The whole EU is hardly democratic though is it?

http://www.fedtrust.co.uk/admin/uploads/FedT_LAD.pdf

I agree – lets leave the EU asap.

Oh for God’s sake …they are talking about fiscal union. People have been saying that the EU cannot survive without fiscal union for ages.

What on earth is the headline about? They are talking about a council of politician-bureaucrats, there is absolutely no mention of banks, no suggestion that banks are getting any more power at all.

This is about the Germans not wanting to have to pay debts run up by other countries, and to try to ensure in the future they won’t have to – they cant avoid having to sort out the current mess. If you consider Keynesian policies to be about running surpluses in good times and deficits in bad times, this proposal is not about “outlawing” Keynesian policies … that would be fine with Germany, because if that’s what other EU countries actually did, they could pay their own debts.

If this council was “democratic” do you think German voters would be more or less willing to finance Greek and others deficits than non-democratic German technocrats?

fiscal union

“None of those institutions is any way democratic. That is profoundly worrying”

Members of the Bank of England’s monetary policy committee are appointed. They may vote in conclave on decisons to change the interest rate that the Bank charges on last resort loans to banks but the committee can hardly be claimed to be a “democratic” institution.

It wouldn’t make sense for the monetary policy decisions of central banks to be democratically arrived at. The whole point of declaring the Bank of England independent in 1997 was to free it from government interference in monetary policy decisions, which were very likely to be motivated by electoral considerations, not by considerations of what best suited contra-cyclical stabilisation or inflation control.

I recall attending seminars in the 1980s where the evidence presented showed that G7 countries with more independent central banks had better historic records for controlling inflation. On that benchmark, Britain, with France and Italy, came at the end of a spectrum with the least effective historic records of inflation control.

Frankly, I’ve a great deal more confidence in central banking where monetary policy decisions are made independently of governments and politicians and I suspect that sentiment is widely shared by most of those who work in financial markets. The result is that the markets are likely to price-in an extra inflation premium on bond yields where central banks are subject to “democratic political control”.

[5] Bob, are you saying that democracy is at least in part responsible for our economic difficulties? Who presented the “evidence” you refer to? Bankers? Slavering devotees of Ayn Rand?

“Give me the choice of this unelected form of government by central bankers in Europe and quitting Europe I know where I stand in an instant – I would have no doubt that Britain should leave the EU if these measures are adopted”…

Another anti-EU rant. Not quite as wacky as Simon Heffer’s recent claim in the ‘Wail’ about a “Fourth Reich”, but still ludcicrous.

It always amuses me to note that the Europhobic right (and their nearly indistinguishable mini-me’s on the Stalinist “left”) bemaon the lack of democracy and accouintability in the EU…but don’t support giving legislative power to the EU Parliament.

The truth is that calls to get out of the EU are inevitably reactionary, sometimes (not in this case) racist, and can only benefit the most xenophobic forces in politics.

Oppose all cuts and anti-working class measures, wherever they come from. If that means defying the EU from time to time, by all means let’s do so. But a campaign to get out? Leave that to UKIP and the BNP.

It’s true that the democratic dimension of fiscal union is a nightmare – people have recognised this for a long time. RM thinks the EU should disband if undemocratic fiscal union is attempted, I think the EU will disintegrate if democratic fiscal union is attempted. How important is it that the EU survives?

Luis: It’s true that the democratic dimension of fiscal union is a nightmare

So, er, you agree with the post that you were railing against just a few comments above?

Sunny, Luis is, correctly, pointing out that Murphy’s headline/main thrust, ie ‘we’re giving power to the bankers’ is, objectively, bobbins. I mean, it is Richard “facts, who cares” Murphy, so it’s what we’ve come to expect, but you can point out the factually ludicrous nature of the analysis without then actually supporting the policy.

Basic level-if you’ve got a fiscal union, you need a financial union that’s able to carry out money transfers, otherwise it’s doomed. The EU is, fundamentally, undemocratic-I believe it can, and should,b e reformed, and that, for example, Lisbon was a good step in the right direction.

