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In the wake of Greece’s announcement that it would indeed need a bailout, Angela Merkel’s coalition partners suddenly got cold feet. Germany was slated to provide 8.4 billion euros out of the EU’s total contribution of 30 billion. Leaders of the FDP feared that the payout would ruin that party’s hopes of providing tax relief.  The German Foreign Minister Guido Westerwelle,told ZDF television, “It has yet to be agreed that Greece will actually get assistance from Europe at all.” He added: “We will not write a blank cheque”. FDP deputy leader Andreas Pinkwart said it would be “a slap in the face of German employees” if the government would give billions of euros to Athens, and tell Germans “there’s no money left for easing their tax burden.” The FDP’s  finance expert Hermann Otto Solms also criticized Finance Minister Schaeuble’s plans. “It was wrong to put the pot of honey in the middle of the table right from the start,” he said. “That was a signal for the Greeks to just help themselves.” The right thing to do would have been to offer Greece no help and direct them straight to the IMF, Solms told the Passauer Neue Presse daily.
The government’s role in the rescue package also received criticism from Chancellor Merkel’s second coalition partner, the CSU party, which is based in the region of Bavaria. CSU parliamentary leader Hans-Peter Friedrich said his party would prefer Athens to leave the eurozone and solve its problems by “re-introducing its former national currency, the Drachme, at a devalued rate of exchange.”  Friedrich’s opinion was echoed by economist Joachim Starbaty from Tuebingen University. Greece was “no longer competitive within the eurozone,” he said. “It’s impossible for the country to repay its debts and the loans it now receives because its economy will be unable to accumulate surpluses for a long time “, he said. “Devaluing a national currency is the only chance for Greece to regain its competitiveness. Starbaty announced he would lodge an official complaint with Germany’s Constitutional Court should parliament in Berlin give the green light to the bailout package.

However, the German financial houses were very powerful at the time, and they could have pushed Merkel into going ahead with the deal anyway. Germany’s financial institutions held some €28 billion, or $37 billion, in Greek bonds.  About half of it had been downgraded by S & P to junk.  Indeed, 14 billion is more than the 8.3 billion that Germany is set to pay as part of the EU rescue. Deutsche Bank’s chief financial officer, Stefan Krause, indicated that the bank would feel the effects of a deeper Greek crisis. “We don’t have much exposure to Greece directly. We are not concerned,” Mr. Krause said during a conference call with analysts. He added, “We could not completely isolate ourselves if the situation gets worse.”

Analysis:

Germany’s direct exposure to Greek debt provides another reason why the Greece's financial problems were very much Europe’s problems. “It’s not just a question of paying for Greece’s luxury pensions. There are intrinsically strong German interests as well,” said Alessandro Leipold, former acting director of the I.M.F.’s European Department. Even so, the politics within Germany shouldn’t be ignored either. The ability of one state to pull out of the EU’s attempted bailout of another of its states illustrates the EU’s vulnerability in having so much authority continue to reside with the state governments.  Ultimately, the risk is one of dissolution of the union.  To be sure, giving the EU too much power would risk consolidation–something that the US is in risk of “achieving.”  The trick is to create and perpetuate a federal balance of power, wherein the two governments for each bit of territory can check each other.  The FDP’s interest in giving the residents in the state of Germany tax relief suggests that states will indeed look out for themselves at the expense of other states, even if one is going bankrupt.  Starbaty’s reference to the “eurozone” ignores that the EU is not just a “zone” wherein there is the euro currency.  Even for the states having the euro, the EU is much more.  In fact, becuase the EU’s ECJ (European Court of Justice) has decided that EU basic law trumps state basic law, it is not clear to me that the  Starbaty is going to the correct court.  That is, an EU court has the jurisdiction to decide on the EU’s assistance to one of its states, even if the EU is counting on its state governments for the funding.  There has been such reliance in US history, and as Hamilton attested, it did not work out well.  Unfortunately, getting away from that problem led the US on a track too close to consolidation.  

