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The New World Ordoliberalism Part 2: A ‘Third Way’ to Fascism

Ordoliberalism has played a significant role in German economic policy-making for decades. But ordoliberalism’s role in providing the theoretical framework for the policies adopted by the eurozone and EU in the post-2008 crisis environment has also been largely ignored by the financial press. It’s a curious lack of interest since the importance of ordoliberal thought on EU policy-makers isn’t exactly a secret:

Draghi says ECB has not compromised its ‘ordoliberal’ principles

ECB president tells Stanley Fischer farewell conference that the ECB’s LTRO and OMT operations are ‘controlled’ and ‘necessary for the pursuit of price stability’

Central Banking Newsdesk, Central Banking Journal | 18 Jun 2013

Mario Draghi, president of the European Central Bank (ECB), today insisted the ECB has not violated its “ordoliberal principles” by taking some credit risk onto its own balance sheet, through its long-term refinancing operations (LTRO) and outright monetary transactions (OMT).

Draghi told a conference in Israel in honour of outgoing Bank of Israel governor Stanley Fischer that the monetary constitution of the ECB is firmly grounded in the principles of ‘ordoliberalism’, particularly two of its central tenets: a “clear separation of power and objectives between authorities”; and “adherence to the principles of an open market economy with free competition, favouring an efficient allocation of resources”.

Ordoliberalism’s Lasting Legacy. It Includes Fascism
First, consider that the head of the European Central Bank (ECB) felt the need to public defend his adherence to ‘ordoliberal principles’. And now consider that fact that the ECB has been notoriously hesitant to actually use the tools at its disposal (like sovereign bond purchases) that prompted the Draghi’s defensive comments. And now consider what an absolute disaster the EU/eurozone crisis-response (or lack of a response) has been over the past few years and how there’s almost no indication of a real, meaningful policy-shift. Considering all of that, a look at the origins and philosophical underpinnings of ordoliberalism is probably in order:

www.bisa.ac.uk
Freedom, Crisis and the Strong State: On German Ordoliberalism
Werner Bonfeld

Introduction

The German ordoliberals tradition is better known in the Anglo-Saxon world as the Freiburg School, or German neo-liberalism, or indeed as the theoretical foundation of the German social market economy. It origins date back to the late 1920 / early 1930. Its foundation lies in the works of Walter Eucken, Franz Böhm, Alexander Rüstow, Wilhelm Röpke and Alfred Müller-Armack. These authors saw their work as providing a third way, a (neo-)liberal alternative to laissez faire liberalism and collective forms of political economy, ranging from Bismarckian paternalism to social-democratic ideas of social justice, from Keynesianism and Bolshevism. In the face of Weimar mass democracy, economic crisis and political turmoil, they advanced a programme of liberal-conservative transformation that focused on the strong state as the locus of social and economic order. The dictum that the free economy depends on the strong state is key to its theoretical stance.2

The fundamental question at the heart of ordo-liberal thought is how to sustain market liberal governance in the face of mass-democratic challenges, class conflicts, and political strife. How, in other words, to promote enterprise and secure the role of the entrepreneur in the face of powerful demands for employment and welfare, and protection from competitive pressures. For the ordo-liberals, yielding to any one of these demands was seen to lead to ‘collectivist tyranny’. Hayek’s Road to Serfdom (1944) brought this insight to wider attention, but did not provide its original formulation, which lies in the ordo-liberal thought of the late 1920s.3 It holds that a functioning free economy requires robust social and economic frameworks to assure undistorted competitive relations. Markets, they argue, also require provision of an ethical framework to secure the viability of liberal values in the face of ‘greedy self-seekers’ (Rüstow, 1932/1963, p. 255) and antagonistic class interests. The provision of these legal-social-ethical frameworks belongs to the state. The state is held responsible transforming a class-divided society into, and maintaining, an entrepreneurial market society. For the ordo-liberals, competition is the indispensable ‘instrument of any free mass society’, and the promotion of enterprise and entrepreneurial freedom is thus a ‘public duty’ (Müller-Armack, 1979, pp. 146, 147). They thus propose the strong state as the political form of the free economy.

