. Commission v. Poland
In SAG ELV Slovensko et al. v. Úrad pre verejné obstarávanie, the 4th Chamber clarified the obligation of awarding authorities to ask for clarification in case of abnormally low bids. Cf. art. 55 of Directive 2004/18. As it turns out, asking for clarification is not optional.
The Dutch again lost a case about Turkish workers, but this one is at least amusing: Does a Turkish worker lose his protections under Decision 1/80 if he acquires Dutch citizenship while keeping his Turkish passport? (As usual, Decision 1/80 is on p. 155 here.) The 1st chamber says no, so the spouses of the dual-citizenship workers get to stay. Staatssecretaris van Justitie v. Kahveci and Inan
In the ongoing litigation about the National Allocation Plans for Greenhouse Gases under art. 9 of Directive 2003/87, the 2nd Chamber rejected the appeals of the Commission in the case against Poland and Estonia. So the 2008-2012 NAPs of these countries get to stay in place.
After Ryanair last week, this week it is a health claims plaintiff who is trying to salvage an impossible case by pointing to art. 15 and 16 Charter (which, for some reason is not available through Amicuria), but again to no avail. To illustrate the degree of “hail Mary” involved: this argument came after the argument that a claim of a temporary health benefit is not a health claim in the sense of Regulation 1924/2006. For background, the claim we’re talking about is the claim that a certain wine is “bekömmlich”. Deutsches Weintor v. Land Rheinland-Pfalz
The 4th Chamber also held that you cannot apply the limitation period of art. 3 of Regulation 2988/95 to interest that is due only pursuant to national law, even if the underlying claim is based on EU law. (In this case agricultural subsidies.) Bundesanstalt für Landwirtschaft und Ernährung v. Pfeifer & Langen
It turns out that intermediary dealers in garbage and other waste do not have attorney-client privilege. They do not get to hide where the waste came from, even if there are business secrets involved. Interseroh Scrap and Metals Trading GmbH v. Sonderabfall-Management-Gesellschaft Rheinland-Pfalz mbH (SAM)

AG Trstenjak has an opinion on the work of a private law standards setting agency as a Measure Having Equivalent Effect under art. 34 TFEU. She attaches both a legal and a practical condition: art. 34 TFEU is applicable if the norms created by the agency are explicitly taken on board by the law maker and if, for that reason, deviating from them is hardly possible in practice. v. Deutsche Vereinigung des Gas- und Wasserfaches eV (DVGW)
Following his opinion in Éditions Odile Jacob v. Commission three weeks ago, AG Mazák now has an opinion in the other two appeals arising out of that case. This time, the Commission gets a partial win: the AG thinks the General Court was wrong to annul the Commission’s Decision approving of the purchase by Wendel of the parts of Vivendi that Lagardère was not allowed to keep. Commission and Lagardère v. Éditions Odile Jacob
Also fun: Mr. Donner is accused of aiding and abetting in various copyright violations for being involved in the sale of copyrighted furniture from Italy, where said furniture was not subject to copyright protection, to Germany where it was. AG Jääskinen argues that this does not violate Free Movement law or EU copyright law. Criminal proceedings against Titus Donner
AG Bot has an immigration case. On 31 May 2006, a Bangladeshi man married an Irish woman living in the UK. Subsequently, his brother, half-brother and nephew applied for residence permits on the grounds that they were dependents in the sense of art. 3(2) of Directive 2004/38. The British thought that that was a bit much, so they said no. And that is how these three Bangladeshis ended up in Luxembourg. The AG’s answers will most likely result in them being allowed to stay in the UK. Secretary of State for the Home Department v. Rahman and Others

The other big competition case this week, other than the abovementioned Post Danmark, is Telefonica v. Commission and Spain v. Commission. In these cases, the Commission’s decision that Telefonica had abused its dominant position by engaging in a margin squeeze was upheld, as was the € 151.875.000 fine. Following Deutsche Telekom and TeliaSonera, this is the third such case where telecoms regulation and competition law get in each other’s way over margin squeezes (cf. my book chapter on the topic), but this is the first time a Member State itself got in on the action. (Also, the last time it wasn’t quite so expensive. Deutsche Telekom only had to pay € 12,6 million.)
With regard to two state aid decisions in Re: Alitalia & the state of Italy, Ryanair lost on both counts. In the first case, its case was declared inadmissible on individual concern grounds, and in the second case it lost on the merits. Ryanair v. Commission

Finally, here is the most recent draft of the new Rules of Procedure of the Court of Justice.

Monday, March 26, 2012


The discussion about the European Parliament's other seat in Strasbourg is infuriating in the extreme for anyone who knows anything about EU law. Yes, we all agree that having two seats is dumb. Yes, we all agree that the Strasbourg seat should be abolished, but no, we can't do it no matter how much we want to. For convenience, and undoubtedly not for the last time, allow me to quote the full length of Protocol 6:
HAVING REGARD to Article 341 of the Treaty on the Functioning of the European Union and
Article 189 of the Treaty establishing the European Atomic Energy Community,
RECALLING AND CONFIRMING the Decision of 8 April 1965, and without prejudice to the decisions concerning the seat of future institutions, bodies, offices, agencies and departments,
HAVE AGREED UPON the following provisions, which shall be annexed to the Treaty on European Union and to the Treaty on the Functioning of the European Union, and to the Treaty establishing the European Atomic Energy Community:
Sole Article
(a) The European Parliament shall have its seat in Strasbourg where the 12 periods of monthly plenary sessions, including the budget session, shall  be held. The periods of additional plenary sessions shall be held in Brussels. The committees of the European Parliament shall meet in Brussels. The General Secretariat of the European Parliament and its departments shall remain in Luxembourg.
(b) The Council shall have its seat in Brussels. During the months of April, June and October, the Council shall hold its meetings in Luxembourg.
(c) The Commission shall have its seat in Brussels. The departments listed in Articles 7, 8 and 9 of the Decision of 8 April 1965 shall be established in Luxembourg.
(d) The Court of Justice of the European Union shall have its seat in Luxembourg.
(e) The Court of Auditors shall have its seat in Luxembourg.
(f) The Economic and Social Committee shall have its seat in Brussels.
(g) The Committee of the Regions shall have its seat in Brussels.
(h) The European Investment Bank shall have its seat in Luxembourg.
(i) The European Central Bank shall have its seat in Frankfurt.
(j) The European Police Office (Europol) shall have its seat in The Hague.
As anyone with basic reading ability can see, the French have a reasonable point in their suit against the Parliament's decision to cancel one of its annual trips to Strasbourg. (Here's the announcement of the case for the 2012 calendar, and here's the one for 2013.) Heck, France already won that case once before.

