Friday, June 08, 2012

The Problem is the Solution

According to The Globe and CBC, Stephen Harper thinks that the problem with the EU is a lack of integration. The CBC news story on this that I heard the other day went even further, more or less agreeing with Harper's perspective (well, more likely the reporter simply accepted what he was told by Harper or a Conservative staffer and didn't bother to look it up himself). In effect, the CBC reporter said that the EU was had an integrated economy but lacked an integrated polity. Its goal was to maintain national autonomy on the political level but promote economic integration.

Well, this might be true if we were talking about NAFTA, but even here it would be a statement that is open to debate (as Stephen Clarkson's work on this subject notes). But ... with regard to the EU? The EU has moved much further down the road of political integration then has NAFTA and has a host of common policies on matters like currency, mobility, environmental protection measures, resource redistribution, agriculture, etc. To state that the EU functions, in effect, mystifies how the EU actually functions.

Why would this be important? This is important because if you don't understand how the EU works, you can't understand the character and nature of the solutions and this is precisely what Harper is doing. How much more integration does he feel is necessary? Sure, the EU maintains political autonomy on all sorts of matters (tax regimes, say). But is this  the root of the problem? Is he -- or anyone -- trying to suggest that the problems in the EU would disappear if there were common continental wide policies on just about everything? In Canada, thanks to federalism, we can't get common national policies on a whole bunch of things (education comes to mind as a key example). What right do we have to tell anyone that they should abandon their autonomy when Alberta and Quebec and New Brunswick guard theirs within Canada. My point is not that Canadians are hypocrites; the opposite. Let's assume that the differences within Canada with regard to matters of provincial jurisdiction exist for a good reason and let's assume that that reason relates to the difficulty of tailoring policies on a national level for geographically diverse populations (Newfoundland, for instance, simply needs a different policy with regard to daycare or education then BC).

If this is true, if Canada's decentralized approach actually has some merits, why would we suggest that others abandon the very things that have allowed Canadians to tailor social, education, health, and economic policy (with admittedly more or less success) to the needs of its population. If "one size fits all" does not work in Canada, why would we think it would work in Europe?

But, let's go further ... what has caused the problems in Europe? It is caused by national economies or is it a product of spill-over from national economies caused by increased international integration? In other words, if Europe truly had isolated national economies, I would argue that they would not have the problems they have now because those problems could be isolated in one or two nations. Increased economic integration -- particularly, but not exclusively in capital markets -- are what has created the disastrous spill-over effect (there are other causes, too, to be sure, such as rampant real-estate speculation and serious macro-economic mismanagement).

The argument for increased integration might be that a bigger polity (say, a continent, has the resources to withstand the shocks set out by, say, Greece or Spain). Perhaps, but is that not what is happening now? Are not Europeans responding more or less on a continental level (let's leave aside the question of whether or not we agree with their response)?  If this is the case, what is there to be gained by increased political integration? Could a more united EU have responded faster? Perhaps but that would depend on the system of government they have (doubt me, as yourself how fast the US responded to its health care crisis). Anyone who says big governments are more responsive then small governments has simply failed to study politics. Anyone who has will tell you that the speed of responsiveness is not a factor of size but of organization. Big governments, I'd guess, tend to be a bit slower just because of their size but this point is not universally true. A dictatorship, for example, can be big and can respond very fast. Our concerns with the dictatorship are not in inefficiency but its ethics.

So, increased political integration does not bring more resources to the table (all resources are scare is  rule #1 of Econ 101) and cannot necessarily increase the speed of response. Moreover, it is possible that increased integration in capital markets is at least part of the problem. So, what is the advantage to increased integration?

I raise these questions to point both to this issue and another one: if the argument for increased integration is so unclear ... why would anyone make it? What do they have to believe and at what evidence have they looked to make such a statement.
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