German citizens firmly against any (even weak) federal reforms to the EMU

I don’t have much time today as I am travelling from Lisbon back to London for a series of meetings. My next public speaking engagement is on Saturday in Germany (see below). But I read an interesting report yesterday, which confirms the belief that Germany is a long way from ever permitting any wholesale reform of the Eurozone, along the lines necessary to make it functional. The research paper – Attitudes towards Euro Area Reforms: Evidence from a Randomized Survey Experiment – was published by the European Network for Economic and Fiscal Policy Research (econPOL) in June 2018. Even a weak sort of ‘federal’ move – to implement a European-wide unemployment benefit scheme – is rejected by a strong majority of German citizens. The same respondents firmly believe a Member State that finds itself in financial trouble should not be bailed out by the other Member States but should be allowed to go broke (exit the Eurozone). These sort of results are consistent across time. They were present when the Eurozone was initially designed, which is why the foundations were rotten from the start. And they condition all the talk since of reform once it is generally agreed that the system is dysfunctional. Which is why we see deeply flawed changes such as the bank union and the like. It is the differences in cultures and economic structures that preclude genuine reform. And so it will always be. The Europhile Left, who hang on to the eternal hope of eventual reform, should drop the Europhile bit and start acting like the Left.

The motivation for the econPOL research was to explore the attitudes of German citizens to reforms to the Economic and Monetary Union (EMU).

Specifically, they sought responses to:

1. “a European Unemployment Benefit Scheme (EUBS)”.

2. “a Sovereign Insolvency Procedure (SIP)”.

They suggest these two reform proposals are “seemingly opposing views” of what might constitute institutional reform in the EMU. The first, being a sort of bailout facility (although as I have written in the past is anything but), while the second, is about self-determination for Member States with no permanent transfers.

I wrote about European-wide unemployment insurance proposals in these blog posts (among others):

1. European-wide unemployment insurance proposals – more bunk! (June 18, 2018).

2. European-wide unemployment insurance schemes will not solve the problem (January 27, 2016).

3. A Brussels-run unemployment insurance scheme is no fiscal solution (Juuly 16, 2014).

The econPOL research project adopted a very interesting methodology.

First, they confronted the respondents with a brief outline of each proposal.

Second, “respondents are confronted with a pro and a contra argument to the proposal”.

Third, “While all participants receive the same pro argument, there are various contra arguments which are randomized across respondents”.

For the EUBS, the for argument:

… states that a EUBS would stabilize the currency union in future economic crises, while the contra arguments allude to a transfer union scenario (permanent transfers) and to adverse incentive effects (moral hazard).

For the SIP, the for argument:

… states that a SIP would protect taxpayers of other member states in case of a sovereign insolvency. The contra arguments point to potential destabilizing effects in times of crises (self-fulfilling prophecy) and to deteriorating financing conditions for countries with high public debt (rising risk premia).

A “control group” was set up for each experiment and it was given a “generic contra argument acting as a placebo treatment”.

So, the randomised nature of the contra argument then allows for statistical differentiation between strength of attachment to a specific view.

The results of the study are summarised as follows:

1. “There is a low willingness among the German electorate to accept fiscal risk-sharing through a EUBS”.

2. “In contrast, a SIP is much more popular. Its approval (rejection) rate amounts to 48 (21) percent.”

3. “In case of the EUBS proposal, our results reveal that potential moral hazard effects are a more serious concern than the possi- bility of permanent transfers across countries.”

4. “In case of the SIP proposal, rejection (approval) rates in the treated groups are 5-6 (8) percentage points higher (lower) compared to the control group, with no discernible differences between the treatment groups.”

5. “Support for the EUBS proposal is highest among voters of left-wing parties. Conversely, voters located on the two extremes of the political spectrum are significantly more likely to support the SIP proposal than voters of centrist parties.”

6. “Respondents with medium and high income are more opposed to the EUBS proposal than low-income respondents. In contrast, there is a positive and highly significant correlation between income and support for the SIP.”

7. “there is a striking contrast between high approval rates for inner German transfers – even in donor states – through the German fiscal equalization scheme, and a much lower acceptance of transfers to other euro zone countries.”