The works of Wilhelm Röpke4 and Alfred Müller-Armack are of particular importance concerning the sociological and ethical formation of free markets. Both were adamant that the preconditions of economic freedom can neither be found nor generated in the economic sphere. A competitive market society is by definition unsocial, and without strong state authority, will ‘degenerate into a vulgar brawl’ (Röpke, 1982, p. 188) that threatens to break it up. In this context, Müller-Armack focuses on myth as the ‘metaphysical glue’ (Fried, 1950, p. 352) to hold it together. In the 1920s he espoused the myth of the nation as the over-arching framework beyond class, in the 1930s he addressed the national myth as the unity between movement and leader, and advocated ‘total mobilisation’ (Müller-Armack, 1933, p. 38), in the post-war period he argued for the ‘re-christianization of our culture as the only realistic means to prevent its imminent collapse’ (1981c, p. 496). Yet, in the context of the so-called West-German economic miracle, he perceived social cohesion to derive from an economic development that Erhard (1958) termed ‘prosperity through competition’. It offered a new kind of national myth rooted in the idea of an economic miracle as the founding myth of the new Republic (see Haselbach, 1994a,b). Sustained economic growth is the best possible social policy (Müller-Armack, 1976) – it placates working class dissatisfaction by providing employment and security of wage income. In contrast, Röpke had started out as a rationalist thinker of economic value, and in the course of his life he bemoaned the disappearance of traditional means of social cohesion in peasant life, and the relations of nobility and authority, hierarchy, community, and family. In his view, the free economy destroys its own social conditions in what he called human community. In his view, the ‘social market economy’ endangered the social preconditions of competition in „human community? – the economic miracle created materialist workers; it did not create satisfied workers who as self-responsible entrepreneurs, maintain their vitality by means of a ‘human community’ of family and natural community (cf. Röpke, 1936 with Röpke, 1998). He perceived the ‘menacing dissatisfaction of the workers’ (Röpke, 1942, p. 3) as a constant threat, and demanded that social policy ‘[attack] the source of the evil and…do away with the proletariat itself…True welfare policy’, he argued, ‘is…equivalent to a policy of eliminating the proletariat’ (Röpke, 2009, p. 225). In this same context, Eucken argued that economic constitution is a political matter. The economic and the political comprise distinct spheres social organisation, which need to operate interdependently for each other to maintain the system as a whole. For the ordo-liberals the state is the power of interdependence and is thus fundamental as the locus of liberal governance.

I Convictions, Assumptions, Positions

In the late 1920s, in a context of economic crisis and political turmoil, conflicting ideologies and entrenched class relations, ordo-liberal thought emerged as a particular account on how to make capitalism work as a liberal economy, or as Foucault (2008, p. 106) saw it, on how to define or redefine, or rediscover ‘the economic rationality’ of capitalist social relations. The ordo-liberals conceived of individual freedom as the freedom of the entrepreneur to engage in competition, and seek gratification by means of voluntary exchanges on the market. The free economy is the purpose of its theoretical effort, the political state is endorsed as the means towards that end, and the social policy is the instrument with which to develop, promote and maintain undistorted competition. They recognised the ‘social irrationality of capitalism’, particularly that irrationality which they called proletarianization, and proposed means to restore the entrepreneurial vitality of the workers. Social crisis is brought about by the ‘revolt of the masses’,8 which destroys the culture of achievement in favour of a permissive society. For the ordo-liberals, this development called for a decisive defence of economic freedom by the elite (Böhm, etal, 1936, Röpke, 1998) to restore liberty, individual self-responsibility and entrepreneurial vitality. That is, „the “revolt of the masses” must to be countered by another revolt, “the revolt of the elite”? (Röpke, 1998, p. 130). They identified the welfare state as an expression of proletarianised social structures, and demanded the de-proletarianisation of social relations9; they argued that socio-economic relations had become politicised as a consequence of class conflict, and demanded the depoliticisation of social-labour relations; they saw unrestrained democracy as replacing the sovereignty of the rule of law by the sovereignty of the demos, and demanded that, if indeed there has to be democracy, it must be „hedged in by such limitations and safeguards as will prevent liberalisms being devoured by democracy. Mass man fights against liberal-democracy in order to replace it by illiberal democracy? (Röpke, 1969, p. 97). For the ordo-liberals, the resolution to proletarianization lies in determining the true interest of the worker in sustained accumulation, as the basis of social security and employment. De-proletarianisation is the precondition of „civitas?. Freedom, they say, comes with responsibility. They thus conceive of society as an enterprise society consisting of entrepreneurial individuals, regardless of social position.

Based on the above description (and be sure to read the rest) ordoliberalism could be characterized as a philosophy that envisions every individual as a potential entrepreneur and it is the entrepreneurs that are to be the driving force behind a healthy society. And since an entrepreneur can only survive as long as there are healthy market conditions a strong State is require to prevent private interests and ‘greedy self-seekers’ from destroying a fair market environment. Now, except for the entrepreneur fetishism, that all doesn’t sound so bad, does it?

