Technology: A European Patent Office, 222 Years Later than the US

After the American Century

The first patent issued by the US government was approved July 31, 1790. The document was signed by George Washington himself. In the early years one of Thomas Jefferson's duties as a member of the cabinet, was to supervise the patent process. It soon became too great a burden and people had to be hired to do this work full time.

The first US patent, signed by George Washington in 1790

That first patent was issued to Samuel Hopkins for a process for making potash and pearl ashes to be used in fertilizer.For a largely agricultural nation, this was an appropriate beginning.

Since then, more than six million patents have been issued in the United States, and each of them has enjoyed the protection of federal law in all of the individual states. In contrast, Europe has long struggled to reach the place where the United States was in 1790. Patents are more costly and much harder to defend in Europe, even today, because of the multitude of national jurisdictions, varying regulations, different languages, and complex procedures. 

During the last year, the EU finally drew up an agreement that will help solve some of these problems, by establishing a more coherent system. The negotiations have lasted 40 years. At the end of June, the three biggest economies in their usual squabbling way carved up the court into three parts, with the pharmaceutical patents to be issued from London, the mechanical ones from Munich, and all the rest from Paris.

This division is silly, and assumes an absurdly neat division of intellectual property with no fuzzy boundaries, but it is evidently the best the EU can do. The new system will create specializations and potential differences between the three sites. Law firms will need to have offices in all three cities if they want to offer full service to corporate customers. In short, the result will not be as efficient or as inexpensive as it might have been with a single location.

Still, it is an improvement. For the first time, inventors in many European nations can get just one patent that protects their discoveries in all the other member states. One would have thought such a clearly good idea would have been part of the original EU treaty, or at the very least that it would not have taken 40 years to negotiate. 

So, the EU is still not where the US was in 1790, when all patents were issued from one office. But it is a big step in the right direction. It almost looks like the EU wants to be competitive.

Are Europe and Greek Debt like the Titanic and the Iceberg?

After the American Century

Imagine that Europe is a large ocean liner called the Titanic, and that it is sailing straight toward a massive iceberg that has appeared in the Mediterranean off the coast of Greece. The original idea  for the ship was to create watertight compartments (national economies) below deck, so that if one or more of them filled with water (debt), the others would not also fill up. But this original plan was not fully carried out in the actual construction. The ship turns out not to be unsinkable because its compartments are not sufficiently strong, watertight, or numerous.

If I could go back in time and rebuild the Titanic, I would carry out the original design more completely. Greek debt is the iceberg smashing into the Euro, and I would rather each national economy had largely to stand on its own. Unfortunately, the European "reform" that seems to be favored by most leaders today is to remove most of the interior barriers and thicken the outside hull of the ship as a whole. The idea is that superior leadership and regulation from the center will avoid most of the fiscal icebergs of the future, and that when they do come the improved hull with be strong enough. I would rather not make well-functioning economies hostage to the Italians, the Greeks, the Spanish, and the Portuguese, or for that matter to any country that in the future might get itself into financial trouble.

What can Europe learn from this fiasco? I suggest that it ought to learn to keep the national economies more separate, rather than the widespread idea that what Europe needs is more integration. Better, surely, (1) to prevent banks from loaning more than 4% of their total worth to a single country, and (2) to limit how much money any nation can borrow abroad, making it finance a minimum 75% of its own national debt. If its own citizens will not buy most of the debt, why should anyone else?

More than two years ago I argued that Greece should not be bailed out. I wrote then, "Greece cannot pay its bills, even in the short run. With a national debt that is more than 110% of its gross national product, and a deficit of more than 10% for this year, Greece's debt will only get worse unless and until it enacts real reforms. So far it has failed to do enough, and the deficit will only get worse."

Most of what I wrote then is sadly still accurate now, except that the rest of Europe and the IMF have been pumping money into Greece while insisting on draconian reforms. But it has not worked. The choices then as now are either Greece leaves the common currency and goes back to its traditional overspending (with periodic drachma devaluation) or it really puts its house in order. Sadly, the second task is beyond its political capacity, as its recent, failed election process demonstrates.

