THE DANGER OF CENTRALISATION

Bulletin article

Ben Hall

01 April 1999

During Oskar Lafontaine's brief reign as German finance minister, Europe seemed to
veer towards much greater centralisation of economic policy-making. He argued that
governments needed to forge a more centralised system of economic policy-making. He
argued that governments needed to forge a common front on a wide range of economic
policies, to balance the monetary policy of the unaccountable European Central Bank.
His close adviser Heiner Flassbeck argues in a new CER report (Will EMU lead to a
European economics government?) that governments should co-ordinate policy on
taxation and wages more tightly, to prevent "unfair" competition and to maintain
demand. But the departure of Mr Lafontaine and the prospect of a new, reformist
Commission under Romano Prodi means that the spectre of a European economic
government is now in retreat.

At present, policy on budgets, tax and employment is for the most part the responsibility
of the EU states. However, the governments discuss each others' policies in these
areas and undoubtedly feel some constraint from the process of peer review and from
the budgetary rules of the growth and stability pact.

It remains to be seen whether these procedures are strong enough to ensure that all
governments tackle excessive public deficits and the structural causes of
unemployment. They must succeed in those tasks if their economies are to adapt
smoothly to the rigours of a single interest rate. Governments should retain control of
the remaining economic levers, so that problems, such as the impact of an economic
shock. Further centralisation of decision-making would not necessarily speed up the
process of reform, and may in fact be an unhelpful substitute for it.

The other contributors to our new report are optimistic that the current, largely-
decentralised arrangements can be made to work. It is that challenge – rather than the
construction of a European economic government – which confronts the EU's leaders. If
they fail, Mr Lafontaine's ideas will return with a vengeance.

The risk of European centralisation

The economic measures that would implicitly support European
political union have turned out to be dangerous
EUROPEAN VOICE
By OTMAR ISSING
7/10/13, 9:45 PM CET

Updated 4/13/14, 1:36 AM CET

For many European leaders, the eurozone crisis demonstrates the need for
‘more Europe’, the final aim being to create a full-fledged political union.
Given the continent’s history of war and ideological division, and today’s
challenges posed by globalisation, a peaceful, prosperous and united Europe
that wields influence abroad is surely a desirable goal. But major
disagreements about how to achieve that goal remain.

Historically, monetary union was regarded as the route to political union. In

the 1950s, the French economist Jacques Rueff, a close adviser to Charles de
Gaulle, argued that “L’Europe se fera par la monnaie, ou ne se fera pas”
(Europe will be made through the currency, or it will not be made). German
President Richard von Weizsäcker echoed this view almost a half-century
later, declaring that only via a single currency would Europeans achieve a
common foreign policy. More recently, German Chancellor Angela Merkel
asserted that “if the euro fails, Europe will fail”.

But the crisis confronting ‘Europe’ is not so much about political union as it is
about European economic and monetary union (EMU). If anything, efforts to
hold EMU together may have taken us further from the goal of a common
foreign policy by re-igniting within member states (regardless of whether they
give or receive financial aid) nationalist resentments that we hoped had died
long ago.
Politicians launched monetary union in 1999, despite warnings that the
constituent economies were too diverse. It was not long before several states
violated the stability and growth pact. Later, the eurozone’s ‘no bail-out’
principle was abandoned. The response to these failings, however, was a
demand for greater economic integration, including such intermediate steps
as the creation of a ‘European finance minister’ or a European commissioner
with sweeping powers to facilitate closer integration.

Such ideas, of course, ignored the central issues of national sovereignty and
democracy, and specifically the privilege of nationally elected governments
and parliaments to determine their own taxes and public spending. The fact
that sovereign member states did not deliver on their European commitments
is hardly a convincing argument for giving up sovereignty now.

In short, all of the measures that would implicitly support political union have
turned out to be inconsistent and dangerous. They have involved huge
financial risks for eurozone members. They have fuelled tensions among
member states. Perhaps most important, they have undermined the basis on
which political union rests – namely, persuading European Union citizens to
identify with the European idea.

Public support for ‘Europe’ depends to a large degree on its economic success.
Indeed, it is Europe’s economic achievements that give it a political voice in
the world. But, as the current crisis indicates, the best-performing EU
economies are those with (relatively) flexible labour markets, reasonable tax
rates, and open access to professions and business.

