If you don't like the word, take the substance

Some people are reluctant to use the word federalism, perhaps because it would imply recognizing that the individuals and parties that always defended it were right. But more and more people throughout Europe recognize that it provides the values and the ideas that are necessary to solve the problems of national minorities and divided loyalties that plague Europe and many other parts of the world. Now it is Ukraine, Scotland or Catalonia. Tomorrow it can be many other places. Today it is again the Financial Times, whose editorial pages have several times endorsed federalism, that includes a column by David Gardner saying exactly that: "The eventual answer to this problem does not have to be either separatism or unionism (monarchy is a secondary issue). It could as well be a creative form of federalism, even though federalism as a word, let alone a formula, sends semantic shivers up the political spine of both countries. Yet if the majority nationalists – also known as unionists – were to look more empathetically at their minority nationalists, they might detect the ambiguities and hesitancy behind much separatist discourse. Surely it has occurred to all three capitals (London, Madrid and Brussels) that these minority nations might settle for something short of secession. But there is a curious reluctance to discuss alternatives – especially to develop further the asymmetric federalism that already exists in the UK and Spain, where Scotland, Catalonia and the Basque Country already have more home rule than other regions, yet want still more.There is no reason why some regions, especially those with a deep-rooted sense of nation, should not have greater self-rule than others if that is what they want – the cost, to paraphrase the King James Bible, of sharing a house of many mansions." The title of the article is "Spain and Britain should not fear the F-word". Its author, and an increasingly number of people, certainly have no fear.

Institutions and inequality

I am attending the Forum on inequality organized by the Socialist Group in the European Parliament (the only group that could organize a conference of this calibre), where Joseph Stiglitz and Martin Schulz just made the key addresses. I presented a much more modest paper earlier. I paste here a few paragraphs from the introduction and the conclusions of my paper:

"The importance of institutions taking into account that they are endogenous (and therefore must be to some degree self-enforcing) has been acknowledged by numerous scholars. Institutional reforms have to be part of a political equilibrium: they must take into account efficiency and distribution, common interest and rivalry. In Europe, the need for reforms that make progress in the process of economic and political integration, and at the same time improve democratic accountability and commitment and reduce capture, should follow the same logic.

Economists such as Spolaore (2013) or Alesina and Giavazzi (2006) are of the view that integrated policies should be limited to “economic” policies where the costs of heterogeneity are low, and where distributive concerns are scarce. However, from the analysis of existing institutions, there is nothing that prevents lessons from being learned and applied to policies with distributive concerns.

In this paper, four EU institutions are evaluated in terms of democratic accountability, capture, commitment and European integration. These institutions are the telecomunications policy framework, competition policy, infrastructure subsidies and the UEFA Champions League in football. Lessons from these existing institutions are applied to other policy areas, such as fiscal policy and financial regulation. There is nothing in policies with distributive components that prevents positive lessons from being learned.(...)

Europe needs increasingly integrated institutions that encourage institutional and product innovation, and needs to empower those who facilitate integration to make institutional reform part of a political equilibrium. The UEFA Champions League in football suggests that reputational issues and saliency of the institution are key in constraining principals and agents to behaviours that are accountable and transparent. In football, the same referees, players and managers behave better in Champions League games than in national games, in a similar way that some politicians are better EU Commissioners than national cabinet ministers.

In a context of international markets that coexist with significant between and within countries inequality, shared prosperity can only be achieved through the development of institutions that at the same time promote regional integration, democratic accountability and commitment. Authors such as Spolaore (2013) and Alesina and Giavazzi (2006) are wrong in suggesting that European integration should not be applied to redistributive policies. There is nothing in these areas that prevents them from learning from existing institutions. Common fiscal policies and financial regulation that tackle distributive problems in a democratically accountable way are a prerequisite for better efficiency enhancing policies. A new democratic federalism must find a middle way between technocratic solutions and populism.

Future research must focus on the details of an institutional architecture that promotes the desired objectives (including distributive concerns) and that is self-enforcing and stable."

 

European secessionists, losing the economic debate

After the editorial of The Economist severely criticizing the economic arguments of the Scottish primer minister Salmond, Paul Krugman also expressed his scepticism with Scottish independence, and his preference for "democracies big and diverse" (federal). Previously, the Canadian governor of the Bank of England explained the incompatibility between a monetary union and political and fiscal independence. In its week-end edition, an editorial in the Financial Times praised the bravery of a Scottish business man for expressing his opposition to Scottish independence. Catalan business leaders have expressed their opinion against secession many times. The FT said that this was particularly significant and credible, because business people depend on consumers, regulations and politicians who may not share their views. An international consultancy published an important report questioning the economic benefits of Catalan or Scottish independence. The weight of expert opinion in economic issues related to independence of parts of European member states is now overwhelming. Time to spend European energy on something else.

