A Nobel Winner’s Radical Proposal to Solve the Euro Area’s Woesby
Eric Maskin says politicians should not set fiscal policy
Fiscal parameters to be set by experts like monetary policy
Fiscal policy should be taken out of the hands of politicians and entrusted to non-elected officials just like monetary policy, Nobel laureate Eric Maskin said at a European Central Bank research conference.
“A radical proposal? Yes -- but i think we can all agree that the euro zone needs pretty substantial reform if it’s going to get fiscal and monetary policy in line with one another,” Maskin, who was awarded the 2007 Nobel prize in economics, said at a lecture at the ECB’s first Annual Research Conference in Frankfurt. “We’ll all be better off -- speaking here as an American -- if the euro zone continues to survive and flourish. But this is not going to happen automatically.”
The economist argued that bureaucrats do a better job than elected officials in taking decisions on policies whose effectiveness cannot be easily judged by the public, or that take a long time before showing their full results. This is the case for monetary policy, which in modern democracies is generally set by unelected, independent central bankers. And this -- according to Maskin -- should also be the case for “fiscal parameters,” such as the amount of revenue that is raised, and how much spending can be done.
Maskin said that deciding on taxes and spending -- who gets taxed and for what public goods the money is spent -- should continue to be decided by the public and its elected officials.
If German Chancellor Angela Merkel says that “Greece should -- or should not -- be bailed out, she may make the argument on the basis of what is good for Europe, but she knows that her real constituency is Germany,” he said. “She has no full incentive to take into account to what is good for Europe. Her party is going to be re-elected by Germans.”
Maskin’s proposal is unlikely to be met with favor by politicians that are facing a populist backlash against the European Union and its unelected technocrats and that are showing little appetite for sharing more sovereignty. Still, the Nobel laureate, who is a professor at Harvard University, said that while initially it might be hard to relinquish power, politicians may one day come to appreciate it.
“It might be a relief that it is out of their hands, that they have to do what others say,” he said. “In the same way that many American presidents are relieved that it is the Fed that decides on interest rates.”