Moreover, the impetus for economic reform has come not from the EU, but
from national governments, one of the most successful examples being
‘Agenda 2010’, launched a decade ago by Gerhard Schröder, then the German
chancellor. Numerous academic studies, following the work of the American
economic historian Douglass North, support the notion that it is competition
among states and regions that lays the groundwork for technological progress
and economic growth. The total failure of the Lisbon Agenda, launched in
March 2000 to make the EU “the most competitive and dynamic knowledge-
based economy in the world”, demonstrated the weakness of a centralised
approach.
A prosperous past
Arguably, in earlier centuries, it was competition within Europe that generated
unparalleled dynamism and prosperity across much of the continent. To be
sure, this was also a time of wars. However, this does not mean that
centralisation is the best – much less the only – way to guarantee peace.

But, once again, EU leaders responded by concluding the opposite: the Lisbon
Agenda’s failure was interpreted as justifying still more harmonisation and
centralisation of national policies. True to form, in his ‘State of the Union’
address to the European Parliament in September 2012, José Manuel Barroso,
the president of the European Commission, called for a more powerful
Commission.

This approach – harmonisation, co-ordination and centralised decision-

making – continues to be regarded as a panacea for Europe’s problems. It is
the sort of pretence of knowledge that the economist Friedrich von Hayek
denounced as a recipe for constraining freedom and ensuring economic
mediocrity. Indeed, the European project should start from the premise that
appropriate institutions, property rights, and competition, together with a
growth-friendly tax system and solid fiscal policies, are the basis of economic
success.

The dangers of a centralising approach can also be seen in the relationship

between the 17 current eurozone members and the 11 non-eurozone EU states.
As the former press on with greater integration, the adverse economic
consequences of doing so are likely to deter the latter from EMU participation
(which may be another sign that institutional competition cannot be
suppressed forever).

There are plenty of areas in which common action at the EU level is both
appropriate and efficient. Environmental policy is clearly one. But
centralisation of economic decision-making, as an end in itself, cannot
underpin a prosperous and powerful Europe.

Jean Monnet, one of the EU’s founding fathers, once said that, given the
chance to start the European integration process again, he would have begun
with culture – a dimension in which we neither need nor want centralisation.
Europe’s cultural richness consists precisely in its diversity, and the basis for
its finest achievements has been competition between people, institutions, and
places. Its current economic malaise reflects European leaders’ prolonged
efforts to deny the obvious.

Video Transcript

0:12

You might ask what is so dangerous about this

movement towards greater equality? Isn't it a good thing
when all kinds of privileges enjoyed in the past by a small
elite now become available for a large part of the
population? Isn't the grand ideal of social equality that
we find on the facade of every French public school,
every French town hall, liberté, égalité, fraternité,
something that we all can easily sympathize with? Well,
Tocqueville, and that may have to do with his aristocratic
background, has a special sensitivity for the dangers
attending this democratic tendency. I already mentioned
the problem of how to protect threatened minorities, for
example, religious minorities, who may find it hard to
maintain their position in a system with majority rule.

1:08

How to defend the arts and the sciences if the majority is

not interested in those expensive extras that we can
easily do without. And Tocqueville was a lawyer, knew
only too well that sometimes majority of the population
would like to severely punish a man whose guilt has not
been proved beyond reasonable doubt. So what to do
when majority rule turns into majority despotism?

1:41

The fundamental problem behind all those examples is

that there seems to be a kind of inherent irreconcilability
between two ideals of the French Revolution, liberty and
equality. Sometimes the drive for equality may stand in
the way of freedom. And sometimes the defense of
liberty is hard to combine with the quest for equality.

2:05

And then there is that other deep social current that is

like a twin brother of the process of democratization,
centralization. That process is every bit as fundamental.
It has also been visible over many centuries. It is also
unstoppable. And in fact centralization is intimately
interrelated with the trend towards more democracy.
When a wave of equality rolls over the land, many
countervailing powers that in the past could stand up
against the center are destroyed. And that is one of the
characteristics of the French Revolution, when the
prerogatives of the aristocracy was crushed, when the
power of the Catholic church was diminished, when the
independent power of the cities outside of Paris was
curtailed. Where equality is on the rise, centralization
follows in its wake, and the result is that the powers in
the center, for example, the governmental, the
administrative services in the capital of the country,
become so overwhelming that the ordinary citizens begin
to feel impotent.

3:22

Who will listen to us, they ask. Who is interested in what

we have to say? And that combination of a very powerful
central government

3:33

with a somewhat apathetic population, that is a recipe for

the gradual dismantling of civil liberties.