Catalonia and Ukraine: similarities and differences

Some days ago the speaker of the Catalan government had to backpedal because a report he had commissioned compared the secessionist movement in Catalonia with the protest movement in Ukraine that led to the fall of the Yanukovitch regime and to a very uncertain and volatile situation (that includes the use of violence and serious financial and monetary problems). The speaker Mr. Homs said that the report was quoted out of context and that the cases were very different. Indeed they are different, and the main difference is that Catalonia is part of a member state of the European Union and the euro zone, and it is thanks to this membership that peace, democracy and the rule of law are well anchored in Catalonia. However, there are similarities in the arguments used by some of the activists. In Ucraine, both the opposition to Yanukovitch and the opposition to the new revolutionary rulers use nationalist arguments like the "right to decide our own future" through a mixture of referenda and "democratic radicalism." Ukraine split from Russia through a referendum in 1991. The chronicles report that the country is divided between a pro-European west and a pro-Russian east, but I am sure than many people would like to live together and do not see these identities as incompatible (Russian and Ukranian are possibly as close as Catalan and Spanish). I am also sure that these peaceful people (the federalists?) are today silenced and ridiculed by radical groups who become more "central," although perhaps the peaceful are a silent majority. In the autonomous region of Crimea, a radical group took the Parliament building violently and proclaimed the right of Crimea to celebrate a referendum to become a state (with a concrete question and a fixed date, but without legal coverage, like the nationalists have done in Catalonia). How long will non-Russian minorities in Crimea wait until they proclaim their own "right to decide their future"? Either we build a united Europe, a big and diverse democracy using the words of Paul Krugman to distance himself from Scottish secessionists, or we keep fragmenting it so that it degenerates into a set of competing ethnocracies. It is just our membership in the European Union that makes it impossible that Catalonia and Spain fall into that. Let's hope it lasts and becomes even more integrated.