But today there's something new. EUObserver reports that the new President of the Parliament, Martin Schultz, has said that if the European Parliament were to have one seat, it should be Strasbourg rather than Brussels. (link) If this is indeed what he said it is, with all due respect, dumber than a sack of hammers.

In the European Quarter in Brussels, all of public life revolves around Place Lux, right outside the European Parliament. This is not because the Parliament is so important, but simply because RP Schuman doesn't exactly have a lot of nice cafés. Regardless, the ability to mingle with the Eurocrats that work for the other Institutions is vital to the working of the Parliament. Even if they could do all their trilogues via teleconferencing  - doubtful - the EP would still lose vast amounts of soft power because of diminished contacts with the rest of the Euro-bubble. And this is important because the EP doesn't exactly have power and influence to spare. They need to be where the action is, because the action isn't going to follow them. (And certainly not to the provincial backwater that is Strasbourg in March.)

Sunday, March 25, 2012

Democratic Deficit

Charlemagne was clearly out of ideas, so he wrote the same column that people have been writing since De Gaulle was president. This, in turn, inspired Benjamin Fox on EUObserver to write some platitudes of his own, some of which are unfortunately, well, wrong. I suppose this shows the difference between the guy that works for the European Parliament and sometimes writes something for EUObserver and the guy who writes for The Economist full time: only the latter is able to avoid the temptation of thinking that the Westminster model is the only way to do it.

Just to clarify, this is wrong:
The Parliament’s election system hardly helps matters. Most member states elect MEPs through the utterly impersonal closed party list system, where MEPs do not represent a local constituency and people vote for a party rather than a candidate. With closed lists the power of election lies almost exclusively in the hands of party bosses – the voters have very little scope to hire and fire their representatives.
And this is right:
Legitimacy requires reforms at both national and European levels. The European Parliament’s 754 MEPs should be sharply pruned, as should its inflated costs. Its workings involve too many cosy deals among Europe’s big party alliances. That said, countries will remain central to the EU, no matter how far it integrates. The EU’s powers and money are conferred by states. EU laws are enacted through governments. Above all, politics is mainly national. So national parliaments need to be more involved in the EU’s work, starting with closer scrutiny of its policies. The Danish system, in which the Folketing (parliament) agrees to ministers’ negotiating mandates before they go to Brussels, is a good example. For all its flaws, the European Parliament is here to stay. All aboard the next train to Strasbourg.
In fact, many other EU Member States are already experimenting with the Danish system, although I must say that based on my limited experience of watching the Danish negotiate in COREPER, the Council of Ministers would completely break down if all countries worked that way. Then the whole EU would slow down to "tempo thirty-eleven".

Even though Het Genootschap Onze Taal says that the following story is wrong, I'm going to tell it anyway: In the time of the Republic of the Seven United Netherlands (1581-1795), the provincial parliaments that actually exercised the sovereign power did not work on the basis of representative democracy, as they do now. Instead, each of the representatives had detailed instructions on how to vote on any given issue, and if something came up that was not covered in the instructions, the representative had to return to his city or county for "ruggespraak". Because Friesland had - and still has - 11 cities, as well as 30 rural counties, this took a very long time, hence the Dutch expression of doing something "op z'n elfendertigst", meaning very slowly. (Apparently, the actual source of the expression is something to do with the weaving of textiles, but I fell asleep half-way through the explanation, so I couldn't say for sure.)

Anyway, as I was saying, if all EU Member States are going to use the Danish system, the mandates had better not be too strictly defined, and had better leave some room for on the ground rethinking, lest the European decision making process crawl to a halt even more than it already has. In any event, the last thing I want is a shift towards a more Westminster-oriented system, where my vote suddenly becomes completely meaningless because I happen to live in a Regione dominated by the centre-left.


Yet another word has entered the dictionary of Euro-jargon. Following "rebate", "subsidiarity" and "absorption capacity", we now have "reciprocity". Charlemagne hates it, the Germans hate it, the Financial Times hates it, and, most damning of all, I hate it.

The basic reasoning runs as follows:
Insisting on reciprocity in international trade, including public procurement, the topic at issue here, always has two consequences. On the benefits side, there is the possibility that this pressure might work, in which case European companies make more money abroad. In Euro terms, this benefit is equal to the probability of success multiplied by the additional profit made in case of success. On the costs side, there is the certainty that European consumers - in this case the public bodies doing the purchasing - will have to pay more. It follows that the benefits of a tough stance exceed the costs as long as at least one of the following two things is true:
  1. Other countries are extremely intimidated when the European Union gets mad.
  2. There are huge profits to be made here.
As it happens, neither of these things is true. The Chinese, who appear to be the main target of this proposal, are likely to be supremely indifferent. In fact, in all likelihood they would resent being manhandled in this way, and as a result would be even more resisting to change. As for the profits to be made by European companies, the same old adage applies here as everywhere: the greater the degree of competition, the lower the profits of the sellers. Putting some numbers in, I'd estimate that the chance that such an External Public Procurement Regulation would have a noticeable effect on any major market at no more than 10%. I leave it as an exercise for the reader to decide how probable it is that the additional profits to EU companies in that case will exceed the certain losses for EU public authorities by a factor of 10. 

