“Sell your islands, you bankrupt Greeks!” – Exploring Public Opinion Towards International Financial Bailouts

Priding itself on openly saying what “the man on the street” thinks, the German tabloid Bild suggested a seemingly simple strategy to deal with Greece’s debt problems: rather than relying on other countries’ financial assistance, Greece should instead sell some of its islands and, if necessary, the Acropolis as well. Perhaps unsurprisingly, European finance ministers ignored this recommendation and instead set up an EU bailout fund of €800 billion. Although the IMF, the European Commission, and others demanded an increase of the fund upward of €1 trillion, German finance minister Wolfgang Schäuble opposed further expansion, deeming it unacceptable to the German public. Indeed, several snap polls reported that about two thirds of the German citizens oppose such bailouts for over-indebted Euro countries.

Although public opinion is widely regarded as a major constraint on governments’ actions in the ongoing debate over the bailouts, scholars know very little about the factors that underlie voters’ attitudes towards such international transfers. In particular, it is unclear whether voters’ opinions reflect their assessments of how the bailouts would affect their own well-being, that of their country, or perhaps that of their fellow Europeans. In a new paper, Jens Hainmueller, Yotam Margalit, and I begin addressing this question. We conducted two large-scale surveys in Germany, the country shouldering the largest share of the EU’s financial rescue fund. Our results show that while the economic features of the bailout package itself strongly affect voters’ willingness to support the bailouts, individuals’ own economic standing has limited explanatory power in accounting for their position on the issue. In contrast, social dispositions such as altruism and cosmopolitanism are robustly associated with support for the bailouts. This suggests that the current divide in public opinion towards the bailouts is generally not along distributive lines between domestic winners and losers. Instead, the divide is better understood as a foreign policy issue that pits economic nationalist sentiments versus greater cosmopolitan affinity and other-regarding preferences.

Exports, Sports Cars, and the Benefits of the Euro Crisis

Many export-orientated businesses in Switzerland complain about the strong Swiss franc. Admittedly, it makes their products more expensive for foreign customers. Some even would like to see the Swiss central bank intervene in the foreign exchange markets to stabilize the Euro. On the other hand, a strong domestic currency also has its (short-term) advantages, as foreign products get (relatively) cheaper.

Since a recent post highlights that academics run the risk of “over-intellectualising”, let me use a hedonistic example: Ferrari’s F430 has a 4.3 liter V8 engine that punches out 375 kW (about 490 hp), thereby producing the kind of forward thrust that many would like to enjoy. Far less enjoyable, at least for younger academics, is its basic list price: €169,600 or about CHF 263,000 when the car was introduced in 2004.

Figure 1: Ferrari F430

Figure 2 illustrates the benefits of a weakening Euro. It shows how the F430’s basic price of €169,000 evolved since its introduction in 2004 if we convert it into Swiss francs. The price remains relatively stable until the end of 2006. Beginning in early 2007, the F430 gets more expensive (up to CHF 281,000). The gray line in Figure 2 shows the average price of an F430 in the 2004 to 2008 period, which is CHF 266,000. Since autumn 2008, the F430 gets cheaper and cheaper. If you were to buy an F430 today, you would “merely” have to spend some CHF 205,000, which is CHF 63’000 or 22% less than its 2004 to 2008 average price.

Figure 2: Ferrari F430 Foreign Base Price

Given that the Euro countries will likely continue to bail out Greece and potentially also other countries, you might think about whether now is the time to make a dream come true. Please let me know if this information triggers a purchase decision.

The Political Economy of International Organizations

Upcoming  PEIO V: Villanova takes over from Zurich

The series of conferences on the Political Economy of International Organizations (PEIO) continues with PEIO V in Villanova (Philadelphia) on January 26-28, 2012. If you want to submit a paper, note that the call is already out. PEIO starts to be known for its good discussions, for the fruitful exchange between economists and political scientists, and for the broad mix of participants with a relatively even balance of people from both sides of the big pond.

