The European debt crisis: Is maybe time for a Maastricht Treaty II?

This blog is not political but exceptionally I write a comment on issues outside the scope of the blog when these issues are of great importance. The current European Union debt crisis is such an issue indeed.
I watched the other days a TV interview of the old Dutch politician and ex-EU commissioner Frits Bolkestein. Bolkestein argues that the solution to the Greek debt crisis will be that Greece should voluntary withdraw from the Euro zone, go back to the drachma as a national currency and solve its debt problems itself. Bolkestein recognizes that there is no mechanism provided in the EU for such a step, so a country who will do that must take the initiative itself. He also said in the interview that the entry of Greece in the Euro zone was the result of a compromise despite the fact that Greece did not need at that time the Maastricht treaty criteria; according to Bolkestein neither Italy met the criteria at that time but since Italy was allowed in the Euro zone Greece was not possible to be refused.
Bolkestein is in line with other politicians and ex-politicians in Europe, mostly from the ultra- right side of the political spectrum, who have made similar suggestions in the past. These views are however not shared by most mainstream politicians and the financial world due to the fact that that such an act will create a precedent that could lead in the end to the Euro zone and maybe of the union itself. What is true in his argumentys is that the EU does not have any mechanisms in place to deal with such situations and that  Greece seems not to be able to meet the targets set by the EU and the IMF / WB with regard to increase of public revenue and decrease expenditure in combination with a rigorous privatization program. However this is something one should normally expect considering the fact that Greece is at this moment in the middle of a worsening recession, with unemployment in levels unknown before and dealing with the effects of the global financial crisis that started back in 2008. Dealing with the rampant tax evasion, making the Greek economy more competitive by opening the “closed” professions and trying to privatize public organizations are on the other hand are time consuming issues that face also a lot of resistance: from corrupted officials and public servants who profit from corrupted practices, from a disillusioned and not well informed public and also from employees of privatization candidates semi-public organizations who will lose some of their privileges, life-long employment being the most important one.

With the crisis sentiment now expanding to Spain and Italy (look to the financial market results of today 5 September) the suspicion that Greece was just a test case of speculators many are wondering how this crisis will be managed. It seems that the European Monetary System suffers from a structural weakness that in the time of the 1992 Maastricht Treaty that set the foundation of the Euro was overlooked. This is a mechanism that guarantees that the Euro zone countries meet the treaty criteria without exceptions all the time and also lacks a mechanism that in case of serious disruptions like the ones we face at the moment with Greece and possibly with more countries would interfere automatically, i.e. without the political bargaining we see at this moment, and correct the situation swiftly and in a way convincing the markets.

The only way the European Union can deal with the situation today and secure its future is to stop the spasmodic and gutless approaches we see since the Greek crisis begun; this approaches failed to convince anyone, bringing more uncertainty to the financial markets and fuel speculation. I think it is time ( almost 20 years later) to deal with the problem head on with a Maastricht Treaty II.

I wonder however any of the present EU leaders has the guts to put the subject at the table, ignoring the usual voices about a federalist Europe that will surface again putting every time the whole discussion on hold. If the EU is serious about maintaining the Euro as common currency and even prevent itself from falling apart this step is inevitable. A Maastricht Treaty II repairing the flaws of the Maastricht Treaty I will be the only way out of the crisis and the only guarantee that the Euro will survive as the common EU currency. The European politicians must take their responsibilities seriously, stop using the issue for internal consumption and political gains and do their best to correct a mistake their counterparts did back in 1991: creating a monetary union without controlling and support mechanisms that would prevent a crisis like the one we experience at the moment.

Dump Growth versus Smart Growth (or what the Dubai bubble has to do with 2.0)

An insightful post of Umair Haque titled "Why Dubai Defaulted - And What America Should Learn From It" in the Harvard Business blog. The post is a guide for recognizing bubble economies build on megalomaniac real estate or financial services (Dubai combined both) and ignoring the real fundamentals of growth. Haque argues that next to this combination of bubble ingredients things got even worst for Dubai because of a rampant pursuit of "Dump Growth" focused (among other things) on the 20th century growth model (trying to attract the IBMs and the Dells) and ignoring the 21st century realities of “Smart Growth” suggesting investment in the Enterprise 2.0 and attracting innovative players like Google and Apple.
Time for new approach to benchmarking in general and a new view on growth fundamentals ? I think so.

Harvard Business School: Case study teaching revisited? II

The controversy about the ethics of managers and their relation to the teaching methods and tactics I mentioned in my post of April 9 continues in the Harvard Business Blog in the subject How To Fix Business Schools. I admire the openness of Harvard on the issue an I suggest to have a look to it if you are interested in the issue. Do not miss the post of Bob Sutton titled "Do Economists Breed Greed and Guile?" , the response of Steve Kaplan titled "The Economists Have It Right" and the readers' comments on both of them.

