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July 19, 2015

Latest Posts from Economist's View

Latest Posts from Economist's View

Links for 07-19-15

Posted: 19 Jul 2015 12:06 AM PDT

'Show Some Mercy'

Posted: 18 Jul 2015 09:58 AM PDT

Greg Mankiw:

... In an earlier era, Greece could have devalued the drachma, making its exports more competitive on world markets. Easy monetary policy would have offset some of the pain from tight fiscal policy. Mr. Friedman and Mr. Feldstein were right: The euro has turned into an economic liability that has exacerbated political tensions. For this, the European elites who pushed for the currency union bear some responsibility.
As creditor nations and international institutions sort through the wreckage, it is worth bearing in mind the lessons from Mr. Keynes. A nation can only withstand so much economic pain before the political fallout becomes ugly. And that fallout can extend beyond the border of the problem nation.
Yes, the Greeks have every reason to be contrite. But it might also be wise for the rest of the world to show some mercy.

'Like Humans, Apes Are Susceptible to Spin'

Posted: 18 Jul 2015 09:53 AM PDT

Apes respond to framing:

...The susceptibility to positive framing is what scientists call an irrational bias, and it is very powerful. To better understand why our psyche responds so deeply, Christopher Krupenye, a Duke University graduate student in evolutionary anthropology, and his colleagues Alexandra Rosati of Yale University and Brian Hare of Duke gathered 40 of our closest living relatives—23 chimpanzees and 17 bonobos—and offered them options for choosing food: either one or two fruits versus a constant number of peanuts. Sometimes the apes were shown one piece of fruit each time they made the selection, but half the time they were given two: positive framing. In other trials, the apes were initially presented two pieces of fruit, but half the time they got only one: negative framing. Regardless of the framing, the apes ended up with an identical quantity of fruit. Yet they were more likely to choose fruit when they were offered the single fruit with its frequent "bonus" than the double fruit with its frequent "loss."
Because these framing effects are shared with our nonhuman relatives, Krupenye says, the results suggest that these biases are hardwired into our biology and may have conferred some evolutionary benefit as apes foraged for food. Yet a hardwired tendency does not have to be a sentence. Although susceptibility to framing is in our blood, being aware of the bias can help us avoid making poor decisions. ... Chances are, you can use your brain to outwit your biology.
The sexes are not equally swayed by spin..., in the Duke study ... male apes were more affected than females by how their choices were framed. ...

'Variable Geometry Bites Back: Schäuble’s Motives'

Posted: 18 Jul 2015 09:47 AM PDT

Fabio Ghironi  in Vox EU:

Variable geometry bites back: Schäuble's motives, by Fabio Ghironi: Success of the German-inspired solution for the latest Greek crisis is far from assured. If it fails, the Eurozone may be changed forever. This column argues that the failure would lead to an outcome that has been favoured for decades by Germany's Finance Minister, Wolfgang Schäuble. Perhaps the package the Eurozone agreed is just a backdoor way of getting to the 'variable geometry' and monetary unification for the core that the Maastricht criteria had failed to achieve.

The Greek crisis risks shattering the Eurozone as we know it. Germany's Finance Minister Wolfgang Schäuble has been leading a coalition of hawks who appear determined to make Grexit an unavoidable outcome. If not immediately then at least once it becomes clear (or clearer) that it is impossible for Greece to satisfy the conditions it is being asked to meet.

As one ponders Mr. Schäuble's possible motives for insisting on such demanding (many would say infeasible) targets, it is instructive to recall his political and intellectual history in the run-up to the euro.

How Schäuble viewed the Eurozone

Mr. Schäuble was Minister of the Interior of the Federal Republic of Germany between 1989 and 1991. In this capacity, he played a central role in the negotiations that led to German reunification. The same period saw the negotiations leading up to the Maastricht Treaty, which established the foundation for the Eurozone.

A widely held view at the time was that Germany agreeing to give up the deutschmark and to participate in a European monetary union was the quid pro quo for British and French acquiescence to German reunification – an event of monumental implications, given Europe's history.[1]

Germans were understandably reluctant to give up a very successful currency for the uncertainty of monetary union with less rigorous partners. Thus, at their insistence, the Maastricht Treaty included convergence criteria that would have to be fulfilled for euro membership. In effect, those conditions were intended to keep unreliable Southern European countries out of the monetary union.

In those years, Mr. Schäuble – heir apparent to Chancellor Helmut Kohl at the time – championed a 'variable geometry' approach to the Eurozone. A key implication of this 'variable geometry' was that that monetary unification should be restricted to a set of 'core' countries that shared Germany's preference for austerity.

Mr. Schäuble originally made his argument explicit in a blueprint for the Eurozone co-authored with Karl Lamers and released by Germany's Christian Democratic Union in the late summer of 1994 (Lamers and Schäuble 2014). Responding to critics less than two weeks later, Mr. Schäuble stated that "We cannot set the pace of European integration according to the slowest ship in the convoy."[2] Speed was clearly defined relative to the German benchmark, as enshrined in the Maastricht convergence criteria. Chancellor Kohl described the Schäuble-Lamers document as a 'discussion paper,' but he did not explicitly distance himself from it, and he defended the plan of a 'core' Europe.[3]

Schäuble after German and France flouted the Maastricht criteria

In August of 2014, Mr. Schäuble and Mr. Lamers reiterated their plea for 'variable geometry' in a Financial Times article 20 years after their original paper (Lamers and Schäuble 2014). They conclude: "In order to make progress […], we should keep using the approach that proved its mettle back in 1994: to establish cores of co-operation within the EU that enable smaller, willing groups of member states to forge ahead." Importantly, the article acknowledges the crucial role of Germany (and France) in scuttling the credibility of the Stability Pact's fiscal policy rules in 2003.

Mr. Schäuble's commitment to European integration is unquestioned, and no better description can be found than the remarks by IMF Managing Director Christine Lagarde when Mr. Schäuble was awarded the Charlemagne Prize in 2012 (Lagarde 2012). But Mr Schäuble's history shows that his commitment to 'variable geometry' is just as strong -- to the point that his most recent statements on support for Grexit within the German government are creating a rift with Chancellor Angela Merkel.[4]

As it turned out, the Maastricht criteria that were meant to implement Mr Schäuble's vision failed to keep Southern European countries out of the euro, and through steps that we all became more or less familiar with, we have gotten to the start of the crisis in 2010, and the current situation.

The cost of Schäuble's strategy

If Greece exits the euro it will become evident to everyone that irreversibility of euro membership is an illusion as long as the countries involved retain their essential sovereignty.

  • Markets will likely test the resolve of countries' governments to stay in the euro, and costly trade-offs will provide additional fuel for populism and nationalism.

While government commitment and ECB firepower may prevent a domino effect, the balance of market and political forces may well result in other Mediterranean countries leaving the euro.

At that point, Germany would be left in a Eurozone that would consist of Mr Schäuble's early 1990s 'core,' plus partners to the East and Baltic countries who have been renewing their historical economic ties with Germany since joining the EU.

Concluding remarks

All this raises the following question: Is Mr Schäuble's position simply intended to find a backdoor way to return to the 'variable geometry' and monetary unification for the 'core' that the Maastricht criteria had failed to achieve?

History will be the judge, but if this was the way to revive 'variable geometry,' it was better to leave it resting. ...

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