EUCOM Economic Analysis - Part I

[Fuchs]

The European Union (EU) is the beating macroeconomic heart of European Command (EUCOM)

(...)

The European Union is not a fiscal union and it is an incomplete economic (common market and customs union) and monetary union; this distinction is at the center of its current macroeconomic troubles.

a) EU is not a part of EUCOM. EUCOM is merely concerned with an area in which the EU member states are.


b) I disagree on the fiscal policy thing.
Italy has the exact same macroeconomic problems between its north and its south as the Euro currency region has between its member states. Legal harmonisation and unification do not change the actual economic properties.

There are theories of optimal currency area, and one of them postulates that you need a high input factor mobility (capital, labour) inside a currency area in order to get a self-balancing effect.
An increase in Greek emigration hints that there is some labour mobility, but the past decade shows that it wasn't sufficient.
Furthermore, there is some theoretical work missing (or unknown to me) to reflect the fact that regions have fixed costs (pensions, government upkeep) and just draining them of input factors is an imperfect substitute for transfers in the case of imbalances.

There are proponents of further EU integration who continually sow the idea that problems are founded in imperfect integration into the world, but that are mere talking points. The actual macroeconomic analysis looks at different variables and finds different key problems.

(...)27 different financial ministries(...)

Actually, more. Some EU members have a federalist structure. Germany has 17 financial ministries alone.

Although comprised of 27 members, only 17 (the Eurozone) have ostensibly met the economic and monetary union requirements of the 1992 Maastricht Treaty. In return for the ability to participate in the world’s second largest reserve currency (...)

I disagree. At most 15 met the requirements. Greece lied its way into the club (and even after admitting it, continued to lie in the following years!) and Portugal was admitted despite failing to meet the requirements. It was deemed small enough to not hurt the other members significantly.

In order to achieve a fiscal union, member states will have to cede a greater portion of national control over fiscal policy to the EU.

The German federal constitutional court has pretty much written in stone by now that further integration would violate the constitution and be repealed by this court's rulings. There is not going to be a major step towards EU fiscal integration without replacing the German constitution.
Afaik amending or changing it won't suffice, for the articles in question are among the 20 first, definite ones that cannot be changed in their meaning.

[davidbfpo]

An alternative view

The idea of a European Union (EU), which is far more than the Euro and a fiscal union, is a concept that is IMO not shared by many of the EU electorate, even less now with the debt crisis. Those who shared the concept, mainly national-level politicians and bureaucracies, failed to articulate what it actually meant, partly out of fear. Now the electorate are expected to "bail out" southern members, partly on the claimed basis it makes sense.

The EU ignored its own rules over the Euro, for political reasons and partly as Germany was distracted by the huge support costs of reunification.

Look at the Schengen Zone's weakening after the Libyan and Tunisian refugee exodus. Let alone the Common Foreign & Security Policy (CFSP) left in disarray after the Libyan intervention.

The EU appears to have attempted a politics-free economic union and then looked surprised when the markets and people have expressed concern over the state we now fin ourselves in.

[Surferbeetle]

a) EU is not a part of EUCOM. EUCOM is merely concerned with an area in which the EU member states are.

Thank you for this observation, you are right; I incorrectly give this impression in several places within this document. I will rework it.

b) I disagree on the fiscal policy thing.
Italy has the exact same macroeconomic problems between its north and its south as the Euro currency region has between its member states. Legal harmonisation and unification do not change the actual economic properties.

There are theories of optimal currency area, and one of them postulates that you need a high input factor mobility (capital, labour) inside a currency area in order to get a self-balancing effect.
An increase in Greek emigration hints that there is some labour mobility, but the past decade shows that it wasn't sufficient.
Furthermore, there is some theoretical work missing (or unknown to me) to reflect the fact that regions have fixed costs (pensions, government upkeep) and just draining them of input factors is an imperfect substitute for transfers in the case of imbalances.

Studies by the northern league in Italy, and on some of the poorer US states immediately spring to mind…I’ll have to do some further reading and get back to you.

There are proponents of further EU integration who continually sow the idea that problems are founded in imperfect integration into the world, but that are mere talking points. The actual macroeconomic analysis looks at different variables and finds different key problems.

