Greek Crisis: Jean Tirole on Europe’s Future Is Federal

8 July 2015. –

jean tirole  FranceNumerous Europeans view Europe as a one-way street: they appreciate its advantages but are little inclined to accept common rules. An increasing number throughout the Union are handing their vote to populist parties – Front National, Syriza, Podemos – that surf on this Eurosceptic wave and rise up against “foreign”- imported constraints.

Embroiled with the Greek crisis, European policymakers will soon have to step back and reflect on the broader issue of the Eurozone’s future. Before envisaging an exit or, on the contrary, more sustained integration, it’s right to reflect upon the consequences of each option.

Oversimplifying, there are three strategies for the Eurozone: (a) a minimalist approach that would see a return to national currencies, while keeping Europe perhaps as a free trade area and retaining a few institutions that have made a real difference such as common competition laws; (b) the current approach based on the Maastricht Treaty of 1992 and its fiscal compact update in 2012; and, finally, the more ambitious version of federalism. My own clear preference is for the federalist version but I’m not at all convinced that Europeans are ready to make it work successfully.

Baneful Fall-out

The Maastricht approach infringes member states’ sovereignty by monitoring public debt and deficits. Its founding fathers rightly feared that the imminent default of one country might trigger a bailout: so the Maastricht Treaty enshrined a debt limit and a “no bail-out” clause. Solidarity towards a member state in trouble is driven by the fear of negative spillovers onto the same countries making good the default of the over-indebted country. These negative effects arising from the default may be economic – exposures for subsidiaries and banks and fear of banking and sovereign panic reactions (as in Greece in 2011), reduced trade – or other types as in Greece in 2015: empathy, the will to prevent damage to the construction of Europe, the nuisance power of the distressed country.

The prospect of a bailout may in turn generate moral hazard: up to 2009, very low borrowing costs brought about by the perspective of a European guarantee for debts (despite the no bailout clause) probably prompted the periphery to enter paths towards debt that were all the more unsustainable because of lax supervision of banks in certain countries.

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– The article closes with this observation.

A Necessary Loss Of Sovereignty

But mutualisation cannot be achieved regarding unemployment insurance. Effectively, the unemployment rate in Eurozone countries is only partly determined by the economic cycle and is very much linked to choices regarding employment protection, active labour market policies, contributions to social security, professional training bodies, the type of redistribution (minimum wage or fiscal allowances), etc.

Clearly, countries electing institutions that enable them to obtain a 5% unemployment rate won’t want to “co-insure” countries that, de facto, opt for 20% joblessness. The same holds for pensions and the mutual sharing of debts. Against all this evidence, Europeans still cannot bring themselves to think of giving up their sovereignty.

We Europeans must accept the loss of sovereignty that’s necessary to live under one roof. And, to do so, we should rehabilitate the European ideal and unite to defend it against populist nationalism – and this is not easy these days…

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About Jean Tirole

Jean Tirole is  Chairman of the Board of Fondation Jean-Jacques Laffont/Toulouse Sciences Economiques (TSE) and Visiting Professor of Economics at MIT. He is winner of the Nobel Prize for Economics 2014.

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About Social Europe (SE)

Social Europe (SE) is a forum for analysis and opinion. We use the values of ‘Social Europe’ as a viewpoint to examine issues in politics, economy and employment & labour and are committed to publishing cutting-edge thinking and new ideas from the most thought-provoking people.Since its founding, SE has published writers of the highest calibre including several Nobel laureates, international leaders and academics as well as some of the best young talent.SE is published from London (UK)

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About the editor:

Eric Britton
13, rue Pasteur. Courbevoie 92400 France

Bio: Founding editor of World Streets (1988), Eric Britton is an American political scientist, teacher, occasional consultant, and sustainability activist who has observed, learned, taught and worked on missions and advisory assignments on all continents. In the autumn of 2019, he committed his remaining life work to the challenges of aggressively countering climate change and specifically greenhouse gas emissions emanating from the mobility sector. He is not worried about running out of work. Further background and updates: @ericbritton | | #fekbritton | | and | Contact: | +336 508 80787 (Also WhatApp) | Skype: newmobility.)

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