Martin Wolf

Martin Wolf articles at IntCom

Britain is better off outside the euro
If a country is to join the eurozone, its people must be willing to cope with the consequences forever,
however unpleasant they may sometimes be.

Martin Wolf, Financial Times, May 29 2008

Sverige bör, liksom England, hålla sig utanför euron så länge som möjligt.
Det säger Martin Wolf, biträdande chefredaktör på Financial Times

Ekonominyheterna 4/12 2006

Emu’s second 10 years may be tougher
Martin Wolf, FT May 27 2008

Do current account deficits matter inside a monetary union?
Martin Wolf, FT 28/3 2007

Picking on the wrong target (Ireland)
Martin Wolf i Financial Times, February 14, 2001

Europe's constitutional dilemma
From Martin Wolf, FT, July 4, 2000

Picking on the wrong target (Ireland)
Martin Wolf i Financial Times, February 14, 2001

A frightened teacher confronts an unruly class. He trembles before his most troublesome pupils. They are intimidatingly big. But suddenly he spies the brilliant, but weedy, new boy. Happily, he vents his spleen on this friendless victim. Thus, he hopes, is his authority established.

This is how the European Commission has behaved towards the euro-zone’s star performer. Over the 1990s, Ireland’s growth was second only to China’s at close to 8 per cent a year. Its unemployment rate is 3.6 per cent, down from 14.1 per cent in 1994. Its current account is in modest surplus. Its general government fiscal surplus is forecast by the finance ministry at an impressive 4.3 per cent of gross domestic product in 2001. The ratio of general government gross debt to GDP will reach 27 per cent at the end of 2001, from 94 per cent in 1993.

Yet it is this stunningly successful country that the European Commission and the European Union’s member states have chosen to reprimand. When Charlie McCreevy, the Irish finance minister, complained over the questionable substance of the rebuke and ”the public manner in which this debate has been conducted”, one could only sympathise.

This episode raises two questions: the first is whether the critics are right about Ireland’s policies;

the second is whether, even if they are right, they are justified in delivering so stinging a reprimand.

The answer to the first is: up to a point. The answer to the second is: no.

Two things must now happen. First, wages and the cost of other domestic inputs need to rise quite quickly, to bring costs into line with those of competitors. Today, Irish wages are probably 10 per cent too low. Second, as long as productivity growth in tradeable goods and services continues to be higher than in partner countries, wages must also continue to rise faster, so keeping unit labour costs in line. But since productivity growth in non-tradeable goods and services is slower than in tradeables, inflation will end up higher than in Ireland’s partners. On plausible assumptions, the annual differential should be between one and one and a half percentage points. Given all this, inflation of 4.6 per cent in the year to December, on the harmonised measure, is no disaster.

Was the Irish government wrong to make a cyclically adjusted fiscal loosening of about 0.7 per cent of GDP in its most recent Budget? Its argument is that its measures will help lower inflation, by increasing labour force participation and private savings and by relieving supply bottlenecks. The Central Bank of Ireland disagrees, saying the measures will ”impart a substantial pro-cyclical stimulus to the economy”.

The Bank is probably correct: the Budget will increase demand, in the short run, by more than it will raise supply. But this analysis ignores the desirability - indeed inevitability - of the rise in Irish costs and overall price level. As important, both the Central Bank and the European Commission exaggerate the potency of fiscal policies. With so huge a surplus, taxpayers are bound to conclude that any fiscal loosening which does not arrive today will come, with interest, tomorrow. It would take a far more contractionary fiscal policy than anything now contemplated to curb demand. Given this, the EU’s suggestion that the underlying fiscal surplus should be at least as big this year as last year is neither here nor there.

Turn then to my second question. Even if one accepts that fiscal policy should be more contractionary, it is far from evident that the Commission and the other members of the EU should make such a fuss over it.

An obvious point is that this takes the euro-zone away from the question of fiscal sustainability into short-term fiscal fine-tuning.

A more powerful point is that even if one believes in the case for greater short-term co-ordination of fiscal and monetary policies in the euro-zone, it does not matter what Ireland does in that context. Germany, France, Italy and Spain are 80 per cent of the euro-zone economy. Since Ireland generates about 1 per cent of euro-zone output, a fiscal deficit that is 1 per cent of GDP shifts the overall euro-zone fiscal outcome by 0.01 per cent of GDP. De minimis non curat lex (the law is not concerned over trifles) is also a good motto for the EU.

To the response that this indifference to what Ireland may do seems unfair, the answer is: no it is not. Since Ireland does not enjoy a monetary policy influenced by its domestic conditions, unlike, say, Germany, it should be allowed to choose its own fiscal policy. It is precisely because Germany, France and Italy do influence euro-zone monetary conditions that it is reasonable to expect them to pay more attention to the spillover effects.

The EU is doubly wrong to pick so publicly on Ireland. It is wrong because Ireland’s policies are defensible. It is wrong also because those policies do not matter to the rest of the EU. True, Ireland’s inflation is higher than the average. But so it ought to be, while no plausible fiscal policy would make much of a difference. Worse, picking on one of the smallest member countries - and much the most successful - provides no credible precedent for confronting the class bullies. This was an unjustified action and a wretched precedent. Teacher should think again.

Anders Ehnmark betonade framför allt Geijers republikanism och hans likheter med Marx.
Liberalen Alexis de Tocqueville behandlade han i en annan bok på liknande sätt.
”Tocqueville är naturligtvis mycket lik Marx.”
Svante Nycander DN 9 september 2010

Europe's constitutional dilemma
From Martin Wolf, FT, July 4, 2000

Outsiders are often the most acute observers. That great French liberal, Alexis de Tocqueville, produced the most penetrating analysis of democracy in America. Now Larry Siedentop - an American expert on French thought who teaches at Oxford - has attempted a similar task for Europe (Democracy in Europe, Penguin Books, 2000).