I incompletely visualize the many, many possible permutations of EU integration as a binary tree, and as an American I think about the possibilities of a ‘United States of Europe’ or of Germany going it alone and becoming a sort of counterfactual German version of the Republic of Texas (1836 to 1846 - but with a *lot* more ordnung and way better infrastructure? Perhaps it was simply too many Lucky Luke comics when I was younger )

I also think about traveling around Europe in pre-Schengen days, noting the differences in customs, dialects, languages, dress, and architecture. Back in the day German’s never wore tennis shoes outside of sporthalle , that was just for tacky Ami’s. Today when I visit I consider the cost of the barriers and delays to the free flow of capital (human and otherwise) of the pre-Schengen zone days and wonder about the effects of cultural homogenization.

Short answer is that I am unable to cut the Gordon knot on this one…

Actually, more. Some EU members have a federalist structure. Germany has 17 financial ministries alone.

Solid point, thanks. I’ll edit…

I disagree. At most 15 met the requirements. Greece lied its way into the club (and even after admitting it, continued to lie in the following years!) and Portugal was admitted despite failing to meet the requirements. It was deemed small enough to not hurt the other members significantly.

I went with the word ostensibly to be polite. From a purely technical standpoint it appears to me from this armchair that the accessions criteria were not met in some instances. Political successes are not strictly linked to technical successes however, which of course results in future costs or benefits depending upon how the dice fall....complicating this gamble is the observation that world's ratio of statesmen/women to politicians is not what it should be

The German federal constitutional court has pretty much written in stone by now that further integration would violate the constitution and be repealed by this court's rulings. There is not going to be a major step towards EU fiscal integration without replacing the German constitution.
Afaik amending or changing it won't suffice, for the articles in question are among the 20 first, definite ones that cannot be changed in their meaning.

Will have to review the Grundgesetz again, it’s been a while.

Speaking of laws I note that timeline wise:

September 27th ,the Greek Parliament is scheduled to vote on property taxes
September 28th, the Finnish Parliament is scheduled to vote on the European Financial Stability Facility (EFSF)
September 29th, the German Parliament might ratify the EFSF

[Fuchs]

Will have to review the Grundgesetz again, it’s been a while.

http://www.spiegel.de/international/...4506-2,00.html

The first 20 constitutional articles cannot be changed or contradicted in their meaning.
https://www.btg-bestellservice.de/pdf/80201000.pdf

Article 20
[Constitutional principles – Right of resistance]
(1) The Federal Republic of Germany is a democratic and social
federal state.
(2) All state authority is derived from the people. It shall be exercised
by the people through elections and other votes and
through specific legislative, executive and judicial bodies.
(3) The legislature shall be bound by the constitutional order,
the executive and the judiciary by law and justice.
(4) All Germans shall have the right to resist any person seeking
to abolish this constitutional order, if no other remedy
is available.

[Surferbeetle]

An alternative view

The idea of a European Union (EU), which is far more than the Euro and a fiscal union, is a concept that is IMO not shared by many of the EU electorate, even less now with the debt crisis. Those who shared the concept, mainly national-level politicians and bureaucracies, failed to articulate what it actually meant, partly out of fear. Now the electorate are expected to "bail out" southern members, partly on the claimed basis it makes sense.

The EU ignored its own rules over the Euro, for political reasons and partly as Germany was distracted by the huge support costs of reunification.

Look at the Schengen Zone's weakening after the Libyan and Tunisian refugee exodus. Let alone the Common Foreign & Security Policy (CFSP) left in disarray after the Libyan intervention.

The EU appears to have attempted a politics-free economic union and then looked surprised when the markets and people have expressed concern over the state we now fin ourselves in.

Hey David,

I appreciate the comments. Working with my police friends in Iraq was a very interesting exposure to experiencing the on the ground reality of population demographics and ways of approaching things.

It would indeed seem to logically follow that if a fiscal union were to occur, some sort of political union would eventually appear upon the horizon.

My copy of The Economist, The World in 2011 quotes Herman Van Rompuy in the article: Europe in the new global game, as follows:

Historians will interpret the period we are living in as the transition from the economic phase of globalisation to its political phase. Economic globalisation came into full swing after the events of 1989, which ended communism and united Europe, and the West was proud of the universal attraction of its lifestyle. The number of democracies rose. Global trade and technology lifted hundreds of millions out of poverty, all over the world. Negative effects, such as growing inequalities, were brushed aside. This phase is now over.

Know that you enjoy the BBC and I do attempt to keep up with it's reporting on this topic and others.

A good book regarding the activities of The Treuhandanstalt or any other references that you would care to share would be most appreciated.

[Steve the Planner]

Beetle:

Thanks for the great post, which has obviously inspired much discussion and debate.

