In the EU, the instinct is always to fudge..

This is a superb interview of Henry Farrell . Farrell is a political science prof so you get that perspective on EMU and its crisis.

He says EU leader just fudge and make it look to outside world that the crisis is solved. But in reality it is just that a fudge..

Suzy Khimm: How likely is it that we’re headed for another global financial collapse due to Eurozone crisis?

Henry Farrell: I think we’re in real trouble. I think we’re in real, real trouble…I’m pretty confident we’re going to see some sort of fudging come out of current negotiations. I’m equally confident that this will help things come along for a few weeks, but it’s not going to work.

The fundamental problem here is a profoundly political problem. It used to be that bondholders assumed that the EU had changed things so that bigger member states were on the hook for the debts of the poorer member states. Therefore, it made sense to lend money to poorer member states, and bondholders were going to get their payday. I would call it a confidence bubble. It coasts along for a period of time, but once that confidence bubble gets pricked, it’s really hard to get it back. Bondholders were basing their holdings on set of political expectations — that when push came to shove, Germany would either bail out Greece, or Greece would never have to be bailed because it would behave the way that good northern states would.

In the EU, the instinct is always to fudge — to come up with technocratic fudges that are incomprehensible to the outside world but get some minimum consensus among states…But the problem is not a technocratic problem. It’s a political problem. So they’re going to hesitatingly help out the Greeks, but it’s not going to provide political actors or market actors the confidence I think they need

This is so true. They keep coming out with some plan with some financial engineering here and there and difficult to understand. So initially, markets think the crisis has been sorted. Then when experts deep dive int he plan and say it another folly, again markets tank. See any solution from Europe and it has been mostly been that.

He looks at the political issues in Europe which are leading to no-solution of the region…

SK: So what specific obstacles must be overcome to resolve the crisis in Europe?

HF: They’re trying to thread a couple of very difficult political needles. You can think of four sets of veto actors they’re trying to deal with:

1) Nationalists of some sort — like the Finns in Finnish government are figuring out how they can get trade-offs, though it seems they’re now willing to come along.

2) National parliaments in richer northern countries, with profound skepticism of the “we are losing our money to southern profligates” variety. They have very genuine, well-placed worries about what’s going to happen to their AAA credit rating. It’s a clear point of worry, given Merkel’s dubious level of support — whether she can get this through without a point of rebellion [from the German Parliament].

3) The German constitutional court has laid out a clear stricture that rules out certain kinds of options, such as the idea of Eurobond arrangement. They said this is not going to be possible given current European Union–it’s not a democratic constitutional order, and certain kind of things cannot happen;

4) The European Central Bank is facing its own difficulties. It’s being asked to bail out, buying bonds month after month, no end in sight. There are a lot of pointed arguments from northern countries in ECB, with the recent resignation [of Austrian board member Juergen Stark]. They were put in a politically impossible position–posed to do things that it was not meant to do, but were obliged to do.

He says America cannot intervene in the crisis as its leverage is pretty limited thanks to its own political problems…

One Response to “In the EU, the instinct is always to fudge..”

  1. The fudging from European policymakers continues « Mostly Economics Says:

    […] think Henry Farrell just nailed it by saying the instinct of EU policymakers is to fudge. The solution from policymakers looks innovative at […]

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