Daily Archives: October 26, 2011

Being stuck in traffic is more bearable if the other lanes are moving. If all lanes are jammed for a long time, tempers flare. And if the police eventually arrive and let a few selected cars get out of their lanes and move through a special path, a riot is likely to ensue. This in short is the sentiment that propels the Occupy Wall St protests. We should take note.

The traffic jam metaphor for the political consequences of economic mobility was originally proposed by Albert Hirschman, the noted economist, in 1973 to explain changes in tolerance for income in equality in poor countries. The idea was as simple as it was powerful: even a modicum of social mobility – sparked by economic growth – buys patience and political stability in developing countries. As people see their relatives and neighbours improve their lot they are willing to wait for their turn.

This idea, which was offered to explain the tolerance for inequality in poor countries, is now in theory applicable to some of the world’s wealthiest nations – except that the Occupy Wall Street crowds, the protesters in the City of London, or the Italian and Greek protesters are getting out of their “cars”, and clashing with the police not just because they see their “traffic lane” horribly jammed. It’s also because they are moving backwards.

They are also paying more attention to the fact that others are advancing thanks to what they perceive as tricks, special privileges and corner-cutting. This is not about hopes sparked by others doing well, but about the collective rage at an elite doing obscenely well while the rest backslides.

Over a century ago Alexis De Tocqueville wrote that Americans’ higher tolerance for inequality relative to Europe’s was the result of more social mobility in the US.

This is over; at least for now. The long, peaceful coexistence with income and wealth inequality is ending. Americans are now infuriated by the fact that chief executives at some of the nation’s largest companies earned around 340 times more than a typical American worker.

While the numbers are unnerving and US income disparities are growing even more unequal, this is not new. What is new is the intolerance towards the hoarding by the “few” of unfathomable wealth, and also towards their profiting even in the midst of the crisis. The rich are seen to be either benefiting from bail-outs and other stimulus measures, or to be immune to the fiscal austerity that governments in many countries have had to adopt to stabilise their economies.

Nothing makes people take to the streets in protest like public budget cuts. In a recent study, Jacopo Ponticelli and Hans-Joachim Voth, professors at Pompeu Fabra University in Barcelona, looked at a large data base that tracked political violence in 26 European countries between 1919 and 2009. They found that “expenditure cuts carry a significant risk of increasing the frequency of riots, anti-government demonstrations, strikes, political assassinations, and attempts at revolutionary overthrow of the established order.” While such events have a low probability in normal years, they concluded, they become much more common as austerity measures are implemented.

We know we have entered new political territory when Mitt Romney, the leading contender for the Republican party presidential nomination, who initially called the Occupy Wall Street movement “dangerous”, is quoted as saying: “I look at what’s happening on Wall Street and my own view is, boy I understand how those people feel …The people in this country are upset.” Yes, they are. They will stay that way until their lanes start moving again. Or, at least, those of their friends and neighbours.

The writer is a senior associate at the Carnegie Endowment for International Peace

Days and nights, Europe’s leaders have discussed the minutiae of private-sector involvement in the Greek debt restructuring. They have immersed themselves in financial engineering with the aim of leveraging the European financial stability facility. This is all necessary, but it’s the job of finance ministers or Treasury officials. What citizens and markets alike expect from the heads of state and government is that they do the job for which they are indispensable, and map out the political choices Europe is now screaming for.

A key reason why the eurozone is under challenge is that markets have become conscious of a fundamental weaknesses in its design. It relies on three hardly-compatible principles: national banking systems, which both finance the sovereign and rely on it as a potential backstop; states that are supposed to be solely responsible for their own debt, so that they cannot rely on partners when in trouble; and a central bank that has not been given the mandate to be a lender of last resort. This trio of principles was assessed consistent in normal times, because banks were sound and state solvency was not in doubt. But in crisis times, a perverse interaction between bank and sovereign weakness develops. And the central bank has no mandate to put a stop to it.

There are several, partially compatible ways out of this. One is to make states individually safe by going far beyond the requirements of the Maastricht treaty and bringing public debts down to levels where solvency cannot be challenged anymore. It implies decades-long austerity. Another way is to make the financial system safe by putting limits to the banks’ exposure to their sovereigns and creating a eurozone-wide deposit insurance. It implies that states renounce the convenience of having ‘their’ banks. The third way is to change the mandate of the European Central Bank. This implies breaking with the Bundesbank’s heritage and giving the ECB a governance structure adequate to a new, quasi-fiscal role. A last option is to move towards fiscal union so that individual state solvency stops being a concern for markets. It means accepting both shared responsibility over public debts and ex-ante oversight of national budgetary decisions.

Provided it is implemented consistently, each of these responses would be recognised by markets as a watershed. Each has advantages and drawbacks. Each has broader implications for Europe. Each involves risks. But a way has to be chosen. As the Pierre Mendès-France, the late French prime minister, used to say, “gouverner, c’est choisir”.

The writer is an economist and director of Bruegel, a think-tank focusing on global economic policy-making.

Response by Olaf Cramme

Politicans’ objective is to keep options open, not to spell out the endgame

The debate about how to solve the eurozone crisis has been going around in circles for months. Seasoned observers of European Union integration, such as Jean Pisani-Ferry, present credible proposals of how to put an end to the downward spiral of market fear, deteriorating public finances and stagnating or falling growth. Political leaders in the member states then fail to implement a “comprehensive” package at one or other of their meetings, the overall situation worsens, market pressure increases and before you know it, new, more radical proposals are being made.

Indeed, governing means making tough choices. But politics is also about keeping options open. To understand why the current see-saw is happening we need to capture the latter, and not just demand the former. In other words, Wednesday’s summit is likely to reinforce political manoeuvring: the basic objective is to gain more “breathing space”, not to spell out the endgame.

This endgame scenario is a particular worry for Angela Merkel. Does she believe in the political strength of a big eurozone, yet one in which growth prospects remain dismal for the foreseeable future? Can the European Central Bank be trusted on inflation if its mandate changes? How much joint liability is a price worth paying for European unity? Each of these questions flows from the various proposals spelt out by Mr Pisani-Ferry. And each of them remains highly controversial among Germany’s political class, let alone its population.

As long as the total collapse of Europe’s economy is not right at the doorstep – read the continental European press and you will notice a difference to the doomsday reporting in the Anglo-Saxon world – Berlin will stick one plaster after another on the wound. Deep down, most German politicians of the political mainstream seem to favour a smaller eurozone of like-minded, fiscally prudent countries. But they simply don’t know how to get there without causing deep rifts or derailing European integration.

The consequence? Keeping the options open and no short-term solution in sight.

The writer is director of Policy Network and a visiting fellow at the LSE’s European Institute.

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