For the European Commission's more scientific (and less objective) numbers, cf. p. 6-7 here. I could be crazy, but they seem to be talking about an EU domestic market worth € 420 billion per year as compared with potential additional revenue (!) for EU companies of € 12 billion per year. Even ignoring the uncertainty involved in trying to force other countries to open up their markets in this way, how will this bill not result in losses for EU public authorities exceeding € 12 billion per year??? All it takes to get there is an average price increase due to reduced competition of 2,9%. Are we really supposed to waste all that government money just so that Alstom can sell a couple more trains to China, maybe?

Voluntary Human Extinction

Yesterday's featured article on Wikipedia was particularly fascinating, exactly one of those articles that makes Wiki such an effective tool for procrastination. Something that you never imagined could exist, but that you will happily spend ten minutes reading about. (I used to do that with my parents' hardcopy encyclopaedia too, but that's another story.) The topic? The Voluntary Human Extinction Movement.

When one first encounters such an idea, one experiences the joy of simply being near it. There is no need to really engage with it, the pleasure comes from simply letting it wash over you in all its eccentric beauty. However, after a while of simply sitting there staring at your monitor, you feel like you should really give the idea some thought to see where it breaks down. The obvious answer is that, while the benefits of human extinction for the environment are easy enough to argue, voluntary human extinction will never happen because - as an empirical matter - it is difficult to see how we would get all of mankind to play along. But why stop there?

Being a jurist-economist, what's been bugging me about this is the question of how to look at it from a standard micro-economic utility maximisation point of view. It seems to implicate two contradictory ideas about utility maximisation: on the one hand, there is the idea that utility is value-neutral. Economic models should work no matter what people derive utility from. For example, people are perfectly permitted to derive utility from the happiness of others. (Never put up with people who claim that economics assumes people are selfish!) Likewise, if people derive utility from the happiness of animals, including animals that have not been born yet, that does not undermine our ability to use their utility function to predict their behaviour.

On the other hand, dead people do not experience utility. Personally, I would like to be buried rather than cremated when I am dead, but when the time comes for that decision to be made, I no longer have a stake in it. Applying this to the idea of Voluntary Human Extinction shows the paradox: How can I derive utility from something that by definition will not happen until after I am dead?

The answer to this question exposes both the strength and the weakness of economics as a social science. Its name is, of course, anticipation. This answer is problematic for economic science because any attempt to model it more precisely is inevitably going to be rather awkward. As a matter of reflex, we would be tempted to describe it as a kind of discounting of future utility, but that cannot be because, as noted, the person experiencing the utility won't be around anymore when the anticipated human extinction occurs. Instead - and it is the strength of economics that we are forced to take note of this - the utility and the anticipation on which it is based occur regardless of whether the anticipated event does. The utility that I derive from the notion that my bones will rest peacefully in a casket after I die does not depend on whether I actually end up that way. If, after my death, my family decides to have me cremated instead, that does not change my utility. Moreover, if it was always clear that there was a chance they might do that, my utility is still not affected as long as I was unaware of the possibility. My utility is subjective in that it depends only on my knowledge. (Although specific economic models might choose to model my knowledge as to some degree perfect, but that's another story.)

And that is essentially the answer to my problem: theoretically, utility can be derived from anticipating the occurrence of any event, no matter how delusional the anticipation might be. In practice, however, economic models might place constraints on the range of possible sources of utility. Not only might they require that the anticipation should be proportionate to the probability that the event will actually occur, but at the same time they might inadvertently end up ruling out the happiness of future puppies as a source of present day human utility. And thusly, once again, economists would fail to live up to their own lofty statements of first principle.

Saturday, March 24, 2012

What were we thinking?

When I wrote, on Thursday, that "[a]pplying all this Optimal Currency Area theory to Europe yields a clear picture", I admit I felt more than a pang of guilt. After all, it seemed like a rather easy thing to say, with 20/20 hindsight. Was I saying that all those British Tories were right when they spent the 90s revelling in the prospect of the failure of the Euro? (Here's Thatcher speaking in 1990.) Or was it a matter of pure dumb luck that they turned out to be correct, with the truth being apparent only with the information we have today? 

I think that, in setting up the Eurozone the way we did, we made two errors in judgement that were only moderately forseeable/avoidable. (As an aside, I write "we" here not because I personally helped in the drafting, but because I learned about Optimal Currency Area theory well before the start of the Euro crisis and I don't recall being particularly bothered by the implications of the theory for the single currency. I agreed with it as a matter of policy and assumed that the economics would work themselves out. To be precise, I thought that the Eurozone was probably larger than optimal, but that this would never lead to serious problems because - in this case fortunately - in Economics it is almost always impossible to prove what would happened if a different decision had been made. Sometimes, the absence of counterfactuals is a good thing. Since I happily joined the lemmings running towards the cliff, it is only right and proper that I should write "we" even though I was 10 years old when the Maastricht Treaty was written.)

The first error was that we underestimated the potential size of the asymmetries. We never thought that it was still possible in this day and age for a European economy to shrink by 20% in a year or two. Instead, we thought of these asymmetries in terms of a spread in GDP growth of maybe 5%, at most. Instead, the current crisis gave us an EU-record of -17,7% real GDP shrinkage for Latvia in 2009 and a maximum Eurozone growth spread, last year, of 14,5%-points. (The difference between Estonia, which went from a 14,3% real shrink in 2009 to 7,6% growth last year, and Greece.) I went back to 1820, and I couldn't find a single year when the Dutch economy shrunk by double digits in peace time. Even before the Great Moderation, we had gotten used to real GDP growth in the range of -1% to +5%, not -15% or + 7%.