Perhaps the US and EU can learn from each other.  The EU is now where the US was in its first fifty or so years.  That is, the EU has passed the Articles of Confederation stage, as the Articles did not have a legislature (i.e., EU Parliament), a President, an executive branch (i.e., the European Commission), and a supreme court (i.e., the ECJ).  Even so, the EU’s governmental institutions are weak relative to those of the states.  This makes it difficult for the EU to effectively respond to a crisis in one of its states because another state, such as Germany, can thwart a viable solution.  In short, the EU needs to move closer to the middle in achieving a federal balance of power.  As the US has already overshot it, perhaps the EU can showcase how federalism at the empire level (i.e., a union consisting of nation-states) can work.

Sources:
http://www.dw-world.de/dw/article/0,,5506597,00.html ; http://www.nytimes.com/2010/04/29/business/global/29banks.html?pagewanted=1

On March 1, 2011, the European Court of Justice, the EU's Supreme Court, declared illegal the widespread practice of charging men and women different rates for insurance, setting in motion an overhaul of how life, auto and health policies are written across Europe. Although tied to commerce, the ruling involves non-economic elements as per the high court's citation of the EU's Charter of Fundamental Rights, which enumerates 14 categories on which discrimination is prohibited; sex is the first. A separate provision states that "equality between men and women must be ensured in all areas." Because fundamental rights go to the core of what a political domain stands for, at least in the case of a republic, an implication is that the EU is indeed a political federal state, rather than simply a WTO for Europe. The fact that the states of the EU must abide by the ECJ's ruling on the fundamental rights means that some governmental sovereignty has indeed shifted from the state governments (and their respective constitutions) to the EU.  Like the US, the EU is a federal system of governance characterized at its core by dual governmental sovereignty, which in turn is sourced in popular sovereignty.  Other, less fundamental, implications can also be drawn from an analysis of the ruling.

Ironically, the court's decision means that women drivers will pay higher premiums (possibly up to 25% more) to be treated equally; premiums for young men would fall. Hitherto, European insurance companies could use the statistical correlation between being male (and young) and risky driving to charge young men higher premiums.  Positive correlation is not causation, however; there is no known causal relationship between a female biology and relatively risk-averse driving. The advocate general, Juliane Kokott, argued that there was "no compelling evidence that women live longer or drive more safely because they are biologically women. Underlying factors affecting longevity or prudent driving—such as drinking habits or the desire to engage in risky behavior—might be associated statistically with one or other sex. But that, she said, doesn't mean insurers can choose a price for a particular customer based on sex," acccording to The Wall Street Journal.

Generally speaking, David Hume argued in the eighteenth century that we don't really understand causal connections even when we think we do. In other words, we tend to make assumptions--essentially over-extending our minds from what we do in fact know. I would add that presumption itself might be hardwired in the human mind even in simply being able to have a coherent (i.e., unitary) consciousness.  Unavoidably, we make assumptions about what we perceive in order for the world to make sense.

In addition to the political and philosophical implications, the case provides an illustration of the nature of business regarding regulatory obstacles. In short, it is in the nature of a profit-seeking machine to get around the dams.  The Wall Street Journal reports that European insurers "had been bracing" for the March 1 ruling. Philip Jarvis of the law firm Allen & Overy in London "says insurers may have to collect more individual data on policy holders to compensate for the loss of sex as a quick dividing line. That could accelerate, for instance, the adoption of vehicle "black boxes" or other devices to plug into onboard diagnostic computers to give insurers a direct look at driving habits." Such a closer tie between a driver's premium and his or her actual driving would be fairer than going on market-segmentation correlations (i.e., groupings).  However, to the extent that correlations are more cost-effective than equipping every car with a black box, insurers could simply find other variables that are not gender but essentially give the same results. For example, if women tend to buy a product, insurers could use owning that product in lieu of gender in pricing premiums. That would probably set off another round of legal proceedings, but it would give insurers additional time under essentially their old rubric.  In short, I contend that business is inherently oriented to getting around things in its way profit-speaking. A regulation that a firm cannot use strategically (i.e., giving it a comparative advantage over competitors less well-equipped to comply) is apt to be viewed from a managerial standpoint as a challenge to get around with the least inconvenience or cost. To be sure, there was no evidence of such behavior as of the ECJ's March 1st ruling; I am merely pointing to how it might look.