3:43

In the sphere of political democratization, Tocqueville has

very sharp eye for demagogy, the habit of politicians in
search of power to please the populace, appealing to
their prejudices, hoping to be elected or reelected. In a
monarchy, if you want to get ahead, you have to flatter
for the sovereign. That means you have to please the
king, or the friends of the kind, or his wife, and maybe
his mistress. But in a democratic society, the sovereign is
the people. So when the elections are approaching, we
can see, and you know Tocqueville describes this but it is
still true today, you can see that all of a sudden the
democratic politicians can be seen at soccer matches, at
pop concerts. And all of a sudden they are the biggest
fans of a movie or a book that has been a commercial
success.

4:42

Tocqueville did not witness the rise of the radio and

television or internet, but the mass media democracy
that we are living in reminds you of some of the shrewd
observations that Tocqueville made.

4:58

What he tries to find out is how to steer that unstoppable

process towards more equality in such a way that the
civil liberties that we also cherish remain protected. And
he believes that the Americans have found some
solutions here, that they have pioneered some
arrangements that Europeans can learn from and that
they can partly apply in their own country. Let us have a
look at some of them.

The Pros and Cons of

(De)Centralization When Placing
Facultative
January 28, 2015| By Chris Crowder | P/C General Industry | English
The following question was posed recently by a client:

"Is it better to place Facultative from a centralized purchase point (i.e., Home Office), or on a
decentralized basis (i.e., the Field)?"
In considering the question, a colleague shared a letter written by one of our
former CEOs. The letter was his response to another client asking the same
question. Over the years, we have seen insurance companies flip flop
between the two approaches, usually in conjunction with a change in
management. There are pros and cons to both approaches and, like most
people, I have a bias so I'll recap what he said in the letter and let you judge
for yourself.

In favor of Centralization:
 Efficiency - This sometimes means "buying the cheapest." Never mind
whether buying the cheapest anything usually works out with complex
financial products [note author's irony]. I'm still trying to figure out
how it could be considered "more efficient" to have folks in the field
call someone in their home office and ask that person to turn around
and place reinsurance for them.

 Control - Sometimes this means "buying less" and other times it

means making sure that what they are buying aligns with their treaty
and net appetite. It also means making sure they are tracking what
they buy so they can match that up when a claim comes in on the
original policy. This was a real issue "back in the day" but with
technology and data advances in recent years, matching Fac
purchases to Primary claims shouldn't be a deciding factor.
  Economic factors - I have lost count of how many times someone in
Finance has been surprised and said, "We paid more in (re)insurance
costs than we got back in claim collectibles?" No kidding. And what do
you say when your insureds tell you that? I'm pretty sure that’s the
underlying principle of (re)insurance. If it were the other way around,
how long would your (re)insurers remain in business? We all take
plenty of risk and generally get paid appropriately for it. And there is
certainly no lack of competition to keep us honest.

In favor of DeCentralization, these are the obvious factors:

 Communication, as in clarity of communication - Ever played the
"telephone" game where you whisper something into a person’s ear,
then that person turns and does the same to someone else, and so
forth? It’s funny to hear what comes out the other end when it’s done
for fun. Not so funny when you are trying to protect yourself against a
catastrophic exposure. "Many hands make light work," is one rule that
definitely does not apply in this situation.

 Subsidiarity and Information = "Ownership" - The closer that

ownership/responsibility for the end result is to the front line assumer
of risk (i.e., the underwriter), the better it usually turns out. Who
better knows the territory, producer and insured risk than the front
line underwriter? In our experience, the further away from the front
line underwriter that the decision to purchase Fac is made, the less it
reflects or lines up with the underlying exposure.

 Two heads/Four eyes - No, we're not talking “Return of the Alien.”
Accessing a topnotch Fac market means your underwriters are dealing
with people who handle the volatile end of the risk spectrum every
day. When your underwriter sees a tough risk only a handful of times
a year, it has to help your bottom line to have someone who deals
with such risks every day casting their eyes over the risk, and sharing
his or her market experience as respects coverage, structure, terms
and conditions, and pricing.

 Locals talking to Locals - Again, there’s nothing wrong with calling in

"the experts" from out of town to help out with a Fac placement. But
usually local knowledge goes a very long way. Reinsurance is no
 different. When your centralized placer of Fac has to figure out the
nuances of the local placement, and then explain it to someone who
also doesn't understand those nuances, well...you can see how that is
going to end up.

