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✍️ Evert Mouw
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Comments on the report of J.P.Morgan on the Euro area adjustment

euro symbol, warning colors

Two months ago, J.P.Morgan released an interesting report on the economic and financial situation in the eurozone. Their report, titled The Euro area adjustment: about halfway there, did stir a few angry reactions on the internet — which might be a good thing, because reports without real insights and real information tend to be ignored. The two main authors are Malcolm Barr and David Mackie. The report was dated 2013-05-28.

I would have liked to write this comment earlier, but a clavicle surgery prevented me from serious typing for a few weeks. The report itself is still of high actual importance. You can download the report here.

This blogpost is not a summary of the report. You should read the report first before continuing to read my comments. The report is well written and very interesting to readers who want to read on the subject of the economy in Europe.

A few angry reactions on a political paragraph

The authors of the report do have something to say about the political structure in the periphery (Southern Europe). And some people will not like it.

The political systems in the periphery were established in the aftermath of dictatorship, and were defined by that experience. Constitutions tend to show a strong socialist influence, reflecting the political strength that left wing parties gained after the defeat of fascism. Political systems around the periphery typically display several of the following features: weak executives; weak central states relative to regions; constitutional protection of labor rights; consensus building systems which foster political clientalism; and the right to protest if unwelcome changes are made to the political status quo. The shortcomings of this political legacy have been revealed by the crisis. Countries around the periphery have only been partially successful in producing fiscal and economic reform agendas, with governments constrained by constitutions (Portugal), powerful regions (Spain), and the rise of populist parties (Italy and Greece).

If you are a socialist, that hurts. A lot. Obviously, angry reactions emerged on the world wide web.

Leigh Phillips

Leigh Phillips wrote an article called JP Morgan to eurozone periphery: “Get rid of your pinko, anti-fascist constitutions”. One of his main reasons to be angry can be summarized from this quote:

JP Morgan, and presumably the EU powerbrokers they are ventriloquising for, finally are being honest with us: they want to do away with constitutional labour rights protections and the right to protest.

Leigh thinks that J.P.Morgan calls for stronger executives because parliament stands in the way:

Weak executives means strong legislatures. That should be a good thing, no? Let us remember that it is the parliament that is sovereign. The executive in a democracy is supposed to be the body that merely carries out the bidding of the legislature. There is a reason why liberal democracy opted for parliaments and not a system of elected kings.

Stefan Steinberg

On the World Socialist Website, Stefan Steinberg wrote an article titled JPMorgan calls for authoritarian regimes in Europe. Stefan disagrees with the authors that there is so much of the right to protest:

In France, Spain and Greece, emergency decrees and the military have been used to break strikes. The constitution adopted in Greece in 1975, following the fall of the colonels’ dictatorship, has not prevented the Greek government from sacking public workers en masse.

Also, he doubts the motives of J.P.Morgan:

This is the unadulterated voice of finance capital speaking. It should be recalled that JPMorgan is deeply implicated in the speculative operations that have devastated the lives of hundreds of millions of workers around the world. In March of this year, a US Senate committee released a 300-page report documenting the criminal practices and fraud carried out by JPMorgan, the largest bank in the US and the world’s biggest dealer in derivatives. Despite the detailed revelations in the report, no action will be taken against the bank’s CEO, Jamie Dimon, who enjoys the personal confidence of the US president.

Personally, although I believe we should monitor casino banks such as J.P.Morgan and Goldman Sachs (the latter of which has many alumni in important political positions across Europe), I don’t believe criticizing motives provides a strong argument. It’s not always a zero-sum game. A good European economy could also benefit banks such as J.P.Morgan.

Paul Jorion

An economist named Paul Jorion received a few alarmed emails about the report. To clear matters up, he wrote an email to the authors of the report, in which he asked:

The authors of the mails I receive are under the impression that this paragraph means that you regard “constitutional protection of labor rights” and “the right to protest if unwelcome changes are made to the political status quo” as detrimental to business. There is however a wide consensus in the community that such principles are basic to democracy.

Paul quickly received an answer:

David Mackie

David, one of the two main authors of the report, wrote:

The paragraph that you refer to is not intended to suggest that there is a clash between democracy and business and, in any case, we do not believe that to be the case. Rather, the paragraph is intended to be about the functioning of EMU. […] Against this background, some countries are struggling to make the adjustments required by this particular vision of EMU.

The need for reform

The response of David is right on target. Indeed, if we want one economic and monetary realm in Europe, than we need to adjust national regulations to a common European-wide system. Such adjustments will come at a cost. Member states with higher than average labor protection rights will have to give up some of these labor rights in order to move to the average European level. Such averaging is necessary when one wants one European monetary and economic union with harmonized taxes and government spending. Joining a club has advantages and disadvantages. Member states with very little labor protection might need to increase their labor protection.

