EUROPE´S ZERO-SUM POISON / PROJECT SYNDICATE ( A MUST READ )

Europe’s Zero-Sum Poison

Jean Pisani-Ferry

30 July 2012

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BRUSSELS – Whenever a society regards its problems solely through the prism of distributional disputes, its chances of solving them diminish greatly, because the “us versus them” mentality distorts analysis and blocks solutions that would unambiguously improve the overall situation. Every policy choice is perceived as a zero-sum game, whereby a gain for one group is necessarily a loss for another group. The very notions of trust and progress vanish.

We have seen in the past the extent to which such conflicts – between rich and poor, landlords and industrialists, or capital and labor – can hamper development. We are seeing today in the United States how entrenched antagonisms result in a stalemate on tax and budgetary matters. And there are many examples of failed economic reforms that fundamentally boil down to the same zero-sum logic.

But that logic is nowhere as salient today as it is in Europe. Since the euro crisis began, almost three years ago, there has been a continuous struggle between two readings of it.

The first interpretation emphasizes the eurozone’s policymaking shortcomings and the reforms needed to remedy them. The second highlights individual eurozone countries’ failings and the costs that they impose on their neighbors. Until now, a rough balance between these two interpretations has prevailed. But the second is increasingly gaining the upper hand.

In northern Europe, public opinion is increasingly exasperated by what many view as an attempt by the south to rob it of its savings. A recent letter signed by 160 German economists claiming that the European Union’s plan for a banking union was little more than an attempt to make Germany pay for Spanish mistakes is revealing in this respect.

The economists largely overlook the problem of financial fragility that a banking union is supposed to address, claiming instead that there would be no problem if governments simply stopped intervening in banking crises. And they overstate the risk that a common deposit-insurance scheme could turn into a massive north-south transfer channel.

In turn, southern Europe is getting angry. Italian Prime Minister Mario Monti recently decried the emergence of a European “creditocracy” – governance by those who pretend to be on the giving side of Europe – and pointed out that, contrary to widespread perception, Italy is not relying on anyone else’s support. (Italy is indeed contributing to support other crisis countries, so, objectively, it is still a creditor). If the mild-mannered Monti speaks in these terms, what can we expect from the new breed of populism that is bound to result from the southern European crisis?

Admittedly, Europe’s increasingly divisive zero-sum thinking is not entirely new: the EU is accustomed to distributional disputes, and the lengthy budget discussions (which take place every seven years) are typically acrimonious affairs. But, until now, policymakers could contain controversies to the usual political give-and-take of taxation and cross-country transfers. The problem with the current debate is that distributional disputes now contaminate the entire policy spectrum.

One man saw this coming. American economist Martin Feldstein wrote in 1997 that monetary union would create conflict within Europe. At the time, he was derided and regarded as an entrenched opponent of the European project. Unfortunately, his insight was correct: European countries today are at loggerheads not despite the common currency, but precisely because of it.

History suggests that international disputes over debt and transfers are a serious danger. In the 1920’s and the 1930’s, representatives of European states devoted countless meetings to resolving them (at the time, mainly German reparations). Despite US goodwill, they were unable to overcome their differences, and let the reparation problem degenerate into a poisonous financial conflict that contributed to much worse.

But conflict is not inevitable. Many societies have proved able to overcome a zero-sum mentality and project their perceptions of national interest into the future; Europe must find in itself the ability to do the same.

An important lesson from how countries address internal disputes is that the attitude needed does not require overlooking distributional issues. Successful societies do not stop having arguments about who benefits or loses from taxation, redistribution, or regulation. But they do not let distributional issues take over the entire debate. They are able to separate efficiency or stability issues from distributional controversies.

That is the lesson that Europe must learn. It must recognize that it is bound to live with distributional disputes, and that it must find ways to address them. But, even more important, it should contain the scope of these disputes, and avoid becoming mesmerized by them. Doing so requires courage, vision, and trust – qualities that are currently in dangerously short supply.

Jean Pisani-Ferry is Director of Bruegel, the Brussels-based economic-policy think tank, and Professor of Economics at Université Paris-Dauphine. He was an adviser to the European Commission’s Directorate-General for Economic and Financial Affairs, and was Director of CEPII, France’s leading international economics research institute. He has also served as Senior Economic Adviser to the French finance minister, Executive President of the French prime minister’s Council of Economic Analysis, and Senior Adviser to the director of the French Treasury.