Do economists ever get it right?

There is one example when they did . . .

According to popular belief, economists rarely manage to predict correctly the consequences of important policy actions. Nevertheless, the case of the European Economic and Monetary Union (EMU) is one of those instances which economists did get it right.

Indeed, as far back as 1977, the MacDougall Report to the European Commission concluded that because the European Economic Community budget was very small, “… in present circumstances monetary union is impracticable.” Moreover, many economists on both sides of the Atlantic were cautioning against the planned single currency in the absence of a significant fiscal redistribution facility and/or the ability to run countercyclical fiscal policy.

Nevertheless, the political bandwagon prevailed, and the Delors Report threw caution to the wind and assumed that EMU could proceed without significant increases in the size of the EU budget, which was hovering around 1% of GDP (the 1977 Report was deeming it as necessary that the federal budget be as large as 10% of GDP). The only “concession” to economists’ concerns was the Maastricht Treaty rules imposing limits on government debts and deficits — as encapsulated in the Stability and Growth Pact (SGP).

However, the precedence given to moral-hazard considerations (and the defective way they were applied) over countercyclical fiscal policy — due to the fear that profligate governments would be too keen to run large budget deficits in recessions but very reluctant to run offsetting budget surpluses in booms — proved detrimental. Since the main focus of the SGP was on deficit limits, the resulting reduction (due to the euro) in real interest rates and concomitant boom experienced by some of the ‘periphery’ countries of the Eurozone made it very easy for governments to run (or to claim that they do) budget deficits below the 3% (of GDP) limit. Yet, this semblance of fiscal prudence — when in fact governments should be running budget surpluses — undermined their ability to conduct appropriately expansionary fiscal policy, when the boom ended, without running excessively large budget deficits.

To a large extent the semblance of fiscal prudence was aided by the very large current account deficits which some of the periphery countries were allowed to run during the Euro’s first decade. Although this appears to run counter to the well-known “twin deficits hypothesis” (i.e. that a larger budget deficit leads to a larger current account deficit), the experience of the periphery countries suggests that it is possible the direction of causality to be from a larger current account deficit to a smaller budget deficit.

For the periphery countries, EMU participation facilitated international borrowing at lower interest rates, allowing for a huge deterioration in the current account while the budget deficit improved. The reason is that imports, which become possible through international borrowing, need not fully displace spending on domestically produced goods (they may even increase it!). Moreover, they can create a revenue boon for the government. For example, car imports generate immediate tax revenue (VAT, registration taxes, etc.). They also allow for increases in domestic value added (e.g. services related to sales, advertising, and repairs of automobiles), thus allowing for second-round increases in income tax revenue. In the same vein, foreign loans (intermediated through the domestic banking sector) allowed for housing booms and created unsustainable increases in tax revenue.

The upshot of the above is that cynical governments may “achieve” a seemingly strict adherence to the SGP limits on budget deficits (they may even run budget surpluses as Spain and Ireland did), for some years, by running current account deficits; however, once foreign capital dries out the lack of fiscal space for countercyclical fiscal policy becomes evident. With the benefit of hindsight we know that the SGP provided the wrong signals about the exercise of countercyclical fiscal policy. It also failed to provide a replacement for the lack of market discipline. The moral is that the warnings of economists about the ability of the SGP to provide a framework for “monetary and fiscal stability” should have been heeded.

George Economides and Thomas Moutos, Guest Editors of the CESifo Economic Studies Special Issue on ‘EMU: The Way Forward’, are Professors of Economics in the Department of International and European Economic Studies, Athens University of Economics and Business, and CESifo Research Fellows.

CESifo Economic Studies publishes provocative, high-quality papers in economics, with a particular focus on policy issues. Papers by leading academics are written for a wide and global audience, including those in government, business, and academia. The journal combines theory and empirical research in a style accessible to economists across all specialisations.