The second error was to underestimate the vast amounts of money it would take to sort such a problem out. Admitting Greece (or even Italy) into Eurozone there was always going to be a potential for bailouts from the North.  But the unpredicted (though not necessarily unpredictable) development was the vast amount of borrowing by banks from the Centre to the Southern Eurozone countries. That is what Krugman is talking about when he is talking about current account imbalances. Phrasing it in terms of macroeconomics is unhelpful. It's about banks lending money, and doing it at rates that were much too low. That was stupid, and they deserve to be punished for it much more than they are, but they can't be because then we'd bankrupt the entire European banking sector. So we're bailing out the Greeks and the others, just like the Irish bailed out their own banks. When it all began, we assumed - implicitly perhaps - that spectacular failure of the kind now observed in Greece would result in a country leaving the Euro. "If € 100 bn can't fix it, it won't get fixed." Instead, we find ourselves spending much more than we ever thought possible, because the alternative is another banking crisis. We underestimated how expensive it would be to bail out a failing Eurozone country, and we underestimated how much we would be forced to keep bailing.

When we used to apply Optimal Currency Area theory to the Eurozone, we always knew it was too big, but we assumed we'd never get caught. Historically, that was not an unreasonable assumption. There's a distinct question whether the US is the optimal size for a single currency. Maybe the Heartland, the East Coast and the West Coast should each have their own currency. But there's no way of knowing, so no one ever raises the question. (Except me, just now.) It was reasonable for us, in 1990 or 2000, to assume we'd never get caught either. But instead, the sheer size of the North-South lending in 2000-2006 and the sheer size of the current crisis have conspired to make this the one case out of a hundred where politicians get exposed for not taking economic theory to its logical conclusion. No one will ever know for certain whether the Obama stimulus was too big, too small or just right, but the history books will forever say that it was a mistake to let Greece into the Euro.

Thursday, March 22, 2012

We're all leftists now

The Social Europe Blog republished a post by Ulrike Guérot on the ECFR Blog. (See what I did there, in the way of promoting the EU-blogosphere?) Much as I like the title ("Brits - Why can't you fly the European flag?"), I think there is something missing. Not something new, mind you, but something that should at least be mentioned in a post on the "British" and the "German" approach to the Eurozone crisis.

That something is what has curiously become the "progressive" approach to the crisis. It is curious not because it involves spending vast amounts of money, that has always been the progressive thing to do. Rather, the curiosity stems from the sudden alliance between the global left and anybody who's ever spent two seconds giving serious thought to capital flows in the Eurozone. It is not often that serious economists find themselves arguing side by side with the left and against the right. (Hey, there's a reason why I vote centre-right.)

Let's review the basics: In any currency area, at least one of three things must be true:
  1. There is a high degree of correlation between the economic growth and unemployment of the area's constituent parts.
  2. There is a high degree of labour mobility.
  3. There are fiscal transfers.
In the US, 2 and 3 are true, while they have more asymmetry in their economy than the Eurozone does. (Because the states are more specialised than the Eurozone countries. In the US, the bulk of Boeing's value is generated in California, while Airbus has carefully spread out its plants over a half dozen EU countries so as to achieve maximum political support.)

As for fiscal transfers, you would not necessarily say so listening to the European net contributors whine, but the worst of them - Denmark in 2009 - contributes 0,53% of GDP more than it receives. In the US, the state that is consistently worst off is New Jersey. In 2005, the most recent year included in this dataset, they paid $ 86 billion in Federal taxes and received $ 58,6 billion in Federal spending in return, for a net "loss" of $ 27.495 million. Compared to a state GDP of $ 429.985 million (source: that makes a net contribution of 6,4% of GDP, 12 times worse than Denmark. Likewise, the biggest beneficiary of all that largesse, Mississippi, gained 16.9% of GDP, doing about 3 times better for itself than Lithuania with its 5,33% of GDP.

Applying all this Optimal Currency Area theory to Europe yields a clear picture: without fiscal transfers, it won't work. The only question is how big they need to be, which is something that depends on the size of the Eurozone, the degree of asymmetry in its economic development and the size of the Member States that get in trouble. (Regarding the latter, remember that it would be cheaper at this point for Germany to just buy all of Greece's debt rather than to keep bailing them out. For Greece, its debt may be 145% of GDP, but that same sum represents "just" 11,3% of German GDP. Doing so is impossible, and a bad idea even if it were possible, but by strict arithmetic it would be cheaper.) There is no need to bring in any advanced Keynesianism here, just some straight-up Lerner & Mundell. Keynes comes in later, when you start figuring out what to do with those fiscal transfers.

Politically, however, this puts economics with the left and with the British, as opposed to the right and the Germans. More Europe is not the answer, at least not as long as More Europe means more power for Europe to make sure no one runs a budget deficit. Viewed that way, More Europe simply means ruling out fiscal transfers in an ever more stringent way. More Europe is only the answer to the extent that it means setting up European taxes and European spending priorities, thus undercutting the lethal calculus of "net contributors" and "net recipients". In the meantime, it is difficult to find fault with the British preference to stay out of this mess whenever possible. That is a coherent philosophical position, in fact it is just about the only coherent philosophical position, and it is quite unrelated to the traditional British penchant for Euroscepticism. The flag thing, yes, but not the ESM.

The PIIGS can't take this approach because they need German money. The Dutch and Sarko can't take this approach because they've already shot their mouths off one too many times. Belgians, Slovaks, Slovenes &c can't take this approach because they might need German money some day. But what is they excuse of the Finns and the Germans themselves? Who is going to tell them their President has no clothes?

This Week in Luxembourg

In Inter-Environnement Bruxelles et al. v. Région de Bruxelles-Capitale, the 4th Chamber decided that the environmental impact assessment directive, directive 2001/42, also applies to measures that are provided for in national legislation but that are not mandatory to adopt. Moreover, the directive applies both to the adoption of land use plans like the one at issue in the main proceedings and to their repeal.

