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/germanys-warped-narrative.html?tx_ttnews%5BbackPid%5D=901&cHash=85ffe4d27a59e3317ac95a
57d78982d7). 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.