The last conclusion is very significant.

The “fiscal equalization scheme” within Germany is designed to “to ensure equal living conditions across the German states”, which is one of the preconditions of a successfully functioning federation.

By way of contrast, the “German debt brake … imposes stringent limits on the (cyclically adjusted) deficits of the federal government and the German states” to ensure the moral hazard problems between German states are minimised.

The study found that “61% (73%) of respondents approve the fiscal equalization scheme (debt brake)”.

Further, the citizens in the German “states paying more into the scheme than they receive” were very strongly in favour of the scheme.

This tells us that the Germans share a common sense of identity and this is a common trait in all federal systems.

This common sense of identity means that citizens are prepared to allow the federal government to make transfers across the regional space (states, or whatever) and, perhaps, redistribute income (and spending) across the regions, to address asymmetrical outcomes.

These transfers do not attract significant rancour within the population, although from time to time, quibbles might be heard.

This federal capacity is an absolute pre-condition for a functioning federal system, and, is, of course absent at the Eurozone level.

The econPOL research also found that while Germans are happy to help the unemployed within different regions of Germany, they are strongly against “transfers to the unemployed in other countries”.

Again, the willingness to consider all citizens within the (federal) nation as equals is a common trait of a successful federation.

The lack of generosity to citizens in other nations varies across time. In the neoliberal era, the sense of generosity has waned – as evidenced by the failure of many nations to meet their commitments under the United Nations Sustainable Development agreements.

I last wrote about that in this blog post – Australia’s Overseas Aid cuts reveal a nation that has lost its spirit (May 15, 2017).

The econPOL authors draw this conclusion from the lack of generosity to outsiders:

These results highlight the relevance of politico-economic objections against reforms in a heterogeneous currency union like the euro area.

Conclusion

The point is that the surveys that ask about the EU in general and tend to reveal strong support among European citizens are not necessarily meaningful guides to the quest for reform.

Once the survey questions become more specific and go to the heart of the matter – permanent transfers between Member States, for example – then the hostility to any ‘federal’ reform becomes evident.

And we should keep in mind that the ‘federal’ reform proposal entertained in the econPOL survey was a very weak increase in ‘federal’ capacity.

The current proposals that have been published do not allow for permanent transfers, require Member States to effectively pay in advance any capacity they might draw upon in bad times, and force weaker states, with a higher probability of claim, to pay in more.

So they are nothing like what is needed to make the Eurozone functional.

And, for Germans, if the econPOL survey is to be believed, even those changes are a step too far.

Remaining date in my current UK/European speaking schedule

Saturday, October 13 – Wurzburg, Germany. Makroskop event.

I am on a panel at 13:15 with Heiner Flassbeck and Martin Höpner – topic Exchange rate regimes

Location: Tagungszentrum Festung Marienberg, Oberer Burgweg 40, 97082 Wurzburg

The workshop runs from 9:00 to 18:00 with several speakers discussing aspects of currencies.

Contact: rsvp@makroskop.eu for details.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

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This Post Has 14 Comments

  2. It’s a shame I can’t make it to Würzburg on Saturday, Bill. Hope you speak in Germany again soon, and might I add, Frankfurt has an excellent cultural and gastronomic scene, so…

    Regarding your post, I couldn’t agree more. However, I wouldn’t as much call it a decrease in solidarity or generosity in the age of neoliberalism, but a monetization of it. Not necessarily in the form of money but influence. Regardless of whether a transfer happens at the national or the international level, the people and especially the political power players in the donor states feel entitled to some sort of “quid pro quo” from the people on the other end of the transfers. As if by taking the money you give up your free agency. Not that I like Victor Orban*, in fact I wish he found his love of music and the arts and abandoned the political scene altogether, but at an international level the german case against him is often framed as “you took our money (actually the development fund of the EU) now you bend to our will. Whereas at a national level, a bavarian regional party (CSU) is constantly pushing the agenda of its nationwide sister party (CDU) on the grounds of it being an (the?) economic powerhouse of the country. The national party then goes on to almost singlehandedly determine european policy. So you get the tail wagging the german shepard, who then proceeds to corral the euopean sheep.