But be aware, places are in high demand. For PEIO IV in Zurich (at the University of Zurich and ETH Zurich) on January 13-15, 2011, we could accept only about 15% of paper submissions for presentations and another 15% for posters. And this despite the fact that many other submissions were very interesting and of high quality, too! Hard decisions to make… But there is a deliberate choice to limit the number of participants to a group that allows exchange and network building, thereby generating a very special atmosphere.

The basic idea of the upcoming PEIO V and its predecessors in Zurich 2011 (Switzerland), Georgetown 2010 (USA), Geneva 2009 (Switzerland) and Ascona 2008 (Switzerland) is the following:

Many economists and political scientists work on the political economy of different international organizations, like the UN, the IMF, the World Bank, the WTO or the EU. And the work of these people largely overlaps. Yet, there are, so far, only few other platforms encouraging the exchange across disciplines. The current deficiencies in communication across disciplines are immediately obvious when looking at citations in economic and political science journals. With our series of conferences, we intend to bridge the communication gap and to establish a more sustainable basis for the international and interdisciplinary exchange on this subject.

Prior experience shows that this exchange can become very lively. And this is true not just for the individual presentations, but also for the poster session that is an important part of PEIO conferences with many first class papers and assigned discussants (in addition to discussions with other interested participants).

An international organizing committee was created in 2008 to ensure the follow-up, shape the orientation of future conferences and referee the papers submitted in response to our call for papers. The 2012 program committee includes:

Thomas Bernauer (ETH Zurich, CIS), Lawrence Broz (University of California, San Diego), Axel Dreher (University of Heidelberg), Simon Hug (University of Geneva), Christopher Kilby (Villanova University), Stephen Knack (World Bank), Helen Milner (Princeton University), Katharina Michaelowa (University of Zurich, CIS), Randall Stone (University of Rochester), Sturm, Jan-Egbert (ETH Zurich, KOF), Michael J. Tierney (College of William and Mary), James Raymond Vreeland (Georgetown University), Eric Werker (Harvard Business School).

The distinguished guest speaker for 2012 will be Jagdish N. Bhagwati, Professor of Economics and Law, Columbia University.

Interested? Then do not miss the deadline for submissions (only full papers!) on September 30. Papers should be mailed to conference@peio.me.

For further details on the upcoming conference in Villanova as well as on past conferences, please see our PEIO website at: www.peio.me

Barrosobama – Add on…

Laura Gies just send me these nice little wordclouds that so neatly illustrate my blog from yesterday. The first one is a cloud capturing the essence of Obama’s January 2010 State of the Union Address.

This one relates to Barroso’s speech at the European Parliament last week.

Of course, I take them as confirmations of yesterday’s blog 😉

Barrosobama – Same States of Different Unions?

Last Tuesday, we witnessed the first so-called “state of the Union” address by a European Commission President. Drawing on the American example – following article II, sections 3 of the Constitution to the United States of America the US President annually informs the houses of Congress about the ‘State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient’ – José Manuel Barroso held a speech, described as ‘upbeat’ and ‘presidential-type’ (euobserver.com). Despite the question whether this is really something new – Commission Presidents already in the past had presented their work programs to the European Parliament on a regular basis – and whether Barroso is really the head of the EU’s executive – remember van Rompuy – and whether it was a good idea of threatening the MEPs with a fine in case of their abstention, I was wondering how strongly Barroso’s speech mirrored Barack Obama’s state of the Union address delivered on January 27th 2010.

The two speeches differ in length: Obama uses 7400 words as compared to Barroso’s 4400. In terms of content, both speeches center on the state of the economy, (‘smart’) growth, the creation of jobs (preferentially in the eco-industries), innovation, and energy questions. While Barroso promotes his 2020 reform agenda and a further deepening of the single market, Obama defends his health care program. Both speakers share concerns about civil rights. Obama focuses stronger on security and geostrategic issues. Barroso expresses his wish of seeing Europe become a global player, a ‘global leader’ but for the sake of promoting climate change, international cooperation and the promotion of the EU’s values, as for instance the respect of human rights. Both speakers underline their interest in the Doha round.

