Are sovereignty referenda a good idea in a borderless Europe?

The Scottish will have a referendum in 2014 to decide whether they want to become an independent country. The British will have a referendum soon after to decide whether they want to stay in the European Union. In Catalonia, there is a movement to call a referendum to decide on independence, if possible in 2014. In these three cases, the starting pressure for the referenda comes from populist nationalist politicians. In some cases, mainstream politicians are unable to resist the pressure and accept calling a referendum as a way to reduce political pressure. However, these referenda may be very divisive, and do not leave room for a civilized debate that tries to build bridges across communities and across people with different views. The public opinions of the affected countries may spend all their political capital and resources to fight these issues whereas the economic crisis and the sharing of its costs are buried under nationalist songs and flags. Some of us think that in Europe the crisis can only have a European federal solution, and we wonder what would happen to Europe if the fashion to hold populist sovereignty referenda in an interconnected world with shared sovereignty generalizes to more territories. Europe is a land of multiple nations that overlap across state borders. Only a borderless Europe will make possible the coexistence of identities, languages and ethnicities that populate our continent.

Flexicurity: not so easy

I am working on a project for the Foundation of the Catalan Socialist Party on the Economic Project of Socialdemocracy. This week we had a discussion of labour market reforms. The starting point was that it would be beneficial, in countries that come from very rigid labour markets but that are under pressure to make them more flexible, to advance towards the ideal of "flexicurity," that is, a model that combines security and flexibility. As in other markets, a complete deregulation is not desirable because there is a variety of market failures, and because of reasons of dynamic investments and distributive justice. But it is true that the labour markets in many countries accumulate many distortions, and that the current crisis and the globalization process require labour markets that work more efficiently. Flexicurity would combine dismantling parts of the job security that exists but at the same time increase unemployment protection, improve active labour market policies and spend more resources on them, and provide better incentives for the unemployed to find a new job. These recommendations are no panacea, and should be accompanied by a host of other policies, in education, taxation, administrative simplicity and industrial policy at least. The problem is that as found out in a paper co-authored by the interesting Italian economist Tito Boeri, flexicurity is itself endogenous. This means that it is not so easy for an individual country to modify its combination of security and fexibility. In his empirical work, he finds that countries that have more flexicurity (such as Denmark or Holland), also have a better educated workforce and have in place a strong redistributive system by other means. Hence the need to make progress, at the same time, in increasing educational levels and disparities, and establishing a more efficient and fairer tax system. The economist at Universitat Pompeu Fabra, Sergi Jiménez, who also participated at the discussion mentioned above as an external guest, also argued that one of the biggest problems of the Spanish economy (where advancing in flexicurity would be desirable) was the enormous difference across generations in educational backgrounds, which among other phenomena has caused a reduction in the returns to a university degree in Spain. And creates a disparity of interests between older generations, still dominant in the political system, and new ones.

Egalitarian Reforms

Structural reforms are necessary but have a bad reputation in Europe. Although one could argue, a la Krugman, that the urgency now in Europe are not reforms to introduce efficiency, but coordinated measures to promote growth from the demand side, the need for structural reforms (on pensions, the labour market, public spending and product markets) will just not go away.

But advocating structural reforms risks becoming a futile exercise, unless one accompanies the recommendation by suggestions on how to address three related sets of problems.

First, those derived from the “endowment effect,” that is, the well recognized pattern in behavioural economics by which one tends to value more what one already has in her possession than the same thing when it is owned by someone else. Hence one will not easily accept losing something that is perceived as a right in exchange for something new and uncertain (such as a more efficient economy).

Second, the government is not an exogenous machine that one can activate at the suggestion of some adviser. With an endogenous government, individuals embedded in social relations and with a understandable eye on the next (democratic) election, are the ones who make the final decisions. Some recommendations often have the flavour of advising a monopolist to lower its price. You probably should suggest something else that improves the prospect of the monopolist.

Thirdly, distributive justice interacting with commitment issues play an important role. In an increasingly disfunctional labour market, why the center-left does not support labour market reform in Spain, if it has supported market liberalization, NATO membership and so many liberal reforms? Perhaps because the insiders of the labour market (a good proportion of center-left potential voters) think that it is unfair to ask sacrifices from them in a country with high tax evasion (which is not precisely concentrated on the workers) and increasing inequalities. Something credible enough accompanying labour market reform should be offered to them (tax reform, corporate participation…).

Should Commissioner Kroes trust the Spanish Government?

Two weeks ago, Commissioner Kroes from the European Commission sent an official letter to the Spanish government threatening it with sanctions unless the proposal to merge the network industry regulators with the competition policy authority was profoundly changed. The main concern of the EC was that the new merged agency would have a significantly lower degree of regulatory independence relative to government than the preceding agencies. The Spanish government replied just a few days later saying that it would reform the proposal to accommodate the requests of the Commission. However, the Spanish government is not withdrawing the proposal, which is what it should do. I have analyzed the proposal in an extended paper, where I draw from the literature on institutional and organization architecture to conclude that the specific characteristics of network industries in Spain, and the experience of countries of similar size in the European Union make this proposal a bad idea. The fact that the proposal was inspired by a Consulting Report commissioned by the telecommunications incumbent, Telefónica, raised the suspicion that the government's proposal was a result of legislative capture. The EC should not even allow that a country with the size and regulatory problems of Spain creates such a big agency, where its governing council will have to be expert in telecoms, energy and transportation, besides competition policy. It should ask the Spanish government to do what it has not done: to open a debate with experts, the public and interested parties to reform regulation in a way that it increases its quality and credibility.

The welfare costs of a 30% devaluation

When I meet a friend from another country, he or she lately asks me how are we coping with the current crisis in Spain. Well, I'm fine, thanks. But not everybody is an upper-middle class middle age academic with a permanent job. Spain is in the way to suffer a 30% internal devaluation, according to the forecast of two economists of almost opposite ideas, such as Krugman and Sinn. How does it feel to be approaching the mark of being 30% poorer? To answer this important question, two important things must be remembered:
-First, 30% is an average. Some of us, so far, have some flexibility to accept some more extra work (extra classes, extra projects, extra commitments), so that revenues stay at least so far not at a very different level than at the beginning of the crisis. We'll see if our purchasing power will be very affected at the end of the process. But those of us who are not unemployed and who have liberal jobs, from the point of view of private goods, I'd dare to say that we are not suffering much. Perhaps a little bit, but since the marginal utility of income increases at a decreasing rate, our welfare has not suffered a lot. But those that have gone unemployed, or that kept jobs that were already badly paid, they are suffering much more.
-Second, the 30% affects not only private goods, but also public goods. The ability to fund public goods and services suffers, and the strong distributive tensions (not only between income levels, but also between different types of groups and territories) mean that collective agreements are much more difficult because of distrust and institutional crisis. To the extent that public goods and services (not only health and education, but also politics) contribute to social welfare, and I think they do heavily, we are all worse-off and can still be much worse.