    *the language I’d like to use to describe Orban would certainly get me modded out. Besides, I’m striving to suppress heavily emotionalized expressions like “hate” or “despise” from my vocabulary. I was told it makes one happier.

  3. HermanTheGerman said:-
    “Whereas at a national level, a bavarian regional party (CSU) is constantly pushing the agenda of its nationwide sister party (CDU) on the grounds of it being an (the?) economic powerhouse of the country. The national party then goes on to almost singlehandedly determine european policy. So you get the tail wagging the german shepard, who then proceeds to corral the euopean sheep”

    Brilliant!

    One of the Federal Republic (Bundesrepublik) of Germany’s peculiarities which is most consistently ignored outside Germany is just that – that it is a federation.

    That means that the altruism (for want of any better word) on the part of citizens of a federal state essential in order for it to be able to function – as Bill highlights again here as so often before – is already widely in evidence *within* Germany. a country with a population of its own of around 89 million. The econPOL research strongly corroborates that.

    That must naturally tend to have the effect that its people are already expending (or over-expending) their available “stock” of altruism upon each other, with little or none being left over to lavish on foreigners. A perfectly understandable outlook for any nation with its own homogeneous indigenous culture and traditions.

    The same holds true albeit to a lesser extent in regard to other EU member-states, even though they aren’t federations, in that several of them also have comparably strong centripetal forces at work born of their own unique history and traditions. But Germany’s case seems to me the most extreme example of the difficulty (impossibility?) of a functioning pan-European federation ever becoming a real possibility.

    The closest approximation to that in recent times was the Austro-Hungarian Empire, which during the nineteenth century increasingly came under strong attack from resurgent ethnic nationalism and was already destined to disintegrate in consequence – even before WWI finally polished it off.

  4. @robertH:

    I agree with your points and would summaraize it as the prevalescence of tribalism in pretty much all of EU member states. This holds true anywhere in the world really.

    However, this tribalism is both dynamic and elastic in nature. Let me explain this with the german case: Dynamic, because wheras a Swabian was most likely to kill a Badener on sight a couple of hundred years ago, they both unmistakenly identify as Germans today (aside of the occasional skirmish after a nether-league football match) and even form a federal state (Bundesstaat) together. I refer to this tribalism as elastic, because regarding the topic beeing discussed and the current situation, the Swabian might refer to himself as such, as southern German (Süddeutscher), as German, as European or even as a member/sitizen of “the west”(!). This elasticity is observable in the particular case of far right groups across Europe, where the rabid “nationalist” actually form international(!!!) alliances to counter the influence of “globalists” and “islam”. You really can’t make that up!

  5. Mr German. Yes. And at the bottom of it you have the wealthy and the powerful who want open markets, so they’r free to take advantage of others without any responsibility to them. And throughout the media the projection to look down on those who have less than you, because you deserve, have earned all the wealth, power, privileges, advantages dearly. And you hate the corrosive concept of sharing, bringing others along, acting as a team or family. There has to be losers and you’r glad you’r not one of them. The nationalists forming an international. Makes sense. They just have to take their countries back from the wealthy and the powerful. Class warfare.

  6. From a perspective of MM science, might it be useful to explore differences between the US and the EU without prejudging either of the two? States in the US are not monetarily “sovereign” yet they are not doing so badly? Countries in the EU as such are not monetarily sovereign either, and some are doing badly. Why? MMT lends support to the idea that Greece (et al.) should not have given up their monetary sovereignty. But is that the only option? Might there be some economic union like EU that in some way works well by MMT lights but without having to subordinate its members to that union in the way that US states are subordinated to the US? I have no idea. But I would not want to be too hasty.

  7. F. Thomas Burke;
    The main difference between the US and the EU (with regards to currency sovereignty) is that the US has a government that is free to provide funding to the states and reallocate resources as it sees fit, and there are no intrinsic fiscal rules to the US state’s budget deficit.

    MMT shows that government deficits and unemployment have a causal relationship. By accepting these limitations, the countries in the EU are all but guaranteeing they cannot respond adequately to a crisis.