Source: http://online.wsj.com/article/SB10001424052748704506004576173832873341162.html?KEYWORDS=EU+Closes+insurers%27

In an article from MSNBC on the public debt crisis facing some of the EU’s states, the reporter writes: “Analysts are also growing more worried about the U.S. budget deficit, which remains higher than that of most eurozone nations. But Greece, Spain and other troubled countries in Europe do not command the kind of economic clout the United States does and, in many cases, have yet to escape the Great Recession.”

I contend that this statement is misleading because it is premised on a category mistake.  Firstly, the EU is not simply “eurozone nations.”  In having a Parliament, Supreme Court (the ECJ) and a Senate or Council representing the states, the EU has a government. Accordingly, some of the governmental sovereignty that used to be held by the state governments has been transferred to the EU, so the governments of the union and its states are both semi-sovereign.

Secondly, of course the respective state governments of the EU do not “command the kind of economic clout the United States does.”  That they should evinces a category mistake. Both the US and EU operate common markets.  That a part of one common market is not equivalent to a common market made of such parts should go without saying (see: fallacy of treating a part as a whole).

Thirdly, in treating the US public deficits and debt as equivalent to those of the EU’s state governments, one ignores the fact that many of the US’s state governments also face daunting public deficits and debt.  In other words, comparing the US debt to those of the EU’s state governments is misleading.  Because the EU government does not have a significant debt (that I know of) and some of the US states do have such debt, the comparison understates the debt on the US side.

In general terms, the presumed comparison assumes that there are no significant differences between a union of states and a state of such a union with respect to political or economic functions.  It might be, for instance, that because an empire-scale union is further from the people, accountability with respect to running up debt might be different than in a state.  I suppose it could be argued that the political entity composed of the states could be expected both to buffer public demands for more spending and to be more profligate than what the people want.  In any case, my point is that different dynamics come into play at the empire-level. Ignoring the qualitative differences in going from a kingdom-level polity to an empire-level policy made up of kingdom-level polities results in the kind of statements I have critiqued here (i.e., as if the US merely has more economic clout than a state of the EU, rather than that the US is not comparable with a state in another union). 

I think we moderns tend to skip over category mistakes when they have become the default in our societies.  This makes us susceptable to relying on erroneous results from comparisons based on such mistakes.  In other words, we take too much for granted in what we read (and hear) in the public square.  Although we don’t realize it, we desparately need Socrates-like writers (and speakers) to point out to us that we don’t know as much as we think we do.  This goes for such writers ourselves.  My thesis on the EU and US is of course merely a theory or argument…far from perfect, perhaps wrong, and doubtlessly improveable by others.  One way out of our epistemological presumptuousness is to subject taken-for-granted assumptions in the public square , including my own, to critique.  We simply do not go far enough, which permits vested interests to get away with too much.

Socrates, where art thou?  You should have slipped out when you had the chance. You were aiding Athens…not corrupting the youth.  Your detractors were just jealous (they owe you a written Apology).  Please come back. Spit out that hemlock.  We need you!

Source: http://www.msnbc.msn.com/id/35268117/ns/business-washington_post/

In other posts, I have argued that the EU and the US are of the same political genus or level.  That is, both are modern empire-level Unions that contain polities on the scale of the early modern kingdom.  In other words, the American states are roughly equivalent to the European states.  I have also argued that once this basis of comparison is established, useful comparisons (and contrasts) can be made.  Contrarywise, likening apples with oranges is apt to lead to erroneous conclusions (which has been the norm).   In the March 2, 2010 issue of the NYT, Roger Cohen illustrates how useful EU-US comparisons can be.  He is careful to compare the EU now not to the current US, but to the US a few decades into its founding.  One would not compare new with old wine; new should be compared with old when it too was new.   The US under its Articles treaty (and before that as a military alliance) was far less integrated politically and economically than the EU is today (which is roughly at where the US was in 1790). 