Manifesto for a political union in the euro zone

I have signed this manifesto and I encourage you to do the same:
The European Union is experiencing an existential crisis, as the European elections will soon brutally remind us. This mainly involves the euro zone countries, which are mired in a climate of distrust and a debt crisis that is very far from over: unemployment persists and deflation threatens. Nothing could be further from the truth than imagining that the worst is behind us.
This is why we welcome with great interest the proposals made at the end of 2013 by our German friends from the Glienicke group for strengthening the political and fiscal union of the euro zone countries. Alone, our two countries will soon not weigh much in the world economy. If we do not unite in time to bring our model of society into the process of globalization, then the temptation to retreat into our national borders will eventually prevail and give rise to tensions that will make the difficulties of union pale in comparison. In some ways, the European debate is much more advanced in Germany than in France. As economists, political scientists, journalists, and above all citizens of France and Europe, we do not accept the sense of resignation that is paralyzing our country. Through this manifesto, we would like to contribute to the debate on the democratic future of Europe and take the proposals of the Glienicke group still further.
It is time to recognize that Europe's existing institutions are dysfunctional and need to be rebuilt. The central issue is simple: democracy and the public authorities must be enabled to regain control of and effectively regulate 21st century globalized financial capitalism. A single currency with 18 different public debts on which the markets can freely speculate, and 18 tax and benefit systems in unbridled rivalry with each other, is not working, and will never work. The euro zone countries have chosen to share their monetary sovereignty, and hence to give up the weapon of unilateral devaluation, without however developing new common economic, fiscal and budgetary instruments. This no man's land is the worst of all worlds.
The point is not to pool all of our taxes and government spending. All too often today's Europe has proven to be stupidly intrusive on secondary issues (such as the VAT rate on hairdressers and equestrian clubs) and pathetically impotent on important ones (such as tax havens and financial regulation). We must reverse the order of priorities, with less Europe on issues on which member countries do very well on their own, and more Europe when union is essential.
Concretely, our first proposal is that the euro zone countries, starting with France and Germany, share their corporate income tax (CIT). Alone, each country is hoodwinked by the multinationals of every country, which play on the loopholes and differences between national legislations to avoid paying tax anywhere. National sovereignty has thus become a myth. To fight against this “tax optimization”, a sovereign European authority needs to be given the power to establish a common tax base that is as broad as possible and strictly regulated. Each country might then continue to set its own CIT rate on this common base, with a minimum rate of around 20%, and with an additional rate on the order of 10% to be levied at the federal level. This would make it possible to give the euro zone a real budget, on the order of 0.5% to 1% of GDP.
As the Glienicke group rightfully points out, this budget capacity would allow the euro zone to carry out stimulus and investment programmes, in particular with respect to the environment, infrastructure and training. But unlike our German friends, we feel it is essential that the budget of the euro zone comes from a European tax, not from contributions by the States. In these times of starving budgets, the euro zone needs to demonstrate its ability to raise taxes more fairly and more efficiently than the States; otherwise, people will not grant it the right to spend. Beyond that, it is necessary to very quickly generalize the automatic exchange of banking information within the euro zone and establish a concerted policy to make the taxation of income and wealth more progressive, while at the same time jointly waging an active fight against tax havens outside the zone. Europe must help to bring tax justice and political will into the globalization process: such is the content of our first proposal.
Our second proposal is the most important and flows from the first. To approve the tax base for the CIT, and more generally to discuss and adopt the fiscal, financial and political decisions on what is to be shared in the future in a democratic and sovereign fashion, we must establish a parliamentary Chamber for the euro zone. Here too we join our German friends from the Glienicke group, who however hesitate between two options: either a euro zone Parliament consisting of the members of the European Parliament from the countries concerned (a sub-formation of the European Parliament reduced to the euro zone countries ), or a new Chamber based on grouping a portion of the members of the national parliaments (e.g. 30 French MPs from the National Assembly, 40 members from the German Bundestag, 30 Italian deputies, etc., based on the population of each country, according to a simple principle: one citizen, one vote). This second solution, which takes up the idea of a “European Chamber” proposed by Joschka Fischer in 2011, is, we believe, the only option for moving towards political union. It is impossible to completely deprive the national parliaments of their power to set taxes. Precisely, it is on the basis of national parliamentary sovereignty that a shared European parliamentary sovereignty can be forged.
In this scheme, the European Union would have two chambers: the existing European Parliament, directly elected by the citizens of the EU 28, and the European Chamber, representing the States through their national parliaments. The European Chamber would initially involve only the countries of the euro zone that want to move towards a greater political, fiscal and budgetary union. But it would be designed to welcome all EU countries agreeing to go down this road. A Minister of Finance of the euro zone, and eventually an actual European government, would answer to the European Chamber.
This new democratic architecture for Europe would make it possible to finally overcome today’s inertia and the myth that the Council of Heads of State could serve as a second chamber representing the States. This wrong fable reflects the political impotence of our continent: it is impossible for one person to represent a country, unless we resign ourselves to the permanent impasse imposed by unanimity. To finally move to majority rule on the fiscal and budgetary matters that the euro zone countries choose to share, it is necessary to create a genuine European Chamber, where each country is represented not by their head of state alone, but by Members who represent all political persuasions.
Our third proposal directly concerns the debt crisis. We are convinced that the only way to put this definitively behind us is to pool the debts of the euro zone countries. Otherwise speculation on interest rates will renew again and again. It is also the only way for the European Central Bank to conduct an effective and responsive monetary policy, as does the US Federal Reserve (which would also be hard pressed to do its job properly if every morning it had to arbitrate between the debts of Texas, Wyoming and California). The pooling of debt has de facto already begun with the European Stability Mechanism, the emerging banking union and the ECB's Outright Monetary Transactions programme, which already affect the taxpayers of the euro zone to one extent or another. It is necessary now to go further, while clarifying the democratic legitimacy of these mechanisms.
We must re-start from the proposal for a “European debt redemption fund” made in late 2011 by the council of economic experts to the German chancellor, which was designed to pool all debts exceeding a country’s 60% GDP limit, and add in a political component. It is not possible to decide twenty years in advance how quickly such a fund could be reduced to zero. Only a democratic body, namely the European Chamber formed out of the national parliaments, would be able to set the level of the common deficit every year, based concretely on the state of the economy.
The choices made by this body will sometimes be more conservative than we might personally wish, and at other times more liberal. But they will be taken democratically, based on majority rule, in the light of day. Some on the Right would like these budget decisions to be confined to post-democratic bodies or frozen in constitutional marble. Others on the Left, prior to accepting any strengthening of political union, would like a guarantee that Europe will forever carry out the progressive policies of their dreams. These two pitfalls must be avoided if we want to overcome the current crisis.
Debate over Europe's political institutions has all too often been pushed aside as technical or secondary. But refusing to discuss the organization of democracy ultimately means accepting the omnipotence of market forces and competition and abandoning all hope that democracy can regain control of 21st century capitalism.
This new political space is crucial. Beyond macro policies or fiscal issues, our social models are a common good that we need to preserve and sustain. But they are also key to a successful inclusion in globalization. For fiscal systems convergence to the growing concern on social investment, France and Germany initiatives or reinforced cooperation are missing the point. 28 European Union lags on those subject to translate consensus into act and, when it come to money, finally fails. A European Chamber would be the place where decisions are made because all implications in terms of rights and duties would be explicit. The scope for such decisions is large and one can dream of subjects to be considered : german corporate governance, by a broader power accorded to employee representatives has contributed to keep a productive sector in the crisis ; childhood care for all ; training ; social legislation convergence ; a price for CO2 emissions in order to mitigate climate change.
Many will oppose our proposals by arguing that it is impossible to amend the Treaties, and that the French people do not want greater European integration. These arguments are false and dangerous. The treaties are being modified constantly, as was the case in 2012, when the matter was settled in little more than six months. Unfortunately, this was a poor reform, which reinforced a federalism that is technocratic and inefficient. To claim that public opinion does not like today's Europe and then conclude that there should be no change in its basic functioning and institutions amounts to a culpable inconsistency. When the German government produces its new proposals for reforming the treaties in the coming months, nothing says these reforms will be more satisfactory than those of 2012. But rather than just sit on our hands waiting, what is needed is finally to start a constructive debate in France so that we finally have a social and democratic Europe.

