Blog Post

The zero-sum game poison

Whenever a society regards its problems solely through the prism of distributional disputes, its chances of solving them diminish greatly, because the “us versus them” mentality distorts analysis and blocks solutions that would unambiguously improve the overall situation. Every policy choice is perceived as a zero-sum game, whereby gains for one group are necessarily a […]

By: Date: October 10, 2012 Topic: Macroeconomic policy

Whenever a society regards its problems solely through the prism of distributional disputes, its chances of solving them diminish greatly, because the “us versus them” mentality distorts analysis and blocks solutions that would unambiguously improve the overall situation. Every policy choice is perceived as a zero-sum game, whereby gains for one group are necessarily a loss for another group. The very notions of trust and progress vanish.

We have seen in the past the extent to which such conflicts – between rich and poor, landlords and industrialists, or capital and labour – can hamper development. We are seeing today in the United States how entrenched antagonisms result in a stalemate on tax and budgetary matters, and endangers the restoration of public finance sustainability. From North to South and East to West, there are many examples of failed economic reforms that fundamentally boil down to the same zero-sum logic.

But the situation is nowhere as acute today as in Europe. Since the euro crisis began almost three years ago, there has been a continuous struggle between two readings of it.

The first interpretation emphasizes the eurozone’s policymaking shortcomings and the reforms needed to remedy them. For example, it sees banking union as a logically necessary complement to monetary union, not because it may imply transfers, but because it is a way to cut the perverse feedback loop between bank fragility and sovereign fragility. It therefore leads to advocating systemic reforms that will strengthen the system as a whole, potentially to the benefit of all participants.

The second, zero-sum reading highlights individual eurozone countries’ failings and the cost that they impose on their neighbours. According to this reading, policy failures in some countries – Greece and Spain, for example – have weakened the monetary union. These countries must get their acts together and reform domestically, rather than calling for changes in the euro principles and rules that would result in letting their partners paying for their mistakes.

Until now, a rough balance between these two interpretations has prevailed. There have been systemic reforms and there has been assistance to countries in trouble, but on the condition that they adjust and reform. But the second, zero-sum reading is increasingly getting the upper hand.

In northern Europe, public opinion is increasingly exasperated by what many view as an attempt by the south to rob it of its savings. A recent letter signed by 160 German economists claiming that the European Union’s plan for a banking union was little more than an attempt to make Germany pay for Spanish mistakes is revealing in this respect.

The economists largely overlook the financial fragility problem that a banking union is supposed to address, claiming instead that there would be no problem if governments simply stopped intervening in banking crises. And they overstate the risk that a common deposit-insurance scheme could turn into a massive north-south transfer channel.

In turn, southern Europe is getting angry. Italian Prime Minister Mario Monti recently decried the emergence of a European “creditocracy” – governance by those who pretend to be on the giving side of Europe – and pointed out that, contrary to widespread perception, Italy is not relying on anyone else’s support. (Actually it is a fact: Rome is contributing to support other countries in crisis, so, objectively, it is still a creditor). If the mild-mannered Monti speaks in these terms, what can we expect from the new breed of populism that is bound to result from the southern European crisis?

Admittedly, Europe’s increasingly divisive zero-sum thinking is not entirely new: the EU is accustomed to distributional disputes, and the lengthy budget discussions (which take place every seven years) are typically acrimonious affairs. But, until now, policymakers could contain controversies to the usual political give-and-take of taxation and cross-country transfers. So for example they were able to argue over the budget while at the same time creating the European single market or the euro. The problem with the current debate is that distributional disputes now contaminate the entire policy spectrum.

One man saw this coming. American economist Martin Feldstein wrote in 1997 that monetary union would create conflict within Europe. At the time, he was derided and regarded as an entrenched opponent of the European project. Unfortunately, his insight was correct: European countries today are not at loggerheads despite the common currency, but because of it.

History suggests that international disputes over debt and transfers are a serious danger. In the 1920’s and the 1930’s, representatives of European states devoted countless meetings to resolving them (at the time, mainly German reparations). Despite US goodwill, they were unable to overcome their differences and let the reparation problem degenerate into a poisonous financial conflict that contributed to much worse.

But conflict is not inevitable. Europe should learn from the many societies that have proved able to overcome a zero-sum mentality and project their perceptions of national interest into the future; it must find in itself the ability to do the same.

An important lesson from how countries address internal disputes is that the attitude needed does not require to overlook distributional issues. Successful societies do not stop having arguments about who benefits or loses from taxation, redistribution, or regulationThey still include rich and poor, industrialists and landlords, or young and old citizens. But they do not allow distributional issues to take over the entire debate. They are able to separate efficiency or stability issues from distributional controversies.

That is the lesson tat Europe must learn. It must recognize that it is bound to live with distributional disputes and find ways to address them. It is legitimate to ask how much the prosperous North is willing to pay to help the struggling South. But, even more important, it should contain the scope of these disputes, and avoid becoming mesmerized by them. Doing so requires courage, vision, and trust – qualities that are currently in dangerously short supply.

A version of this column was also published in Caixin


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Grégory Claeys and Wolfgang Lemke Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More by this author
 

Podcast

Podcast

A green fiscal pact

How can the European Union increase green public investment while consolidating budget deficits?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: September 29, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Read about event More on this topic
 

Past Event

Past Event

How to strike the right balance between the three pillars of the pension system?

In this event panelists will discuss the future of European pension schemes.

Speakers: Elsa Fornero, Svend E. Hougaard Jensen and Suvi-Anne Siimes Topic: Macroeconomic policy Date: September 23, 2021
Read article More on this topic More by this author
 

Blog Post

Germany’s foreign economic policy: four essential steps

Germany and the EU need to develop a strong and proactive agenda to manage foreign economic relations, which are essential for German and European prosperity.

By: Guntram B. Wolff Topic: Macroeconomic policy Date: September 23, 2021
Read article Download PDF More by this author
 

Policy Contribution

A new integrated-value assessment method for corporate investment

To contribute more to the green transition, companies should start to make investment decisions based on integrated-value assessment, weighing up the environmental and social impacts alongside the financial returns.

By: Dirk Schoenmaker Topic: Green economy, Macroeconomic policy Date: September 23, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Unboxing the State of the Union 2021

In this Sound of Economics Live episode, Bruegel experts look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

By: The Sound of Economics Topic: Macroeconomic policy Date: September 15, 2021
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Unboxing the State of the Union 2021

In this Sound of Economics Live episode, we look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

Speakers: Grégory Claeys, Maria Demertzis, Alicia García-Herrero and Giuseppe Porcaro Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 15, 2021
Load more posts