Contagion Beyond the Headlines in the E.U.

The E.U. states of Greece and Italy were grabbing headlines during the first two weeks of November 2011, given the dramatic resignations of Papandreou and Berlusconi. The only other state to get some attention was France. The Wall Street Journal noted on November 12^th that concerns had been quietly building about France. According to the paper,“French bond yields rose to four-month highs, one day after Standard & Poor's Ratings Services erroneously issued a message saying it had cut France's triple-A credit rating. The yield on France's benchmark 10-year bond climbed 0.02 percentage point to 3.46%. That was 1.66 percentage points over yields on comparable German government bonds. France now has the highest government bond yields among its triple-A-rated peers in the region.” However, it seems overly dramatic to say that a .02 percent increase evinces a climb. Moreover, 3.46% is well under 7 percent, which is the level that was presumed at the time to signify the need for a bailout. Relative to the changes in the Italian yield, those of the French bonds could be viewed as relatively moderate, The French yield was still closer to that of Germany. Although not a red herring, the concern over France masked some real sleepers that were poised to take a hit in 2012. 

Eclipsed by the headlines, Portugal’s expected GDP for 2012 was revised downward by the E.U.’s executive branch in November from the May estimates of around -1.8% to -3% with an expected unemployment rate of nearly 14 percent. The 2011 numbers were also revised downward, from about -1.9% to around -2.1 percent. Meanwhile, Portugal’s semi-sovereign 10-year bond yield was at just over 12 percent, well over Italy’s “point of no return” rate of 7.5 percent, which was hit for a day during the second week of November. With an expected contraction of 3% in 2012 and a 12% yield in November of 2011, Portugal could be expected to face stronger head-winds in being able to make its interest payments in 2012. I suspect that the press had become so captivated with the circus of personalities in Greece and Italy that the iceberg lying in front of Portugal was simply not seen.

Besides Portugal, some of the states in Eastern Europe faced icebergs of their own—though not necessarily of their own making. These too were receiving too little press coverage in November of 2011. Specifically, the state leaders of the “euro zone” had decided in October to give the “zone’s” major banks until the following summer to raise their capital reserves. With that amount of time, the banks could avoid issuing new stock (which would dilute the holdings of their existing stockholders) and get the added reserves together by cutting back on lending to Eastern E.U. state governments instead. Morgan Stanley figures that Poland, Romania, and Hungary are most vulnerable to a loss of “euro zone” bank lending. Roughly 1 trillion euros of “euro zone” bank assets were in Eastern Europe at the time of the change in governments in Greece and Italy. Hungary’s exposure was the largest, with loans held by the banks amounting to about 37% of GDP. According to the Wall Street Journal, any hit to the E.U.’s eastern states, whose economic growth had been powered the global recovery, would only worsen the E.U.’s economic outlook and its ability to service its debts. That is to say, enabling the “euro zone” banks to raise additional reserve capital by reducing lending rather than raising equity may have been in the banks’ interest, but choking the eastern states could already in November be expected to make it more difficult for Greece, Italy, and Portugal to service their respective debts from reduced economic output in 2012. 

It would have been wiser on the journalists’ part to put France in perspective and take a look at Portugal and Eastern Europe than to have fixated so much on the plights of Papandreou and Berlusconi as they struggled to maintain power only to ultimately lose it.

For more on this topic, see Essays on the E.U. Political Economy

Sources:

Matthew Dalton, “Europe Slashes Its Growth Forecast,” The Wall Street Journal, November 11, 2011. 

Kelly Evans, “Eastern Europe Vulnerable in Debt Crisis,” The Wall Street Journal, November 11, 2011. 

Neelabh Chaturvedi, Stelios Bouras, and Liam Moloney, “Europe Pulls Back From Brink,” The Wall Street Journal, November 12-13, 2011. 

Can an Electorate Hold Its Political Elite Accountable: The Case of François Fillon

Can a political elite hold itself accountable? Left to its own devices, absent a virtuous citizenry, a political elite is able to exploit a conflict of interest in both wielding the authority of government and using that power even to constrain the elite itself. Unfortunately, even where an electorate is virtuous, the dispersed condition of the popular sovereign is an impediment to galvanizing enough popular will to act as a counter-power to that of a political elite, which is relatively concentrated and well-informed. In early 2017, the problem was on full display in the E.U. state of France, with little the federal government could do given the amount of governmental sovereignty still residing at the state level. So the question is whether an electorate can galvanize enough power to counter that of a political elite.

  François Fillon in trouble for corruption (Christian Hartmann/Reuters)

Just months before the election, France’s leading presidential candidate was “in deep trouble” for payments of nearly €831, 440 “from the public payroll to his wife and children” over the 30 years in which François Fillon employed them.[1] Penelope Fillon “was paid with taxpayer money for a bogus job as a parliamentary assistant to her husband and his deputy” in the state Assembly.[2] Because her husband had “fashioned himself as a stern and honest politician,” the sordid odor of hypocrisy was in the air, yet the practice itself, which was legal at the time, was to “many French politicians” no “big deal.”[3] So from the press and the public came “a wellspring of anger” calling into question the standard operating procedures of the political class.”[4] In short, the response was: “They just don’t get it.”[5] C’est vraiment incroyable. Really incredible.