The Romanian prosecutor tried to “grandfather” the Rasdaq market into the financial markets regulations despite the fact that it, itself, was not a regulated market, by relying on the fact that its operator had merged with the operator of a regulated securities exchange. The 2nd Chamber, however, says that that is a no go. Cf. art. 4(1)(14) of Directive 2004/39. It also held that it is possible to be a regulated market without being on the list of regulated markets that the MS have to prepare under art. 47 of that Directive. Prosecutor v. Rareş Doralin Nilaş et al.

AG Bot concluded that the eruption of the Eyjafjallajökull and the resulting closing of much of Europe’s air space constituted an extraordinary circumstance in the sense of art. 5(3) of Regulation 261/2004. While this means that Ryanair no longer has to pay the compensation of art. 7, they still have to take care of their passengers as required by art. 9. Just for fun, you should see which arguments Ryanair pulled out of its backside next (par. 48-71). But not even art. 16 and 17 of the Charter can save them. McDonagh v. Ryanair

AG Sharpston proposed that the Court should strike down a Spanish fee for the right to install facilities on municipal public property because it is in conflict with art. 13 of Directive 2002/20. The problem was that the fee wasn’t so much for the right to install facilities as the right to use them. Moreover, the fees were not linked to the extent to which a scarce public resource was used, but rather to the company’s revenue and market share. Vodafone España

Interesting, albeit admittedly not for everyone, is AG Mengozzi’s opinion in Geltl v. Daimler AG, a rare case about Directive 2003/6 and Directive 2003/124, the market abuse directives. The case concerns a lawsuit by investors in Daimler who argue that the company should have disclosed the fact that Mr. Jürgen Schrempp, the CEO, was thinking of stepping down, even though no formal decision had been made yet. The AG argues that the fact that the board was discussing what to do and how was sufficiently precise information that it should have been disclosed.

AG Mengozzi also has a case where the French prosecutor does not think the 2009 judgement in Wolzenburg is clear enough when it comes to the rule against extraditing your own citizens vs. the European Arrest Warrant vs. the ban on discrimination on the basis of nationality. In this case, the sought person is not French, but married to a French person. Lopes Da Silva Jorge

AG Mengozzi’s third opinion this week concerns the closure of a US military base in the UK. The case is about employers’ obligation to inform and consult the workers’ representatives about mass redundancies because the more interesting question of state immunity seems to have been forfeited at an earlier stage. Pity… United States of America v. Nolan

On renvoi, the General Court again annulled a Commission decision finding that certain tax exemptions for mineral oil in Ireland, France and Italy constituted unlawful state aid. On first attempt, the General Court found an infringement of the obligation to state reasons, which the CJEU overruled, and now they’re going with legal certainty because of the conflict between the Commission’s 2005 decision and the Council’s Decision 2001/224 which authorized these exemptions. Ireland v. Commission

In the area of asset freezes, the General Court has resumed it regularly scheduled programming, and annulled the sanctions against a company called Fulmen and its owner Fereydoun Mahmoudian because the Council failed to adduce any actual evidence that they had anything to do with helping Iran develop nuclear weapons. I’m not entirely sure, though, what is going on with the remedies (par. 107). Fulmen and Mahmoudian v. Council

I am intrigued by the cases of Marine Harvest Norway et al. v. Commission and Fiskeri og Havbruksnaeringens et al. v. Commission only because I was not even aware that it was possible to impose anti-dumping duties with in the EEA. But apparently such duties have been in place since 2006. Cf. the basic regulation, Regulation 384/96, as well as Regulation 85/2006, which imposed such duties on Norwegian farmed salmon. Both cases resulted in a partial win for the applicants, by the way.

In competition law, the General Court sided with the Commission against Slovak Telekom in an action for annulment of a Commission decision requiring Slovak Telekom to produce information. Slovak Telekom v. Commission

Finally, apparently the Pillar Wars continue. The Commission is suing because the Council and the Parliament enacted Directive 2011/82 on the cross-border exchange of information on road safety related traffic offences under art. 87(2) TFEU (JHA) instead of art. 91 TFEU (Common Transport Policy). Both work with the Ordinary Legislative Procedure, but the Commission seems to be worried about the principle of it, as well as about some countries’ opt-outs and opt-ins in the area of JHA. (cf. section 3.2.2 here) (HT: Ronny Patz.)

Wednesday, March 21, 2012

Sovereign Immunity

Yesterday's US Supreme Court ruling in Coleman v. Court of Appeals of Maryland gave me some serious non-employment discrimination-related food for thought. As such, the case is about whether Daniel Coleman can sue his former employer, the Court of Appeals of Maryland, for firing him while he because he was ill, which is ostensibly in violation of the Family and Medical Leave Act of 1993, specifically 29 USC 2612(a)(1)(D). The interesting thing is not the FMLA as such, but the reason why the Court held for the defendant:
A foundational premise of the federal system is that States, as sovereigns, are immune from suits for damages, save as they elect to waive that defense. See Kimel v. Florida Bd. of Regents, 528 U. S. 62, 72–73 (2000); Alden v. Maine, 527 U. S. 706 (1999).
From this premise, the result naturally follows, and I'm not sure why this was a 5-4. (Somehow it seems to involve a concise history of feminism. Don't ask.) The obvious exception to the rule is Congress' explicit power under section 5 of the 14th Amendment, but it is difficult to see how that helps sick people, as opposed to women, ethnic minorities, etc. Conclusion: this particular subsection of the FMLA is ultra vires to the extent that it applies to state government entities. Not very interesting.

Instead, the reason why this gave me food for thought is that it rests on a very peculiar approach to sovereign immunity. (The Wiki-page is not very good, but OK.) The state cannot be sued, unless it consents. Not even the Federal government can overcome this barrier, absent specific Constitutional provisions. (Justice Ginsburg, with only Justice Breyer concurring, brings up the case of Seminole Tribe of Florida v. Florida again, but not even Justices Kagan and Sotomayor are willing to follow her there. In that case they were in the minority too, and would have held that Congress can authorise suits against states under the Commerce Clause. The conservative majority, however, disagreed.)