I guess I am getting too old when, after reviewing many of these articles and ideas, I am taken back to the De-Industrialization issues of the mid-1990s, wherein we referenced backward to Drucker, etc... and the Marshall Plans, and the older industrial systems and structures. Not much new in the macro-world except re-arrangements of assets, and re-assessments of what makes which assets important at the moment.

Rare Earth? Re-opening the Inland Silk Road? Russia having resources on which Europe is critically dependent? Oil empires fighting for nuclear technology so that they can free up export capacity by generating domestic power from something other than oil?

Manufacturing chopsticks in Georgia (USA) for the chinese market due to availability of wood, minimal mechanization, cheap labor and cheap transport (empty reverse haul containers). Go figure?

Comparative advantage is in real-time flux, and the dynamic and interactive market complexities remain beyond the limits of command planning at the macro level.

The downfall of all this stuff is not the failures of complex market systems to track, control and project past activity into the future, but their inability to grasp what the actual future will be defined by.

Thanks for making me rethink about this stuff.

[Surferbeetle]

Beetle:

Thanks for the great post, which has obviously inspired much discussion and debate.

Hey Steve,

Thanks; a long motorcycle ride followed by a couple of cold beers somehow always seems to help with the writing process on this end.

I guess I am getting too old when, after reviewing many of these articles and ideas, I am taken back to the De-Industrialization issues of the mid-1990s, wherein we referenced backward to Drucker, etc... and the Marshall Plans, and the older industrial systems and structures. Not much new in the macro-world except re-arrangements of assets, and re-assessments of what makes which assets important at the moment.

It sometimes seems that I regularly hit the airport just so that I can catch a copy of the latest HBR. Drucker is good, and a staple of HBR articles. Speaking of HBR did you catch the Jan-Feb 2011 Double Issue Creating Shared Value: How to reinvent capitalism, and unleash a new wave of growth by Michael Porter & Mark Kramer?

From the idea in brief rollup:

The concept of shared value-which focuses on the connections between societal and economic progress-has the power to unleash the next wave of global growth.

There are three key ways that companies can create shared value opportunities:

*By reconceiving products and markets

*By redefining productivity in the value chain

*By enabling local cluster development

...and deeper in the article:

Strategy theory holds that to be successful a company must create a distinctive value proposition that meets the needs of a chosen set of customers. The firm gains competitive advantage from how it configures the value chain, or the set of activities involved in creating, producing, selling, delivering, and supporting its products or services

However, companies have overlooked opportunities to meet fundamental societal needs and misunderstood how societal harms and weaknesses affect value chains

It's interesting to compare his latest concept with his five forces model.

Rare Earth? Re-opening the Inland Silk Road? Russia having resources on which Europe is critically dependent? Oil empires fighting for nuclear technology so that they can free up export capacity by generating domestic power from something other than oil?

Reminds me of talk I was able to attend regarding the British East India Company; if we were to ignore the technological changes, how much have the underlying business models really changed?

Comparative advantage is in real-time flux, and the dynamic and interactive market complexities remain beyond the limits of command planning at the macro level.

The downfall of all this stuff is not the failures of complex market systems to track, control and project past activity into the future, but their inability to grasp what the actual future will be defined by.

Perhaps along similar lines, from another talk that I was able to attend:

'The Globalization Engine' consists of:

*The production of change

*New conditions for the creation of value

[Steve the Planner]

The Porter stuff, too, all harkens back to the Structure of Scientific Revolutions: First, there is a new technological driver; Second, the implementation and dispersion.

So many technological drivers emerge from that Toynbee-esque challenge/challenge-faced stuff: sign companies in Iraq, Syria and Turkey that made a living changing out signs while the Arabization movements in the 1990s eliminated Kurdish, Aramean and Christian town names.

Otherwise, who could imagine that anyone could make money making new signs for ancient areas.

I keeping hearing about local clusters, and creative urban centers as if they were something new and magical, but its all just Jane Jacobs and David Bowie (Ch-ch-ch-changes...): that marvelous interaction that occurs between people, communities, ideas, problems and their interactions.

Hanover, MD c. 1995. We built a business park near NSA and BWI Airport, attracted a lot of defense contractors, which attracted more defense contractors, which attracted techno headhunters, then restaurants, hotels, retail, college satellites, which led to Arundel Mills Mall and a new casino under construction. Go figure?

[slapout9]

Link to a BBC interview of a market trader......Euro will crash no matter what because governments do not control the world, big financial institutions like goldman sachs do


http://www.youtube.com/watch?v=aC19f...ayer_embedded#!