About Rationally Speaking

Rationally Speaking is a blog maintained by Prof. Massimo Pigliucci, a philosopher at the City University of New York. The blog reflects the Enlightenment figure Marquis de Condorcet's idea of what a public intellectual (yes, we know, that's such a bad word) ought to be: someone who devotes himself to "the tracking down of prejudices in the hiding places where priests, the schools, the government, and all long-established institutions had gathered and protected them." You're welcome. Please notice that the contents of this blog can be reprinted under the standard Creative Commons license.

Friday, October 21, 2011

What to make of the “European problem”

by Massimo Pigliucci

There has been much talk of late about the “failure” of the European system, with predictable and hardly repressed glee on the part of libertarians and right wingers alike to the effect that the financial turmoil across the Pond clearly and finally shows that the social-democratic approach to capitalism is bound to fail. Actually, that is precisely not the lesson to be learned from what has been happening lately. In fact, quite the opposite.

To begin with, of course, even if the European system is in trouble (and it surely is), there ain’t much to snicker about on this side of the Pond either. The US financial-political system is still going through a quasi-depression from which it is hard to see when it will recover, and as recently as three years ago it single handedly caused a worldwide financial collapse from which the rest of the planet is still reeling. So, please, my American friends, stop the patting of your own backs, because it is richly underserved.

Moreover, while in terms of the UN’s Human Development Index, the US ranks a (healthy, to be sure) #6, this is below Australia, Norway, Netherlands, Ireland and Canada (3 out of 6 of which are European countries), and slightly above New Zealand, Finland, Iceland, Switzerland, Luxembourg, Denmark, France, Sweden, and Spain (all except the first, European countries, though not all part of the EU). In terms of income equality (measured for instance by the Gini coefficient), the lowest disparity is found in Denmark, Japan, Sweden, the Czech Republic, Norway, Slovakia, Bosnia, Hungary, Finland, Ukraine, Germany, Slovenia, Croatia, Austria and Bulgaria (again, all European, except for the second one), while you have to go all the way down to #72 — right between Turkmenistan and Turkey — to find the good old US of A. Not much to brag about.

Anyway, back to the European crisis. It is most certainly not caused by “socialism,” partly because no EU country is purely socialistic, as difficult as this is for much of the American public to understand. European countries all have variants of the same system that the US has adopted (pace much right wing rhetoric): a social-democracy where a capitalistic system is kept in check by regulations and where there is a number of social nets in place.

No, the reason why Europe is in trouble is because it is not politically integrated. Europeans have known this for a long time, of course, but it is becoming painfully clear that one cannot have a common currency if there isn’t also a common economic policy, and one cannot have the latter without political integration. Of course, the creation of the Euro zone back in 1999 was supposed to be an important step toward political integration within the EU, a project that goes back at least to Giuseppe Mazzini’s “Giovine Europa” (link in Italian) movement established in 1834.

But two things happened: too many countries joined the EU too quickly, suddenly bringing in too much political and cultural disagreement (not to mention economic difficulties), largely from Eastern Europe. And the European Parliament has simply never been given sufficient supra-national authority to be able to establish coherent lines of political and economic action. In other words, Europe risks failure not because “the European way” doesn’t work, but because the European way hasn’t been pursued far enough quickly enough. The choice the EU countries now face is either to reverse what they have done over the past dozen years and go back to a loosely integrated EU, or to accelerate things forward as they should have done when Mazzini first envisioned it. I hope for the latter, but I fear the former.

This insanity of having a Union without sufficient integration is, of course, not limited to Europe alone. Look no further than the United States, where citizen’s quality of life, economic and job prospects, education, health care and the like are dramatically different depending on whether one happens to live in Alabama or Massachusetts, to take just two of the obvious examples. Indeed, it is often the case that you hear that the State of, say, Alabama, competes with the state of, say, Georgia, to lure business away, and does so by loosening regulations and/or by giving said business even more tax breaks than it already enjoys. This idiotic internecine game can only have one outcome: a rush to the lowest possible denominator in terms of business taxes, environmental and labor regulations, workers’ compensations, and the like. Everybody loses except large corporations that can play States against each other for their own greed.