A political class cannot police itself if its culture is so ensconced in the misuse of funds, even if legal, that the ubiquitous practice is not even recognized as being unethical in nature. On an organizational scale, I have witnessed a university’s culture so dysfunctional—with such passive aggression from the non-academic staff—that the offending creatures would not even recognize themselves in the mirror; even to question them would be perceived as a provocation. Accountability is impossible in such a sordid organization. So, too, a political class with an ingrown sense of presumptuous entitlement cannot possibly hold itself accountable. A perception of wrong-doing is requisite to holding oneself accountable. The decisive question is therefore whether a “wellspring of anger” in a public-at-large can be sufficient to “throw the bastards out.”

Even if a sizable proportion of an electorate votes to “throw the bums out,” other rationales for voting doubtless exist and can dilute the effect such that the culture of the political class can survive. Furthermore, even intense anger today can quickly dissipate, such that the results of an election even just months away show little sign of the earlier sizzling headlines. Even major protests do not necessarily translate into the ballot box. At the time Fillon was facing a harsh reaction in France, more than 250,000 irate people in the state of Romania were protesting after Liviu Dragnea’s governing Social Democratic Party passed a law on January 31, 2017 making “official misconduct punishable by prison time only in cases in which the financial damage is more than 200,000 lei, or about $47,000”—Dragnea himself facing “charges of abouse of power involving a sum” less than 200,000 lei.[6] Here we can see the conflict of interest on full display: Dragnea was using the power of his party in the state legislature such that he would essentially be above the (constraint of) law. Yet even such a blatant case cannot be expected to be punished when the next election comes around. Something more is needed to address the inherent conflict of interest.

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1. Adam Nossiter, “Fillon Scandal Indicts, Foremost, France’s Political Elite,” The New York Times, February 3, 2017; Aurelien Breeden, “Graft Allegations Grow Against Francois Fillon, French Presidential Hopeful,” The New York Times, February 1, 2017.

2. Aurelien Breeden, “Graft Allegations Grow Against Francois Fillon, French Presidential Hopeful,” The New York Times, February 1, 2017

3. Adam Nossiter, “Fillon Scandal Indicts, Foremost, France’s Political Elite,” The New York Times, February 3, 2017

4. Ibid.

5. Ibid.

6. Palko Karasz, “Protests Rock Romania After Government Weakens Corruption Law,” The New York Times, February 2, 2017.

Is States' Rights in the E.U. Racist?

Thousands of Romania’s Roma people (also known as Gypsies) headed for the wealthier Western E.U. states, setting off a clash within the European Union over just how open its “open borders” really were. Migration within the 27 states of the E.U. became a combustible issue during the economic downturn. The Union’s expansion that brought in the relatively poor states of Romania and Bulgaria in 2007 renewed concern that the poor, traveling far from home in search of work, would become a burden on the state governments of the wealthier states. The migration of the Roma also raised questions about the obligations of Romania and Bulgaria to fulfill promises their governments had made when they joined the Union. Romania, for instance, mapped out a strategy for helping the Roma, but financed little of it.

Nicolas Sarkozy of the E.U. state of France demanded in 2010 that the Romanian state government do more to aid the Roma at home. He vowed to keep dismantling immigrant camps and angrily rejected complaints from E.U. Commission officials that the French authorities were illegally singling out Roma for deportation.

Sarkozy, being oriented to state politics, tried to revive his support on the political right by deporting thousands of them, offering 300 euros, about $392, to those who go home voluntarily, and bulldozing their encampments.[1] The European Commission threatened legal action against the state of France over the deportation, calling it disgraceful and illegal. Perhaps it could also be called racist. If so, might Sarkozy’s action be comparable to a Southern state in the U.S. trying to kick black people out. That is, might Sarkozy’s action evince state rights perpetrating racism? Arizona’s immigration law requiring people being investigated by the police to show I.D. pales in comparison.  Might the association of state rights and racism have shifted from the U.S. to the E.U.? If so, it is doubtful that state rights would be marginalized in the E.U. as it has been in the U.S. on account of the association; the state governments in the E.U. enjoy more than enough loyalty by their citizens to defeat it.

More generally, this case illustrates the problems that the E.U. has had in enforcing compliance of the terms of the accession talks of new states. Prime facie, the case showcases the difficulty involved in integrating Europe, particularly as states such as Italy, Spain, France and Denmark have striven to keep out immigrants from Africa. The case of the Roma could be just the tip of the iceberg in how state rights may be fueled by racism to keep certain groups out. In other words, there could be a rather troubling pattern here, and Europeans may have been torn—looking to the E.U. to thwart the racism while supporting their state governments in keeping out “troubling” groups. It is part and parcel of the checks and balances in modern federalism that member governments can be called on their sordid policies even when they are popular within the particular states.

1.Suzanne Daley, “Roma, on Move, Test Europe’s ‘Open Borders’,” The New York Times, September 16, 2010.