Belmont Club

One Framework To Rule Them All

Bank shares and stocks fell globally as Spain and Italy saw their borrowing costs surge in the wake of fears over a sovereign default. “Italy, the eurozone’s third-largest economy and home to the continent’s biggest bond market, saw the premium it pays to borrow over German debt rise by more than a quarter to 3 percentage points, a euro-era high. Spain’s benchmark borrowing costs rose above 6 per cent, also a euro-era high.” The danger to a single European currency, once deemed far off and fanciful, was now at the door. Jim O’Neill of Goldman Sachs stated the obvious when he concluded that not even Europe together could afford a full-blown Italian bond crisis.

The Los Angeles Times quoted analysts who said that since “Spain and Italy are nearly five times the size of Greece, Portugal and Ireland and carry nearly four times the volume of debt” and there was no way they could be bailed out.  The coming “disintegration of Europe” according to Hayden Shaughnessy of Forbes had its roots in the gigantic mis-investments of the past decades. “The EU’s innovation spending is funneled through its Framework Programmes – the equivalent of ARPA and DARPA or the NSF. … The FPs are in fact a travesty that no-one dares call out – so many Universities, research labs and companies are dependent on the largesse: Euro 7 billion a year (close to $10 billion) with next to no visibility on success or failure, dispensed in a system that simply ignores market signals.” As a result, many of Europe’s best brains have been wasted on things that nobody wants.

The other driver was an obsession with social engineering and equalizing outcomes. Shaughnessy continues:

The way Europe spends on countries like Spain is just as crazy. And the instutional arragements and guardians of EU money are culpable here too.

Spain for example gave birth to the first modern ghost towns, whole mini-cities that were so under-populated their were incapable of supporting an infrastructure, created in part because its construction industry has been subsidised by European money for the past twenty five years.

Under its structural spending EU money goes into projects in under-developed regions – those with a sub-par living standard. Between 1989 and 1999 Spain received over Euro 66.6. billion (close to $100 billion) in EU support for its regions, not including additional money that went into agriculture. …
By the late mid 2000s more concrete was being poured annually on the Spanish coastline than in Germany, France and Italy combined.

Like Greece, Spain has been developed as a playground for northern Europeans who relieved their long winters and cloudy summers with cheap flights to the Costas, sun, booze and golf.

In the long run none of that social engineering would pay off. It resulted in grotesquely distorted economies, in misshappen societies condemned to a future of dependency and debt. “The problem now is finding a way out. How to innovate these countries out of structural economies that simply do not deliver what an economy has to – sufficient surplus for the people working it.”

Freidrich Hayek, reflecting on the question of ‘who should decide’ economic activity concluded that the worst thing anyone could do was let the center rule the roost. Hayek argued that no group of bureaucrats knew  enough to make decisions for everybody. The right answer was literally unknown to any single group of planners. The only possible alternative was to create a framework in which everyone could make their own rational decisions.

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality. …

that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about “economic planning” centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly.

The “disintegration of Europe” as Shaugnessy puts it may have been due in part to a “one size fits all” decision making process. European institutions expanded to a level beyond their level of competence.  The result was one currency for all. One framework plan for all. One aspirational standard of living for all.  It all looked good on paper and went up just as quickly when the flame was put to it. The last decades of the 20th century saw the emergence of institutions that were Too Big to Fail. These are towers are now apparently collapsing. Can they be shored up? Although some of their inhabitants may be praying for a secular miracle in the next few weeks, the answer is probably not.

The fall of insupportable institutions are the start of reform. Failure is nature’s way of telling people something’s wrong. The good news is that it forces a change for the better. The bad news is that much that was beautiful and good will perish along with it. From literature we know that great falls often mean new beginnings.

A brief vision he had of swirling cloud, and in the midst of it towers and battlements, tall as hills, founded upon a mighty mountain-throne above immeasurable pits; great courts and dungeons, eyeless prisons sheer as cliffs, and gaping gates of steel and adamant: and then all passed. Towers fell and mountains slid; walls crumbled and melted, crashing down; vast spires of smoke and spouting steams went billowing up, up, until they toppled like an overwhelming wave, and its wild crest curled and came foaming down upon the land. …

And as they stood so, their hands met and clasped, though they did not know it. And still they waited for they knew not what. Then presently it seemed to them that above the ridges of the distant mountains another vast mountain of darkness rose, towering up like a wave that should engulf the world, and about it lightnings flickered; and then a tremor ran through the earth, and they felt the walls of the City quiver. A sound like a sigh went up from all the lands about them; and their hearts beat suddenly again.

‘It reminds me of Numenor,’ said Faramir, and wondered to hear himself speak.

‘Then you think that the Darkness is coming?’ said Eowyn. ‘Darkness Unescapable?’ And suddenly she drew close to him.

‘No,’ said Faramir, looking into her face. ‘It was but a picture in the mind. I do not know what is happening. The reason of my waking mind tells me that great evil has befallen and we stand at the end of days. But my heart says nay; and all my limbs are light, and a hope and joy are come to me that no reason can deny.

But we don’t live in a movie or in a book; or if in a book it is one whose author has not finished the manuscript. What will happen? Well, who knows?

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