Less obviously, there are hidden costs ("opportunity costs") to

Centralized placements:
 The risk you never should have taken at the offered market terms.
Without diving into the math, trust me when I say that you have a
much higher chance of writing your “mistakes” than not. Centralized
placements tend to focus on one thing in their conversation with the
Fac market. That is, getting the Fac placed rather than talking about
whether you should do the risk at all in the first place. Fac will never
make a “bad” risk into a good one, although it certainly can lessen the
sting on a volatile risk.

 The risk you should have written, but didn't. This is the toughest one
to quantify because no one measures it. You didn't write the deal
because it was too much of a hassle to run it up the flagpole (for Fac),
for a variety of reasons. In the end, with limited time and resources, it
can be easier to offer less capacity, place restrictive terms on it, or
simply decline it outright (a.k.a. “the path of least resistance”), which
leads to unhappy producers (agents/brokers).

To me, the bottom line is what I would do if I were running a primary

insurance operation. I would opt for the decentralized model in a minute.
Granted, I would want to do so with the right controls in place, including
strong financial credentials, acceptable contract wordings, and appropriate
monitoring of Facultative activity and results.

I will close with a quote from that long-retired reinsurance veteran who
penned that letter many years ago,

"Net-net, I believe the decentralized system would contribute more to

shareholder value than the centralized system."

In my 30-plus years of experience in this business, companies that behave

in the former way seem to have better net results in the long-term. And that
is pretty much “the bottom line.”

Tags: facultative, insurance operations

Majority rule
From Wikipedia, the free encyclopedia
"Majority rules" redirects here. For the Canadian comedy series, see Majority
Rules!
Majority rule is a decision rule that selects alternatives which have
a majority, that is, more than half the votes. It is the binary decision rule
used most often in influential decision-making bodies, including
the legislatures of democratic nations.

Despotism (Greek: Δεσποτισμός, Despotismós) is a form of government in

which a single entity rules with absolute power. Normally, that entity is an
individual, the despot, as in an autocracy, but societies which limit respect
and power to specific groups have also been called despotic.[1]
Colloquially, the word despot applies pejoratively to those who abuse their
power and authority to oppress their populace, subjects, or subordinates.
More specifically, the term often applies to a head of state or government. In
this sense, it is similar to the pejorative connotations that are associated
with the terms tyrant and dictator.[2]

Lesson Transcript

Instructor: Erin Carroll

Erin has taught English and History. She has a bachelor's degree in History,
and a master's degree in International Relations
This lesson will help you understand the system of majority rule. We will
briefly discuss what it means, how it is used in the United States and some
of its advantages and disadvantages.

What is Majority Rule?

Five friends hanging out on a Friday night are trying to decide where they
should go for dessert. Some of them want ice cream while others want
frozen yogurt. When they put it to a vote, three vote for ice cream and two
for frozen yogurt so the five friends head to the ice cream shop. Ice cream
wins by the power of majority rule.
Majority rule is a decision-making system. In a choice or vote between two
or more options, the option that wins over 50% of the vote wins. Although
we use this strategy in daily life as in the ice cream/frozen yogurt dilemma,
more often we think of majority rule in government. When a new law is
voted on or a president is being elected we often use majority rule. The will
of the majority of people is respected and controls the outcome almost all
the time.
Majority rule is similar but slightly different from a plurality system. When
a plurality system is used, the winning candidate only needs to win more
votes than the other candidates. In a majority rule system a candidate
needs to win over 50% of the overall vote.

Majority Rule in the United States

Majority rule is used in many democracies. Indeed, the United States has
long used a majority system as the basis for political decision-making. For
example, in order to be elected president of the United States, a candidate
must achieve a majority of votes in the Electoral College. There are
currently 538 electoral votes, so a candidate must win 270 electoral votes to
be declared the winner and president.
Some presidents have been elected with less than a majority of the popular
vote but had more electoral votes. This occurred a few times in presidential
elections. One example is the election in the year 2000 involving George W.
Bush and Al Gore. Gore actually won more popular votes but lost the
election because he had fewer electoral votes.
Majority rule isn't the only system used in the United States. Interestingly,
when we look at the make-up of the Electoral College, two states, Maine and
Nebraska, have opted to use a version of proportional representation to allot
their electoral votes. In California, for example, all of the electoral votes
would go to one candidate. In Maine and Nebraska the electoral votes can be
split between the candidates based on the proportionality of the vote.