Why the US is Becoming a Transfer State

Since the US has been on its way to winning the Cold War, public resources (taxes) have been freed by the peace dividend (see the graph) for other use.



Accordingly, the rent seeking competition has been increasing, and various, support maximizing, administrations have been happy to oblige the demanders of transfers.

Greg Mankiw on Optimal Taxation

Here.

Previous Dissolutions of Currency Unions

Here are a few links to papers on the topic that could shed some light on the current Euro problem:

Marc Flandreau on the dissolution of Austria-Hungary (gated version but the abstract is available).

Linda S. Glodberg, Barry W. Ickes, and Randi Ryterman on departures from the Ruble Zone.

And Jan Fidrmuc and Július Horváth on the break-up of Czechoslovakia.

Hat tip: Tyler Cowen (Marginal Revolution) who also mentions a March 1920 article by Karl Schlesinger, “The Disintegratin of the Austro-Hungarian Currency”, in The Economic Journal.

Foreign Aid: A Policy in Search of a Rationale

In a review of a book by Zambian economist Dambisa Moyo, in the January issue of Foreign Affairs, Jagdish Bhagwati retraces a short and striking history of the doctrine of aid to development. It has been surprisingly shallow from the start and resting on extremely weak arguments.

The first one was the charity argument, but international altruism proved quite limited. Then followed the Cold War argument: if western nations did not give aid, the Soviet Union would do it, with dire consequences. But the catch was that it was then inevitable that much of the aid would end up in the hands of unsavory regimes that pledged to be anticommunist, but would use the funds for sumptuary spending. The self-interest argument (The Pearson Commission, 1968; the Brandt Commission, 1977) of doing well by doing good then followed. It was based on a crude Keynesian assertion that made no sense at all: raising global demand for goods and services through aid to poor countries would reduce unemployment in the rich countries. But obviously spending that money directly in the rich countries would reduce unemployment even more. Nowadays, the aim of limiting illegal immigration is taking center stage, but it neglects the fact that the primary constraint on illegal immigration, writes Bhagwati, is the inability of many aspiring immigrants to pay the smugglers who guide them across the borders. If paid higher salaries at home, they would have an even easier time paying “coyotes”, and more of them would attempt illegal entry.

Moreover, the provision of aid creates perverse incentives and unintended consequences. For instance the Harrod-Domar model widely used throughout the 1970s, which says that in order to get a target rate of growth one has to invest a target investment level, and for that reach a target savings rate. But if aid furnishes the funds for investment, then the problem is that, in practice, it led to reduced domestic savings. Many aid recipients were smart enough to realize that once wealthy nations had made a commitment to support them, shortfalls in their domestic efforts would be compensated by increased, not diminished, aid flows. The classical moral hazard problem.

Aid not only did not work, but it cannot work concludes Bhagwati following Moyo. On the other hand:

“After countries such as China and India changed course and adopted liberal (or, if you prefer, "neoliberal") reforms in the last decades of the century, their growth rates soared and half a billion people managed to move above the poverty line -- without question, the greatest and quickest progress in fighting poverty in history.
Neither China nor India, Moyo points out, owed their progress to aid inflows at all. True, India had used aid well, but for decades its growth was inhibited by bad policies, and it was only when aid had become negligible and its economic policies improved in the early 1990s that its economy boomed. The same goes for China.

If history is any guide, therefore, the chief weapon in the "war on poverty" should be not aid but liberal policy reforms. Aid may assist poor nations if it is effectively tied to the adoption of sound development policies.”

Dambisa Moyo, a young Zambian-born economist educated at Harvard and Oxford and employed by Goldman Sachs and the World Bank, is highly critical of how rock stars, such as Bono,Holywood actresses and globetrotting troubadours have dominated the public discussion of aid and development in recent years, to the exclusion of Africans with experience and expertise. She sometimes goes too far according to Bhagwati, for instance when she proposes terminating all aids within five years. But she is also healthily skeptical of academic proponents of aid, such as her former Harvard professor Jeffrey Sachs, and other activists. Instead, she dedicates her book to a prescient early critic of aid, the development economist Peter Bauer.

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. By Dambisa Moyo. Farrar, Straus & Giroux, 2009, 208 pp. $24.00.

Spain in the Eurowar

“Greece set off the crisis rattling the euro zone. Spain could determine whether the 16-nation currency stands or falls” writes Wall Street Journal’s Stephen Fidler.

