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

Summary:
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

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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 data 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.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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