Of course, in the US this situation is somewhat mitigated by the presence of a Federal government with much stronger powers than the European Parliament (which is, of course, precisely what Republicans — in the pockets of big industry — desperately want to weaken). And that is what both the US and Europe can learn from all this: on the one hand, America’s fixation with “States' rights” is quaint and little more than an excuse to cave in to the demands of large corporations, leading to gross inequality for American citizens who happen to live in different states; on the other hand, Europe’s inability to make the final leap into full integration is exactly what has caused the current debacle to begin with. If only we truly had the United States of America and the United States of Europe both American and European citizens would be much better off.


  1. (A Polish reader de-lurking)

    I think blaming the European crisis on the Eastern European accession states is preposterous (but you are right on the mark on the broader issue of lack of common policy). They were and are undeveloped infrastructure-wise, but most have their own currencies and their economies growing at very decent pace, well above the "old Europe". The countries that were most hit (and most responsible) for the crisis were Greece, Italy, Portugal, Spain and Ireland.

  2. I understand your point of view and it is natural you are pushing back the rope to eastern countries.
    The problem is the early E.U. unfitness to solve the polítical integration of all members and the old Social State next to impoverishing the members states.

    José Félix

  3. The problem in Europe are not really with the European Union as such (27 countries), but with the Euro zone (17 countries). To access the latter, countries had to comply with certain stringent requisites established in the 1990s at the Maastricht treaty: debt under 60% of GDP, fiscal deficit under 3% of GDP, inflation not more than 2% above the EU average, and so on. But the conditions were not perfectly tight. On the one side, some of the countries were allowed in without complying with all the requisites, under a promise to "converge" in subsequent years (e.g. Italy had too much debt, but was accepted anyway). On the other side, even for countries initially complying, there was no binding mechanism whereby those countries were incapacitated to run higher deficits (and increase their debt) after joining the monetary union.
    Governments usually go into trouble when they use unwisely their two more important economic weapons: fiscal policy (taxing and spending) and monetary policy (issuing or calling back currency). Frequently, people spend more than they tax, incurring a deficit. Deficits can be covered by two means: issuing additional fiat money, or borrowing the money from others.
    The currency union put money issue in the hands of the European Central Bank, outside the immediate will of the governments, thus effectively tying up the governments's ability to issue money in order to cover their excess sending. But nothing in the euro treaty keeps governments from borrowing. Thus most governments issue IOUs (government bonds) and sell them in the open market for private investors to buy. These bonds create an obligation to pay interest and principal (in ways and terms varying with different bonds). The bonds can be resold by their holders in a secondary market, and the price they fetch in this secondary market is an indication of the faith investors have in the ability of the government to repay debts.
    The problem with Greece (and also Italy and to a lesser extent Spain) is exactly that: overspending over and over, until the debt mountain is too high and the annual payments too onerous, while the government continues running a deficit and thus continues borrowing more, year after year. The reason, of course, is that their internal arrangement for public spending are excessive as compared with tax revenues. As anyone who is overspending for a prolonged period, the bills start coming and either you go bankrupt and lose everything, or you make an arrangement with creditors to repay in the best of terms while putting your house in order.
    It does not matter, really, whether the overspending was due to expenditures in weapons of mass destruction or in social benefits for the poor; whether the money went into the pockets of corrupt officials or was honestly distributed to the needy. In any case, it is money owed to creditors, who expect their money back.
    The current negotiations between Greece, the UE and the IMF are on three main fronts: on the one side, creditors should be persuaded to forsake some of their expected returns, applying what is called a "haircut" to principal and interest of standing debt (a 50% haircut is being discussed about Greece), so creditors would have their dues reduced by half or so.