Lamenting the concern of the EU states that have done a better job than others (Portugal, Ireland, Greece and Spain) on debt-management, Cohen sees a parallel in the early US.  He writes, “More than two centuries ago, the newborn United States faced a similar crisis of integration. With the Constitution approved, Alexander Hamilton, as treasury secretary to President George Washington, grappled with proving that the government of the 13 states that now existed on paper could function in practice. The economy was a shambles, beset by debt incurred in the fight for liberty. In 1790, Hamilton set about establishing the financial credibility of the federal government. Central to his proposals was that the government would assume the debts of the states. This precipitated the “assumption” crisis because different states had different levels of debts and had proved more or less conscientious in paying them off.”  Cohen maintains that a similar “assumption” crisis would befall the EU as states like Finland and Germany brissle at the EU assuming the outstanding debt of some of the Southern states (notably Greece).

Cohen goes on to note that the “assumption” crisis was resolved in the US by creating Washington, D.C. near Virginia to appease Madison and Jefferson (the US’s institutions had been in New York City).  Cohen doesn’t see any such deal in the works in Europe, so he concludes that the tensions between having a centralized currency and federal (i.e., EU and state-level) fiscal policy will continue.  Comparing oranges with oranges (which is rare…at least during the winter of 2010 given Florida’s cold weather then), he argues that “Greece is a far smaller economy than crisis-hit California, but thanks to Hamilton, California’s travails are absorbed within a huge economy where most taxing and spending is done by the federal government. Athens agonistes has no such cushion.” This is a very good point.  After the earthquake of 2010 in Chile, I was thinking along similar lines (i.e., the difference that a SAU would make for Chile’s recovery). 

However, Cohen falters from his otherwise excellent basis of comparison.  Ignoring the governmental sovereignty that the European Court of Justice has ruled belongs to the EU over its state governments (and constitutions), he  views the EU as simply “the halfway house of monetary union, fiscal divergence and à la carte national politics.”  In actuality, the EU is far more—just ask a European whether he or she has encountered any of the EU’s laws and regulations (which go beyond monetary union).  I suspect that Cohen is thinking of the EU only in terms of its monetary authority and generalizing that to “what Europe is.”  His ending line, “The differences between America and Europe go beyond the political to their very nature,” can be interpreted as a denial of the EU-US basis of comparison that is the basis of his comparisons (oranges with oranges).  If the EU is merely economic whereas the early US was political and economic, then the EU and US are not of the same political genus, which would render comparisons between them questionable at best.  But the EU does have political or governmental institutions, such as a court (the ECJ) and a parliament.  The ECJ functions as the Supreme Court (even ruling against state constitutions at odds with EU law in an EU enumerated power).  Furthermore, the EU Parliament has a role in the enactment of laws that cannot be reduced to state laws.

Undoubtedly from his truncated view of the EU,  Cohen generalizes too much in concluding that “ever closer union” will not occur in the EU because of the differences among the state governments’ respective debt-levels (relative to the state economies).  The EU is much more than a currency, I would argue, and other lines of integration will not necessarily be impeded by monetary divergences.  To be sure, political differences from the latter may spill over onto other policy domains, but I believe that Cohen is being to much of a monetary reductionist in casting doom on the EU as a whole.