This approach to sovereign immunity is peculiar because it is almost unique in the world. It has some roots in British common law, where the Crown was the fountain of all justice and the authority that created the courts, and could therefore not be sued, but even that was done away with by Act of Parliament in 1947. For that reason, sovereign immunity barely got a mention in the litigation over Frankovich and Factortame, where the European Court of Justice created a tort remedy for an infringement of EU law by a Member State.

In Frankovich, AG Mischo wrote:
[A] Member State cannot object to the bringing of an action for damages against the State in respect of the infringement of a right granted to individuals directly by Community law on the ground that its national legal system recognizes the principle of immunity of the public authorities, in particular the legislature; once the action for damages exists as a form of action, a Member State can no longer rely on the status of the person alleged to be liable in order to deprive individuals of the possibility of bringing such an action and thus impair the effectiveness of Community law with direct effect.

Indeed, the context we are dealing with here is completely different from that in which the theory of the immunity of the State in its capacity as a legislator was developed in certain Member States. The Commission correctly pointed out at the hearing that in national law there can hardly be a situation where not only is the legislature under the obligation to enact a law, not only is it possible to determine with a sufficient degree of precision what it must do, but in addition the legislature must act within a certain period. In my view it is not excessive to say that in relation to the transposition of directives the legislature is in a situation close to that of the administration responsible for the implementation of the law.
In the Waterkeyn judgment the Court was careful to state that pursuant to Article 171 of the Treaty,

"all the institutions of the Member States concerned must ... ensure within the fields covered by their respective powers that judgments of the Court are complied with" (paragraph 14).

That is merely the consequence of the fact that

"under Article 169 of the Treaty the Member States are liable no matter which organ of the State is responsible for the failure, and ... a Member State may not plead provisions, practices or circumstances existing in its internal legal system in order to justify a failure to comply with the obligations and time limits under Community directives" (18)

and under Community law in general. Furthermore, in Humblet the Court expressly stated that the obligation to rescind the national measure which is contrary to Community law and make reparation for the effects which it may have had results from the Treaty, which has the force of law in the Member States following its ratification and takes precedence over national law ([1960] ECR 569). A Member State cannot therefore take refuge behind the principle of the immunity of the legislature, even if that has the status of a constitutional rule, (19) in order to escape its obligation under the Treaty to take all necessary measures in order to ensure that Community law has full effect, where necessary by making good the wrongs suffered by individuals as a result of its infringement of its Community obligations. (20) On the contrary, as the Court has required in a different context, that of national budgetary rules,

"it falls to a Member State in accordance with the general obligations imposed on Member States by Article 5 of the Treaty, to recognize the consequences, in its internal order, of its adherence to the Community and, if necessary, to adapt its procedures for budgetary provision in such a way that they do not form an obstacle to the implementation ... of its obligations within the framework of the Treaty." (21)

I think that that is all the more necessary inasmuch as the implementation of directives is not always, or in all Member States, a matter for the legislature; to take refuge behind the principle of the immunity of the legislature would therefore give rise to disparities not only from one Member State to another, according to whether they recognize that principle or the implementation of directives as a matter for the legislature, but even within Member States where the legislature has the power to implement some directives but not all. I should add that in its order in Joined Cases 24 and 97/80-R ([1980] ECR 1319 at page 1333), paragraph 16, the Court had already firmly declared that

"by reason solely of the judgment declaring the Member State to be in default, the State concerned is required to take the necessary measures to remedy its default and may not create any impediment whatsoever".
In that case, the Court itself was silent on the matter. Likewise AG Tesauro in Factortame I, the ECJ in Factortame I, and the ECJ in Factortame III/Brasserie du Pêcheur. In that latter case, AG Tesauro writes:
36. Admittedly, in the past the idea that the State was not liable for acts or omissions of the legislature was a widespread one. Its rationale was that the sovereign could do no wrong or, according to a more modern, democratic version, parliamentary sovereignty. In other words, in so far as it was the highest expression of the sovereign power, the legislature fell in principle outside the general rules governing liability in view, inter alia , of its democratic legitimacy.That view, which took root above all in legal systems in which the law was not reviewed in the light of some higher parameter, should take on a different complexion where there is a higher norm which can be used to verify and, in an appropriate case, deny the legality of the legislature's activity. Yet, also in those legal systems in which there is not only a clear, formal hierarchy as between constitutional rules and legislative rules, but also a mechanism of ad hoc supervision as to constant compliance with that hierarchy (Austria, Italy, Germany and Spain, for example), the question as to whether compensation can be awarded for loss or damage ensuing from an unconstitutional law is far from having been incontestably resolved. (42) The fact remains, however, that in such a case it cannot be ruled out that the State will be called upon to answer for the loss or damage caused by laws declared unconstitutional.

Fn. 42: For instance, in Germany such a possibility is not ruled out per se , but only to the extent to which the official duty infringed is not referable to a particular third party, which, as I have already mentioned, is true in most cases involving an unlawful act or omission attributable to the legislature; for those very reasons, the possibility in question is unquestionably available in relation to individual-case laws ( Einzelfallgesetze ). However, the prevalent view among academic writers is that an individual should have the right to compensation at least in the event of breaches of fundamental rights (see, for instance, in this connection, Haverkate: Amtshaftung bei legislativem Unrecht und die Grundrechtsbildung des Gesetzgebers, in NJW, 1973, p. 441). In Italy, in which the question is still the subject of debate, such a possibility has been allowed, for example, in the specific case of presidential expropriating decrees issued pursuant to the agrarian reform which have been declared unconstitutional, where the agrarian reform agency was held liable in damages even though it was not guilty of any unlawful conduct; hence the conviction that in such case the compensation is more in the nature of restitution of undue payments, relating solely to the value of the asset lost (for some more general observations in this connection, see Zagrebelsky in Processo costituzionale in Enciclopedia del Diritto XXXVI, 1987, p. 639).
In other words, even analogising from European Federal states does not lead the AG to consider anything even remotely resembling the US approach. And on the whole, the ECJ simply dismissed the problem as one of effectiveness of EU law and one of its uniform applicability in all Member States, regardless of their internal rules with regard to sovereign liability. Which is all well and good, but does not address the threshold philosophical question of whether it should be possible to sue sovereigns without their consent in the first place. (We're going to ignore, for the moment, the ultimate cop-out that the Member States consented to be sued when they joined the European Union. That argument may be legally sound, but philosophically it is more than unsatisfying.)