Murphy’s premise, that a) these proposals give power to “bankers”, used as a pejorative and that b) this is reason to leave the EU is so ludicrously off the wall it’s laughable, and a discredit to the site, above and beyond the usual drivel you’ve been letting him post here.

He’s decided that anyone that works in banking, that understands finance, is a “banker” and therefore bad by default. He’s also noticed that, shock horror, the EU has a tendency to create committees and institutions that’re a few too many steps removed from democratic oversite.

This, apparently, is surprising and new. Um, except for when they did it in Maastricht, Nice, Amsterdam, SEA and, oh, Rome.

Either you’ve given him free posting privileges, which shows a big error of judgement, or you chose to publish this dreck, which, um, shows a huge error of judgement. I’m fine with posting anti-EU stuff here, it’s against my beliefes but I agree with you that this should be a broad based site. I’m fine with posting analysis of the financial system here.

But this? It’s embarrassing, frankly.

If the Eurozone is to survive, and not kick out countries like Greece that were, frankly, taking the piss, it needs stronger systems. That’s a statement of fact. Given that we’re not in the Eurozone, this doesn’t actually affect us anyway.

@5: “Bob, are you saying that democracy is at least in part responsible for our economic difficulties?”

Recall Churchill’s decision in 1925, as Chancellor, to retun the Pound to the Gold Standard at the pre-war parity. The decision accorded with the prevailing City and political consensus at the time but it was a bad decision and Churchill had personal reservations.

He came to the decision after holding a dinner party at 11 Downing St attended by Monatgue Norman, governor of the BoE, McKenna, a banker who had been Liberal Chancellor at the outbreak of WW1, and JM Keynes. Only Keynes spoke out against returning the Pound at ther pre-war parity so Churchill went with the majority. Keynes reckoned that the pre-war parity would overvalue the Pound by about 10%.

The consequence of the decision was to lose markets for the traditional exporting industries, notably coal – which led to the general strike in 1926. When the new National Government after the 1931 election abandoned the Gold Standard, the Pound depreciated 25%.

Jump forward to 1946. Hugh Dalton records in his autobiography that Churchill, as leader of the opposition, absented himself from the Commons during debates on the legislation to nationalise the Bank of England, which was in private ownership and therefore truly independent. The Conservative opposition in the Commons opposed the legislation but Churchill privately agreed with it. As Chancellor in the 1920s and sat in the Treasury, he had been embarrassed by having to depend on press reports for the Bank’s decisions about Bank Rate.

Conclusions: democratic decisions about economic policy aren’t informed and aren’t necessarily technically the most appropriate. But as much can be said of decisions by elected politicians and the latter are very likely to be motivated by electoral, not technical considerations.

“Who presented the ‘evidence’ you refer to? Bankers? Slavering devotees of Ayn Rand?”

The context was a series of very respectable seminars in London in the 1980s and 1990s for professional and academic economists and for policy makers. The evidence that “independent” central banks (eg the US Fed, the Bundesbank, the Bank of Japan and the Swiss central bank) have better historic records for controlling inflation is pretty well document and accepted by most economists.

However, recall that “professional” economists split on whether Britain should sign up to join the Euro in 1999 – although, I like to think, that the better economists opposed joining and on economic, not political grounds.

None of those institutions is any way democratic.

Is the OP using the same definition of “democratic” as everyone else? What I read in the first quote in the story is that democratically-elected politicians are proposing that an economic council be set up under the chairmanship of the person appointed by democratically-elected politicians to represent them.

The second reference is to a proposal – from another democratically-elected policitian – that would require negotiations between and sign-off from democratically-elected policitians; and thereafter would operate without policital interference – just as, say, HMRC or the police or etc etc etc operate.

[10] As you note in your last sentence, economists and “experts” are not always of one mind. I still think it would be more persuasive if you would say exactly where these seminars were held: or are you implying that some form of “Chatham House rules” hold good thirty years later?