As the crisis has been prolonged, money has been fleeing the country for safe havens before the collapse which seems to draw slowly but inexorably closer. It is difficult to know precisely how much money has been transferred or carried personally away from Greece, but it is more than €1 billion. This money could have helped keep the economy going. It is like taking blood from a dying man. Adding further to the misery, tourists are wary of booking trips to Greece, because it may descend into financial and political chaos. Why go there when other places are far more stable?

The only bright spot here is that the rest of Europe has had 27 months to prepare itself, by putting some firewalls in place. Whether these are good enough is not clear.

Had the Greeks been hit with a natural disaster like an earthquake, they would deserve sympathy and charity. But for years the Greek insisted on spending more than they could afford. They gave massive pay increases and early retirement to state employees that were not funded by taxation. Tax evasion was massive. There is no reason for the other European states to give or to loan them any more money. Giving them another handout will only delay for a short time the day of reckoning.

Can the EURO be Saved by Top Down Budget Controls that Start Next October? And Is Brussels Really Up to this Job?

The New EU Agreement May Not Work in Practice

After the American Century 

I confess that the Euro Crisis seems to me only temporarily "solved." Except for Britain, all the other countries seem ready to let the EU have a veto over their budgets.  Is this idea feasible or practical? I think it will prove unworkable, at the latest by November, 2013. I very much hope events prove me wrong, but I fear this was an ill-advised treaty based on panic diplomacy.

Assume this new agreement goes into force and try to imagine how it will work. Each autumn all 17 nations using the Euro (and some 8 or 9 nations who might someday use it)  will send their national budget to Brussels and then sit back and wait for weeks or more likely months to hear whether their budget is acceptable.

Brussels will need to have deep knowledge of each nation's domestic politics and economy, so deep that each budget can be evaluated fairly, and quickly. If a single committee of experts examines each of the 25 national budgets and gives just one day to each, it will require five weeks to review them all. That is too superficial a look and yet would take to long, so there would need to be teams of Eurocrats devoted to different clusters of nations. And what chance is there that different committees will all apply the rules in the same ways?

These 25 or 26 national budgets will be complex documents built upon political compromises and assumptions about how each national economy will do in the following year.  This year it took the Danes well over a month to come up with their budget, which began with horse-trading behind closed doors between members of the newly elected coalition. What if the technocrats in Brussels declare such a budget invalid? Who then decides where the cuts should be made? How long will decision making take? How will coalitions respond if Brussels imposes cuts that hurt one party in the coalition far more than others? Might not Brussels cause governing coalitions to collapse, forcing new elections, and leaving nations without budgets in the meantime?

Which economic theory will be used to provide the standard model?  And what system of national accounting will be used? All nations will need to use the same or very similar systems, one would think, otherwise it will be hard to apply the same rules in an evenhanded manner. Most nations will have to "translate" their customary budget into an EU-friendly form.

What will be the allowable margin of error - i.e. the allowable difference between annual projection and actual performance in the previous year? Will a nation that suffered a natural disaster, such as a flood or earthquake be fined for failing to meet expected performance targets?  What if the cuts favor banks rather than homeowners, or they hurt schools rather than hospitals? Workers rather than pensioners? Suppose an EU budget decision is controversial? Can it be appealed? Meanwhile, is a nation making an appeal unable to tax and spend until a decision is final? These are only some of the questions that come to mind. I cannot imagine such a scheme working in the real world. 

If we assume that the new arrangement is approved this spring, expect a bureaucratic circus in October and November, 2012.

I think the new treaty is a bad idea because
(1) it is a top-down control mechanism that will be unworkable.

(2) It is based on the idea of cutbacks everywhere as the solution, and does nothing to create jobs or foster growth, except growth in the Brussels bureaucracy.

(3) It does not focus on the international banks as a major part of the currency problem. The banks irresponsibly loaned billions of Euros to nations that could not repay their debts, and the new idea is to let the European Central Bank make those loans instead. I would rather see much tighter controls on the banks themselves, learning from the effective regulation of the Canadian banks who rode out the 2008 crisis quite well.

