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What does Euro Debt and Climate Crises have in common? Free Riders

The spotlight on this year’s long-planned climate negotiations in Durban must be shared with the hastily arranged eurozone negotiations in Brussels. These issues seem a world apart, but the fast-moving euro crisis and the slow-moving climate crisis have similar origins. Addressing both require collective action.

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Debt of European countries in % of GDP

The spotlight on this year’s long-planned climate negotiations in Durban must be shared with the hastily arranged eurozone negotiations in Brussels. These issues seem a world apart, but the fast-moving euro crisis and the slow-moving climate crisis have similar origins. Addressing both require collective action.

In the case of the euro, the problem is that poor fiscal discipline by any euro country threatens other members. By unifying monetary policy but not fiscal policy, Europe created an incentive for the less disciplined countries to free ride on the members that held stronger credit ratings, helped along, perhaps, by expectations of a bailout.

There is a strong urge for countries to free ride. Globalization amplifies these incentives.

For climate change, the problem is that every country’s emissions of greenhouse gases add to atmospheric concentrations. The costs of reducing emissions are borne by the countries that take action. The benefits, by contrast, are diffused. There is a strong urge for countries to free ride. Globalization amplifies these incentives.

Debt of European countries in % of GDP

Debt of European countries in % of GDP

To prevent fiscal free riding, the eurozone created the Stability and Growth Pact in 1997. This required that government budget deficits not exceed 3 percent, and that government debt not exceed 60 percent, both relative to GDP. Stiff penalties were proposed, but by design their imposition was to be a political decision.

When, in 2003, the euro’s biggest economies, France and Germany, exceeded the 3 percent limit three years running, the threatened punishment was not imposed. This showed that the threat lacked credibility.

To prevent free riding in the abatement of emissions, the Kyoto Protocol was negotiated under the auspices of the United Nations. Kyoto was negotiated the same year as the Stability and Growth Pact in1997.

Unlike the caps imposed by the Stability and Growth Pact, Kyoto’s emission caps vary from country to country. They also apply over a period of five years, from 2008 to 2012. Though this period has yet to expire, Canada has already said that it won’t comply.

Kyoto requires that Canada cut its emissions 6 percent, but at last report in 2009, its emissions were up by 17 percent—a gap of 23 percent. Parties agreed on penalties for non-compliance, but did not adopt them by amendment. This makes Kyoto’s enforcement mechanism worse than non-credible; it makes it non-binding.

While international law says that countries must comply with their treaty obligations, countries are not obligated to participate in a treaty, and there is speculation that Canada will withdraw from Kyoto. Of course, the United States never ratified Kyoto.

The lesson is that an effective agreement must not only enforce compliance. It must also enforce participation.

The design problems with the Stability and Growth Pact were never remedied, and the meeting in Brussels sought to change that. Angela Merkel had proposed fiscal union with strict rules that would be enforced by the European Court of Justice, not politicians.

via Read More Euro Debt and Climate Crises Spotlight Free Riders

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