“The euro zone’s No. 4 economy, Spain has an unemployment rate of 19%, a deflating housing bubble, big debts and a gaping budget deficit. Its gross domestic product contracted 3.6 % in 2009 and is expected to shrink again this year, leaving Spain in its deepest and longest recession in a half-century.”

Punch line:

“The problem is that, thanks largely to its membership in the euro, Spain lacks tried-and-true means to heal its economy”, or rather, I would say, to absorb the shock of the world crisis.

The journalist, however, seems to believe that the previous years of prosperity were due to the euro, while it was mostly a case of catching up, by a latecomer, of the other European countries level of living. The euro indeed played a role, because the local inflation, much higher than the EU average and higher than the ECB interest rates, made real interest rates negative, thus fueling the housing bubble and excessive real estate activity.

A classical case of applied “austrian theory” over-investment, in ultimately non profitable ventures, and an example of the inadequacy of a "one size-fits-all" monetary policy.

Euro Crisis: Germany is the Key

For those who can read French, my saturday article in Le Figaro (written with Philippe Villin) is now downloadable (ungated version) on my website here.

Since the Eurozone has been proved not to be an OCA, and since the extreme and unreasonable assumption that a non optimal currency zone would become optimal as soon as a common currency is created (the "endogenous OCA hypothesis") has been decisively proved wrong, Germany is responsible for having imposed its "mark rule" upon naturally more inflationary countries such as Greece, Spain and Italy.

No longer able to mitigate their loss of competitiveness by currency devaluation, these countries -- hard hit by exchange rate external over valuation in the midst of a deep recession and structural internal over valuation relative to Germany, as embedded in the definition of the euro and aggravated by subsequent relative evolution of inflation rates -- have used in return the moral hazard incentive provided by the strong euro to absorb part of the recessionary shock through fiscal policy, i.e. increased deficits, without having to pay for increased default risk through interest rates premia.

If Greece, and Spain, have to be spared the unbearable burden of deflation added to recession, with catastrophic social and political consequences, Germany has to help to convince the ECB to adopt a more lax monetary policy stance, while accepting at home larger budget deficits (through tax cuts, not inflated public spending) and euro depreciation.

But in the longer term, in a non optimal currency area, a durable solution can only come from the exit of the country which is the most different from the other, average members, in its economic structure and inflation requirements, that is to say Germany. While an exit of Greece or Spain could wreak havoc on their banking systems, a German exit is obviously possible without determining a run on German banks. On the contrary it could attract international capital flows anticipating a revaluation of the New Mark.

The situation is similar to that of the 1930s when the exit of European countries from the Gold Standard, after a long and unsuccessful struggle to keep it, conditioned the return to growth. Today the European countries must get out of the mark standard embedded in the current euro.

Germany, not Greece, is the main immediate problem of the eurozone.

Revolutionary Administrative Rationality

Jacques-Guillaume Thouret (1746-1794), a French député for the Third Estate for Rouen for the Estates-General (les Etats Généraux) of 1789, had a plan for rationalizing the Ancien Regime administrative structure and replacing the age-old provinces by geometrical new districts, the rectangular départements, as represented on the map.

Note however that according to von Thünen, the rational shape for states was not a rectangle but an hexagon.

Anyway, further rationalization is still on the government's agenda today.

Read the complete paper in the blog Strange Maps.

How Financial Institutions Misread the Risks they Were Taking

A great video presentation in The Economist here.

Euro Dilemmas and the Specter of the Gold Standard

Simon Johnson and Peter Boone present a lucid analysis of the Greek and other « PIIGS » (Portugal, Ireland, Italy, Greece and Spain) adjustment problem to the great recession in the Wall Street Journal:

“If Greece (and the other troubled countries) still had their own currencies, it would all be a lot easier. Just as in the U.K. since 2008, their exchange rates would depreciate sharply. This would lower the cost of labor, making them competitive again (remember Asia after 1997-'98) while also inflating asset prices and helping to refloat borrowers who are underwater on their mortgages and other debts. It would undoubtedly hurt the Germans and the French, who would suffer from less competitiveness—but when you are in deep trouble, who cares?

Since these struggling countries share the euro, run by the European Central Bank in Frankfurt, their currencies cannot fall in this fashion. So they are left with the need to massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed directly to the onset of the Great Depression in the 1930s.”