The Economist, against Scottish independence

The Economist dedicates today three pieces to the debate on Scottish independence. In the editorial, it criticizes the Scottish prime minister, Alex Salmond, for underestimating the financial costs of independence, and for trying to convey the message that independence will be easy and smooth. In a specific article on monetary options, the magazine says that politicians from the main Brittish political parties plus the governor of the Bank of England are right to argue that a truly independent Scotland could not keep the pound because monetary union should go with fiscal and political union, as the euro crisis has taught. In the section on Europe, the magazine is very balanced, arguing that the president of the European Commission, Durao Barroso, was too tough when he said that Scotland would have it too difficult, if not impossible, to become a new member of the EU. But The Economist is clear at the end of the article: "Divorce means breakaways must live as singles, at least for a time. There will be no instant betrothal to the EU, no dowry from Brussels—and no cheques guaranteed by other central banks. Scary or liberating, that is the meaning of independence." I am no fan of a referendum to create new borders in a Europe that should proceed to eliminating what remains of the current borders. And I suspect that whatever is the outcome of the referendum, not even the Scottish nationalists want a truly independent Scotland (they wanted a third alternative in the question, but the UK primer minister imposed only two). After all, they want to keep the pound, the Queen, and the BBC. By the way, for the latter, you don't need a referendum and a 600 hundred page book explaining how independence would look like, you just need a satellite dish. I also want the BBC in Catalonia. Actually I'm watching it now, as I do every day in my apartment in Barcelona, one more sign that national independence in Europe, by the UK, Scotland, Catalonia or Germany in the XXI century is absolute nonsense.

The spatial dimension of polities

The book "Before and Beyond Convergence. The Politics of Economic Change in China and Europe", by Jean-Laurent Rosenthal and R. Bin Wong, is much more than a comparative history of China in Europe in the last ten centuries, although it is also that. It is a vindication of the importance of the spatial dimension of polities. In particular, it criticizes the notion that political competition between jurisdictions has advantages similar to economic competition between firms, in terms of fostering innovation and better tayloring of public action to the preferences of citizens/consumers. The history of Europe since the fall of the Roman Empire in the first centuries of our era has been a history of political fragmentation and competition, whereas the history of China has been one of more successful political integration. For most of the period under study, this allowed China to develop a larger market with relatively low taxation and high level of public good production, thanks to a lower intensity of wars and more unrestricted trade as compared to Europe. The markets of Adam Smith develop more easily in larger polities, not among quarrelling ones that prevent the creation and regulation of large markets. Public policies such as responding to financial or natural catastrophes are also easier in large polities. The concentration of people in cities and the differences in relative prices that encouraged the industrial revolution in some European countries and not in China, were an unintended and late consequence of political fragmentation. After missing that revolution, the incredible economic development of China in the recent decades owes a lot to previous informal institutions and to the channels that are made possible by a large polity. The attempts of Europe to proceed to higher levels of harmonization and integration are the result of the tragic lessons of the twentieth century which did nothing else that culminate a trajectory of disastrous fragmentation. The industrial revolution took place in spite of this, not as a result of this. The limits to European integration that come from nationalist shortsightedness are a symptom that the right lessons have not been fully learned.