The two speeches address different audiences and they differ in terms of style. Commission President Barroso does not greet his ‘fellow Europeans’ and he delivers the basic structure of a work program – without actively discussing its pros and cons and illustrating and supporting his claims with examples from l’Europe profonde. But there are some attempts not to sound too bureaucratic: ‘This is Europe’s moment of truth. Europe must show that it is more than 27 different national solutions. We either swim together or sink separately. We will only succeed if, whether acting nationally, regionally or locally we think European.’ Compared to Barroso, Obama celebrates a mass, interacting and flirting with the audience: ‘I thought I’d get some applause on that one’. Or his comment on the bank bailout: ‘I hated it. You hated it. It was about as popular as a root canal.’ Obama cheers up his audience – ‘Let’s get it done. Let’s get it done’ – in a blood, sweat and tears fashion basing his optimism on the American spirit of ‘great decency and great strength’. And yes, Barroso doesn’t end with: ‘And god bless the European Union’.

Just Another Talk Shop? International Institutions, European Summits and Financial Markets

Many commentators hold the view that international diplomacy does not affect financial markets in any notable way. Especially since international decisions require consent by all actors, this de facto unanimity requirement allows every government to torpedo any attempt to bring about a collectively binding agreement. What we observe then in the theatre of international diplomacy and negotiations is a sometimes entertaining, yet economically ineffective play. Governments meet in “talk shops” and make lofty proclamations, but produce nothing more than “hot air” that markets do not care about.

In a recently published article, Gerald Schneider (University of Konstanz) and I take issue with the view that the results of deliberations in multilateral fora are “hot air”. Our focus is on decision-making in the European Union’s (EU) key intergovernmental body in the domain of EU foreign and security affairs. As is the case for most international institutions, the unanimity requirement governing this body allows nationalist governments to torpedo any attempt to build up a credible European defense force and a unified foreign policy stance.

We argue that investors react positively to a successful strengthening of Europe’s military component – a vital part of the intensified cooperation within the European Security and Defense Policy (ESDP) – since such decisions increase the demand for military products and raise the expected profits in the European defense industry. We find that financial markets react positively to those summit decisions which consolidated EU military capabilities and the ESDP. Each of these substantial Council decisions increased the value of the European defense sector by about 4 billion Euros on average. This shows that multilateral decisions can have considerable economic and financial repercussions.

Clearly, this is not to say that the skeptical view many hold about the effectiveness of international institutions, diplomacy and their relevance for the economy is incorrect. Yet, the potential for effective decision-making within international institutions that is relevant for markets may be underestimated, because we lack systematic evidence on when and how it matters. Our results also suggest that political scientists may detect economically crucial events in international relations by studying the way in which markets differentiate in the short run between events that are important to them and those that will remain “hot air”.

But he hasn’t got anything on!

In Hans Christian Andersen’s short tale ‘The Emperor’s new Clothes’, it is a child pointing out the obvious fact: “But he hasn’t got anything on.” Simple truths often evade more sophisticated observers. And similarly, in academia, we often do not bother to ask and (for that matter) answer seemingly obvious questions.

Recently, in a meeting reuniting ten experts of EU decision-making, a colleague asked what actually drives the European Commission to submit its proposals either in the form of directives or regulations. While we all had an idea about the legal differences between these two provisions – regulations are binding in entirety and directly applicable in all Member States, directives leave to national authorities the choice of form and methods of transposition (Art. 288 of the Treaty on the Functioning of the European Union; former Art. 249 EC Treaty) – nobody of us, including the author, was certain about when the Commission opted for directives and when it pulled the regulations card. The legal answer is that in “most instances the Treaty leaves open the choice whether to proceed by way of regulation, directive or decision” (Craig & De Búrca 2008: 83). Fair enough. But the answer highlights that there is great room for strategic action – usually a nice playing ground for political scientists.

Commission submission p.a. (source: EULO)

The graph based on our new EULO dataset (more information on this is to follow) plots the yearly amount of Commission proposals in the form of regulations, directives and decisions (decisions are binding but they are not addressed to all member states).

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