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Monday, September 15, 2003

Two Good Decisions

So the Estonians have voted to join the EU , and the Swedes have voted to stay out of the euro (at least for the time being). The first decision was widely expected and hardly controversial. The second was anticipated, but the extent of the victory was not, and this vote is, of course, most controversial. Now there will be a lot of heart searching about 'what went wrong' in Sweden. Here I think there are two evident pitfalls. The first would be to read this as a profund understanding of economic reality being exhibited by the Swedish voter. This I think would be to claim too much. As is evident, I am a profound skeptic about the mid-term advisability of abandoning independent monetary, fiscal and currency policy. I don't, however, think that arguments like mine were foremost in the minds of the voters. We may well be seeing something of a retrenchment away from globalisation, and that would reflect itself in increased concern about national sovereignty. That is what the survey results tend to show was the case in Sweden. Insofar as economic arguments played a part, obviously the growing problems of the German economy have not hepled the euro case, nor has all the coming-and-going about the stability pact and its breaches. If the Swedes voted no to protect their capacity to have their own macro policy, then bravo. If they voted no because they think this will directly facilitate the protection of their welfare state, then they are mistaken (I am sure the stability pact can be revised to allow short-term stimulus with long-term prudency, but Sweden's demography makes some reform inevitable either way. Of course indirectly, if by staying out they achieve stronger growth, and in so doing attract more young immigrants - either from other EU countries or the third world - then obviously this will make any welfare 'adjustment' much easier). And if they voted this way due to growing nationalism, and anti EU sentiment, then shame, shame.

The second pitfall would be to ask what 'went wrong with the spin'. Well the answer should be nothing at all went wrong with the spin. The lesson we should be learning here, whether it is with the euro, or with the war with Iraq, is that difficult choices cannot simply be 'spun' away. I think both the euro and the Iraq decisions were nearly 50-50 ones. It was hard to decide in both cases. Not everyone is, or wants to be, a professional economist. Even among the professionals opinion is, and will remain, divided. Ditto Iraq: for every informed commentator in favour, there was one against. What we should learn, is that these decisions cannot be made on the basis of false promises, or false threats. They are inherently 'tough' to decide. People have to think and exercise judgment. In the short term that may make for good or bad decisions, in the long term it is good for democracy.

Finally, of course, there are the rest of the pack. Those who have taken the 'irrevocable' decision. They may feel betrayed by the Swedish vote. They should not. The Swedes have simply exercised their right to prudence. One more time we're back in the same territory: is the decision about the euro an empirical or an ideological one? Is the topic of whether the EU 12 form an optimum currency area an empirical one, or is it, like the money itself, based on fiat. In other words are there facts we might take into account to see whether the euro works or not, or do we simply have to accept it because it is backed by a Nobel prize, a strange use of the theory behind the Harrod-Samuelson-Balassa effect, and the opinions of a big part of the professional economics community? Make your own minds up. But remember, maybe you need stronger than normal criteria to take irrevocable decisions. As we now from other experiences, simply saying 'I love you' is no guarantee.

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