I think there is an interesting discussion to be had about the relationship between democracy and expertise, whether in economics, medicine or any other area of public policy. I’m not sure that your example takes us much further (other than to show that you’ve read Roy Jenkins’ Life of Churchill ). Why don’t you write an article and submit it to Sunny?

@12: Mike

The said seminars were sometimes held in Chatham House but the venue changed later.

“Experts” in most subjects often disagree – such as lawyers, politicians, medics, physicists etc – as well as economists. Geologists have not been able to predict earthquakes and vulcano erruptions.

There is a continuing debate on the “wisdom of crowds” versus the “mania of crowds”. Remember the South Sea Bubble of 1720? The only possible antidote is open public debate and that, in the end, is why most of us prefer democracy to totalitarian dictatorships or elitist oligarchies.

Sadly, there is much evidence that the Nazi government in Germany post January 1933 was initally very popular and a consensus that the previous (very democratic) Weimar Republic had been a huge mistake.

Sunny

So, er, you agree with the post that you were railing against just a few comments above?

So, er, I agree that the democratic dimension of fiscal union is a nightmare, and, er, I still think what I wrote @2, to repeat: that this is not about “giving banks more power”, it is not about “outlawing Keynesian economic policies” and that a “democratic” fiscal union is probably less likely to deliver rich countries financing poor country deficits than a council of technocrats appointed by our democratic representatives would be.

By my count that’s one point of partial agreement [1], two points of disagreement and one related observation.

[1] Only partial, because thinking that the democratic dimension is a nightmare does not entail agreeing with RM’s views about that.

Recall Churchill’s decision in 1925, as Chancellor, to retun the Pound to the Gold Standard at the pre-war parity. The decision accorded with the prevailing City and political consensus at the time but it was a bad decision and Churchill had personal reservations.

He came to the decision after holding a dinner party at 11 Downing St attended by Monatgue Norman, governor of the BoE, McKenna, a banker who had been Liberal Chancellor at the outbreak of WW1, and JM Keynes. Only Keynes spoke out against returning the Pound at ther pre-war parity so Churchill went with the majority. Keynes reckoned that the pre-war parity would overvalue the Pound by about 10%.

The consequence of the decision was to lose markets for the traditional exporting industries, notably coal – which led to the general strike in 1926. When the new National Government after the 1931 election abandoned the Gold Standard, the Pound depreciated 25%…

Conclusions: democratic decisions about economic policy aren’t informed and aren’t necessarily technically the most appropriate.

Er, what? You really can’t use the return to the Gold Standard as evidence that experts are better placed to make macro-economic decisions than politicians. Churchill only took that decision because he was so strongly advised to by, um, experts. If the decision had been left in the hands of the independent Bank of England, the outcome would have been identical.

You’d need to present evidence of politicians taking macro-economic decisions in the teeth of unified opposition from mainstream orthodox economists to make this point stick. And the only instance that immediately springs to mind is the famous 364 economists’ letter to Thatcher. But then, that might not be the best example…

http://www.iea.org.uk/sites/default/files/publications/files/upldbook310pdf.pdf

There is a continuing debate on the “wisdom of crowds” versus the “mania of crowds”.

Madness of crowds, I think. /pedant

http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds

@15: “Er, what? You really can’t use the return to the Gold Standard as evidence that experts are better placed to make macro-economic decisions than politicians. Churchill only took that decision because he was so strongly advised to by, um, experts. ”

If you re-read @10 and @13, one of my main messages is that “experts” as well as democratically elected politicians can be divided and fallible. Hence the advice:

There is a continuing debate on the “wisdom of crowds” versus the “mania of crowds”. Remember the South Sea Bubble of 1720? The only possible antidote is open public debate and that, in the end, is why most of us prefer democracy to totalitarian dictatorships or elitist oligarchies.

That said, the evidence is that independent central banks have better historic records in controlling inflation than central banks controlled by democratically elected politicians, who are likely to be motivated by electoral considerations.