So a lot of people are now complaining. Some people want more labor protection, some less. Some member states want more, some less. It is easier to bring such different wishes together if all members are (literally) in the same boat. But now, economic, cultural and political differences make it hard to reach agreement. No wonder that J.P.Morgan reports on the political problems. The authors emphasize that the political problems mostly affect the periphery:

At the start of the crisis, it was generally assumed that the national legacy problems were economic in nature. But, as the crisis has evolved, it has become apparent that there are deep seated political problems in the periphery, which, in our view, need to change if EMU is going to function properly in the long run.

An alternate hypothesis would be that there are political problems in the center (e.g., Germany), and that the center must adapt to the periphery. The current economic reality proves that this alternate hypothesis is wrong. The periphery needs help from the center. Maybe some cannot agree with the authors, but also we cannot reject the hypothesis of the authors.

There is a real need for reform, given the fact that we now have a European economic and monetary union.

An alternate course: do away with the EU

If you are no longer in the same boat, than you don’t have to get along. Bringing very different nations together on one economic and monetary space might be a bad idea. Some people argue that the EU comes with more costs than benefits. Even J.P.Morgan is not that optimistic:

Even though we anticipate an exit from recession, the still substantial journey of adjustment suggests that growth is likely to remain lackluster for an extended period. This is unlikely to change unless either the region moves more quickly to area-wide burden sharing (with a banking union the most advanced in terms of negotiations) or the ECB becomes a lot more aggressive.

Some authors from the Economist are even more pessimistic. For example, read Buttonwood on The ECB and OMT: OTT, OMG or WTF?. There are people who couldn’t agree more: [Germany’s New Euroskeptic Elite](http://www.spiegel.de/international/europe/new-anti-euro-figures-in-germany-offer-vague-ideas-and-fan-fears-a-906675.html ” The Rise of the Fearmongers: Germany’s New Euroskeptic Elite - Stefan Willeke - Spiegel Online International, June 19, 2013”).

It seems that J.P.Morgan believes that finishing the road already taken is the best thing to do. We are halfway there. The adjustments needed at national levels will be politically painful, so more angry reactions such as discussed above will be likely. There can be no real change without friction.

Also, political reality dictates that Germany will not accept high costs (“burden sharing”) without political reforms in the periphery:

But, in line with its approach to crisis management, Germany is seeking to slow the process down, using the argument that treaty change is required to put fiscal risk sharing and burden sharing on a sound legal basis. […] Germany has always taken an inter-temporal perspective with regard to crisis management. It has been concerned that the more that burdens are shared ex ante, the less likely it is that appropriate adjustments will be made ex post.

If the road ahead takes much time because of political difficulties, than the European economy will unnecessarily suffer for years to come. If necessary measures are taken, then Europe can recover much quicker. I agree with J.P.Morgan that, if we want to continue on this road, then we need to make those reforms, and quickly so. That means that I have to conclude that their call for stronger executive political leadership in the periphery is sound.

Yet another alternative course: the Hanseatic option

Most of the problems on the road ahead are of a political nature. Northern- and Southern Europe do differ in many ways: politically, culturally, and economically. The founder of sociology, Max Weber, first mentioned the importance of religion in his book The Protestant Ethic and the Spirit of Capitalism. Protestantism, individualism and economic success are related with each other. Southern Europe is Catholic, collectivistic and less economic successful.

The Hanseatic League was an early example of a successful trade area in Europe. The Hanseatic cities were free, and were only subject to the Emperor of the Holy Roman Empire of the Germanic Nation. Note that “Germanic” here is much broader than “German”; “Germanic” includes all the Germanic tribes, probably also a few related Celtic tribes, and it includes the lands that now form my home country, The Netherlands. My official place of birth is in a Hanseatic city, Harderwijk. I like the idea of a new Northern European trade area very much. There is a strong historical, cultural and political basis for it. Such an politico-economic area would, in my expectation, be highly prosperous, inventive, and cooperative.

A somewhat “light” edition of this only involves separate currencies for the center and the periphery. One of the politicians favoring a “neuro” of North-European currency is my former teacher, Frits Bolkestein, a former member of the European Commision responsible for the internal market and taxation policy.

The way forward

Only after the reforms are made is it possible to make real economic recovery possible. Currently, the emphasis is on deleveraging and the minimizing of (public) debts. But ultimately, new investments, economic growth and more jobs are needed. I guess that’s why former IMF chief Johan Witteveen called for a national investment funds for The Netherlands (see my article in Dutch).

For getting there, the J.P.Morgan report helps in creating clarity and understanding.

Deze blogpost werd in december 2022 overgezet van WordPress naar een methode gebaseerd op Markdown; het is mogelijk dat hierbij fouten of wijzigingen zijn ontstaan t.o.v. de originele blogpost.