    (To be continued separately: character limit reached)

  4. (continued)

    On their part, other governments in the Euro zone (especially those that do NOT have the same problem, e.g. Germany, the Netherlands and a few more) would have to put up some money to easse the current problem or avoid its repetition in the future. This would include setting up a Stability Fund to cover occasional deficits here and there, the larger the better, and also to purchase some of the Greek bonds that the markets no longer want; rich european countries are understandably loath to commit so much money to the rescue of the monetarily imprudent, and also demand that the sinners arrange their affairs in such manner as to reduce their deficits and consequently reduce their needs to incur new indebtedness. Otherwise the Stability Fund would be rapidly swallowed by insatiable profligate States, and would encourage the rest to do the same in what is quaintly called a "moral hazard" created by the existence of such rescue funds (like a car insurance coupled with an airbag may encourage faster and reckless driving).
    The problem goes on and on because the German coalition doesn't budge, the French have their own fears, and the concerned debtors are required to adopt harsh measures of austerity in the short term much before the results of austerity can be seen. Especially in cases like Greece, where the extra spending is mostly devoted to employ people in the State's payroll and providing generous social benefits, all for a noble purpose no doubt, but costing more than the government can afford.

    The situation in Ireland is somewhat different. The government coffers are (or were) in good order, but the banks lent money irresponsibly in years past, and the government has had to go to the rescue to avoid a domino fall of the entire bank system. Now the government itself needs help, to cover the losses incurred in order to save those darned banks (a situation also faced in the US, but mostly solved in 2008-09 but the cheap purchase and then resale at higher prices of troubled-bank shares, effected by the Obama govt in the early phase of the crisis, and resulting in a profit to the government, no less).
    Capitalism is about innovation, competition and creative destruction. It ensures progress at the cost of effort, and induces effort by putting a flame to the backside of everyone. Those not quick enough to move and adapt are burned out in the process. It is not certainly a bed of roses. Some too-generous interpretations of the Rheinische Modell of social democratic capitalism in Europe will have to go no doubt, especially in countries where the overall level of productivity and competitiveness cannot afford such fancies. But in fact, most of the scheme would survive (the system needs a modicum of social cohesion to survive), and some of its tenets will probably be adopted by America as well, in spite of the ridiculous attachment of right-wing Americans to ideas that belong in the dustbin of history --at least since the 1930s.

  5. A final word for philosophers. I have been speaking of capitalism (with an "ism" at the end, as in realism, idealism or agnosticism) and this may instill in some minds the notion that capitalism is a kind of philosophical position, a political philosophy that may or may not be put in act. It is nothing of the sort. It is an historical fact, a historical process, with its embryonic st ages set up in the Middle and Early Modern Ages, its blossoming in the Industrial revolution at national scale in the 18-19 centuries, its intermediate stage of horrendous wars between rival national "capitalisms" in the first half of the 20th, and its (so far) more mature stage of global economic integration in recent decades (economic but not yet political integration). This gigantic transformation of human life did indeed result in the formulation of certain ideas (say, by Adam Smith and others) but the ideas were just another factor, probably motivating and philosophically legitimizing some legislation, but the process advances on its own, creating new ideas (and new institutional forms) as needed. Not in an orderly advance towards perfection, not either in an orderly application of a philosophical doctrine, but as societies normally go: by trial and error, by opposition of different views and different interests, and by the (sometimes casual and always temporary) triumph of one instead of the other.
    Thus the chances of "changing capitalism" by reformulating one doctrine or other is probably doomed. "Many philosophers have tried to transform the world, but their first task is to understand it", if you allow me the reversal of a well known dictum of a young an inexperienced German thinker (who never published it, and spent his entire life trying to understand "the laws of motion of capitalism".)

  6. Massimo: ...in terms of the UN’s Human Development Index, the US ranks a (healthy, to be sure) #6...

    My initial reaction was: Really? That high? But then your Gini-based ranking of #72 elicited the opposite reaction. So I looked up the inequality-adjusted HDI, which ranks the US at #12 (behind Norway, Australia, Sweden, Netherlands, Germany, Ireland, Switzerland, Canada, Iceland, Denmark, and Finland).