Long story short: I don't know as much about the difference between Europe and the US in this regard as I would like, but I know enough to know that I would like to know more.

Tuesday, March 20, 2012


Courtesy of the European Parliament's Twitter feed, I was informed that the PETI Committee had decided to declare the petition against ACTA admissible. Despite being an EU lawyer by training, I have to admit that that one made me do a double take. They declared WHAT admissible? WHO declared something admissible? In my defence, admissibility is usually something for courts and lawsuits. Petitions, on the other hand, are usually something that is imagined as low-threshold and lawyer-free. But look at what the Treaties say:
Article 227
(ex Article 194 TEC)
Any citizen of the Union, and any natural or legal person residing or having its registered office in a Member State, shall have the right to address, individually or in association with other citizens or persons, a petition to the European Parliament on a matter which comes within the Union’s fields of activity and which affects him, her or it directly.
This provision contains at least three reasons why a petition might not be admissible: The petitioner might not be an EU citizen, the petition might not be on a matter within the competences of the EU and the petitioner might not be directly affected by the subject matter of the petition.

These first two I do not care about very much. I would avoid like the plague any suggestion that a failure to meet those requirements results in anything as technical sounding as "inadmissibility", but it is clear that the EP can't be in the business of responding in detail to petitions by Chinese residents complaining about the Slovakian education system.

Direct concern, on the other hand, is a big, big problem. The issue is that direct concern is a doctrine from EU procedural law under the old art. 230 EC. In its new version, the provision allowing EU citizens to sue to have EU legal acts annulled reads:
Any natural or legal person may, under the conditions laid down in the first and second paragraphs, institute proceedings against an act addressed to that person or which is of direct and individual concern to them, and against a regulatory act which is of direct concern to them and does not entail implementing measures.
(Feel free to ignore the part where you're supposed to sue the Act rather than the EU Institutions that enacted it.)

When I took EU procedure in undergraduate, we had great fun studying the meaning of the bolded words, as discussed in such cases as Plaumann, UPA and Jégo-Quéré. But in so doing, we all understood that we were having lawyer-fun. Normal people do not tend to find this kind of thing the least bit amusing. Do we really expect EU citizens and residents to reflect on this before submitting a petition?
43. The Court's case-law shows that, for a person to be directly concerned by a Community measure, the latter must directly affect the legal situation of the individual and leave no discretion to the addressees of that measure who are entrusted with the task of implementing it, such implementation being purely automatic and resulting from Community rules without the application of other intermediate rules (see to that effect, in particular, International Fruit Company, cited above, paragraphs 23 to 29, Case 92/78 Simmenthal v Commission [1979] ECR 777, paragraphs 25 and 26, Case113/77 NTN Toyo Bearing Company and Others v Council [1979] ECR 1185, paragraphs 11 and 12, Case 118/77 ISO v Council [1979] ECR 1277, paragraph 26, Case 119/77 Nippon Seiko and Others v Council and Commission [1979] ECR 1303, paragraph 14, Case 120/77 Koyo Seiko and Others v Council and Commission [1979] ECR 1337, paragraph 25, Case 121/77 Nachi Fujikoshi and Others v Council [1979] ECR 1363, paragraph 11, Joined Cases 87/77, 130/77, 22/83, 9/84 and 10/84 Salerno and Others v Commission and Council [1985] ECR 2523, paragraph 31, Case 333/85 Mannesmann-Röhrenwerke and Benteler v Council [1987] ECR 1381, paragraph 14, Case 55/86 Arposol v Council [1988] ECR 13, paragraphs 11 to 13, Case 207/86 Apesco v Commission [1988] ECR 2151,paragraph 12, and Case C-152/88 Sofrimport v Commission [1990] ECR I-2477, paragraph 9).
(Société Louis Dreyfus v. Commission, Case C-386/96 P, ECR-I [1998] p. 2309)

Surely the whole point of the petitions process is to create a system for complaints with as few legal hurdles as possible? So why doesn't the Treaty more clearly distinguish between the legal hurdles for an Action for Annulment and whatever non-legal hurdles they want to create for a petition? And even if the EP does not apply the CJEU's detailed jurisprudence when deciding this issue, why are we restricting the right of petition to cases where the citizen or resident is directly affected? Why shouldn't I be able to petition them to complain about the Common Agricultural Policy? It's stupid, and I should be able to petition them to let them know I feel that way.

Friday, March 16, 2012

10 Words

The latest news out of the Netherlands is that the energetic 40-year-old Diederik Samsom has won the leadership election of the Labour party. And given that I've finally taken to using Twitter (see right-hand column), I was looking for something useful to tell him in my congratulations tweet. What I ended up writing sounded a bit harsh - that's what you get for being constrained to 140 characters. I asked him whether he was going to be a "tussenpaus", a Dutch word defined by Wiki-dictionary as
"an incumbent whose main function is not to exerce the office but to 'keep the seat warm' or prepare the way for a far more notable successor, but fully titled, without being formally styled 'ad interim'."
After all, it is widely expected that Lodewijk Asscher will take over the leadership of the Labour party in a few years, having decided that the time was not yet right for him to enter the fray this time. But I also managed to squeeze something positive into my 140 characters. If Samsom wants to avoid being a seat-filler, he should define "a mission" for his party.

