A Plan for Europe – Interview with Thomas Colignatus (Part 1)

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Thomas Colignatus
Personal website: http://www.dataweb.nl/~cool/
Plan for Europe: http://mpra.ub.uni-muenchen.de/33476/

NOTE: This is the first part of the interview. In case you are looking for the second and final part check the following link: A Plan for Europe – Interview with Thomas Colignatus (Part 2)

Thomas Colignatus is a Dutch econometrician (1954). All his works can be found in his personal website. In September 2011 he drafted a plan for Europe, to deal with the political, economic and institutional flaws of the European Union and its constituent member-states. The plan is titled “High Noon at the EU Corral. An economic plan for Europe, September 2011“. __It uses standard economic theory but also has some new insights. It shows that political decision makers have more options than commonly thought. The plan is rather long and at points technical. Can it work? An interview may highlight its key aspects and may allow the broader public to grasp the plethora of ideas found in it.

The interview consists of two parts. This is the first part of the interview. Feel free to post or send (see contact info) any comments you may have regarding the ideas of Thomas Colignatus, either if that is to shed more light to some aspects of his plan or to clarify some of his points.

Start of Part 1

-Protesilaos Stavrou: Europe is in a deep crisis. You have produced a paper on the matter, titled “High Noon at the EU Corral. An economic plan for Europe, September 2011“. I would first like to ask you whether you believe that the crisis can be solved with the current approach European leaders have?

Thomas Colignatus: It is not very clear what approach our European leaders have. It seems like a permanent state of chaos with every time a new way to draw power from the members to the center. Barroso in his 2011 State of the Union speech was rather upbeat European. My approach is different. I try to select win-win measures such that everyone could see their advantage. If those are accepted as the solution, then other approaches aren’t.

-PS: Among the many aspects of your paper I was especially fascinated with the idea of the Economic Supreme Court and the part about National Investment Banks. Can you explain these, and are these indeed the main elements?

TC: That are three questions in one. My overall suggestion is that only an integrated approach will work. Much of the crisis arises from focussing on only a single element, at the neglect of the other, which creates a new crisis, and so on. My paper deals with these four aspects: (1) better governance, (2) investments for employment and growth, (3) fiscal policy based upon functional finance, and (4) monetary stability. You select the first two but the other two are equally important.

-PS: Could you summarize the basic idea concerning governance?

TC: The current model of democracy is Montesquieu’s Trias Politica, with the separation of Legislative, Executive and Judicial powers. These checks and balances work to some extent but still allow too much room for political manipulation of information. We need a fourth power, an Economic Supreme Court, based in science but with the policy power to veto the budget if it contains wrong information, in the view of the Court. President and Parliament keep the right to decide on the budget, but are blocked from hiding information. It is essential for the democratic process that voters get the right information. The current process means a distrust of scientists. It is time to grow up and start trusting science. My book “Definition & Reality in the General Theory of Political Economy” contains a draft constitutional amendment to make sure that the ESC is really based in science, open to the universities and the public.

-PS: But we are dealing with a European crisis, if not a world crisis.

TC: Think of the system. One idea now is to have a EU Super Commissioner to check on the national budgets. This will likely not work well since the EU is an outsider while each national Economic Supreme Court will be of national origin. The information can be checked at the national level and could be incomprehensible in Brussels. At the same time, the national Courts have international contacts, and thus achieve international co-ordination of the relevant information.

-PS: Should we then have a new EU Treaty that all members have such Economic Supreme Courts?

TC: I don’t think in that manner. Treaties are an endpoint and finalisation of a process that has grown over a period. If you think about democracy then economic science leads to the notion of an Economic Supreme Court. Namely, a budget is a plan for the future. It contains economic predictions. Events will be affected by decisions by politicians.
Hence the forecasts involve predictions about political behaviour. Are the politicians going to keep their promises or are they going to fail them? Current forecasts on national budgets are conditional on the assumption that policy makers are going to execute the budget and that all measures will succeed. But such forecasts are biased. An unbiased forecast requires not only independence but also a scientific approach. You want forecasts by competent people that cannot be influenced by President or Parliament. Hence an Economic Supreme Court. It is basic logic. We already have independent Statistical Bureau’s, independent Courts of Auditors, independent Central Banks, but we don’t have yet independent forecasting bureau’s with a power to veto wrong information. If it doesn’t have a power at the level of President and Parliament then it is pretty useless. Thus the EU can encourage member nations to think about democracy, that’s all. That would be the proper road. If people would think that the Courts are imposed from the EU then those would not be seen as natural components of the national democracy.

-PS: But we see economists failing all over the world. Since the crisis erupted economic theory is in chaos and economic blogs show thousands of contradictory views. Compare for example Paul Krugman with the Wall Street Journal. You now suggest to put our trust in this profession?