Harvard Business School: Case study teaching revisited?

Bloomberg reports that top US universities are in a soul searching mode after criticism that some of their alumni have been among those responsible for the current financial crisis. According to Bloomberg "Harvard’s alumni include Stanley O’Neal and John Thain, the former chief executive officers of Merrill Lynch & Co. who presided over the New York company’s decline; Rick Wagoner, the ousted CEO of General Motors Corp.; and Christopher Cox, former chairman of the U.S. Securities and Exchange Commission" Another HBS ex-student is Andrew Hornby, the head of the failed bank HBOS. Interestingly the Harvard Business School, well known for its management teaching based on case studies prepares a new case study meant to examine whether this method of teaching is adequate to prepare future managers in risk assessment and risk management.The case study must be really interesting, look forward to read it.

Economists: Back to basics (but what basics?)

In my previous post I argued that even if Marketers wish to return to a more pure form of marketing they have to realize that the fundamentals of the market have dramatically changed in comparison to 20 or even 10 years ago. In other words using old approaches and models in order to solve new problems is not likely to work.
I am glad to find that some people seem to share the view that changing fundamentals require new solutions. Fred Wilson discussing the lack of out of the box thinking in the debate about fixing the economy argues in his post What If the Economic Model Is Wrong? that "The old rules certainly don't work for many (most?) businesses anymore and they probably don't work for the economists either." I recommend the article to everyone.

Academic Voices: The way forward

With some delay I came across the wonderful initiative of Paul Davidson and Henry C.K. Liu to send an open letter to the address of the world leaders attending the White House Summit on Financial Markets and the World Economy last November.
I must say that I was delighted with this initiative since it is in line with my plea for a more assertive an loud voice of academics in world issues at times of crisis when many politicians, regulators and managers are proved hopelessly inadequate for their role.

The full text of the Open Letter of Paul Davidson and Henry C.K. Liu

This Open Letter appeared in AToL on November 7, 2008. For the list of supporters to the letter go to the web page of H. Liu

Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World EconomyDear World Leaders:

The Winter of 2008-2009 will prove to be the winter of global economic discontent that marks the rejection of the flawed ideology that unregulated global financial markets promote financial innovation, market efficiency, unhampered growth and endless prosperity while mitigating risk by spreading it system wide. For more than three decades mainstream neoliberal economists have preached, and regulators have accepted, the myth of the efficiency of unregulated markets, ignoring the critical lesson provided by John Maynard Keynes’s analysis of interconnection of financial markets and the international payments system.

Those who do not learn the lessons of history are bound to repeat its tragedy. Neoliberal economists in the last three decades have denied the possibility of a replay of the worldwide destructiveness of the Great Depression that followed the collapse of the speculative bubble created by unfettered US financial markets of the “Roaring Twenties”. They fooled themselves into thinking that false prosperity built on debt could be sustainable with monetary indulgence. Now history is repeating itself, this time with a new, more lethal virus that has infested deregulated global financial markets with “innovative” debt securitization, structured finance and maverick banking operations flooded with excess liquidity released by accommodative central banks. A massive structure of phantom wealth was built on the quicksand of debt manipulation. This debt bubble finally imploded in July 2007 and is now threatening to bring down the entire global financial system to cause an economic meltdown unless enlightened political leadership adopts coordinated corrective measures on a global scale.

The US sub-prime mortgage problem that started in 2007 has developed predictably to a morass that has caused the abrupt failure of interconnected financial markets and threatened the viability of financial institutions worldwide as contagion spread at electronic speed via an antiquated, dysfunctional international payments system.

To arrest the global financial meltdown, much can be learned from Keynes’s vision of how the international payments system should work to permit each country to promote a national full employment policy without having to fear balance of payments problems or to allow financial incidents in other countries to infect the domestic banking and non-bank financial systems.

Another Great Depression can be avoided if world leaders would reconsider John Maynard Keynes’s analytical system that contributed to the golden age of the first quarter century after World War II. The undersigned and others have long advocated a new international financial architecture based on an updated 21st century version of the Keynes Plan originally proposed at Bretton Woods in 1944.

This new international financial architecture will aim to create (1) a new global monetary regime that operates without currency hegemony, (2) global trade relationships that support rather than retard domestic development and (3) a global economic environment that promotes incentives for each nation to promote full employment and rising wages for its labor force.

Sincerely,

Paul Davidson
Editor, Journal of Post Keynesian Economics
Visiting Scholar Schwartz Center for Economic Policy Analysis, The New School, New York

Henry C.K. Liu
Visiting Professor of Global Development, Department of Economics,
University of Missouri-Kansas City