What the authors do not explain, however, is that membership in the eurozone, that the recession puts at risk, was also, during boom time, a main source of the present difficulties of these countries. In a common currency, the centralized monetary policy is necessarily divorced from national economic conditions (one size cannot fit all), and moreover it exerts a pro-cyclical effect on national economies. Those countries that are growing more rapidly, and thus with more inflation, than the others during boom time benefit from lower real interest rates than countries with less inflation, since the nominal interest rates of the ECB are the same for all. This exacerbates the boom as was clearly the case of Ireland and Spain, and that premium explains in large part the extraordinary real estate booms in these countries.
By a theoretical “Austrian” mechanism, bad investments will be the magnified where the real interest rate is lowest. Thus the deeper will be the necessary correction in the recessionary phase.

Moreover, since no national currency depreciation is possible in a currency union, as explained above by Johnson and Boone, the only other way to cushion the recessionary shock is through government deficits, and precisely these are made easier by the “strong common currency” vehicle, which means relatively low interest rates for governments to pay on their borrowing, at least up to a point, which Greece has now reached.

Thus the euro, by itself, magnifies the business cycles in member countries, contrary to what was advertised by his promoters (see my 1998 book: L’erreur européenne, and my 2002 paper “Les promesses de l'euro: tout était faux" here).

Johnson and Boone advocate four measures to try to remedy the present problem: first ask the IMF for help (but that would amount to recognizing a failure of the eurozone policies and system); second, Europe must soon create a multilateral funding system that ensures that adequate finance is available to each nation that adhered to these conditional programs (but this amounts to progressing in the direction of a central federal financial and fiscal system, a known requirement of non optimal monetary zones, such as the eurozone, which is unlikely to be adopted in the current political state of the European Union); third, “the European Central Bank needs to adjust its policies, lowering interest rates further and allowing higher inflation throughout the currency union. If such looser money policies are not palatable to the Germanic core, then Berlin/Frankfurt should get on with the task of admitting that the euro zone itself is a failure”; and last but not least, the European Union needs “living wills” plans – plans for countries to exit from the euro zone, (a basic requirement indeed, but also again a recognition, if used, of the non-optimality of the zone and of the euro).

The euro has been launched on the vain premise that where there is a political will, there is necessarily an economic way of reaching whatever governments define as their objective: the primacy of politics over economics. Now European politicians are confronted with economic difficulties that they find difficult to ignore, but will find even more difficult to solve.

A Miles Tax Is a Bad Idea

“One of the most ridiculous policy proposals I’ve read in a while” writes Andrew Samwick in Capital Gains and Games.

"Compared to a higher gas tax rate, a tax on miles driven ignores the amount of fuel used to drive those miles. Highway travel is taxed the same as city travel. Gas guzzlers are taxed the same as hybrids. Neither change makes any sense from an environmental perspective. Nor is it necessary to raise issues of privacy involved in collecting a tax on miles driven in the ways suggested in the article by monitoring the history of the locations of the car (as opposed to an annual fee based on an odometer reading collected at a state inspection).

Many cities are experimenting with congestion taxes, which are based on miles driven at particular times in particular locations. Those are worthwhile policy measures to relieve congestion and are different from a uniform tax on miles driven."

Hat tip: Alex Tabarrok (Marginal Revolution).

The Current State of the Euro Union

David Beckworth (Macro and Other Market Musings) posts an excellent and comprehensive survey of the current Greek and Euro problem, as seen by journalists and professional economists such as Carmen Reinhart, Simon Johnson, Barry Eichengreen, Tyler Cowen, Paul Krugman: “The Eurozone: Déjà Vu Argentina 2001 & Other Thoughts”.

Among other considerations, this excerpt:

« I couldn't help but think of Argentina's crisis in 2001-2002. It too had a sovereign debt problem, an overvalued real exchange rate, and was effectively part of a currency union that did not meet the optimal currency area criteria. It too tried to cut wages and prices but found the deflationary price too high. Ultimately Argentina defaulted and broke the peso-dollar link, even though the currency board linking the two currencies was almost a decade old and considered an important institution. It seems possible some of the PIGS could go the way of Argentina. »

NB: "PIGS" stand for Portugal, Italy, Greece, and Spain.

I agree. A must read.

Economics as a "Normal" Inexact Science

Daniel Little comments in his blog Understanding Society
on a book by Daniel Hausman, The Inexact and Separate Science of Economics (Cambridge University Press).

