Reassessing Europe’s open society and its enemies.
(with Davide Orsitto)

The convergence of political narratives in the Euro Area is a necessary condition for the sustainability of the monetary union. We measure the evolution of ideological preferences in Europe over half a century in a two-dimensional space. In addition to the classical right-left cleavage, we define a cultural dimension that is inspired by Popper’s distinction between open and closed societies and Dumont’s opposition of individualism against holism.

We find that political preferences, as expressed by people voting for party programs, have converged since the end of the Cold War, which also coincides with the Maastricht Treaty in 1992. Thus, the institutional framework set up for the management of the monetary union has contributed to greater political coherence inside the Euro Area, while ideological convergence outside the Euro Area is significantly weaker. Germany is the leader of a conservative group of member states, France of a progressive group. Compared to Anglo-Saxon societies, the Euro Area is highly centrist, which makes the cooperation across policies easier.

A sequence of severe shocks has brought inflation back to Europe and America, but unemployment is still at record low levels. Is higher unemployment required to bring inflation down? The challenges are the same for both economies across the Atlantic, the policy tools resemble each other, but they apply to different economic landscapes. What can we learn from each other? Who has been more successful? The paper looks at basic facts, the nature of shocks, and the efficiency of policy tools. It turns out that the Phillips curve whereby higher unemployment lowers inflation has a different role in Europe than in the US.

The key to understanding recent developments is uncertainty. The paper extends the standard New Keynesian model to measures of uncertainty. It argues that the channel through which uncertainty influences inflation, wage cost and unemployment is the markup firms charge to cover their cost of capital. The Federal Reserve Bank has been more successful because it operates in a more competitive market for goods and capital. The Euro Area lacks a fully integrated capital market with a benchmark euro bond and the institutions for setting up a coherent macroeconomic policy stance. This will make disinflation in Europe more painful in terms of unemployment.