If you re-read @10 and @13, one of my main messages is that “experts” as well as democratically elected politicians can be divided and fallible.

So, humans are fallible. Film at eleven.

Mr Osborne implicitly reversed centuries of British policy in regards to Europe when he urged them to unite in some form of fiscal union. Why he did it is because the only way that the eurozone will survive intact is if there is a fiscal transfer mechanism. The Conservatives recognise that and quite rightly do not want us to be a part of it. However, a catastrophic break up of the EMU would be equally catastrophic for the UK.

The thing is you can’t have a fiscal transfer mechanism or even an off the table so far eurobond, without some degree of conditionality and method of sanctions against the excessive spenders. Therefore, some degree of centralised control over budgets is not only inevitable, but the system would not work without that control. Think about the moral hazard that would exist if governments faced no discipline over their spending. The bond market provides that discipline. However, if you are going to bypass the bond market for weaker members some other form of sanction must exist or it will be a disaster.

19 – this was the basis of the eurosceptic critique of the Eurozone before it was created. I remember writing A-level economics essays (96-97) on the inherent contradiction of a monetary union without an equivalent fiscal union.

One way or another, you’re going to have to see fiscal transfers from the rich, Northern Euro members to the poor, Southern Euro members. The only way you’d ever get France and (especially) Germany to agree to this is if they get a degree of fiscal oversight in exchange – or, at the very least, central enforcement of fiscal rules regarding borrowing and spending.

Even that would be a tough sell. The German constitution is explicitly set up to prevent ‘the people’ having their say, but a policy that endorses German money being sent south (and we’d have to be talking 5% GDP for a fiscal transfer to have any effect) would be electoral kryptonite. It really is getting to the point where the least unlikely outcome is the break-up of the Eurozone.

@18: “So, humans are fallible. Film at eleven.”

The intelligent response is to devise institutions best able to protect us from the consequences of human fallibility – hence, the persuasive case for open public debate.

I keep remarking that independent central banks have better historic records in controlling inflation than politically controlled central banks. George Osborne has taken that a whole new step further by handing more powers to a newly created BoE Financial Stability Committee.

Btw note that the BoE MPC infrequently makes unanimous decisions about setting interest rates.

@20: “One way or another, you’re going to have to see fiscal transfers from the rich, Northern Euro members to the poor.”

What sticks in the throats of many in Germany is that Italy isn’t “poor” and it has the third largest economy in the Eurozone.

But I agree with Richard W that a monetary union, in the absence of flexible exchange rates, needs a transfer mechanism to transfer funds toward parts of the union with chronic balance of payments deficits and that monetary unions need a central fiscal authority to function. Without that, monetary unions usually fail.

And what would a “democratic” mechanism for arranging these necessary transfers look like?

Luis Enrique: the answer to your last question depends on the answer to this one:

How much do we care about major land wars in Europe?

Europeans have gotten rather complacent since we exported all the land wars to other continents in the late 20th Century. Remove the EU, and it will not be long before somebody in Eastern Europe is fighting, either someone else in Eastern Europe, or someone in what used to be the USSR. Or someone in Western Europe. Or Turkey. Or…

While I doubt the Scots are going to rise in armed rebellion any time soon, the prognosis for a Britain which imports better than three quarters of its food, let alone everything else, is pretty poor if Europe starts having hot wars again.

The intelligent response is to devise institutions best able to protect us from the consequences of human fallibility – hence, the persuasive case for open public debate.

I know – we could choose representatives from the people whose specific job it would be to debate these matters. To keep it properly democratic, we should elect these representatives of course, and to maximise the openness of the debate they should be held in a chamber where the public is admitted and where the media, both print and broadcast, should have the freedom to report precisely what is debated.

That should do the trick.

John, I’m not sure I follow you. I care about land wars in Europe a lot. What does that imply for the form of supposedly democratic fiscal union?