    That said, it might seem out-of-character for me if I didn't mention here The Equality Trust's Index of Health and Social Problems (viz. as it relates to income inequality). It captures information that's pertinent to your assessment of social well-being, yet is either missed or hidden by the HDI methodology -- even after it's adjusted for inequality.

    Also, it shows a significant gap in outcomes (e.g. see the graph reproduced on this page) between the US and "profligate states" like Greece, Italy, and Spain, which makes the latter group look far less troubled by comparison. Austerity measures, however, may soon narrow that gap (if they haven't already).

  7. evopapers,

    thanks for your note. However, I wasn't blaming the current crisis on the Eastern countries, I was pointing out that their integration has made it even more difficult - at least in the short run - to achieve political unity. See, for instance, the debacle about mentioning or not mentioning god in the European Constitution. Sorry if I wasn't clear.

  8. As far as I understand from those economists who make sense instead of regurgitating talking points, the major problem is indeed the common currency in combination with separated economies. If countries like Greece et al still had their own currencies, they could devalue to increase their competitiveness against Germany et al and inflate internal debt away. Now they are on a kind of gold-standard, all their debt is in Euros and they have lost sovereignty over their currency.

    That means their only way of increasing competitiveness is to massively lower living standards, and their only way out of debts is bankruptcy or austerity, which will contract their economies.

    To safe the Euro, there is essentially only one solution: massive transfers from countries like Germany to countries like Greece, either in the form of more balanced trade flows or as a kind of continual support similar to how the more productive US states subsidize the poorer ones.

    If you had told me a few years ago that the Euro was gonna fall apart, I would have not believed you and replied that it is so important that the politicians will do whatever is needed to keep the project alive. Seems as if I massively underestimated the irrationality of my own home country, which insists that it should maintain its mercantilist policy while exhorting everybody else to do the same. Pro tip to Ms. Merkel and Mr. Schäuble: a world in which everybody has trade surpluses is literally impossible. The trade surplus of the core is the trade deficit of the periphery, and it is breaking the Euro zone apart.

    It is really sobering to see the complete economic illiteracy of current European, and dare I say, global leadership. It is enough to be able to say "the market knows best" and "don't increase spending ever" and you are considered to know all there is to know.

  9. Massimo:

    While I generally agree with you on the topic, using "income equality" here does not seem reasonable, if the measurement places countries like Ukraine and Bosnia in the same league as Denmark, Japan, Sweden, Norway, Finland, and Germany.

    Thanks, Greisha

  10. I think you were clear, Massimo, but at the same time you missed the point. To start with, you refer to "the European problem", which apparently is not having achieved political unity; well, that is not so. The idea of political unity, or even a federation, is not in the agenda for the time being, even if the EU aspire to "an ever closer union". Defense of national sovereignty is adamant in almost all member countries. This was so since the beginning, when only France and Germany were in, and then the Benelux countries, and then gradually all the rest. Not even a common Constitution was approved, when put to the test.

    Now, then, what is "the European problem"? Currently, the "problem" is that the Euro monetary union (not the European Union as such) is in economic trouble because of some countries having fiscal imbalances which have led to excessive public indebtedness. This requires from other euro countries to accept that preserving the euro would imply helping those countries to get out of their situation. They have been horribly slow at it, which only worsens the problem, and there are disagreements on various aspects, all economic indeed, but the general agreement is to preserve the common currency of those 17 currencies, to impose on the strayers the necessity to mend their fiscal ways and reduce their deficits and indebtedness, and to create common mechanisms to patch this mess now and to avoid similar situations in the future. Many recognize now that admitting so many members in the euro was probably a mistake, and that a closer fiscal union should be a necessary complement to monetary union, as every economist knows it should. Note that even in the unlikely event that Greece pulls out of the euro, or even if the euro itself is abolished, the European Union would still exist (even if badly hurt by such disgraceful developments, should they come to happen).

