Premier Monti of Italy and premier Papademos of Greece are democratically appointed leaders of their country. They are sworn to care for their peoples and to uphold their constitutions. There are EU agreements on budget targets but these are not the prime concerns of a prime minister. The well-being of the people, health care, justice, education, employment instead of poverty, those are the prime concerns. Some commentators label Monti and Papademos as technocratic since there are no political parties behind them. We may as well admire the flexibility of democracy to put party issues aside in a time of need. When a person adopts a position in government it becomes politics nevertheless and that person may be swept aside by party politics again at any time. Monti and Papademos thus are advised to design a national agenda en to establish a strong footing within the supporting political parties.
Monti and Papademos are professors in economists as well. The last 30 years since the Presidency of Ronald Reagan 1981-1989 caused a swing in economic theory to neoliberal thinking. If Monti and Papademos are locked into this neoliberal thinking then they will follow the hardline programme that the EU is adopting now. This will cause unemployment and poverty for their people for the next years. If Monti and Papademos have some flexibility of mind then their training as economists will help them to better understand the situation, and explain it to the other EU government leaders who have no such training in economics. Thus both economic theory and their national interests will cause them to take a critical look at what the EU has wrought till now.
Economic theory has made a huge advance since the years of Reagan. This advance is little noticed in the literature and in the newspapers, likely because there seemed to be no need for it given the seeming prosperity of the Greenspan years. Now that widespread and ill-advised deregulation eventually caused the Credit Crunch and the current Double Dip Recession (that even might turn into a veritable Bush-Obama Depression), it is time to look into the innovations in economic theory that we urgently need now. Monti and Papademos have been professors of economics. The EU may see the special occasion when they are allowed to teach the class of 25 other EU leaders of government. The class can ask the professors whether they have kept up to date.
The first point is that the Trias Politica model of democracy with the checks and balances of the Executive, Legislative and Judiciary branches of government has failed, and that we need a fourth branch, an Economic Supreme Court, based in science and with the constitutional task to oversee the quality of information and with the power to veto the budget if it contains incorrect information. The current EU agreements already want that budget rules are put into (constitutional) law and that there be independent bureaus to forecast the budgets. These current two ideas are inoptimal. A law is inflexible and will tend to be procyclical. Independence can cause stagnation since bureaucrats might forecast that budget cuts will enhance economic growth while we need science that is open to society and open to contradictory information. Hence an Economic Supreme Court is much superior to the current plans and creates a high-definition democracy. As Monti and Papademos are called technocratic, we get a better balanced situation when an Economic Supreme Court oversees the more traditional political process of the other branches of government. When each nation has its own Economic Supreme Court then co-ordination at the EU level is achieved by scientific exchange of information between these courts. There is less need for directives from Brussels, which supports the open kind of Europe that most people favour. The UK already made the move to an Office for Budget Responsibility. That OBR however is not open to science and still locked into the neoliberal kind of thinking that causes unemployment and poverty.
A second point concerns the tax void and the dynamic marginal tax rate. In our economies, taxation and social welfare are as badly managed as our banks and financial system. Our wrong systems caused mass unemployment or inflation since the 1970s. Governments did not see the causes in taxation and social security and tried to respond by "Keynesian" policies to stimulate demand. When this failed, Ronald Reagan came into power, and followed his "supply side" approach. His reduction of taxes of course implied a "Keynesian" demand stimulus as well. His deregulation of (financial) markets also meant a "Keynesian" demand stimulus, since capital was liberalised to find new sources of profit. The injection of capital supported the ICT and dotcom revolutions but also bubbles, and China was so kind to absorb American paper. It becomes time to fix the true problem that resides within our system of taxation and social welfare. Tax exemption better be set at the level of the net minimum wage, so that a person can start working without the burden of taxes that drive up the wage that cause unemployment. VAT better be set at 1% so that this tax burden is eliminated as well. The top marginal tax rate can be put at 75%. There is an economic theory that high marginal tax rates are bad for incentives but there is also another theory that what matters is the dynamic marginal tax rate, that is close to the average rate. The empirical evidence supports the second approach.
A third point concerns the German fears for inflation and debt defaults. Around 1895, Fürst Bernhard von Bülow, then Ambassador in Rome and later Reichskanzler 1900-1907, and his pastor Otto Frommel, visited the painting atelier of my greatgrandfather in the Villa Strohl-Fern in Rome. Pastor Frommel indeed bought a drawing of the interior of the San Paolo. My greatgrandfather had some innovative ideas about painting space and light, a bit like his contemporary Vincent van Gogh. I sometimes wonder what difference it might have made if Von Bülow had had a somewhat wider view on art and had bought a painting as well. Kaiser Wilhelm II had some grudge against his English mother and the aspiration to overcome the British Empire of course was strong – I refer here to the historical discussion by Sebastian Haffner. The German decision in World War I to allow Lenin to go to St. Petersburg and to supply him with ample gold to have his revolution was dismal too. In my analysis we can observe a similar closed and tunneled German mind nowadays as well. Painting of course is a matter of taste. So let us switch to the hard subjects of econometrics and mathematics. Let me first refer to my books A Logic of Exceptions and Elegance with Substance and Conquest of the Plane about logic, mathematics and their education. These ought to establish that we have a new foundation for looking at these subjects. Then there is my book Voting Theory for Democracy. This establishes that we have a new foundation for looking at democracy. Parliaments in Europe can look into these subjects and make sure that their scientists study these issues and that also German scientists understand them well. Not only the young people in training but established scientists as well. All this ought to provide a good scientific foundation to discuss the German fears for inflation and debt defaults, in the light of my book DRGTPE and its "Economic plan for Europe".
The policy followed by Bundeskanzler Merkel can be understood to some extent. Apparently her first objective is to establish a (semi-) automatic regulation of government deficits and debts, something that Theo Waigel tried at the Treaty of Maastricht but did not succeed in securing. Once the EU has shown its good intentions she may be willing to consider subsequent measures. Here she seems to overlook a crucial element. Germany’s hands are tied, namely, with a national debt of 83% of GDP in 2010 next to the off-budget guarantees, and the newer stricter rules combined with dropping exports to a EU in recession. The German electorate will not be impressed by the performance of Italy and Greece. The conditions of a recession may mollify an economist but not an electorate that faces that recession itself. It is curious that the EU is willing to borrow from China which funds have been created by the printing press in the USA, but is not willing to use its own printing press while there is no risk of inflation. Hence Kanzler Merkel seems to have manoeuvred herself in a tight spot while the remainder of Europe becomes annoyed by the directives from Berlin or its spokesmen in Brussels. Also, the true problem isn’t inflation or debts but import and export imbalances within the EU. Germany creates unemployment in its home market and tries to resolve this by exports to other countries. The export earnings are loaned to Southern Europe again to finance those exports. It would have been different if Germany had invested in shares in Southern Europe and prepared to take a loss if invested wrongly. To understand the true source of the problem, see above on taxation and social welfare, the tax void and the dynamic marginal tax rate.
Germany is part of the problem. Premiers Monti and Papademos need not think that they have a weak position because their countries seem dependent upon external capital. They can revise their internal systems of taxation and social welfare without people suffering, and provide a living example for Germany. There is scope for more taxes for the wealthy even though the IMF does not understand that yet. They can designate investment area’s under international laws that investors will be more familiar with than local laws. Most of all, they have economic theory on their side. Subsequently there will be even German economists who can explain it all to their fellows. Most of all, premiers Monti and Papademos best consider the proposal to adapt the Trias Politica with an Economic Supreme Court. There is an alternative to the current EU agenda.