TC: Sure. The point is that we already do. Economists are all over, in goverments, in newspapers, in political parties, in businesses, even in universities. Thus, to have economists look at issues is no new thing, and often better than have jurists or accountants do so. The problem is regulation and imposing order. An Economic Supreme Court creates order and transparancy, and is open to science such that all those thousands of contradictory views are properly answered to the best of our abilities.

-PS: Now the investment banks. What should their role be?

TC: National Investment Banks are crucial to control the economic flow over time and space. These banks work under a national statute since they exist for the management of the state and not for private profit. The National Investment Banks can collaborate with private banks but have a different role. Over time you want to control the cycle. In booms you research what are interesting ventures, in times of bust you invest in those ventures, and when boom comes again then you sell what succeeds to market parties. The crucial point is that a National Investment Bank can counter risks that private parties cannot do. In the past robber barons and amazing inventors have played that role, but this is a rather primitive mechanism and a much too romantic idea of pure capitalism. We can use part of that function but more stable and stabilizing. The National Investment Banks need not be that big since private banks can benefit from its presence. But in crisis times like today they would be the Investment Banks of Last Resort. I was very happy to read John Ross about growth and investment in China, and I particularly liked his quotes of Keynes. Clearly, some Chinese investments will fail and National Investment Banks can make errors, but the current crisis is much costlier. My fellow economists are afraid of state meddling with investments and wonder about the accurate timing of the cycle but logic causes the conclusion that you need such banks, so that such worries are only relevant with respect the optimality of details and particulars. We are in recession and stagnation because we lack such banks, that ought to be an argument.

-PS: You said “over time and over space”. Would you like to elaborate on that?

TC: Yes, such boom and bust also occur over space. Germany and Holland run an export surplus via an aggressive low wage cost policy. It is difficult for Southern Europe to compete. Holland has this policy rather traditionally since 1950, see my paper on the macro-economic lesson. In the past the Dutch policy did not have much of an impact since it is a relatively small country. Germany copies it in the last decade and now that policy has a huge impact. German economists call it a labour market miracle but it is actually a disaster. Germany and Holland are exporting unemployment to other nations.

This policy is also against their own interest since they are stuck with their export earnings that they need to invest somewhere, and very often these proceeds land in risky and losing ventures, such as Greek bonds. Now, the standard story about the Eurozone is that a monetary union only works when you also have a fiscal union that allows transfer of funds from the surplus to the deficit countries. This would be sufficient but I don’t think that it is necessary. What is necessary is that Germany and Holland start investing in their own countries to resolve their unemployment at home instead of exporting it. These can be reliable investment and overall more profitable than risky foreign investment in countries that you know nothing about. What is necessary is that Southern Europe also invests to get closer to the technological frontier. Hence what we need is a mechanism that penalizes surplusses, say at 10% of the four year moving cumulation, and channels these to deficit countries. There may be a rule how much remains owned and how much is forfeited. I suppose the National Investment Banks arrive at some co-ordination for European wide ventures, in which the EIB may play a role too. I would like to see more action by pension funds too. Now they “invest” in bonds and securities but the ideas are still generated by private investment banks. The pension funds behave like elderly people who wait for the action by others. A good pension fund however has a young state of mind, is pro-active, and provides for the pension by true investments and not only in paper. You don’t want your investments to kill the environment, with fake rates of profit because of wrong accounting, so that when you retire there is no environment to enjoy anymore.

-PS: Your idea of a “mechanism that penalizes surpluses” is in fact a way to cover the structural trade deficits of the European periphery, in order to achieve convergence in the euro area?

TC: Not covering in the sense that these funds can be used to pay for current imports. Deficit countries would need to reduce their deficit. But the penalty on surplus countries would flow to deficit countries as a separate stream to invest in additional ventures that otherwise would not come about. There is the eternal tough question how bureaucrats can out-guess the markets on what would be good investments. It is comforting to see that markets can make horrible mistakes too. The point remains that we can establish by principle that we need this function, and hence the discussion shifts to the secondary problem how to optimally design it.

-PS: Would you like to add a final comment to this first part before we proceed with the more technical aspects of your proposal on part 2?

TC: Please note that I am not blind to problems in Southern Europe. But repairing those for example via their own Economic Supreme Courts will not be enough. The main worry is the following. Suppose that this analysis is adopted by Southern Europe. Then Southern Europe would tell Germany and Holland that they should stop their aggressive export policies. Will people in Germany and Holland believe them? No, they will respond that the Southerners are using a self-serving argument, and cannot be trusted. Hence, even when Southern Europe adopts the proper economic analysis, then this is not what Germany and Holland believe in, and then we are still not out of the crisis. What can work is that Germany and Holland start to think real hard about their own errors. My worry is that economists in Germany and Holland are blind on this. When these countries lack their own Economic Supreme Courts there is no level playing field and events depend upon economic advisors in collusion with political powers. It is a crisis indeed.

—End of Part 1—
See Part 2 of the interview

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