Yes we can, in Cannes


Thomas Colignatus
October 28 and November 2 2011 
 

When the G20 meet in Cannes November 3-4 the leading role will again be for President Obama. He got elected with the slogan "Yes we can", and the key question facing him now is: can he drag the world economy from the second dip or even depression that is threatening us ?

Theoretically, Obama and the G20 can do so. Jobs can be created in short notice. The theoretically wise value of VAT is 1% while many nations have 20%. Nations in Southern Europe have unemployment reaching 20%. A short term solution is to reduce working hours by 20% and VAT to 1% so that people can start working at effectively similar net incomes. It is important to keep people in jobs so that they can participate in economic development. During recessions the pace of technology continues and this will create continued higher unemployment unless people are involved in that technology change. The reduction of VAT will mean less tax income but nations will save unemployment benefits and related costs while the remainder can be covered by higher income tax on the wealthy. This in fact fits the long term optimal solution, see my book DRGTPE, that also advises national investment banks. Southern Europe may face wages that grow only with inflation but it can increase productivity, while Northern Europe must develop its home markets to allow more scope for exports from the South.

George Papandreou's call for a referendum sent our economies rocking. The eurozone plan that was supposed to bring stability is exposed as highly inadequate. The Greek prime minister faces a nation that is falling apart and one can understand his desire that everyone rallies behind the difficult decisions that he has been making. Unfortunately, economies and democracies do not quite work like this. On the other hand, I would advise all European parliaments to reject the eurozone plan. Thus a 'no' on a Greek referendum would be perfect.

The recent eurozone 1000 billion euro "bazooka" and recapitalisation of banks and partial bail out of Greece have met with a consensus amongst academic economists that it is insufficient. The European economists are active at voxeu.org and for example Harvard professor Kenneth Rogoff still sees a large chance that Greece may have to leave the euro in the next ten years. Premier George Papandreou promised "Greece will pay back". If he understood Northern European sentiments on reliability he would step down now that Greece doesn’t, but even that doesn’t happen and his option of a referendum generates a sense of unreliability again. In my analysis this can be different though. Greece can stay in the euro and provide reliable collateral if the country really wants to.

It is actually a masterstroke by Kanzler Angela Merkel to continuously create plans that don’t quite work. In the permanent crisis she will remain the center of attention and the powerhouse that everyone relies on. In crisis everything becomes fluid and she can always require more changes to be made. The treaty on the euro has no provisions to force member countries to make such changes. Only the continual threat of rising interest rates and bankruptcy may induce countries like Greece and Italy to create better governmental structures. 

Naturally, Merkel also meets with a downside of this approach. Continual inadequacy of plans and continual scapegoating of Southern European nations causes a loss of confidence in the euro itself. It wasn’t wise of eurozone countries to meet only with its 17 members and exclude the 10 other members of the EU. Sitting in a smaller group creates tunnel-vision. Premier David Cameron is right that the whole EU is affected. It would have been better to discuss the EU system of central banks as a whole. What is actually a monetary crisis is now handled as a fiscal crisis. The EFSF "bazooka" is a rather dangerous way to create something like eurozone bonds while the better approach would be to create a monetary system for all Europeans, that also includes the Bank of England.

The G20 meeting could concentrate on an exchange of views on governance. The political leaders may be less at home in the world of finance but they will be on their turf on the issue of political management. President Obama has a background as a teacher in constitutional law. The world has seen the deadlocks in American policy making, for example on the debt ceiling. Obama as a Democrat faces a parliament with a Republican majority. The elections are not synchronous and each have a different electoral mandate. A two-party system with district voting is less democratic than proportional representation that allows many views and parties. The EU can suggest to Obama that he adopts a constitutional initiative for a system where the US House elects the premier. In my research on voting theory and social welfare this indeed is the best approach, also for France. 

All G20 leaders can be advised to look into the suggestion for each nation of a constitutional amendment of an Economic Supreme Court. It is unwise to have a German Kanzler hammer on Southern Europe to make changes when those nations are perfectly capable to invent such changes themselves, and even better ones since they know the local conditions. The only point is that we should allow economic scientists in those nations to be heard as well. President Obama also has a background as a community worker. He can help to discuss the problems in the European community. The key problem in our modern economies is that our systems of political decision making do not include the insights of our best economic scientists. We are sending rockets into the sky while listening to Aristoteles, no disrespect intended, instead of Newton and Einstein. Let us make progress, please, let us make progress in human civilisation.

Actually, the EU is already partly on the road towards such Economic Supreme Courts. In the Euro Plus Pact there is already the inclusion of rules on structural budget balance "preferably at constitutional level". The eurozone now states: "national budgets should be based on independent growth forecasts" (point 26). When remixed this gives such an Economic Supreme Court. The rules on the budget should better not be in the constitution. The debt ceiling clash in the USA shows that inflexibility is a problem in times of crisis. Independent forecasts however require constitutional safeguards, and especially their scientific base and openness to the scientific community. Then see the draft constitutional amendment in my book DRGTPE.

My advice to the parliaments in the eurozone is to reject the plans from the night of 26-27 October and instead look at, big surprise, my economic plan for Europe. The ECB and the EFSF can handle the uncertainty that this delay will cause for the financial markets. European leaders can already start criticising Germany and Holland for their export surplusses and lack of home investments. Premier Papandreou would not have to step down when Greece would offer collateral. This must be seen in conjuction with the growth agenda presented by the EU Council on October 23. This is still a neoliberal agenda that still depends upon the crucial errors in analysis by Alan Greenspan and that Europe unfortunately imported from the US.

Can President Obama do it ? In theory he could. Economic theory allows a better world, it only needs to be studied. Like Kanzler Merkel disciplines Southern Europe, economic theory has a way to discipline its users by creating crises if not properly studied.
 

References

Eurozone (2011), statement of October 26-27 2011. 
Baldwin, R. (2011), "EZ rescue or recession: Fallout of the October 2011 package", Vox EU October 28
Bloomberg (2011), "Harvard's Rogoff says Greece will still leave euro", Ekathimerini October 28
Consilium (2011) "European Council 23 October 2011 Conclusion", EUCO 52 / 11
Colignatus (2009a), "The current economic crisis: A solution that "lies buried and obscured in a mass of false theory"", Vox EU February 16
Colignatus (2009b), "Gliding into the Bush-Obama Depression", website
Colignatus (2010), "Single vote multiple seats elections. Didactics of district versus proportional representation, using the examples of the United Kingdom and The Netherlands", MPRA 22782
Colignatus (2011a), "High Noon at the EU corral. An economic plan for Europe, September 2011", MPRA 33476
Colignatus (2011b), "An economic plan for Europe", Ekathimerini October 23
Colignatus (2011c), "Definition & Reality in the General Theory of Political Economy", (DRGTPE) 3rd edition October 
Malkoutzis, N. (2011), "Grand gestures, empty gestures", Ekathimerini November 1
Market News International (2011), "Papandreou: Greece Will Pay Back Debt In Full, But Rates High", Forexlive February 21 
Stavrou, P. (2011), "A plan for Europe – Interview with Thomas Colignatus", blog October 8