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Posts Tagged ‘European Union’

Why hasn’t Europe fought World War III? Could it be because the Soviet Union eventually collapsed? Could it be that the NATO, the western military alliance, was effective? Could it be the mutually assured destruction kept the peace? Could it be that America’s commitment to defend Europe was a deterrent?

But all those reasons focus on the role of the Soviet Union. Let’s cast the net wider and ask why World War III, or even smaller wars, didn’t begin with fights among Western European nations. How did long-time rivals France and England avoid war? Why did the Germans not launch another war on the continent? Did these things not happen because civilization finally triumphed? Because the peoples of Europe finally got sick of fighting? Because Western European nations were focused on the danger from the Soviet Union? Because the large U.S. military presence as part of NATO helped keep the peace?

I’m not a foreign policy expert, so I’m sure this is not even close to being a comprehensive list of potential explanations. But it turns out that all of my guesses are wrong. Or they’re wrong if we choose to believe French Finance Minister Christine Lagarde, who says the creation of a pan-European bureaucracy in Brussels has been the key to peace. Moreover, we are supposed to believe that the only way to keep the peace is to impose more harmonization, more centralization, and more bureaucratization on the unwilling peoples of Europe.

You may think I’m being satirical, but this is not a joke. Ms. Lagarde was being interviewed on BBC. She was asked about plans to further erode national sovereignty and transfer more power to Brussels, and whether the people of Europe (rather than just the political elite) should get to choose whether this happens. Here’s a summary of her  mind-blowing statement from Open Europe.

…when asked whether people had ever voted for this convergence she replied, “The European project has been around for over fifty years and it was built on the back of a situation where people were at war…The European project is something we all believe in because we want peace to be maintained.”

To be fair, I don’t actually think Ms. Lagarde is stupid. There’s no way she thinks the so-called European Project, or any of its bureaucratic creations (European Commission, European Parliament, European Court of Justice, etc), deserves credit for keeping the peace. But she obviously thinks the people of Europe are a bunch of stupid peasants and serfs. Or she thinks they are so powerless, thanks to the anti-democratic structure of the European Union and the housebroken European media, that she can say something utterly absurd and be confident that there will be no adverse consequences.

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The news is going from bad to worse for Ireland. The Irish Independent is reporting that the Swiss Central Bank no longer will accept Irish government bonds as collateral. The story also notes that one of the world’s largest bond firms, PIMCO, is no longer purchasing debt issued by the Irish government.

And this is happening even though (or perhaps because?) Ireland received a big bailout from the European Union and the International Monetary Fund (and the IMF’s involvement means American taxpayers are picking up part of the tab).

I’ve already commented on Ireland’s woes, and opined about similar problems afflicting the rest of Europe, but the continuing deterioration of the Emerald Isle deserves further analysis so that American policy makers hopefully grasp the right lessons. Here are five things we should learn from the mess in Ireland.

1. Bailouts Don’t Work – When Ireland’s government rescued depositors by bailing out the nation’s three big banks, they made a big mistake by also bailing out creditors such as bondholders. This dramatically increased the cost of the bank bailout and exacerbated moral hazard since investors are more willing to make inefficient and risky choices if they think governments will cover their losses. And because it required the government to incur a lot of additional debt, it also had the effect of destabilizing the nation’s finances, which then resulted in a second mistake – the bailout of Ireland by the European Union and IMF (a classic case of Mitchell’s Law, which occurs when one bad government policy leads to another bad government policy).

American policy makers already have implemented one of the two mistakes mentioned above. The TARP bailout went way beyond protecting depositors and instead gave unnecessary handouts to wealthy and sophisticated companies, executives, and investors. But something good may happen if we learn from the second mistake. Greedy politicians from states such as California and Illinois would welcome a bailout from Uncle Sam, but this would be just as misguided as the EU/IMF bailout of Ireland. The Obama Administration already provided an indirect short-run bailout as part of the so-called stimulus legislation, and this encouraged states to dig themselves deeper in a fiscal hole. Uncle Sam shouldn’t be subsidizing bad policy at the state level, and the mess in Europe is a powerful argument that this counterproductive approach should be stopped as soon as possible.

By the way, it’s worth noting that politicians and international bureaucracies behave as if government defaults would have catastrophic consequences, but Kevin Hassett of the American Enterprise Institute explains that there have been more than 200 sovereign defaults in the past 200 years and we somehow avoided Armageddon.