Economics is far from being alone in that category, hence the qualifier "normal" that I use in the title. It follows that the criticism of economics helps define the limits of its uses, not its scientific status that it shares with Galilean mechanics or Darwinian theory.

Excerpts:

« To say that a social or economic theory is true is to say that it correctly identifies a real causal process -- whether or not that process operates with sufficient separation to give rise to strict empirical consequences. Galilean laws of mechanics are true for falling objects, even if feathers follow unpredictable trajectories through turbulent gases.

Second, how can we reconcile the desire to use economic theories to make predictions about future states with the acknowledged inexactness of those theories and laws? If a theory includes hypotheses about underlying causal mechanisms that are true in the sense just mentioned, then a certain kind of prediction is justified as well: "in the absence of confounding causal factors, the presence of X will give rise to Y." But of course this is a useless predictive statement in the current situation, since the whole point is that economic processes rarely or never operate in isolation. So we are more or less compelled to conclude that theories based on inexact laws are not a useable ground for empirical prediction.

Third, in what sense do the deductive consequences of an inexact theory "explain" a given outcome -- either one that is consistent with those consequences or one that is inconsistent with the consequences? Here inexact laws are on stronger ground: after the fact, it is often possible to demonstrate that the mechanisms that led to an outcome are those specified by the theory. Explanation and prediction are not equivalent. Natural selection explains the features of Darwin's finches -- but it doesn't permit prediction of future evolutionary change. »

The whole paper is illuminating and well worth reading here. I did not read the book yet but plan to do so shortly. Here is an editorial comment:

"...challenging and stimulating...[this book] does reflect an insightful familiarity with the nature and uses of economics. Its criticisms of the discipline are not to be lightly dismissed. It is definitely recommended reading for academic economists and advanced graduate students." Social Science Quarterly.


Hat tip: Mark Toma (Economist’s View).

What European Centralizers Think

The New York Times publishes an article ”Is Greece’s Debt Trashing the Euro?”.

Here is an excerpt reporting a centralizer’s diagnosis and “quitte ou double” dilemma: does the euro survival now compels Europeans to merge their diverse polities into one?

“We have a centralized monetary policy, but we allow budgets and wages to move in different directions,” said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, José Manuel Barroso. “Without a political union, in the long run the euro zone cannot last.”

That was the hope of the federalists from the start. But the remedy would prove to be worse than the disease in this decentralizing, post-imperialist era. In a choice between creating a continental super-state and a return of some member states to an autonomous national monetary policy, the latter option is clearly the lower cost and higher welfare improving strategy. But centralization means more power for political decision makers, and better career prospects for bureaucrats. It is thus the preferred solutions of European elites, while voters, when clearly asked the question, tend to reject it.

Deficits Don’t Matter

At least that’s what John Cassidy writes in the New Yorker, The Return of the Rosy Scenario. Winston Churchill, Dick Chesney, and Victor Zarnowitz also professed a benign neglect for projected deficits, and rightly so.

The reasons? Deficit forecasts are notoriously unreliable (the Cassidy thesis). Reagan proved that deficits don’t matter (the Chesney thesis). Dire deficits forecasts are a necessary part of any political adjustment process (the Churchill thesis). And all forecasts are acutely sensitive to the economic assumptions that underpin them, especially the economic growth rate (the Zarnowitz thesis).

The punch line: enjoy.

Banks and Populism

Simon Johnson clarifies the debate on the meaning (or absence of meaning) of "populism".

Kant, Freud, Laughter and Brain Science

Many philosophers since Kant have tried to explain jokes, humor, and laughter, notably the French philosopher Henri Bergson and Sigmund Freud at the beginning of the twentieth century. Some of them saw in the joke and following laughter a mechanism of “bewilderment and illumination”. Freud wrote about that:

“The factor of ‘bewilderment and illumination’, too, leads us deep into the problem of the relation of the joke to the comic. Kant says of the comic in general that it has the remarkable characteristic of being able to deceive us only for a moment. Heymans (Zeitschr. f. Psychologie, XI, 1896) explains how the effect of a joke comes about through bewilderment being succeeded by illumination. He illustrates his meaning by a brilliant joke of Heine’s, who makes one of his characters, Hirsh-Hyacinth, the poor lottery-agent, boast that the great Baron Rothschild had treated him quite as his equal – quite ‘famillionairely’. Here the word that is the vehicle of the joke appears at first to be a wrongly constructed word, something unintelligible, incomprehensible, puzzling. It accordingly bewilders. The comic effect is produced by the solution of this bewilderment, by understanding the word. Lipps (Komik und Humor, 95) adds to this that this first stage of enlightenment – that the bewildering word means this or that – is followed by a second stage in which we realize that this meaningless word has bewildered us and has then shown us its true meaning. It is only this second illumination that produces the comic effect.” (Sigmund Freud, Jokes and their relation to the unconscious, 1905, pp. 27-28).