But it ordoliberal thinkers also appeared to champion the necessity of the “national myth”. And they also viewed the increasing affluence and political influence of the ‘proletariat’ as a direct threat to both the entrepreneurial vitality of society’s human capital AND a threat to the political order that, in turn, threatens the precious entrepreneurs. In other words, ordoliberal thinkers appeared to appeared to treat the concept of a decent life for non-business-owners as an existential threat to the social order. So if the ordoliberal thought-leaders like Wilhelm Röpke,Alfred Müller-Armack, and Walther Eucken sound sort of scary and authoritarian it’s because they sort of were:

davidlewisbaker.net
The Political Economy of Fascism: Myth or Reality: or Myth and Reality?

David Baker

This is a working draft of an article published in New Political Economy, Volume 11, Number 2, June 2006. pp. 227-250.

“No comparative study exists of fascist economic systems. Nor is this surprising. For one can legitimately doubt whether it is appropriate to use so distinctive a term as system when discussing fascist economics. …… Nor, in the economic field, could fascism lay claim to any serious theoretical basis or to any outstanding economic theoreticians. Were fascist economics…..anything more than a series of improvisations, of responses to particular and immediate problems? Were not the economic actions of any single fascist regime …. so contradictory as to make it difficult to speak of a coherent and consistent economic policy in one country, let alone of a more general system.”

S. J. Woolf: Did a fascist economic system exist? in Woolf (Ed) The Nature of Fascism, Random House, NY, 1968, p. 119.

It is almost forty years since Woolfs observations, yet they remain pertinent. At the time of writing, a search for the term political economy in the index of almost any serious work on fascism, or via a web search engine, yields distinctly thin results.[*] Equally, there is still no major comparative monograph dealing with the question, aside from Charles Maiers magisterial general political economy of the period, which concluded:[1]

“…if it advanced any economic program, fascism proposed an economy geared for national self sufficiency and war. Autarkic policies represented a natural outgrowth of their political premises. They seemed all the more attractive to the dictators as ways to cut through contradictory interests at home. Faced with a tug of war among conflicting priorities and bureaucratic agencies, Mussolini in 1925 and 1936 and Hitler in 1935-6 seized upon autarky to impose a more comprehensive authority over disputing factions….. In a larger sense, fascist economics was not really economics at all. As Hitler wrote, economic issues were problems to be overcome by political will. The original appeal of fascism consisted in part of its promise that ordinary people need not be powerless against what often seemed inevitable and overpowering economic trends.”Fascisms economic doctrines and aspirations have, therefore, remained amongst the least researched elements of classical fascism. They also represent one of the most difficult components of the value-matrix of fascism to probe, encapsulated in vague statements of the corporate state and of restoring blood and soil agricultural communities, largely abandoned in practice. Equally, a supposed adherence to forms of third way economics, between individualism and collectivism, appear little more than mobilising myths to separate fascism from its chief enemies and rivals – liberalism and socialism/communism rather than any developed political economy. There were also glaring contradictions and inconsistencies in the economic pronouncements of fascist leaders towards market capitalism and the proper functions of the state.”

Further, neo-Marxist scholars consistently conceptualise fascist movements, parties and regimes as licensed defenders of the interests of monopoly capital, seeking to rescue the capitalist system from the rising forces of the organised working class and inherently falling profits, while furthering the international Imperialist purposes of monopoly capitalism[2]. Frankfurt School Members Horkheimer, Adorno, Neumann, and Pollock, viewed fascism as a system in which capitalists increasingly acted through the medium of the authoritarian state. Such a society could eventually abandon market commodity production and its law of value, as it was replaced by the state bureaucracy, allowing capitalists to extract surplus value directly through the state. The market would be completely replaced by a state-owned and managed economy, and capitalists would no longer be capitalists, but rather owners of the state economy through their permanent control of the state.[3] As Maier put it, fascism represented crisis capitalism with a cudgel[4].

When attempting to evaluate classical fascist economic doctrines, it is important to understand classical fascists aversions to traditional concepts of political economy, due to an inbuilt ideological bias against materialist based arguments and an associated hostility towards structural-economistic interpretations of events in history.[9] Marxism and socialism are inherently materialistic, embracing the need to have a highly developed understanding and appreciation of the interaction of the economic side of human existence upon the forms of politics and civil society they support. Liberal beliefs also derive from forms of political economy a term which emerged in liberal thought in order to explain the natural rise of market-based individualism and liberal notions of the innate value of freedom of action in civil society.

