Posted Tuesday, Dec. 6, 2011, at 12:45 PM
Europe's new overlord.
Photo by Ralph Orlowski/Getty Images
Ezra Klein makes the astute point that one reason Germany's not stepping up to resolve the eurocrisis quickly is that Germans are pretty happy with the direction events are taking. The German economy itself is doing well, and southern european countries are being induced to undertake reforms that Germans feel they undertook in the past and ought to be undertaken in Spain, Italy, and Portugal. What's not to like? I would apply this logic with even more force to the European Central Bank which, led as it is by an Italian, helpfully takes this out of the national rivalries context. ECB chief Mario Draghi is an apolitical technocrat, but like all apolitical technocrats everywhere he's not actually apolitical. Rather, he's a citizen of Italy and of the world with detailed views about public policy and a strong desire that countries everywhere -- but perhaps especially his native land -- adopt policies that he thinks are good. So why not use monetary policy leverage in a bit of a bluffing game to try to manipulate public policy in Italy and elsewhere?
As it happens, I don't think the fake-apolitical technocrats are even wrong about the desirability of reform in Spain and Italy. Spaniards and Italians would be better off adopting a social model more similar to the one prevailing in northern europe. But I think there are serious problems with this "central bank won't do its job unless parliament enacts laws it approves of" model of monetary policy:
— First: I see no real reason to think that as a rule unaccountable central bank bureacracies are going to make better long-term economic policy choices than a democratic process. The very same people who seem enthusiastic about this model of policymaking would likely be the first to explain to you that it's unwise to have a centrally planned economy run by unelected bureaucrats.
— Second: that there actually is good reason to think that giving elected officials direct control over short-term macroeconomic stabilization is a bad idea, namely that they'll try to time the business cycle to the election cycle, which is exactly how central bank independence came to be enshrined as a principle of good governance. But in the medium term once it becomes clear that central banks are using their "independence" to encroach on other areas of policymaking, the central banks are (rightly) going to wind up having their independence taken away.
— Third: I think labor market reform is badly mis-marketed as a kind of punishment for bad conduct. The best reason for Southern European countries to adopt public policies more similar to what's seen in Northern Europe is that living standards are much higher in Northern Europe. Southern Europe is skating by on better weather and better food. But if Portugese people could enjoy Dutch living standards, or Italians were as rich as Germans, these would be absolutely the best places on earth. Growth-friendly policies are something you should do for yourself, not something you should do as a favor to Frankfurt.
— Forth: Reform and austerity are not tastes that taste great together. People's views of politics are very dominated by the short-term. Social Security didn't end the Great Depression, but FDR ended the Depression and he launched Social Security so the whole New Deal wound up getting the credit. If you pair reform with growth-crushing austerity, you'll discredit reform.
— Fifth (and not unrelated): If you want to look at a recent time when the Italian government was pursuing reforms, it was back in 2006 when unemployment was low and falling. Taking on vested interests is always politically challenging, but it only gets harder to do when you're struggling to cope with demand shortfalls or financial sector chaos.
Long story short, even if this particular saga happens to turn out well I think this idea that central bankers should try to dictate labor market policy is extremely dangerous.