Now Daniel Elkan writes in NewScientist The comedy circuit: When your brain gets the joke (February 1, 2010):

“Take the following exchange from the classic British sitcom Only Fools and Horses, when an anxious "Del Boy" Trotter visits his doctor for a heart check-up. "Do you smoke, Mr Trotter?" asks the doctor. "Not right now, thank you doctor," he responds.

The joke's incongruity, of course, lies in the unlikely offer of a cigarette by a doctor to a patient concerned about his heart. It is only once we understand the mismatch that we get the joke. "Humour seems to be a product of humans' ability to make rapid, intuitive judgements" about a situation, followed by "slower, deliberative assessments" which resolve incongruities, says Karli Watson of Duke University in Durham, North Carolina.

But which parts of the brain carry out these processes? To find out, Joseph Moran, then at Dartmouth College in Hanover, New Hampshire, used functional MRI to scan the brains of volunteers while they watched popular TV sitcoms. The experiments revealed a distinct pattern of neural activity that occurs in response to a funny joke, with the left posterior temporal gyrus and left inferior frontal gyrus seeing the most activity. These regions are normally linked to language comprehension and the ability to adjust the focus of our attention, which would seem to correspond to the process of incongruity-resolution at the heart of a good joke (NeuroImage, vol 21, p 1055).

Further research, conducted by Dean Mobbs, then at Stanford University in California, uncovered a second spike of activity in the brain's limbic system - associated with dopamine release and reward processing - which may explain the pleasure felt once you "get" the joke (Neuron, vol 40, p 1041).

Examining one particular part of the limbic system - the ventral striatum - was especially revealing, as its level of activity corresponded with the perceived funniness of a joke. "It's the same region that is involved in many different types of reward, from drugs, to sex and our favourite music," says Mobbs, now at the MRC Cognition and Brain Sciences Unit in Cambridge, UK. "Humour thus taps into basic rewards systems that are important to our survival."

That reward explains the relaxation and laughter that we experience when we get to understand the incomprehensible or paradoxical elements in the joke: our brain is rewarded for having solved the puzzle because understanding a complex environment has survival value and should thus be rewarded.

Spence on Banking Reform

In an article on the American Recovery for Project Syndicate Michael Spence, 2001 Nobel Laureate in Economics, formulates a synthetic judgment on the financial reform possibilities :

« In fairness, the new rule proposed by former US Federal Reserve Chairman Paul Volcker to separate financial intermediation from proprietary trading is not a bad idea. Combined with elevated capital requirements for banks, it would reduce the chance of another simultaneous failure of all credit channels. But it is not sufficient. Hedge funds can also destabilize the system, as the collapse of Long Term Capital Management in 1998 demonstrated. So they also need clear, albeit different, limits on leverage. »

Sustained.

Scott Sumner on macroeconomics and blogging

Tyler Cowen writes: “Read the whole thing. It is one of the best statements of how blogging can make a difference” and answer the question “In what way is blogging science?”

Scott Sumner (TheMoneyIllusion) is often not easy to read and his arguments about macro and monetary policy are quite subtle. He makes an important point in his recent post "Seeing the world in a different way (one year later)" about the “Official Method” in macroeconomics. He doesn’t think much of it. Excerpts:

“You devise a model. You go out and get some data. And then you try to refute the model with some sort of regression analysis. If you can’t refute it, then the model is assumed to be supported by the data, although papers usually end by noting “further research is necessary,” as models can never really be proved, only refuted.

My problem with this view is that it doesn’t reflect the way macro and finance actually work. Instead the models are often data-driven. Journals want to publish positive results, not negative. So thousands of macroeconomists keep running tests until they find a “statistically significant” VAR model, or a statistically significant “anomaly” in the EMH. Unfortunately, because the statistical testing is often used to generate the models, and determine which get published, the tests of statistical significance are meaningless.

