A plenum
of leading German economists has recently signed a
declaration (http://www.voxeu.org/index.php?q=node/6153)addressed
to the German authorities against further support
by the EU and the ECB to the highly indebted European
peripheral countries. These should instead be coerced
into an insolvency procedure managed by the IMF. German
economists are traditionally influential on the government,
and this document shows their traditional conservative
political and scientific orientation. It also shows
how little can we expect from an educated economic
debate on how to get out of the European blind alley.
The question is indeed of a clash of national interests
(http://www.networkideas.org/news/jan2011/news28_
European_Crisis.htm), and the majority of the
German economists have clearly shown where their hearts
beat1.
In synthesis, the German economists warn the German
authorities about a progressive Europeanisation of
the peripheral debt that would heavily involve the
German taxpayer in a much feared ''transfer union'',
and about the inflationary impact of an enduring support
of this debt by the ECB. Moreover, these guarantees
would promote a moral hazard on the part of the indebted
countries, giving them ''a powerful incentive to repeat
the mistakes of the past and continue a policy of
indebtedness at the expense of their EU partners''.
So both the enlargement of the rescue fund approved
in May 2011, and its renewal as a permanent facility
currently discussed are condemned. The document hardly
considers that the actual amount of the existing fund
is much less than the nominal – given that only the
money put by the ''healthy'' countries is effective
– and the loan shark interest rates at which money
is lent.
The proposal is of a managed process of insolvency
and debt restructuring. Indeed, this is not something
that should in principle be opposed if one considers
that careless credit from the core Europe banks –
mainly German banks – have been much more responsible
than the ordinary Spanish or Irish households for
the housing bubble that exploded there. The friendship
between the German and the former centre-right Greek
governments is well known2.
Never forget that the German banks have also participated,
with gusto, in the US sub-prime crisis and still have
plenty of toxic assets. German exports also hugely
benefited from the growth of aggregate demand and
imports in those countries. Following a canonical
Kaleckian model (Kalecki 1971), Germans banks were
indeed financing the ''external markets'' where German
firms could ''realise'' their surplus profits. The
default of the indebted markets is part of the game
and the credit side may be called upon to forgive
part of the credit. Questo è il capitalismo
bellezza! the German colleagues seem to acknowledge.
We agree. Of course, the German taxpayer and the ECB
would then be called (once more) to sustain the German
banks. Thus, the German economists so ready to condemn
the EU and ECB support of fiscal debts, will be ready
to bless the support of banks' debt without mentioning
moral hazard. Moreover, they want to protect the German
taxpayer, but they are either cheating her, or perhaps
implicitly telling her the truth: she will in a way
or the other be called to pay for the ultimate outcome
of a short sighted German and European economic model
(the non existence of free lunches in Economics is
certainly a favourite theme of the 189 economists)3.
The declaration narrative is the one that the German
authorities want to hear, and general public have
been educated to hear: the European crisis ''is a
story of fiscal irresponsibility and lack of competitiveness.
There is a banking crisis, but it is not central'',
a ''xenophobic narrative that blames mostly southern
Europeans'', as Wolfgang Munchau aptly put it. (http://www.eurointelligence.com/article/article/germ
anys-warped-narrative.html?tx_ttnews%5BbackPid%5D=901&cHash=85ffe4d27a59e33
17ac95a57d78982d7). As seen, however, the fiscal
crisis in Spain and Ireland has originated in a market
context tailored to Germany, and the Greek fiscal
profligacy had the open blessing of the German government.
But what should, in the opinion of the German economists,
follow the regulated default? Since these countries
will not easily regain access to the financial markets
to finance the remaining debt, some EU financial support
will be necessary, but with Teutonic punctiliousness
they remark that this lending should be given at loan
shark rates in order to avoid any further moral hazard.
In a few lines they then pronounce the ''key question
is how after a concluded debt rescheduling procedure
an over- indebted state can regain its competitiveness''.
Since, they argue, ''the Eurozone does not allow nominal
devaluations, international competitiveness can only
be restored by means of structural reforms in the
affected states.'' These reforms should be managed
by the IMF with its ''extensive experience in this
area.'' The experience is indeed of lost decades of
growth in developing countries, leaving aside the
fact that even the past most infamous conditionality
packages by the IMF were accompanied by a currency
devaluation that softened a little their impact. But
even the IMF, nowadays, would feel embarrassed even
to receive a proposal of involvement on such terms.
In conclusion, the idea of a managed insolvency procedure
is welcome, but not in the terms proposed by the 189
economists.
With great haste (though cynicism would be a better
expression) the declaration acknowledges that ''nevertheless,
recessionary reactions to structural adjustments will
not be completely avoidable''. German economists look
little interested in the social, cultural and political
devastation brought about by the policies they suggest.
Nobody serious can believe that competitiveness can
be regained in the midst of a ferocious recession
and social waste. Moreover the repercussions of such
deflationary policies would be felt by Germany itself.
But Germany is likely looking elsewhere, at the emerging
economies' markets. In this direction we may also
read the opposition to the ''the ECB using its monetary
policies in support of these [peripheral] states''
that ''would endanger the reputation and the independence
of the ECB''. In the present context of rising inflation
expectations, the later must rapidly return to the
traditional role inherited by the Bundesbank of watchdog
of German wages and external competitiveness.
Were not Europe in the midst of a serious situation,
the declaration might be dismissed as representative
of an unfortunate tradition of closed mindedness,
moralism and arrogance. Since the eruption of the
European crisis, things have indeed moved against
the often irrational wishes and uncertainties of Germany
well represented by this pronouncement. The only serious
hope for a progressive Europe is that this country,
as a result of the circumstances and of political
pressure from the partners, will more and more accept
the unthinkable: fiscal and monetary activism, a nice
touch of domestic inflation and a more fair income
distribution. This declaration, full of half-truths
and feeble economic arguments, many if not most of
the world's economists would disdain. Paradoxically,
however, its typical German lack of political sensitivity
might help more reasonable and better funded political
and economic solutions to acquire terrain, in the
interest of the periphery and ultimately of Germany.
References
Kalecki, M. 1971. ''The Problem of Effective Demand
with Tugan-Baranovski and Rosa Luxemburg.'' In ID,
Selected Essays on the Dynamics of the Capitalist
Economy. Cambridge: Cambridge University Press.
February
28, 2011.
[1] The document was approved by 189
economists, disapproved by 7, 11 abstained. Among
the most known signatures: Hans Werner Sinn, Jürgen
von Hagen, Manfred Neumann, Michael Burda and Volker
Wieland
[2] In a communiqué by the
Greek Embassy in the US we can for instance read that
during a visit in July 2007 ''Merkel referred to Karamanlis
as a "political friend" and praised the
Greek government's "productive efforts"
on the thorny constitution issue, whereas she lauded
Greece's euro zone-leading economic growth, in the
neighbourhood of 4 percent annually. Both leaders,
in fact, repeatedly called bilateral ties excellent.''
http://www.greekembassy.org/embassy/content/en/Article.aspx?office=1&folder=19&article=21324
[3] In what has been described as
''a rare show of dissent over the European Commission's
economic policies'', the Greek commissioner Maria
Damanaki supported last February the idea that if
''the banks were ready to accept their share of responsibility
in the situation of restructuring of sovereign debt,
fiscal consolidation could be construed in a totally
more acceptable way" advocating a ''better balance
between austerity and growth'' since so far ''the
response to the crisis has focused too much on pushing
deficit cuts and not enough on job creation''. (http://online.wsj.com/article/SB10001424052748703775704576162442228551776.html)
|