The Scandinavian countries, none of whom now have the Euro. should put a few people to work on Plan B: a common currency for Norway, Sweden, and Denmark. This would quickly be recognized as solid and secure. Compared to working with Brussels, it would be easy to administer. This particular Plan B has been discussed before and rejected. Would any Danish political party have the courage to explore this idea? Probably not now.

Wait until about 2013, when people see the complexities, inequities, and delays that come with a centralized Euro and top-down control of national budgets. By then, Britain may look like the smart one who opted out early.

Can the Euro Crisis Be Solved? Not in Greece

After the American Century

The Euro Crisis has not gone away. Several times there have been meetings and pledges of more money. The Greek Governemtn keeps making cutbacks, and the Greeks themselves keep protesting. The EU keeps up the pressure with one hand and gives the Greeks money with the other. Nothing seems to change for the better, and the financial fallout continues.

Who would have thought that all European consumers would be nervous because the Greeks profligately overspent? Why should this matter to other countries? Because the banks are all inter-related, and in Greece they are over-exposed. What is now possible is a kind of gigantic domino effect, in which the fall of Greece will topple some banks abroad, which will in turn have a knock on effect right across Europe and across the globe. 

Once upon a time the world was less connected, and some countries made a regular practice of overspending and then devaluting their currency. Take Mexico as an example. Starting in the 1950s for two decades the exchange rate was 12.5 pesos to one American dollar. But in 1976 this rate became impossible to maintain, and Mexico lowered the value of its currency to 20.4 pesos to the dollar. By June, 1982 the rate was 25 to the dollar, but things rapidly got much worse reaching 150 to the dollar by the end of the year. This was a serious crisis for Mexico. It got worse in the following decade, but it did not drag other larger economies to ruin.

By comparison, Greece has a smaller economy than Mexico, but it is much more tied into the economies of its neighbors. Mexico's peso fell pretty much on its own, but Greece has the same currency as much of Europe. 

So how bad is it in Greece? Worse than it was a year ago. The yearly deficit is getting bigger, not smaller, despite passage of austerity measures. It reached 19.2 billion euroes ($26.1 billion) for the first three quarters of 2011 compared to 16.65 billion euros for the same period last year. That is considerably worse than the EU Commission predicted in 2009, as can be seen in the chart above. The EU thought the deficit would be "only" about 12.3 billion for all of this year, but it looks to be about twice that once we have all four quarters. The cumulative deficit is growing even faster than the annual deficit, because it includes interest payments. The Greek rat hole is getting much larger, not smaller, as the size of the debt is exploding. Worse still, the cutbacks now being feverishly passed in Greece will reduce economic activity, in turn reducing revenues from taxation. It is a vicious circle, and nothing suggests that the Greeks are going to be able to avoid catastrophe. 

It may be time to give up on saving them and instead bail out the banks outside Greece, so that the European economy can continue to function. The banks should not be allowed to make a profit on their incompetence, of course, but it looks as though we must save them from ruin. I suggest this not for any love of banks, but because it seems the only plausible course of action to protect the rest of the EU. 

I said the European banks have been irresponsible. How so? Consider a chart from the Financial Times.

Far more than any other EU nation Greece has relied on foreign banks to buy its debt. This was smart of Greece, perhaps, but just plain stupid on the part of the banks. I would suggest an EU regulation that created a sliding scale for the amount of debt any member country could sell to outsiders. In other words, the worse the deficit, the less debt could be externally financed. A nation with almost no deficit would be able to borrow more and far more easily. Frugal virtue would be rewarded, profligacy punished, and punished much sooner than has happened in the present crisis.

Going off the cliff with Greece could ruin the EU economy for some years, and the Europe that might emerge after such a collapse will have fallen well behind Asia and the United States. Decoupling the banks from Greece will not be pretty, and the Euro will fall, but it will fall less and fall for a shorter time.In such a scenario, any Christmas bonuses for bankers would be obscene.