Now, for sure, if you asked him, he could give you ten missions. But none of them would be the least bit appealing to anyone outside the Hague-beltway. The problem is that they are invariably too long, too filled with jargon and too unfocused. What I was looking for is best summed up in this story from The West Wing, which I've been re-watching in the last few weeks (jay!):
In the midst of the big debate, President Bartlet's opponent, Governor Robert Ritchie, played by James Brolin, was asked about his tax policy, to which he responded: "We need to cut taxes for one reason - the American people know how to spend their money better than the federal government does." President Bartlett's response was: "That's the ten word answer my staff's been looking for two weeks. There it is. Ten-word answers can kill you in political campaigns. They're the tip of the sword."
That's what Dutch politicians, including even the youthful Diederik Samsom, don't have: ten word answers.

Now, to be honest, the website that I lifted that summary from makes an entirely different point. There, the author emphasises Bartlet's reply, asking for "the next ten words" and argues for a political system that is not completely reduced to sound bites. But none of that matters unless you have politicians who are effective communicators. None of that matters unless you have politicians who are at least capable of defining what they stand for in 10 poignant words.

Pauw & Witteman is the only Dutch political talk show that matters. As a political junkie, I should be totally addicted to it. (At least while I'm in the Netherlands.) But I'm not. Why not? Because every time I watch it I can't help but yell at the TV in sheer frustration about the inability of Dutch politicians to speak effectively. That's not the same as speaking plainly, heavens forbid, but at least it means being able to answer any given question in 10 words, if you choose to.

Why doesn't Europe have a theory?

For completeness sake, I should probably explain the one area where I disagree with Paul Krugman about "that austerity nonsense", as I called it yesterday.

Krugman constantly describes the actions of the European leaders in the current economic crisis in terms of "the confidence fairy". I, on the other hand, think that this is wrong.

To be sure, when Wolfgang Schäuble came here to Florence last week to participate in Debating Europe, he spent a minute making the argument that research has shown that there is a debt/GDP ratio above which countries cannot tread without getting into difficulties. (Never mind that this research, by Reinhart and Rogoff, is highly flawed. It also conveniently ignores such pertinent cases as the 250% Debt/GDP ratio enjoyed by the UK at the start of its post-war economic boom.) However, the vast majority of policy makers either do not mention such research at all, or - like Schäuble - mention it only to "sell" something they already want to do anyway. That's why it is pointless to follow the Krugman mantra and keep taking pot-shots at the confidence fairy. The confidence fairy doesn't matter, it is only a rationalisation.

And that's what really puzzles me. For all its flaws, expansionary austerity is an actual theory. A wrong theory, but a theory that could conceivably be correct. It is possible to imagine a parallel universe where this would be a coherent description of what happens, where this theory would result in correct and useful policy prescriptions. It's not this one, but it's close. Actual this-world economic science has some better models too, generally rooted in Keynesianism. They tell you that the consequences of a fiscal impulse in the economy (i.e. the opposite of austerity) generally depend on the reaction of the central bank and more generally on the scope for crowding out on capital markets. Given that we're currently about 100 miles away from any rate increase, that no one is borrowing, that there are no inflation worries, no nothing, it's the best of all possible situations for stimulus. There's no down side, as long as you spend it on something that's worth the (near-zero) interest you have to pay to borrow the money in question. That's another model.

So if European policy makers aren't working from a framework of expansionary austerity, and they're not doing any form of Keynesianism, what are they doing? What is their model of the economy, the model that they are using to decide when to apply how much austerity?

The answer is that I think they don't have one. For people like Angela Merkel austerity is not something they do because they think it will benefit the German or European economy. Instead I think they view it purely in moral terms: the government should pay its own way the same as everybody else. To do differently would be unethical. In Germany, this is known as the principle of the Swabian Houswife. This is very, very bad.

If the German/Dutch approach were based on some kind of economic theory, it would be possible to have a reasoned argument about its efficacy. But given that their preference is purely value-based, it is like a religion. De religionis non est disputandum. But if we're not careful, this religion is going reduce us all to poverty.

Thursday, March 15, 2012

Europeans can't jump

Since my friends from Breughel encouraged me to disagree more, I suppose I have to.

But seriously, most of their post of why there is no pan-European blogosphere is completely correct. There isn't one for very same reason that there is no pan-European public opinion, or even a pan-European labour market for that matter: too much heterogeneity and too many barriers to trade in ideas.

But I seriously have to disagree with the suggestion that Europeans aren't as good at arguing as the Americans. They write:
Second, there are probably also “cultural” reasons behind that phenomenon. Europeans don’t have “debate” classes in High School and they tend to have far less confrontational academic discussions (we have nothing as direct and antagonistic as the Cochrane/Hubbard vs. Krugman/DeLong for instance). European economists seem to prefer spreading knowledge rather than stirring debate. VoxEU, Telos, the column section at Eurointelligence, and the new OFCE blog all provide avenues to disseminate research and to express opinions, but are not, so to speak, blogs with arguments and disagreements.
We invented it for crying out loud! Not just parliament, but also continuation of politics by other means - an area that we have traditionally excelled at. The comments sections of our newspaper websites are full of moronic comments just like in the US. Everybody argues with everybody all over the place, often times quite unbothered by any lack of knowledge or understanding. My compatriots - the Dutch - pride themselves in their rudeness, in their willingness and ability to speak the truth, the whole truth and nothing but the truth regardless of whether it is polite, kind or politic. We're the ones who invented GeenStijl! (Official tagline: "tendentious, unfounded and needlessly hurtful".)

The problem isn't that Europeans don't debate, it is that European blogs don't debate, at least not with each other. And the reason for that, other than the ones already given in the Bruegel post, is that in Europe relatively more of the interesting topics are national rather than European. You can only have a European debate if there are things happening at the European level that make people mad.

Personally, I wouldn't mind a good debate about all this austerity nonsense, but it looks like Krugman already has that covered. (For what it's worth, I'm an economist and I think he's right.) So what else should we debate about? That dumbass PVV Polish complaint hotline? Surely not... It may be dumb in the extreme, but so is giving it more attention than strictly necessary. So what's left?