Tag Archives: fiscal union

07.13.2012 | A Euro Zone Olympic team?

Sharing a larger and more varied pool of European talent was supposed to create an economic synergy. Starting with the European Coal and Steel Community in 1951, the first step was free trade. Nations were added, trade barriers disappeared, and by 2002, they had their monetary union.

What next? Does an Olympic union make sense?

In a report on the economics of the Olympics, Goldman Sachs asks if a euro zone team would win more medals than the 17 member nations took home separately.

For the “yes” side, they point out that the pool of talent would multiply, athletes might train harder because of fewer spots, and more resources would be supporting a single goal. In addition, because athletes would have to choose events more selectively, they would only compete in their best sport.

On the other hand, when East and West Germany combined their talent, the results were mixed and tough to evaluate because other variables changed (like China’s increased competitiveness). As a specific example, the report points out that a unified Germany fared worse in football but better with hockey. Also, national pride and cheering home crowds might make a big difference. Finally, small countries tend to target one event with huge resources.

Their conclusion? The key to capturing the benefits of a euro team relates their current problems. Whether looking at the Olympics or monetary union, euro zone nations need more success optimizing the benefits of their union and minimizing its negatives.

Using Goldman’s medal chart from the 2008 Olympics, here is how euro zone nations compared with the US and China:

2008 Beijing Olympic Medal Winners (Euro Zone, US and People’s Republic of China)

	Gold	Silver	Bronze	Total
Germany	16	10	15	41
Italy	8	9	10	27
France	7	16	18	41
Netherlands	7	5	4	16
Spain	5	10	3	18
Slovakia	3	2	1	6
Slovenia	1	2	2	5
Finland	1	1	2	4
Belgium	1	1	0	2
Estonia	1	1	0	2
Portugal	1	1	0	2
Greece	0	2	2	4
Austria	0	1	2	3
Ireland	0	1	2	3
Luxembourg NA
Malta NA
Cyprus NA
Euro Zone Total				174

USA	36	38	36	110
People’s Republic of China	51	21	28	100

The Goldman report, “The Olympics and Economics 2012,” is interesting. But here, the Telegraph disagrees with its conclusions. And here is a concise timeline history of the euro zone.

Posted by: adminEcon
Tags: euro, euro zone Olympic team, European Coal and Steel Community, fiscal union, London, monetary union, Olympics 2012, sovereign debt
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12.13.2011 | Alexander Hamilton, George Washington and the Euro Zone

How to decide euro zone policy today? Just look at the U.S. between 1780 and 1840.

Saturday, in his Nobel Prize lecture, economist Thomas J. Sargent compared the past U.S. to the current euro zone. He based his talk on 4 questions:

Should governments default on their debt?
Should a central government bail out a subordinate state?
Should monetary union precede fiscal union?
Should fiscal union precede monetary union?

First setting the scene, Dr. Sargent reminded us that after winning the War of Independence, U.S. debt was massive, the Congress was weak, and we had 13 different trade and fiscal policies. What to do? Write a new Constitution. The results? A bailout of state war debt, fiscal union, and national trade policy.

But, during the 1840s when states needed another bailout for excessive borrowing, the federal government refused. The results? Lenders avoided federal and state debt but states added balanced budget provisions to their constitutions.

A 1790s bailout and an 1840s refusal took Dr. Sargent back to his initial questions:

Default: The cost of a default is reputation and elevated lending expense. But it also means higher current consumption because taxes can be lower.
Bailout: The cost of a bailout is moral hazard and perhaps, excessive federal control but creditors benefit and are likely to lend again.
Monetary Union: Should monetary union come before fiscal union? Saying, “No,” Dr. Sargent concluded his talk.

The Economic Lesson

U.S. fiscal authority–the power to spend, tax, and borrow–was established when the U.S. Constitution was ratified. By contrast, the U.S. had no central monetary policy and therefore no control over the nation’s supply of money and credit until after the Civil War. (More from econlife here on Alexander Hamilton’s economic policy.)

Using the U.S. as his prototype, Dr. Sargent conveyed the importance of a central fiscal authority and implied that euro zone success will depend on it.

His 33 minute talk was excellent. You might want to look separately at his slides.

An Economic Question: How do monetary and fiscal policy interrelate?

Posted by: adminEcon
Tags: Alexander Hamilton, bailout, fiscal union, monetary union, Nobel Prize, Thomas J. Sargent
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