    (to be continued)

  11. (continued)

    Now, more in general, the development of the capitalist economy in the last century, and especially in the last half of it, has coalesced in a transnational economic system, where production takes place in a decentralized manner across borders, and national economic systems are no longer governable by individual nations. Some institutional, political and economic coordination is needed, not only in Europe but worldwide. The fact that the EU exists is already a gigantic step in that direction, although a global coordination mechanism is still not with us in spite of the G-20 and all its travails.

    This process is already happening, with lots of economic decisions being coordinated, and also other aspects such as international security, although still very imperfectly. However, do not hold your breath: political union on a global scale is perhaps centuries away.

    But it will arrive, I trust, just as national units arose, when needed, out of a jumble of fiefdoms which (among other things) impeded the development of markets and the capitalist economy in the Modern Era. However, it took centuries to be accomplished, since the unification of France in the 1600s to the UK in the early 1700 to the German and Italian unification processes by the mid 1800s, contemporaneous to the opening of Japan in 1868. Clashes ensued between them, over natural resources at the core countries (such as warring over steel and coal in the zone between France and Germany) or outside (such as warring and trying to outrun each other for colonial possessions), a course that provoked two world wars and produced the current jumble of national governments unsuccessfully trying to manage a system which has grown way above the management capabilities of any individual nation, even the largest.
    Thus we have economic globalization cum political parochialism. Constituencies in France or the US or Slovenia decide what to do at the world level. This leaves only a tenuous veneer of democratic representation on international bodies, and makes worldwide coordination (even European coordination) painfully difficult and cumbersome, as coordinating all the duchies and principalities of the 1500s may have been.

    Now that is a "problem", not an academic one but a practical one, a challenge that the economic and social system would face and probably slowly solve in some haphazard way during the coming decades and centuries. It will be interesting to watch, if only one is lucky to be around.

  12. Hector: http://en.wikipedia.org/wiki/Cooperative_principle#Grice.27s_Maxims

  13. Massimo:

    Your points here about economic disparities within the United States are gross oversimplifications. The inequalities between citizens of Alabama and Massachusetts are the products of history, demographics, and geography. Massachusetts was wealthy and Alabama was poor long before Massachusetts and the United States implemented social welfare programs and comprehensive environmental regulations. It is bogus to attribute Alabama's current economic conditions to Republican politicians in the pockets of big industry.

    Furthermore, it would be disastrous for Alabama if the federal government imposed Massachusetts-level taxes, social programs, and regulatory burdens on every state in the Union. The business-friendly climate that makes Alabama even marginally competitive in global manufacturing would go out the window, along with the Mercedes factory in Tuscaloosa and the Toyota plant near Hunstville. You may rejoice in the slow decline of "dirty" factory jobs in New England and the Rust Belt over the past few decades, but, personally, as long as our cars and engines have to be built, I'd rather they be built here. At any rate, to pretend that the uniform imposition of relatively expensive welfare programs and regulatory structures would result in prosperity for poor states is absurd.

  14. Alex SL poses the alternative of devaluing the currency (if you have one of your own) OR reducing living standards. The fact is that devaluations have as their main effect the reduction in living standards to gain some sort of spurious and transient "competitiveness", as clearly explained by its main proponent, the conservative Chicago economist Milton Friedman: he argued that instead of trying to lower nominal wages, against great resistance, a clean devaluation of the currency achieves the same end (it makes your salary lower in terms of international goods). Of course, that is transient: the higher value of foreign currencies translates into higher cost of imports and higher value of exports, and slowly penetrates the rest of the economy through cost inflation until a new devaluation is needed.

    Devaluing your currency to counter your lack of competitiveness is like purchasing XL clothes instead of reducing your weight when you become obese and your clothes are too small for your size. The only way to increase competitiveness, and enhance living standards at the same time, is to modernize industries and to make overhead costs (e.g. public services) more efficient and cheaper. This requires a more educated labor force and more competition between firms to force them to be efficient. The transition is normally unpleasant, rather like losing fat through dieting and exercise and perhaps the occasional stomach surgery, but in time you achieve more fitness to live longer and better.