Comparing the EU now to the US in 1790, there are more adequate structural safeguards against consolidation at the Union-level of government than there were in the US.  For example, the heads of the state governments sit on the European Council whereas the counterparts in the US sent delegates to the US Senate (which represents the state governments even today).  The US could learn a thing or two from the Europeans and replace the US Senate with the Governor’s Association.  More balance in power between the state governments and that of the Union would be more likely as a result.  Of course, that the EU began with regulations and is only now picking up powers that are more typical for the Union level could mean that the EU could consolidate power from its state governments (esp. as Europeans gain more of a sense of being Europeans…perhaps in 100 years or so…as was the case in the US).

My advise to the Europeans is: don’t be afraid to deny all that the EU has become, and redouble your efforts to safeguard the state governments from an encroaching EU government.  These to things sound contradictory, but they are not.   For only by realizing what the EU is politically (i.e., a federal government) will you realize how important it is to construct a federal structure that works against a consolidation of power far from the people of Europe.  Of course, this does not mean starving the EU, for then dissolution and possible future wars would be likely.  So it is a federal balance that should be strived for, and you can structure your Union (and its states) in such a way that balance is achieved (you are not yet there) and maintained.  US History provides a case study of what NOT to do if this is your goal.  We have really screwed up federalism here (and most of us don’t even realize it).  Hopefully, by comparing the EU with the US you can do better.  Maybe that will prompt folks like Cohen to look at Europe and say, “Hey, we can do that too. Afterall, the US is a Union of states too.”   It is of course possible to re-trace and correct for a wrong turn federally speaking.  Anyway, bonne chance, mes Amies!  Gut Gleuck! Viel, viel Gleuck!

Source: http://www.nytimes.com/2010/03/02/opinion/02iht-edcohen.html?hp

In its 1993 Maastricht Treaty decision, the German Constitutional Court decided that national authorities are not bound to respect and apply Community law to the extent that it exceeds the outer boundaries of Germany’s transfer of sovereignty to the European institutions.  It has also ruled that no transfer of sovereignty is valid to the extent that it results in the violation of the fundamental individual rights guaranteed in the German Constitution.  But that court’s latest ruling on this subject indicates a willingness to rely on the ECJ for the vindication of those fundamental rights.

A willingness to rely on the ECJ shows how tenuous the EU is. The German Court could simply disallow a disadvantageous ruling of the ECJ. In contrast, the ECJ undoubtedly views its rulings as binding on the EU’s states. This is a recipe for conflict. Being skeptical that the EU institutions are too far from the people and viewing the EU as akin to an international organization, most of the EU’s states are apt to resist being subject to an averse ECJ ruling. I contend that such states are mistaken in their premises here.  The EU Parliament, for example, is directly elected by citizens of the EU. Furthermore, the Parliament as well as the Commission and the ECJ give the EU governmental institutions that make the EU a federal government rather than a single-issue international organization. The recipe for conflict, in other words, lies in misunderstanding rather than simply in differential interests.

At the same time, there is a conflict of interest in having the ECJ be the decider of last resort on disputes between the EU and a member state. According to Bermann and Nicolaidis, “Systems which more or less readily accept the notion of implied federal legislative pre-emption—treating such pre-emption as basically a question of statutory interpretation—almost invariably vest federal courts with the power to determine whether there is federal legislative pre-emption or not.  The situation in the EU appears to be evolving in much the same general direction. Thus, even if the Community’s Treaty-based legislative authority  on a certain subject is concurrent only, this will not in itself prevent the EU legislature from legislating pre-emptively on that subject… . The Community’s internal market harmonization is widely considered to be pre-emptive.” In other words, there is a conflict of interest in having an EU-level institution (the ECJ) decide on federal pre-emption.

Given this conflict of interest, how the EU institutions are viewed in the member states, and how ruinous nullification by a state would be, I suggest that EU-state disputes be adjudicated by a special court whose justices serve on a rotating basis taking leave from the state constitutional courts. This solution would mitigate perceived distance between the EU and state institutions.