2. Excessive Government Spending Is a Path to Fiscal Ruin – The bailout of the banks obviously played a big role in causing Ireland’s fiscal collapse, but the government probably could have weathered that storm if politicians in Dublin hadn’t engaged in a 20-year spending spree.

The red line in the chart shows the explosive growth of government spending. Irish politicians got away with this behavior for a long time. Indeed, government spending as a share of GDP (the blue line) actually fell during the 1990s because the private sector was growing even faster than the public sector. This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

Eventually, however, the house of cards collapsed. Revenues dried up and the banks failed, but because the politicians had spent so much during the good times, there was no reserve during the bad times.

American politicians are repeating these mistakes. Spending has skyrocketed during the Bush-Obama year. We also had our version of a financial system bailout, though fortunately not as large as Ireland’s when measured as a share of economic output, so our crisis is likely to occur when the baby boom generation has retired and the time comes to make good on the empty promises to fund Social Security, Medicare, and Medicaid.

3. Low Corporate Tax Rates Are Good, but They Don’t Guarantee Economic Success if other Policies Are Bad – Ireland used to be a success story. They went from being the “Sick Man of Europe” in the early 1980s to being the “Celtic Tiger” earlier this century in large part because policy makers dramatically reformed fiscal policy. Government spending was capped in the late 1980 and tax rates were reduced during the 1990s. The reform of the corporate income tax was especially dramatic. Irish lawmakers reduced the tax rate from 50 percent all the way down to 12.5 percent.

This policy was enormously successful in attracting new investment, and Ireland’s government actually wound up collecting more corporate tax revenue at the lower rate. This was remarkable since it is only in very rare cases that the Laffer Curve means a tax cut generates more revenue for government (in the vast majority of cases, the Laffer Curve simply means that changes in taxable income will have revenue effects that offset only a portion of the revenue effects caused by the change in tax rates).

Unfortunately, good corporate tax policy does not guarantee good economic performance if the government is making a lot of mistakes in other areas. This is an apt description of what happened to Ireland. The silver lining to this sad story is that Irish politicians have resisted pressure from France and Germany and are keeping the corporate tax rate at 12.5 percent. The lesson for American policy makers, of course, is that low corporate tax rates are a very good idea, but don’t assume they protect the economy from other policy mistakes.

4. Artificially Low Interest Rates Encourage Bubbles – No discussion of Ireland’s economic problems would be complete without looking at the decision to join the common European currency. Adopting the euro had some advantages, such as not having to worry about changing money when traveling to many other European nations. But being part of Europe’s monetary union also meant that Ireland did not have flexible interest rates.

Normally, an economic boom drives up interest rates because the plethora of profitable opportunities leads investors demand more credit. But Ireland’s interest rates, for all intents and purposes, were governed by what was happening elsewhere in Europe, where growth was generally anemic. The resulting artificially low interest rates in Ireland helped cause a bubble, much as artificially low interest rates in America last decade led to a bubble.

But if America already had a bubble, what lesson can we learn from Ireland? The simple answer is that we should learn to avoid making the same mistake over and over again. Easy money is a recipe for inflation and/or bubbles. Simply stated, excess money has to go someplace and the long-run results are never pleasant. Yet Ben Bernanke and the Federal Reserve have launched QE2, a policy explicitly designed to lower interest rates in hopes of artificially juicing the economy.

5. Housing Subsidies Reduce Prosperity – Last but not least, Ireland’s bubble was worsened in part because politicians created an extensive system of preferences that tilted the playing field in the direction of real estate. The combination of these subsidies and the artificially low interest rates caused widespread malinvestment and Ireland is paying the price today.

Since we just endured a financial crisis caused in large part by a corrupt system of housing subsidies for Fannie Mae and Freddie Mac, American policy makers should have learned this lesson already. But as Thomas Sowell sagely observes, politicians are still fixated on somehow re-inflating the housing bubble. The lesson they should have learned is that markets should determine value, not politics.

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I’m working on a serious blog post about European fiscal developments, but my research on that issue has alerted me to a couple of stories about President Jose Manuel Barroso that cry out for immediate mockery and abuse. Mr. Barroso, for those that don’t follow the exciting world of international bureaucracy, is the President of the European Commission. This is not an elected position (perish the thought of letting voters have a say in such matters!). Instead, he’s the chief bureaucrat of the sprawling Brussels-based euro-bureaucracy.

