Europe's Collective Action Problem

| Wed May 2, 2012 2:27 PM EDT

Matt Yglesias disagrees with my previous post suggesting that Europe faces a gigantic collective action problem:

Collective action is difficult, but I don't really think that's the issue here....If you look at a big place like the United States or China what you see are huge place-to-place divergences in economic vitality paired with large open-ended transfer programs. Even in smaller economies, the old West Germany has been subsidizing the old East Germany for a long time and will continue to do so for a long time.

....The Euro was meant to be a step in a project of "ever closer union" in which Europe's nationalisms would be overcome and replaced by a pan-European identity. That's because the only way to make it workable would be for European voters and European politicians to act in a spirit of continental solidarity and think on a continental scale. It was, from the beginning, a fairly utopian project. But now that the crisis is upon us, it looks like nobody wants to try to play the role of visionary leader who brings the utopia to fruition.

It's probably important to understand the scope of our disagreement here. Certainly I agree that transfers from the core to the periphery are necessary right now. No argument there. But I don't think that open-ended transfers, even if they were politically feasible, would solve Europe's problems.

In the United States, some regions have higher productivity and higher wages than others. Others have lower productivity and lower wages. Federal transfers ameliorate some of the differences, but it's wage differences and high labor mobility that play the main role in keeping things balanced. People are paid less in Alabama than they are in California, which makes their lower productivity sustainable, and workers who want to do better are pretty free to move if they don't like Alabama's low-wage-low-service economy.

Europe's problem is that over the past decade, wages in the periphery went up but productivity stayed considerably lower than in the core. At the same time, labor mobility, thanks to language and cultural differences, is inherently much lower than in the United States. The level of fiscal transfer it would take to sustain the eurozone in the face of these problems would be enormous. At least, I think it would be. I'd be interested in seeing someone try to estimate what it would take and then compare it to the United States. But unless the numbers turn out to be a lot lower than I think, I simply don't see how open-ended fiscal transfers would be a workable solution for Europe.

And that's not even taking account of politics. But as Matt says, Europe isn't a single country, and "visionary" in this case means convincing the Germans and the French to pony up extraordinary amounts of money for the south indefinitely. That might sound visionary in New York and Washington DC, but probably not so much in Stuttgart and Marseilles.

So: I think we're in agreement about the value of short-term transfers, and also about the lack of European identity getting in the way of longer-term solutions. But even accounting for that, I doubt that open-ended fiscal transfers on their own are a plausible solution. Thus the need for a genuine kind of multi-state collective action, as opposed to the somewhat easier kind you have when a single federal government is in charge. That might not be possible no matter what, but certainly a minimum requirement would be a credible long-term commitment from Europe's periphery to reform their labor markets. Without that, it's hard to see any solution at all.

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