Sources: Judgment of 22 October 1986, in Application of Wunsche Handelsgeselischaft (Solange 11), Case 2 BvR 197/83, 73 B. Verf. GE 339, (1987) 1 3 CMLR 225 (Ger. Const’l Ct.).
George A. Bermann and Kalypso Nicolaidis, Basic Principles for the Allocation of Competence in the United States and the European Union, pp. 483-504 in Nicolaidis, Kalypso, and Robert Howse, eds., 2001. The Federal Vision: Legitimacy and Levels of Governance in the United States and the European Union (Oxford: Oxford University Press, 2001), 494, 495.

The Hungarian state government assumed the over-all presidency of the E.U. on January 1, 2011 for six months. This instantly put the question of whether some of the state laws enacted the previous year violated E.U. constitutional law.  The extent of the breach is itself instructive for us in wondering how it is that a state government could find itself so obviously in violation and yet look the other way.  In other words, this case study suggests that European integration, and federal government in general at the empire-level, is not exempted from the tensions in federalism between the state governments and a general authority tasked with holding the union together. According to The Wall Street Journal,  "In some ways the dispute between Budapest and Brussels goes to the heart of a debate over the proper distribution of power between national governemtns and the central authorities of the European Union."  Hungary's governor, Viktor Orban, stated, "The EU basically has no right to interfere" in these sorts of policy decisions. In 2008, EU government officials had criticized Hungarian officials for relying on short-term fixes rather than long-term spending cuts to shirk the state's budget deficit.

In Hungary, "crisis" taxes that fell disproportionately on out-of-state businesses doing business in the state had been enacted.  The European Court of Justice had previously ruled against such taxes having a disproportionate effect, yet somehow the Hungarian legislature missed this point in enacting the law. It should come as no surprise that officials of other state governments in the E.U. claimed that Hungary was targeting select sectors and out-of-state companies in particular to balance the state's budget. Even so, a state official in Hungary claimed that the "question is: how much economic liberty you have in the EU? We think every state does hoave economic freedom--within a certain framework, we have different methods and models."  While the notion of a shared framework allowing of diversity fits with modern federalism, the diversity cannot contradict the basic principles in the framework.  In this case, a common market requires that states do not discriminate in intention or consequence against firms based in other states. In other words, a common market requires a level playing field.

Secondly, the state legislature enacted a new media law that became quite controversial in the E.U. The law passed by the state legislature in late 2009 allowed regulators to impose fines for "unbalanced" or 'offensive" reports and sets limits for the amount of time that can be devoted to certain types of news. The law also required bloggers to register with the state government. It should be <i>prime facie </i> evident that this law goes against the E.U.'s commitment to freedom of the press.  Guy Verhofstadt, leader of one of the parties in the E.U. Parliament, stressed that no state government should be allowed to put "restrictions to freedoms that lie at the heart of our union of values." From the standpoint of republican principles alone (i.e, being a representative democracy, or "free"), a government fining journalists for being unbalanced or for their allocation of news stories is odious. That a state government in the E.U. would even attempt such a thing ought to give pause to anyone who assumes that it most of the governmental sovereignty in the E.U. should remain with the states. In other words, there is a real need for the E.U. governmental institutions to provide a check with teeth on wayward states, or the union will dissipate.

Finally, European Central Bank officials claim the Hungarian government's changing of the selection process of the state's bank's rate-setting committee threatens the bank's independence. This change of law in Hungary illustrates the difficulties involved in having monetary policy set at the E.U. level (for states using the euro as their currency) while fiscal policy is set at the state level.  Bringing fiscal policy to the E.U. institutions would give the E.U. the added puissance it would need to effectuate a viable check on state governments that for one reason or another are confused about E.U. basic law and principles.  In other words, because the state governments being on the same page concerning the E.U. and its principles cannot be taken for granted, so more power should transfer to the E.U. level from the states--though while working on institutional firewalls to keep the E.U. government from encroaching on the states such that a consolidated central state results (similar to what has happened in the U.S.). 

Source: Gordon Fairclough, "European Probe Fuels Tensions with Hungary," The Wall Street Journal, January 4, 2011, p. A11.