The first story is from the EU Observer, which reports that the European Parliament actually wanted to fine members that didn’t suffer through Barroso’s Castro-esque three-hour speech on the state of the European Union. Amazingly, the MEPs didn’t file a human rights protest against this proposed form of torture, but they did stage an internal revolt and the authorities backed down.

European parliament authorities have bid a hasty retreat from a tentative proposal to fine for non-attendance of today’s State of the Union speech after the idea was met with derision and anger by MEPs.

A meeting yesterday (6 September) evening of parliament president Jerzy Buzek and the 14 vice presidents of the EU assembly abandoned an idea to check up on just who was listening to European Commission president Jose Manuel Barroso’s speech and the ensuing debate.

…The original proposal agreed by the assembly’s political groups late last week envisioned three electronic checks over the three hour slot and a small fine for MEPs whose absence was registered twice.

A short debate on the issue before the presidential meeting already showed the way the wind was blowing.

UK Liberal MEP Baroness Sarah Ludford called the idea a “massive own goal” adding: “You have damaged the reputation of the European Union and indeed President Barroso.”

Mr. Barroso obviously is not happy about the fact that nobody knows who he is or cares what he has to say, because the next story is from the Telegraph, which reports that Barroso’s staff is being dramatically expanded in an effort to “boost his media and political profile.” But this is not just an example of how international bureaucrats waste taxpayer money. There’s also a very offensive and reprehensible plan to corrupt journalists by paying the expenses of reporters traveling with Europe’s deservedly-invisible chief bureaucrat.

Jose Manuel Barroso, the former Portuguese prime minister, will also have a photographer and television producer available 24 hours a day, as well as the services of a team of four speechwriters to call on at all times, under the new strategy to boost his media and political profile.

The new measures to “personalise” his image were revealed in a leaked letter written by Viviane Reding, the Justice Commissioner, who is in charge of EU communications.

…The EU has already come under fire for spending more than €8 million euros on entertaining, “training” and “informing” individual journalists last year, and devoted particular attention to those from Ireland in the run up to that country’s referendum on the Lisbon Treaty.

…The package of measures include a team of eight staff to update his website, monitoring and rebuttal of blogs criticising the EU, rapid verbatim transcripts of all the Commission president’s public remarks – and, from next month, a plan to pay the costs of reporters travelling with Mr Barroso or other commissioners to “important meetings abroad”.

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I’ve never focused much on immigration issues, but this EU Observer story caught my eye. Libya’s dictator is asking the European Union to give his country €5 billion (more than $6 billion) each year as a price for stopping illegal migration across the Mediterranean.
Mr Gaddafi suggested Monday during his speech to business representatives in Italy the EU should pay his country “at least €5 billion a year” to stop African migrants crossing the Mediterranean and avoid Europe becoming “black.” “Gaddafi is thinking what all north African leaders are thinking: they can’t and don’t want to be the keepers of Europe,” Mr Frattini said, adding that: “Europe needs to finally get a migration policy, giving plenty of funds to the migrants’ countries of origin and helping transitory countries face a huge burden.” While a European Commission spokesman declined on Tuesday to react to the Libyan leader’s comments, France said the immigration issue would be included in a broader accord with Libya, on the negotiating table since November 2008.
This floors me. I’m not surprised a kleptocrat like Gaddafi made the request, but I’m stunned that European politicians seem to be taking it seriously. It’s possible, I suppose, that I’m misinterpreting the article and the Europeans are merely being diplomatic, but why be polite? Won’t that encourage other North African nations to make similar demands? And if European nations actually agree to such payments, are they really dumb enough to think that North African governments have the ability (or desire) to block individuals from seeking a better life in Europe?
Since bad ideas have a nasty habit of migrating across the Atlantic, my next thought is to wonder whether politicians from Mexico and other Latin American nations will decide to make similar demands of the U.S. government. Given the rampant corruption and political greed in places such as Mexico, I’m sure the ruling classes would love an additional excuse to shake down American taxpayers. The unanswered question, of course, is whether U.S. politicians would make the same mistake as their European counterparts and respond with genuine interest rather than derisive laughter.

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