How are we going to get voters in rich countries to vote for sending money to other countries that spent more than they taxed? How are you going to get voters in these countries to vote for conditions wanted by rich countries?

RM thinks having an appointed council to design and enforce fiscal rules and transfers is sufficient undemocratic to be unacceptable. I want to know what an acceptably democratic mechanism would look like, and how it would overcome the problem of voters in each country being unlikely to agree with each other.

@23: “And what would a “democratic” mechanism for arranging these necessary transfers look like?”

There are such national government mechanisms for fiscal transfers from richer to poorer regions in Britain.

For starters, prior to the financial crisis and the soaring budget deficits, the London and South East Regions were the only regions making net tax contributions to the national exchequer – other regions were net recipients.

Regions with relatively high unemployment rates are sending lower income tax revenues to the national exchequer but receiving income for unemployment benefit payments. Obviously, depressed regions will be returning lower VAT revenues.

And then there are the grants for business expansions and job saving in the designated Regionally Assisted Areas in England and the assistance granted to businesses starting up in Enterprise Zones. Scotland, Wales and Northern Ireland have their own fiscal arrangements and business promotion systems with funding from central government in block grants.

The like of that could be administered for the Eurozone but for years there have been concerns about the reliability and security of grant systems administered by the EU Commission. I’ve lost track of how many years is it since the EU Court of Auditors last approved the Commission’s annual accounts?

@25: “That should do the trick.”

Yeah – I get the point but UK Parliaments have in practice been:

- devolving statutory powers to Scotland, Wales and NI
- handing discretionary powers for monetary policy and financial stability to the BoE
- handing powers for competition policy and market regulation to the OFT, the Competition Commission and a collection of watchdogs such as Ofwat, Ofcom, Office of Rail Regulation etc.
- devolving discretionary powers to the civil service and to QUANGOs

Come on Bob, the UK has a central government, unified budget, tax regime etc. The EU does not.

I’ve lost track of how many years is it since the EU Court of Auditors last approved the Commission’s annual accounts?

16.

Although, to be fair,

Sir John Bourn, Comptroller and Auditor General at the UK’s National Audit Office told us that, were he required to issue a single Statement of Assurance on the UK Government’s accounts in the same way as the Court of Auditors does for Europe’s accounts, he, like the Court, would be unable to do so (Q 192). This is because last year [2004] he issued a qualified opinion on 13 of the 500 accounts of the British Government which he audits (Q 190). (paragraph 22)
http://www.publications.parliament.uk/pa/ld200506/ldselect/ldeucom/270/27010.htm

Bob B: “I keep remarking that independent central banks have better historic records in controlling inflation than politically controlled central banks.”

Yes, but the proposed economic council and stability council are expected (if created) to do considerably more than “control inflation”. It’s a whole different kettle of fish to the Bank of England.

We have never before had an “independent central bank” determining if a government spending/taxation proposal is appropriate, or determining which labour market regulations are appropriate. It strikes me that most reasonable people who believe they live in a democracy would expect the level of spending and taxation, and the regulations determining how their employers treat them, to be something that could be influenced by their vote.

It’s true countries where those creating economic and labour policy are ‘technocrats’ largely exempt from political pressures can be very economically successful – see China or Singapore for example – but I don’t think I actually want to live in one of those countries.

@29: Luis: “Come on Bob, the UK has a central government, unified budget, tax regime etc. The EU does not.”

Absolutely. But what Richard W is saying – and what I’m agreeing with – is that to function, a monetary union requires a central fiscal authority, whether “democratic” or otherwise, in order to function and that without one the union is unlikely to survive without departures – although a central fiscal authority is a necessary but not a sufficient condition for internal stability in the union.

This is because members of the union lose monetary autonomy, meaning they have to live with one set of interest rates, set by the central bank for last resort lending, regardless of national conditions, and because union members give up exchange rate flexibility to deal with chronic balance of payments deficits (or surpluses).

These prospective issues were widely anticipated in an economics literature but were ignored by politicians committed to a euphoric enthusiam for European integration regardless – a classic case of politics trumping economics.