This article first appeared on blog.oup.com, and is republished here with permission

A statue outside the European Commission. Photo: Getty
George Economides and Thomas Moutos, Guest Editors of the CESifo Economic Studies Special Issue on ‘EMU: The Way Forward’, are Professors of Economics in the Department of International and European Economic Studies, Athens University of Economics and Business, and CESifo Research Fellows.
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Meet the ex-footballers launching a support network for victims of sexual abuse in the sport

The Offside Trust is set up after hundreds have come forward, and 55 football clubs have been linked to allegations of abuse.

In a sumptuous room inside a luxurious hotel in the centre of Manchester, the country’s media anxiously await the arrival of a man whose story has rocked English football to its very foundations.

Since Andy Woodward went public with allegations that he experienced sexual abuse as a young footballer in the 1980s, the nation’s favourite sport has been left in crisis and, in the process, forced to do some soul-searching.

Following Woodward’s story, a number of his peers have also come forward with tales of unimaginable suffering.

This week, some of those men have joined together to launch the Offside Trust, an independently-run body aiming to provide support to players and the families of those who have suffered sexual abuse in football and other sports.

According to Woodward and his colleagues, the Trust won’t just be a way to help those who have been abused while playing the sport they love, but also represents a direct response to institutions that, in their view, have failed to protect them.

“A number of people who have come forward have indicated that they don’t have trust in the establishment,” says Edward Smethurst from Prosperity Law LLP, a Manchester law firm in charge of administering the trust.

“We are not here to criticise any of the establishment bodies, but we do have to respect the sensibilities and the opinions of the victims.” 

Wearing a crisp blue suit, hair combed neatly into place, Woodward’s composed demeanour masks the tremendous emotional stress he has revealed to the world he had to endure for decades, in silence until now.

Hearing him retell his story time and again, it is evident that, although exhausting, this process of letting the world know the horrors he says he experienced as a boy is both cathartic and a way to help others.

“I’m totally overwhelmed, the emotions are just unreal,” he says. “I can’t believe how many [people] have come forward, but I just encourage more and more [people] to have that strength and have that belief to do it.”

Sitting beside Woodward is Steve Walters – a former football prodigy whose career was cut short due to a blood disorder – who says he fell prey to the same serial child molester as Woodard. The person in question can no longer be named for legal reasons.

Walters tells me how his story has affected every aspect of his life. “It has ruined marriages, the relationship with my children, flashbacks, lack of sleep, panic attacks,” he tells me.

Walters speaks of “injustices” done to him for the past 20 years by those in charge of the sport he once loved. But he also knows how he would like to start turning the page and move on with his life.

“An apology [from Crewe Football Club] would be a start,” he says. “For them to not even put out one small apology, it does hurt.”

Since Woodward’s allegations were first made public on 16 November, 18 police forces across the country are now investigating claims of historic sexual abuse in football.

Every player I speak to at the Offside Trust launch in Manchester describes this as an epidemic, and that, in modern Britain, some children are still at the mercy of paedophiles operating within the sport. 

“I do believe it’s happening,” says Jason Dunford, who also claims to have been abused at Crewe Alexandra. “I believe it’s happening on a lower scale than when we were children, but as a father of a young boy who is around the football industry at the moment, I still have worries.”

Woodward coming forward has had worldwide implications. Walters and Dunford tell me they have been contacted by players as far-flung as South America and Australia who say they have been through the same ordeal as young footballers. The men are adamant this is not a UK problem, but a football one – wherever the game is played.

Woodward is mentally drained. Prior to the interview, he repeatedly tells me how the whirlwind of the last few weeks has affected his health. But he knows that this is his chance, perhaps the only one he’ll get, to help those like him.

“The closure will be when I feel like I’m satisfied that I have done everything I can to help as many people out there as possible,” he says. “People with children in football need protecting.” 

Felipe Araujo is a freelance journalist based in London. He writes about race, culture and sports. He covered the Rio Olympics and Paralympics on the ground for the New Statesman. He tweets @felipethejourno.