Here's that block-quote:
The IMF usually has maximal bargaining power at a country’s moment of crisis – it typically cares far less about whether the country makes it through than the country itself does, and hence can extract harsh conditions in return for aid.2 But – as we have seen with the Greek crisis – EU member states are far less able to simulate indifference when one of their own is in real trouble, both because member states are clubby, involved in iterated bargains etc, and because any real crisis is likely to be highly contagious (especially within the eurozone). In other words, the bargaining power of other EU member states (and of any purported EMF) is quite limited. If Greece really starts going down the tubes, Germany faces the unpalatable choice of either helping out or abandoning the system that it, more than any other member state, created. In short – any EMF, unlike the IMF, needs (a) to concentrate on preventing countries getting into trouble rather than dealing with them when they are already in trouble, and (b) deal with the fact that any country in trouble likely has significant clout in the architecture overseeing it.In my first big post on this topic, I speculated that because the current arrangement in Europe is so unsustainable both economically or politically (Greece being the case in point), the system could only fall one of two ways: Europe will unravel or it will converge, but the middle ground can't hold any longer.
From my sense of the EU integration process, and of the rough bargaining strengths of the actors involved, I imagine that any final bargain will emphasize forward-looking measures, which are intended to forestall problems before they arise. Unhappily for Bundesbank disciplinarians, these are likely to rely more on carrots than sticks – it is clear from previous experience with the Growth and Stability Pact that threats of harsh punishment are not sufficient to produce virtue if these threats are not credible. We can expect moderate levels of fiscal transfers (likely ratcheting up over time), aimed at helping ease the pain of adjustment, together with admonishments (and withdrawal of goodies) for those who fail to live up to their promises...So yes – the Greek crisis is plausibly a very significant step indeed in EU integration (whether for good or bad, I am not going to speculate, since even if I am right, it would depend heavily on the detail) (CrookedTimber).
But I think I may have been wrong. For reasons relating to policy inertia, confidence in financial markets, politics, and the sheer limits of logistical implimentation, it seems like integration is a bit of a one-way street. It would be very difficult for any one actor in Europe to begin disentangling itself from the rest of the continental system, let alone to disentangle that system itself. At this point, it seems like things can only roll one way.
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While I'm no expert on Europe, I'm a little hazy on what, exactly, the immediate benefits are for anyone to leave the union. I know that the single currency is clumsy and often counter-productive, but does the lack of independent monetary policy outweigh, in, say, Greece's case, the benefits of generous transfer payments? The PIGS are all net recipients of EU largesse, I believe, and a good deal of their prosperity has been based on it. As for the Germans, the EU is the foundation of their export-driven success.
ReplyDeleteI might be missing something--I'm positive that I am, in fact--but at present there seems to be no tangible political incentive to defect from the current regime. I'm not saying that in an objective analysis of costs and benefits one wouldn't come ultimately to the conclusion that decentralization far outweighs the benefits of agglomeration, only that that kind of far-sightedness is not often in demand during electoral cycles, nor crises.
Ben, do you have any especially good commentary on the issue?
I meant commentary by outside sources. Your commentary is, as always, just lovely.
ReplyDeleteSources? I don't need no stinking sources.
ReplyDeleteI think at this point, the costs of pulling out are too great to justify even the suggestion, and that was the point of my post and that's why you're ultimately right in your question.
The problem with being inside the EU as things stand now however is that, while Greece might benefit, as you said, from EU largesse in an indirect way during the boom years, it doesn't have access to direct and official fiscal transfers in the same way that a U.S. state does. That, in combination with reduced labor mobility, makes it really difficult for the country to re-adjust to the new macroeconomic environment in any other way than straight up deflation and unemployment (which is to say, they can't prop up demand with fiscal/monetary policy or through depreciation led export growth). That is all to say, the Eurozone probably worked a lot better for everyone when capital markets were booming and Americans were still buying German beamers. But now that things suck again, the system is proving to be pretty inflexible. I don't know if that answers your question.
In terms of outside commentary, most of the stuff I've been reading has come from blogs--blogs that I've sited in my previous pieces I think. What? You expected me to do real research on this or something? If you want to take up the gauntlet search some combination of "eurozone," "optimum currency area," and "greece."