As mentioned before, my eyes were initially opened on reading the late Rudi Dornbusch on: Euro Fantasies, in Foreign Affairs for September 1996 and then Martin Feldstein on: EMU and International Conflict for Foreign Affairs, November 1996 (both with pay barriers, sadly). Try googling on Paul Krugman and the Euro for more and without pay barriers. Otherwise, try Dornbusch’s well-known text on Marcroeconomics (McGraw Hill) and Walter Eltis: Britain, Europe and EMU (2000) – Walter Eltis was Michael Heseltine’s personal economic adviser when he was DTI minister.

@31: “We have never before had an “independent central bank” determining if a government spending/taxation proposal is appropriate, or determining which labour market regulations are appropriate. It strikes me that most reasonable people who believe they live in a democracy would expect the level of spending and taxation, and the regulations determining how their employers treat them, to be something that could be influenced by their vote.”

I largely agree – although recall that the Financial Services Authority was an independent watchdog charged with regulating financial institutions but that it fell down on the job for reasons analysed at length in the: Turner Review – A regulatory response to the global banking crisis (FSA 2009)

The point I was trying to concisely make @28 is that Parliaments have handed an increasing range of discretionary powers to a variety of independent institutions, including the Bank of England, territorial assemblies, watchdogs, QUANGOS and the civil service.

I suppose the claim is that these are “democratic” arrangements because Parliament remains sovereign and can always repeal the relevant legislation. Part of the (? undeclared) rationale for this (astonishing) secular change is that governments and politicians are conspicuously absolved from making those unpalatable decisions which have been hived off to non-partisan “experts”.

Bob, I understand why fiscal union is seen as necessary: the OP says the proposed form of central fiscal authority is sufficiently undemocratic to warrant leaving the EU, if enacted. I am asking what a democratic central fiscal authority would look like.

I would hope that those complaining about an undemocratic central fiscal authority would be able to describe a feasible democratic alternative.

@34: Luis: “I would hope that those complaining about an undemocratic central fiscal authority would be able to describe a feasible democratic alternative.”

That’s a valid enough question but it is challenging to reconcile that with the extent to which Parliaments in Britain have delegated discretionary powers to a wide range of independent institutions, apparently to avoid partisan sentiments influencing decisions.

IMO the powerful reason for Britain to remain a member of the EU is that it will be much easier to protect Britain’s commercial interests that way.

It cannot be assumed that on leaving the EU, Britain will be treated in much the way that Norway and Switzerland are treated through benign bilateral treaties. Norway’s population is just under 5 million and Switzerland’s is just under 8 million. By some demographic projections, Britain, presently with a population of 61 million, will become the largest EU country in terms of population by around mid-century. Many EU members have an interest in curbing the access of Britain’s service industries to EU markets, notably financial services in which we have a prounced competitive advantage.

The “feasible democratic alternative” is a single government running the Eurozone, as per the United Kingdom and the United States. Many would argue that this was the objective of European integration all along.

If the Eurozone was a single country, transfers between rich and poor regions would be no more newsworthy than the transfers that currently occur between rich and poor regions in individual countries.

The Euro was always doomed, because:
a) A single currency requires a single government, and
b) Because countries were allowed in that didn’t meet the rules (all except Luxembourg in fact). The rules were designed to remove the need for a single government.

“The “feasible democratic alternative” is a single government running the Eurozone, as per the United Kingdom and the United States. Many would argue that this was the objective of European integration all along.”

No, I think this is what people feared, and what various leaders kinda side-stepped. But all the while many European countries built up larger and larger debts and now the near-inevitable is upon us, and the choice European leaders have is increasingly being framed as: fiscal union or euro exit. Neither is palatable to the German public which is why all these committees and non-existent taxes (eg Tobin tax) are being discussed. However, these are domestic policy solutions to international problems.

As someone said above, the original article’s headline and general thrust is nonsensical and ignores much of what is already known about European policy processes and politics.