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Is the EU suited to handle the crisis? April 1, 2009

Posted by Sverre in : Political economy, World politics , trackback

Keeping up the recent days’ interest in the EU’s response to the financial crisis, I came across Megan McArdle’s comments on the apparent failure of EU states to apply enough stimulus to the economy, and points to a significant system failure within the EU system:

But as multiple people have blogged, this isn’t just a matter of the infamous tight-fistedness of Germany’s fiscal and monetary policy, born out of the ashes of Weimar; it’s genuinely harder for Europe to run a stimulative policy.  For one thing, they can’t coordinate a broad European policy, which means that any government will see substantial amount of any stimulus “leak” abroad–and also that there is great temptation to free ride.  For another, they aren’t the world reserve currency, so they can’t borrow on the same lavish, practically interest-free scale as the US Treasury.

I think she’s right on this one. The nature of the EU, especially after introduction of the Euro, is fiscal conservatism on the European level. It is the first time in EU history that intervention in fiscal policy on this scale is even a topic of discussion, and it’s clear that the member states with the biggest needs are the one with the least means – Eastern Europe. On the state level there is the freeloader problem to contend with – a side effect of the common market. It is hard for a government within a common market and a monetary union to spend taxpayers’ money without being able to guarantee that those taxpayers will benefit in terms of jobs at home. No single state wants to take the initiative without being sure the others will split the bill, so to speak. All of this is quite consistent with Le Maire’s and Sarkozy’s focus on pushing for international solutions. One could argue that the issue of “leaks” abroad is just as bad for the US, but it does have a different tradition from especially France and Germany when it comes to taking the position as world leader and accepting that “what is good for the world economy is good for the United States.”


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