France's Dirty Little Secret | 54 comments (54 topical, editorial, 0 hidden)

Re: France's Dirty Little Secret (4.00 / 4)

The European Union should develop a true, discretionary federal budget, as opposed to the ad-hoc and largely non-discretionary CAP and structure transfers. This policy should serve three objectives:
- First to design and implement industrial policy in those member states which are under-industrialised or which run structural trade deficits against the rest of the €-zone.
- Second, to fund harmonisation efforts in workplace safety rules, health care and other areas where harmonisation to a civilised level would be so expensive for poorer member states that they would insist on harmonising to third-world levels.
- Third, to ensure full employment by spending into depressed economies, in accordance with the first two objectives (occasionally depressed economies always have some infrastructure project or another that would be worthwhile to do, while chronically depressed economies usually need systematic industrial policy).

Scrap the current mandate of the ECB. Replace it with a three-pronged financial stability mandate:
- Ensure financial stability by moving to a full-reserve banking system and conducting monetary policy through the discount window.
- Ensure financial stability by using differential rediscount rates to kill speculative bubbles.
- Ensure financial stability by purchasing, on the open market and with Euros created ex nihilo, sufficient foreign currency to match the gross foreign currency exposure of the private European banking system (this kills carry trades stone dead). Further, do not permit the real exchange rate to rise by more than one percent per month against a trade-weighted basket of currencies (if the markets really believe that the € is worth much more than it's traded for, the ECB should use the opportunity to add a little seigniorage income to its war chest).

On the income side, the federal EU level should:
- Levy taxes on real estate, because this is a persistent cause of financial and macroeconomic instability.
- Auctioning pollution rights, fishing quotas, etc., where the aggregate quota should be set at the federal level, and where there is no sound economic argument for giving quotas away for free.
- Levy Tobin taxes on financial transactions.
- Levy import duties on countries that practise subsidy-by-environmental-despoliation and subsidy-by-dead-workers.
These are the taxes that it makes more economic sense to collect at the federal than at the state level. Obviously, the federal level can harmonise other taxes (or tax indirectly through the states for that matter) if it finds its revenues insufficient for the macroeconomic policy it wishes to pursue.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 25th, 2011 at 02:10:43 PM EST
[ Parent ]

Re: France's Dirty Little Secret (none / 1)

That's a good one.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Fri Mar 25th, 2011 at 02:21:27 PM EST
[ Parent ]

Re: France's Dirty Little Secret (none / 1)

This definately does deserve a diary of of its own.

Some Observations:

No mention of inflation targets for the ECB!
How to you assess real estate on a pan European level for the purposes of taxation?
You are proposing a Federal Government for the EU (or is it just the Eurozone?). How will that fit in with existing institutions and how will it enhance its democratic legitimacy in line with it's increased powers? - Head of Commission becomes Prime Minister hired/fired by Parliament? President of the Council becomes directly elected Federal President
Why would Germany vote for a "Transfer Union"
Why would smaller member states vote for a Federal Government likely to be dominated by the major powers?
How will the above structures accommodate Sarkozy's ego?
How big must the Euro crisis become before your proposals become "serious"?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 02:34:14 PM EST
[ Parent ]

Re: France's Dirty Little Secret (4.00 / 2)

The central bank does not have any appropriate tools for inflation control. And after policing currency policy and financial stability it wouldn't be able to police inflation even if it had the tools to do so in the first place (because an inflation mandate would often conflict with the stability mandate). Inflation control is a fiscal and industrial policy objective, and not a terribly important one at that.
Initially, I rely on member states' own auditors, but using a common set of definitions. Ultimately, of course, it would be better to have a corps of auditors directly employed by the federal bureaucracy. My idea would be that you would pay tax on the higher of the auditors' assessment or the sale price, but the ECB would only rediscount real estate loans up to 80 % of the lower of the two. That should kill speculative bubbles dead real fast.
Yes, I am. My preference would be to make the ECB answer to the Commission, make the Commission serve at the pleasure of Parliament and reduce the Council to an advisory position.
Because otherwise they'll get a messy series of defaults, that will make their banks insolvent. Repeatedly.
Because it would answer to Parliament, which is the only European institution that actually divides itself along ideological rather than national lines.
They won't. Fortunately, Sarko is a temporary problem.
Don't think "how big." Think "how frequent." I never believed for a moment that sane policy would result from the current crisis. But since the insane policy currently on offer would recapitulate the crisis at most ten years down the road, we will have another opportunity within a foreseeable time frame. And, as I said above, I am cautiously optimistic, since the peripherals seem to have gotten their act together a lot faster than I expected.