    In the short term, too, for Greece to pull out and reinstate the drachma would mean forcibly reneging on their euro debts and repaying them in devalued drachmas, at an enormous cost for the rest of Europe and condemning Greece to a future of foreign investment starvation. Nothing of the sort is quite advisable, and neither it is "progressive" or "liberal" in the American sense of this word. It is rather a callous way of isolating your country and forcibly reducing the standard of living of your citizens. Milton Friedman would applaud. Not me.

  15. Economist Bryan Caplan wrote a blog post critique of the Human Development Index (http://econlog.econlib.org/archives/2009/05/against_the_hum.html) in which he said the following:

    Now what exactly is the HDI? The one-line explanation is that it gives "equal weights" to GDP per capita, life expectancy, and education. But it's more complicated than that, because scores on each of the three measures are bounded between 0 and 1. This effectively means that a country of immortals with infinite per-capita GDP would get a score of .666 (lower than South Africa and Tajikistan) if its population were illiterate and never went to school.

    So what are the main problems with the HDI?

    1. I can see giving equal weights to GDP per capita and life expectancy. But education? As a professor and a snob, I understand the appeal (though a measure of opera consumption would be even better). But in terms of the actual if not professed values of normal human beings, televisions and cars are a lot more important than books.

    2. When you take a closer look at the HDI's education measure, it's especially bogus. 2/3rds of the weight comes from the literacy rate. At least that's not ridiculous. But the other 1/3 comes from the Gross Enrollment Index - the fraction of the population enrolled in primary, secondary, or tertiary education. OK, I feel a reductio ad absurdum coming on. To max out your education score, you have to turn 100% of your population into students!

    3. The HDI purportedly gives equal weights to three different outcomes, but bounding the results between 0 and 1 builds in a massive bias against GDP. GDP per capita has grown fantastically during the last two centuries, and will continue to do so. In reality, there's plenty of room left for further improvement even in rich countries. But the HDI doesn't allow this. Since rich countries are already close to the upper bound, the HDI effectively defines their future progress on this dimension out of existence.

    To a lesser extent, the same goes for life expectancy: While it's roughly doubled over the last two centuries, dying at 85 is not, contrary to the HDI, approximately equal in value to immortality.

    The clear winners from this weighting scheme, of course, are the literacy and enrollment measures, both of which have upper bounds that are imposed by logic rather than fiat.

    4. The ultimate problem with the HDI, though, is lack of ambition. It effectively proclaims an "end of history" where Scandinavia is the pinnacle of human achievement. Admittedly, I've never visited Scandinavia. But when I see it for the first time this August, I'm pretty sure I won't say to myself, "Wow, it can't get any better than this!"

    At this point, you might ask, "Yes, but will you take the HDI bet, Bryan?" Nope. Scandinavia comes out on top according to the HDI because the HDI is basically a measure of how Scandinavian your country is. While Obama is moving us in that direction, I don't think he's going to be able to take us all the way there.

  16. gralm,

    > using "income equality" here does not seem reasonable, if the measurement places countries like Ukraine and Bosnia in the same league as Denmark, Japan, Sweden, Norway, Finland, and Germany. <

    That's because income inequality is only one major of the wellness and fairness of a society. You also have to take into account GDP, which is why I brought in also the UN human development index.


    > Your points here about economic disparities within the United States are gross oversimplifications. The inequalities between citizens of Alabama and Massachusetts are the products of history, demographics, and geography. <

    Of course they are, but I was actually talking about disparities in civil rights, access to education, access to health care, and so on, not about economic disparities per se. Yes, the two are related, but my experience living in the south for nine years clearly told me that southern states simply legislate in a far more unfair way than coastal ones. And that's got nothing to do with economic disparities (though it does perpetuate them).


    well, clearly Caplan doesn't like the UN index. What do you expect? His positions are considered "radical libertarian" in nature, and I frankly I have decreasing degrees of patience with libertarians, let alone with the radical variety.


Note: Only a member of this blog may post a comment.