Thursday, June 14, 2012

British Austerity, National Sovereignty, and International Unions

-- Posted by Neil H. Buchanan

As recently as a few years ago, I could not have predicted that I would become so keenly interested in -- and even somewhat knowledgeable about -- the domestic politics and economic policies of our friends across the Atlantic. My recent writings on the continuing economic crisis and its aftermath in the United States, however, all but require me to think about the UK and Europe as well. First, they are good laboratories, offering additional evidence about the effects of various policy choices. Second, their fate is almost certainly our fate (and President Obama's political fate, too).

I was, therefore, intrigued by an op-ed in today's New York Times, "This Separate Isle," written by a Conservative member of the British Parliament, John Redwood. I found the essay fascinating, for a number of reasons. Indeed, as I will explain below, Mr. Redwood offers some insights into European power politics that raise important questions of federalism, nationalism, and policy coordination.

I should add that I know nothing about Mr. Redwood, other than that he is identified at the end of the op-ed as a Tory MP. I do not know if he is a prominent figure or an obscure back-bencher (who, if the latter, must be delighted to have placed a piece in the NYT), or whether he is known to be a staunch defender of his Prime Minister, David Cameron, or is thought to be as much of a "maverick" as the UK's parliamentary system tolerates. In short, I engage with Mr. Redwood's stated ideas with virtually no baggage weighing down the inquiry.

As noted above, I do plan to get to the good parts of Redwood's op-ed presently. First, however, I cannot help but point out that the essay -- which was essentially a thoughtful "We told you so!" written by a politician who apparently withstood some mockery in the 1990's from those who viewed opposition to EU membership with disdain -- exposes Mr. Redwood's inability to see the folly of his government's own economic policies, about which I have written in passing recently. British austerity policies are a disaster, imposing terrible and unnecessary pain on Britons, but the Conservative government is as enthusiastic as ever about pursuing those policies.

Having noted that saving the euro "will require statesmanship and compromise of high order," and that the EU must "correct the large imbalances in trade and competitiveness," which "will not be an easy sell to voters," Redwood's final paragraph reads as follows: "Somehow growth has to be restarted and more jobs generated. The largest question is whether there is political will to do it." What a wonderful use of the passive voice! Growth must "be restarted" and jobs must be generated, but by whom? Certainly not by anyone modeling their policies on those of the Cameron government, which believes against all evidence in the Confidence Fairy. There is currently no political will in the euro zone to break from the Continent's own Cameron-like policies; but it is difficult to imagine that this is what Redwood has in mind.

Moreover, the comparison between the euro zone and the UK exposes another way in which Cameron's austerity policies are a mistake. Redwood argues, correctly to my mind, that the UK is much better off having kept its own currency (and thus its ability to run an independent monetary policy, along with an independent fiscal policy through its sovereign government). Along with the benefits of devaluation that Mr. Redwood describes (preserving jobs by increasing net exports, a strategy not available to, say, Greece), having its own currency has allowed the UK to maintain extremely low interest rates (just like in the US and Japan, which have their own currencies), despite recession-induced increases in Britain's fiscal deficits. Investors still think of the British government's debt as safe, because it can issue more debt (and more currency) in the future to cover its required payments.

Although that strategy can get out of hand at an extreme enough point, the financial markets are currently showing that they view countries with large deficits AND their own currencies as much safer than those -- like Spain, France, and Italy -- with large deficits but which are tied to a single currency (and thus have no independent monetary policy). The Bank of England is a lender of last resort, just like the Fed. (Indeed, Redwood points out that British banks were bailed out in 2007-08, in a way that the euro zone is unlikely to have tolerated.)

This means that the pain of Cameron's austerity policies in the UK is an "unforced error." The Spanish, Italian, Irish, Portuguese, and Greek governments -- with others sure to follow -- individually have virtually no choice but to impose austerity. Germany (which, despite its moralistic hectoring, has a debt level roughly equal to that in the US) and the European Central Bank simply refuse to ease up on the economic beating that they piously inflict on the other countries. A politician in Madrid has no choice but to go along, unless she is willing to take the huge risks of proposing an exit from the euro.

It is, therefore, more than a little odd to read a British politician extolling the virtues of monetary independence (and taking a victory lap while doing so), at the same time that he is a member of a government that is voluntary harming its own people -- and thus threatening the country's economic future -- as badly as euro zone austerity measures would. Yes, maintaining economic sovereignty can be a good thing, but only if you use it wisely!

I did, however, promise to praise Mr. Redwood's op-ed, or at least to describe why it was thought-provoking. The bulk of the piece is devoted to explaining how difficult it is to integrate countries into a single economy, given the political constraints and the slap-dash compromises that undermine the fundamental governance mechanisms necessary to create a truly unified economy. He writes:
Our government need not apologize or disguise the simple fact that most of our voters want to live in an independent, democratic United Kingdom. I am sure American voters would not want to share a currency with Mexico and Canada, if it meant major economic decisions being made by a Union of the Americas over the heads of the president and Congress. That is how we feel about the euro.
This seems reasonable, but surely it proves too much. Mr. Redwood, after all, offers no broader principle to stop his argument from becoming a parody of hyper-localism. I recall attending a guest lecture that Professor Dorf delivered at Oklahoma City University Law School in 2003 (when I was clerking in Oklahoma City), and a guy in the audience approached Professor Dorf after the speech to argue against federal power. Nearly every one of his statements and questions included reference to decisions being made "in Washington, DC." It was practically a nervous tic. I asked him if he would be happier if all decisions were to be made in Tulsa (the hated big city on the other side of the state), and his argument quickly devolved to a comic-book version of local governance that was indistinguishable from anarchy.

Clearly, Redwood's argument falls well short of that suggestion. He is essentially saying that people should live in countries that are as large as people are willing to let them become. Somehow, despite their historical problems with England, the Scots and Welsh and Cornish (and, with a lot more current political freight, the Northern Irish) are willing to live in a politically weak position within a union of states that is governed by the Parliament in London. Americans in New Jersey and California generally do not call for the end of the U.S. dollar, or the break-up of the country, even though their tax dollars flow overwhelmingly to red states like Oklahoma and Mississippi, states whose citizens have outsized influence on federal decisions (through their over-representation in the Senate).

So, yes, the euro was a mistake -- certainly ex post, but arguably ex ante. People who fought against their countries' joining the euro, like Mr. Redwood, deserve their moment to gloat. Surely, however, we should want to have a better decision rule than simply to say that no country should engage in cooperative agreements with other countries -- up to and including merging into a larger whole -- because doing so reduces the country's sovereignty. One need not be a believer in world government to think that the euro project had worthy goals, or to suspect that "We're just different" is not a convincing reason to do nothing.

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