Confessions of a PPE* Mind: What have you done, Euro?
* Pretentious, Posh and Egoistic
Having had the opportunity to choose my pathway at Warwick PPE, I was guided by the idea that an Economics pathway will be an insurance that I can surely have a job after graduation (the myth of PPE). The statistics show that, last year, 86% of PPE students chose a pathway that included Economics (note: this number is approximate and people still can choose to take economics modules, even when they dropped the subject). We, PPE students, have the impression that this discipline is the most “down-to-earth” out of the three. Thus, I believe many will be more likely to choose not to drop it. As it turns out, this “down-to-earth” characteristic can be questioned.
In higher education, we learn the do-s and don’t-s from the historical crises. But mainly, I find myself sitting in a lecture theatre and learning about the 50th model - and we are asking the same question over and over again: “so is this how it works in reality, then?” and the professor’s answer is: “well yes, but no” (we should really start a meme reference).
We - potential economists - get the criticism of being too theoretical with our models.
In practice, “Economists are often criticised because they are very bad at predicting crises and very good at explaining afterwards why these were inevitable.” - Economics of Monetary Union, Paul De Grauwe.
If this is true - what is the use of our economic knowledge? Do citizens, who haven’t necessarily been exposed to higher level education of economics, have an understanding of our work? Or do they just see a bunch of “experts” goofing around with words and numbers?
Now, hands up for those who have a subscription for the Economist. Thought so. Hands up for those who honestly understand every bit of it (I’m sure after having to have studied two years of economics at university, everything becomes clearer - doesn’t it?). The Editor-in-Chief of the Economist, Zanny Minton Beddoes, was a guest at WES 2020, and one question about the existence of an “economists’ bubble” that she was asked caught my eye, which captured the criticism I have been pursuing very well. I believe her answers were very shallow, only stating that there might be a potential bubble. Therefore, I wish to dive deeper into this question. Let’s all face it: there is a gap between economists and people who lack economic knowledge.
The core value of this series of articles is that it is from students to students (or anyone else who has an interest). Therefore, I turned to another editor, Will McMahon, 2nd year Economics student, the new editor of the Assumptions, who offered me a snapshot of his insights:
“There is certainly a barrier between economics and the general public. I think this is partly due to the public’s knowledge of economics, but largely due to economists failing to explain their theories or policies in simple terms, without jargon. [However], I certainly believe that there is a big misconception in the public and in other areas of academia that economics is all about rational agents and complicated theories that don’t apply to the real world.” But also some notes on the positive side: “Obviously economists are not always good at predicting seemingly inevitable crises, but understanding why they were inevitable is important for two reasons: it helps to prevent the same type of crises from recurring and it guides the government’s response if it does. Things are getting better in regards to empirical proof of theory.”
Through exploring this, I've realized something that I have been guilty of: thinking that real-time economics is identical with an economics exam. That in reality, economics has all the right answers - that was a big mistake. Real-time economics will place economists in situations that they have never seen before. They are certainly facing the unknown of the Great Lockdown Recession. Speculation will hold a great role in decision-making. Therefore, there is no one correct answer. So, let us see what has been created by the economists of the European Union. Is their economic model of the EU and Eurozone working well in practice?
A simple answer would be, overall, yes, if we follow conventional economics measurement; growth in real GDP. The graphs show overall a positive trend for the EU area.
However, the answer becomes more complicated once we look closer into the details.
The greatest achievement of the EU is the Single Market (SM). This phenomena allows the EU to function as one territory, without any internal borders or other regulatory obstacles, enabling the free movement of goods and services. This market has undoubtedly brought benefits to its member countries. A report suggests that: “on average, EU citizens’ per capita welfare gains from the SM amount to 840 euros per year”. It is obvious that the SM has led to the economic growth of the EU area. However, there is a core-periphery pattern, which is bringing less significant gains to the periphery, deepening the inequality between countries.
The European Monetary Union (EMU), aka Eurozone, did not turn out to be as successful as the SM. The Euro, as a common currency, was introduced in 1999, and today, it has 19 members. The first decade of the Euro was smooth, but when 2009 came, many countries suffered the fragility and burdens of this union.
It has some benefits: a common currency encourages trade by preventing transaction costs, encouraging investment, and providing greater financial market liquidity. Nonetheless, at the time, it was in the interest of the EU and the national leaders to continue reaching towards a higher level of integration, meaning that a common currency seemed like a good idea. But it is clear to me that they have rushed into it. Many argued that it was built up with several ‘design faults’ which would inevitably lead to many problems and conflicts. The second decade offered a glimpse at the faults; the Euro Crisis, battles of south vs. north, and the situations in Greece and Italy (no article about the Eurozone would be complete without the mention of those countries, sadly). The Eurozone is strong in monetary stabilisation for symmetric shocks, but it is not a budgetary union; each government has different fiscal policies and capabilities for stabilisation. Nevertheless, the government dept is issued in a currency they do not have direct control over. In the case that these faults are not corrected - the design stays highly fragile and unsustainable (second years, how is that Econ 2 essay going?).
During these series of troubling times, we have experienced a weakening in the EU’s economic collaborations. Some critics are already discussing the potential end of the monetary union as a result of the crisis ahead of us. This crisis will be “a fiscal rather than monetary challenge. As a result, it strikes at the central weakness of the eurozone. [...] Over time, this will trigger a political dynamic that could push the eurozone to the brink again”.
I intend to highlight the significance of one element of the EU in particular, to ensure its structure is robust and sustainable - the common interest. In order for the Eurozone to survive, the member states have to pursue to keep their membership in the EU, as a national interest. That pillar can only be achieved if the leaders of member states make it happen and are willing to cooperate. Thus, many things will depend on this game called “politics”, and how it will play itself out.
Here we are again, questioning the operation of the EU with respect to economics, finding ourselves yet again criticising its roots. In conclusion, the economics we know is very important. The models are great for us to be intuitively taught for economic problem-solving, and these are on the way to become more empirical-based. Thus, I believe economists are offering solutions the best of their ability - but there are greater risks in politics. Politicians hold the future of the EU in their hands. In the bubble, economists come up with cohesive solutions, and with cooperation it should be better communicated in simplistic terms to the public. Therefore, I feel that there are certain ways in which society must move forward; 1) short run: the interest of politicians and economists must not diverge, and 2) longer run: potential better economic understanding of the public.
For that I can see one potential solution: us, interdisciplinary students. According to Will, the editor: “There is a growing cross-disciplinary collaboration between economics and other areas”. Thus, I set out a hypothesis: if studying politics (as a discipline) - whilst having a good understanding of economics - makes us understand the power relations and the games of politics better, then we might have a great deal to offer to policy-making. But can political theory make us good public figures?
As I said many times, I cannot solve it all. I am very interested in opposing and agreeing opinions too. Do not leave me hanging here all alone. Leave a comment if you wish.