A student of de Tocqueville's work, he is well qualified for this task. The result reveals both the magnitude of the constitutional challenge to Europe and the failure to find answers. Both are encapsulated in his book's closing sentences:

"federalism is the right goal for Europe. But Europe is not yet ready for federalism".

Mr Siedentop believes federalism is desirable, but difficult. I would be inclined to put the point in a gloomier way: federalism is necessary, but impossible.

In the debates that surround the current inter-governmental conference, the principal concern appears to be mere efficiency. Efficiency does matter. The prospect of doubling the EU's membership is on its own a potentially fatal challenge to the current way of doing business. As Joschka Fischer, Germany's foreign minister, asked in an already famous speech, "from confederacy to federation", delivered in May, "what would a European Council with 30 heads of state and government be like? How long will Council meetings last? Days, maybe even weeks? How, with the system of institutions that exists today, are 30 states supposed to balance interests, take decisions and then actually act?"

These questions are compelling. Yet efficiency is very far from the only challenge. On the contrary, attempts to address it - notably through greater reliance on qualified majority voting - will aggravate the difficulties Europe now faces.

Mr Fischer points to popular disenchantment with a process of European integration "viewed as a bureaucratic affair run by a faceless, soulless Eurocracy in Brussels - at best boring, at worst dangerous". His analysis is not wrong, but it is incomplete.

The underlying issue is, as Mr Siedentop notes, that of consent. Attempts to increase "efficiency", by making it easier to overturn the opposition of elected governments, undermines consent, thereby threatening the legitimacy of the European enterprise.

Mr Siedentop ascribes the dangers to the success of France on the European stage. "If Europe is created on the model of the older, unreformed French model of the state - so that a 'federal' Europe becomes the facade for a political class and a political culture shaped by bureaucracy - then the danger for Europe is that its history will come to resemble that of France since 1815. The tutorship of a bureaucratic state will be rejected from time to time by Europeans angry at being treated like children, but unused to the disciplines of citizenship."

Within Europe, such rebellions would not be contained by loyalty to a nation state. They could become rebellions against Europe itself, possibly in the name of nation states.

The view that Europe is being created on the old French model is a gross over-simplification. Yet what the European structure shares with the old French state is its lack of accountability: an unelected Commission with a monopoly of legislative initiative; the world's most independent central bank; a supreme court that takes promotion of further integration as its raison d'être; a remote, polyglot parliament; and a Council of Ministers acting sometimes as the legislature and sometimes as the executive, but always in secret.

If the founding fathers of the US had surveyed this scene, they would have reacted with horror. This is no basis for an active democracy, but an attempt by a political elite to escape its constraints.

There exists then an even bigger challenge than making the enlarged Europe workable: it is to make it constitutionally legitimate. It is greatly to Mr Fischer's credit that he identifies this need. He is also right that the classic response is federalism, by which one means a constitutional framework to achieve three objectives: allocation of powers between levels of government; division of powers at the centre; and definition of the fundamental rights of citizens.

Yet federalism is surely impossible. De Tocqueville identified four informal conditions that made the US constitution workable:

the habit of local self-government;
a common language;
an open political class dominated by lawyers; and
shared moral beliefs.

Of these, the second and third are entirely lacking in Europe. As important, none of the states of the US had enjoyed sovereignty before independence. But Europe contains, in France and the UK, the two states that have, historically, defined what a sovereign nation state is.

Political discussion and identity is - and will remain for the foreseeable future - national. Only there does one find - if to varying extents - the political engagement that makes democracy alive. Here then is a profound dilemma. To make the existing union - and still more the prospective integrated Europe of 30 states and more than 500m people - both workable and tolerable, it needs a legitimate federal structure.

Yet a true federation is cloud cuckoo land. The integration process then risks undermining the legitimacy of existing states, without putting anything better in their place. To the dilemma there have been three distinctive responses - the German, the French and the British. The first is to combine maximum integration with some kind of federalism; the second is to combine maximum integration with control by governments; and the third is to combine minimum integration with control by governments.

The French and Germans agree on what Europe should do, while the French and British agree on how it should be run.

Yet none of the approaches can work: the German, because the federal ideal is unworkable; the French because bureaucratic inter-governmentalism is intolerable; and the British because minimal integration is unavailable. The likely outcome, however, is the French, the worst of both worlds. France wants "more Europe", but, as its president, Jacques Chirac, said last week, it will not accept a superstate that replaces the role of nation states on the world stage.

Is there a solution? No, there can only be choices. Mine is to accept that Europe will not have democratic legitimacy of its own and so try to limit what states do together to the minimum essential to secure peace and prosperity across Europe, with all else left to members individually.

Like many Americans, Mr Siedentop is frustrated by what he sees as the constitutional illiteracy of the mother country. But even he recognises the validity of such "British" concerns. "Building democracy in Europe is a matter of decades rather than years - indeed it is probably a matter of generations."

In the meantime, there can only be one sane way to proceed: circumspectly.

More about Siedentop's book

I can understand the arguments for streamlining decision-making. But I do not understand why a constitution should be a priority.
Nothing is going to turn the EU into a United States of Europe.

In the end, the EU will remain a structure for co-operation and competition among states embedded in a shared institutional framework.
Martin Wolf, Financial Times 14/3 2007

German handicap, Martin Wolf, Financial Times, March 31, 1999:
Few have realised the most dangerous feature of Emu:
it has locked Germany into a seriously uncompetitive real exchange rate

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