I’m not trying to be a nihilist here, or a Luddite who wants to go back to the era before computers. I do regressions in my research, and find them very useful. But I don’t consider the results of a statistical regression to be a test of a model, rather they represent a piece of descriptive statistics, like a graph, which may or may not be usefully supplement of a more complex argument that relies on many different methods, not a single “Official Method.””

One could add too that in so many published papers, mostly in fields other than macroeconomics, the story goes like this: first a rather simple, or basic economic statement is made about a plausible causal link between two variables. It usually relies on very simple economics, although it is a speculative hypothesis not justified by deeper argument or any other evidence. Then follow twenty pages of abstruse and irrelevant mathematics, preferably with a score of triple integrals. And then only, some statistical tests of the sort Scott Sumner criticizes are presented. Here the mathematical apparatus, not the statistical testing, is what determines which paper gets published, wasting a lot of publication pages.

Deirdre McCloskey has been suggesting for a long time, as Scott Sumner does in a way, that economics is a persuasion instrument. In this perspective one has to wonder what can be the value of mathematical developments and “proofs” derived from rather arbitrary formal models designed mostly to justify, in an apparently “scientific” way, the statistical presentations that follow. A more useful discussion should be centered on the choice of the main building blocks of potential models, and a comparison with alternative choices, in the process of constructing the model.

This is congruent with the author’s experience with journal publishing that he reports later in his post:

“In 2008 and 2009 I sent papers on the economic crisis out to journals like the JMCB and the JPE, journals that I have published at in the past. But now for the first time in my life the articles come back without even being sent out to a referee. “It’s not the sort of thing we publish” they’d say. I gather this means they don’t see enough equations. I hope it doesn’t mean “because it addresses the most important macroeconomic problem since the 1930s.” "


There are many gems in the post. I especially liked the beautiful summary of what the efficient market hypothesis (much criticized – wrongly - for being disproved by the crash) really is : it “merely tells us that the market forecast is the optimal forecast, not perfect foresight.”

The second part of the post, “Don’t ask me to become a blogger”, is about the experience of publishing a blog. It is very well worth reading and invites one to think about the respective influences and impact of the blogosphere and the established institutions of universities and journal publishing.

Hat tip: Tyler Cowen (Marginal Revolution).

The U.S. as a Social Market Economy

Charles Rowley comments on the transition of the American system towards state capitalism .

Efficient Markets, Fundamental Values, and Identifying Bubbles

Should monetary policy react to asset bubbles, assuming that they are identifiable? Beyond the political babble, an intelligent and learned discussion of the issues on Rajiv Sethi’s blog .

Mankiw and De Long agree on Phillips

On June 9, 2008, a post on this blog reported work by Greg Mankiw and others on the Phillips curve, showing the durability of the inverse relationship between unemployment and growth.

Now Brad de Long posts an interesting graph (above) showing the relation since 1970.

Eurozone: What Centralizers Think

Wolfgang Munchau, an editorial commentator in the Financial Times and a staunch promoter of European centralization, warns of the coming Spain problem (FT January 31) as the “clear and present danger” to the zone’s survival, and its entering “the most dangerous phase in its 11-year history.” The solutions?

First establish a “robust and transparent system of crisis management” that would minimize moral hazard: “countries that benefit from help will have to accept a partial loss of sovereignty.” Centralization.

“The second essential prerequisite for survival is a reduction in internal imbalances, which lie at the core of the current crisis.” In other terms, a condition for solving a crisis is to treat the causes of the crisis. Nothing new there, except that doing so necessitates, according to Munchau, more coordination by the finance ministers of the eurogroup. More centralization.

Third, centralize financial regulation. But this begs the question of the responsibility of the national regulations in the crisis. Is it proven that Spanish financial regulation is worse than say the French or British ones? And if this is the case, then why not let Spain adopt the British of French regulatory system (a competition of regulations) or “import” some parts of them, rather than imposing to all the member countries a supra national one?

If regulatory and policy centralization is the solution, one has to assume that decentralization was the cause of the problem. Many commentators, on the contrary, have shown that suppressing the national exchange rate indicator ( a centralization of exchange rate and monetary policy) created an incentive for governments to increase public deficits, with no visible external consequence such as a currency depreciation, and that national imbalances are aggravated by the disequilibrium exchange rates embedded in the common currency system. While a swift depreciation of a national exchange rate would have helped to reduce the imbalances, a common currency forbids the use of such an instrument and thus exacerbates the problems.

When advocating centralization policies, one should make explicit the expected costs along with the hypothetical future benefits.