Wednesday, April 1, 2009

Radio Free-Riding Europe

. Wednesday, April 1, 2009

Was I unnecessarily strident in my tone towards Europe in my last post? Loyal IPE@UNC reader Sensemania certainly thinks so, and she/he may have a point: my tone was probably more abrasive than it needed to be. Substantively, however, I'm unconvinced by Sensemania's rebuttals. I'll respond to Sensemania's bullets in kind:

1. "Europe (as a whole)" does not have the "second most impressive military in the world" because "Europe (as a whole)" does not have a military. If Sensemania means that all of the individual countries of Europe combined have the second most impressive military in the world, then the statement may be true but it is also meaningless. In all of the notable Western military interventions in the past two decades (that I can think of), Europe has been divided, with some prominent states favoring intervention and others opposing. Still, even if you take all EU military expenditures together, the US still spends more than twice as much, despite the fact that the EU has recently surpassed the US in gross GDP (i.e in percentage terms, the gap is even greater). Indeed, only two European countries -- France and the UK -- spend more than Japan, who is constitutionally forbidden from maintaining a standing army. What's the point of nit-picking? Only to point out that the lavish social spending programs in Europe have been possible in large part because America has borne a disproportional share of the security burden. This was probably more true in the second half of the 20th-century than it is today, but even still the disparity is stark.

2. I'm not talking about footing the bill for American adventurism in Vietnam (although France did start that one) or Iraq; I'm talking about the fact that Europe has been able to avoid costly security dilemmas with itself and the former Soviet bloc for decades because America has been willing to foot a large part of the bill. I think this point is pretty much inarguable. This is not to say that Europe does nothing, or that European intelligence, technology, and territory have not benefited the US. Of course they have. But if the question is who has benefited more from the other, there's only one answer.

3. The context of my post was the G-20 meetings, and the meat of it was about economic, not military, free-riding. To be sure, the two are sometimes related (which is why I brought it up), but they are also distinct. In this case there are three main noises coming from Europe: Germany is saying "Go ahead and stimulate your economy so you can buy our exports, while we sit back, keep inflation low, keep debt low, and free-ride". France is saying "We must have coordination, but you guys screwed everything up and we did nothing wrong, so if you don't do exactly as we please then we're outta here. Oh yeah, and we're gonna free-ride on your stimulus also." The U.K. is saying "Okay, so our banking system is even more screwed than yours, and our real economy is tanking, but we can't get the money we want for stimulus, so please help us out". True, some EU states (esp. Germany) aren't interested in stimulus for historical/ideological reasons, but others (esp. UK & E. Europe) are very much interested but don't have the political clout to get the EU to play ball. So the EU is asking for the IMF to step in and bail out their own member countries, as well as others on the Continent, rather than engage in stimulus as the US is doing. Some kind of cooperation!

As to the question of who pays for the IMF, well that is answered easily enough: the U.S. pays the greatest share of any country, and it's not even close (yes, the aggregate share of the EU countries is greater, but the EU does not vote as a bloc in the IMF). As for temporary increases in funding, the new $100bn commitment from the EU is encouraging (I wasn't aware of it until Sensemania pointed it out), but all sorts of commitments are made at G-20 meetings that never materialize. And even if the EU matches the US contribution to the IMF kitty, they are still falling far behind in other types of action.

The long and short of it is that the US is trying to stimulate domestic consumption, much of which will be consumption of imports from Europe and Asia. This consumption boost may not actually increase much domestic employment if the benefits of the stimulus leak from the US to its trade partners. Instead, the net effect could be an expansion the trade deficit and US debt. Other countries (e.g. China, Brazil) pushed forward with their versions of fiscal stimulus, but Europe refuses (UK excepted). Instead, they are content to let the US foot the bill and rack up the debt. Meanwhile, demands from Europe include calls for a new reserve currency and a new financial regulatory structure, despite the fact that European banking regulations were often much laxer than those in the US and the fact that the dollar has held its value better than the Euro or pound sterling since the crisis began. Oh yeah, and then there's the creeping protectionism that has some talking about a "new Iron Curtain" splitting Europe back into West and East. So much for common markets.

Perhaps Europe's actions are rational, but they aren't cooperative. And as the US continues to see Europe reap greater rewards from defecting in this version of the Prisoner's Dilemma, they will become more and more likely to retaliate.

For more on free-riding, and the differences between how Europeans and Americans view the crisis, see this piece. One tidbit:

If the episode that haunts the U.S. is the Great Depression, in Europe, where the Germans have been dominant in shaping economic policy, the defining historical moment is the hyperinflation of Weimar Germany, when prices rose more than seventy-five billion per cent in just one year, 1923, and, in the words of Walter Benjamin, “trust, calm, and health” vanished. The legacy of that episode lives on not just in German policymakers’ inflation phobia but also in their sense that there is something fundamentally distasteful about debt. For Germany, fiscal rectitude even in the face of a crisis is not just economically sensible but morally correct.


Radio Free-Riding Europe




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