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 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