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 4^th 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 1^st 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 2^nd 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 4^th 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. Fra.bo 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.

Strasbourg

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:

PROTOCOL (No 6)

ON THE LOCATION OF THE SEATS OF THE INSTITUTIONS AND OF CERTAIN BODIES, OFFICES, AGENCIES AND DEPARTMENTS OF THE EUROPEAN UNION\
THE REPRESENTATIVES OF THE GOVERNMENTS OF THE MEMBER STATES,

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.)

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.

Reciprocity

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.

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.

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: www.bea.gov) 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 2^nd 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.)