    For example, the US government can decide to build a massive infrastructure project in a state with high unemployment, without fiscal constraints, and without the states having to contribute anything other than real resources. In the EU, countries would have to finance it themselves, and if it takes them below the arbitrary limit of %GDP, all sorts of penalties come into play.

  8. Matt,
    I agree that the current arrangements in the EU are not good, as you illustrate. But might the EU alter these arrangements in some MMT-friendly way without eliminating the EU altogether *and* without, at the other extreme, turning it into some sort of US-type republican centralized government? I’m just asking. In how many ways might governments or collections of governments realize the design principles of MMT?

  10. Matt. Ahhhhh the Germans. What they need do is get rid of the Hartz Reforms, stop bringing in cheap foreign labor(the immigrants) to undermine domestic workers, embark on an infrastructure plan, turn their trade surplus into a mild deficit and let all their neighbors pay them back. There’s only one problem with being a good neighbor – wealth would be distributed downward and the wealthy would take a hit. How does a country pay off a foreign debt when it has high unemployment? Austerity. It can’t because the creditor doesn’t want paid off. He wants to be a rentier with a perpetual income flow.

  11. Burke,

    Bill has also many posts on the subject, though probably not as rigorous.
    The simple explanation that I got from a few of them were enough for me. Americans are culturally unified and have little issue with using federal money or having transfers between states: if nothing else, because the wealthiest states are more progressive.
    Neither of that is true in the EU, the centuries-old xenophobia is still around and used frequently by politicians, and the wealthiest states are pretty stingy due to their strong monetarist beliefs. This will not change, as evidenced by size of the surge of xenophobia against the south at the start of the GFC (and Polish workers, and…) and the complete reluctance of minor intra-eu solidarity. Even the mighty Macron will be a tiny historical footnote of Hollande relevance, no matter now much the euro-fanatics praised him.

    No northern politician can suggest any change because they will quickly be replaced by a xenophobic populist that will take the ordo-liberalism the former has been living on to it’s logical extreme, impoverishment of their people due to the incapable and lazy foreigners. Dismantling the Eurozone would be the less dangerous option by far for the euroland.

  12. Paulo Marques:
    My one and only point is that the US-vs-EU macroeconomic scenarios offer a way to examine, explore, and test different ways that governments (e.g., states) may be productively subordinated to larger governments (e.g., federations of states). Might the EU be made to work even if not in its present form? I have no idea. But this presents interesting analytical and experimental questions that may help to clarify what is at issue.

  13. @ F. Thomas Burke

    With respect I think that that is barking up the wrong tree.

    Yes quite possibly you’re right in arguing that the problem is (like most) amenable to calm dissection and orderly appraisal of various theoretical ways of reassembling the system’s components so that it will (or ought to) work better. But that has not historically been the way in which the matter has been tackled. To take but two examples: the US constitution and the EU’s. Perhaps that ought to have been the way adopted but it wasn’t, nor do I imagine it ever would be in the event of any re-run.

    I would say:- by all means let those sages who have a penchant for bringing (and the ability to bring) philosophical (in the widest sense) analysis and olympian impartiality to bear on the problem do so – and good luck to them.

    Meanwhile however in the hurly-burly in the world outside the lab the law of unintended consequences will go merrily along wreaking havoc. People are dying in Greece who in an MMT world probably wouldn’t have, for example. I don’t think the solution to the urgent problem which that fact points-to can afford to await the outcome of the sages’ deliberations (the opportunity to do just that was in fact presented during the lead-up to Maastricht, in the form of recommendations arrived-at by not just one but two separate committees of acknowledged authorities in the relevant fields which independently and unequivocally pointed in the same – negative – direction, and the sad historical fact is that it was willfully sacrificed to the dictates of purely political objectives).

    What is urgently needed is to cut to the chase:- proceed immediately to jettison the neoliberal policy-prescriptions which currently hold sway and to adopt instead more people-friendly ones. In particular to disassemble the EMU in its present embodiment. Anything else is just wasting precious time – and lives.

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