In his Fascism: Doctrine and Institutions, (1935) Mussolini explicity rejected all such economic conceptions of history:

Fascism, now and always, believes in …. actions influenced by no economic motive, direct or indirect…. Fascism denies the materialist conception of happiness as a possibility, and abandons it to its inventors, the economists of the first half of the nineteenth century…Fascism has taken up an attitude of complete opposition to the doctrines of Liberalism …. in the field of economics…… If the nineteenth century was a century of individualism ….. it may be expected that this will be a century of collectivism and hence the century of the State.[10]

Fascist anti-materialism ruled-out allocating a key role to any independent economic causation, either the disciplines of the free market, or materialist/structuralist class-based forms. The roots of fascist ideology lay principally in pseudo-Nietzschean superman myths, expressed first through the apocalyptic meta-historical writings of Oswald Spengler, and vitalistic opera plots of Wagner, which denied the significance of mere economics in dictating the upward (and downward) movement of peoples and civilizations. Fascist philosophy was centred on an anticipated triumph of the will of the chosen leader and his devoted disciples over mere material/structural obstacles. For fascists, when an economy failed, or succeeded, someone not something was responsible.

Fascist Political Economy: A Two Regime Model

What scholarly effort has been devoted to understanding fascist political economy has naturally concentrated on the regime phases of fascism in Italy and Germany,[16] the only examples of mature fascist dictatorships.[] The problem with regime models, however, is that the realisation of the economic intentions of regimes depends upon their relative autonomy from the existing socio-economic structures and power blocs inherited from of the previous state, and the degree of pragmatism and/or force of will shown by the new leadership in overcoming a variety of external economic barriers to their plans.[17] In both cases the wishes and desires of both dictators were undoubtedly modified by the inherited exigencies of the pre-existing economies and by external forces in the international economy, undermining any genuine fascist political economy (in the case of Italy producing shallow corporatism and in Germany single-minded preparations for total war). Besides, Milward argues that:

economic policy …. remained not only subordinate to but also an integral part of the ideological and political ambitions of the fascist movement….the ideological framework within which economic decisions were made often had even more weight than the practical questions of satisfying the economic wishes of those groups which supported the regime.[18]

Nevertheless, if elements of fascist political economy can be discerned behind regime practices, this may partly explain the nature of the Italian and German economies under their dictatorships. In order to investigate this, a comparative analysis of the two regimes is undertaken below, divided into three idea-typically discrete historical phases, to capture the multi-layered ideological and/or contingent practices underlying fascist economic policies.

Phase One Radical Ideas and Reformist Leaderships.

Early fascism was militantly anti-big-capitalist and violently anti-Bolshevik, strongly for reclaiming and unifying the lost national territories, and located on the left of the fascist spectrum in the more radical elements within the early movements, many of which emerged from authoritarian-leftist and anti-capitalist rightist splinter groups. Consequently, such impulses produced programmes which were extremely anti-market-capitalist, authoritarian and ultra-nationalist.

The Italian fascist programme of 1919 demanded a heavy capital levy, a tax on war profits, generous minimum wage rates, participation by workers in management, confiscation of church property and surplus land to be allocated to peasants cooperatives. Leading Italian Fascist intellectuals spoke of a postcapitalist economic system with collective ownership of a corporative economy.

The Nazi programme of 1920 sought the abolition of unearned income, outright confiscation of excess war profits, nationalization of trusts, land reform, and the strengthening of the middle orders. Calls were also made for closing the stock exchanges and nationalising the banks. While: On taking power, radical Nazis launched a campaign against department stores which were hit with special tax legislation and by consumer boycotts. [] Artisan and small business groups sought to ban certain services from large chain stores and cooperatives. Even the concept of the industrial corporation was challenged by Nazi populists who dreamed of a return to the old system of patriarchal management.[19] In both countries, early fascists displayed a visceral mistrust of big capital, especially rapacious finance capital in Germany, contrasted with creative industrial capital, while fascists in Italy distinguished between the productive and the parasitic elements of the bourgeoisie and promised wholesale nationalisation of industry and commerce.

In Italy, the revolutionary syndicalism and corporativism of the more radical Ras (regional fascist leaders) lay behind such anti-capitalist beliefs, while in Germany nationalbolshevist left-Strasserism of the North German faction was responsible for much of the high profile argumentation within the nazi movement. But, arguably, the most important doctrine of this kind was the ordoliberalism of Wilhelm Roepke, Walther Eucken and Carl Schmitt. Schmitt, in particular, theorised the possibility of a natural compatibility between liberal economics and a total state.[**] But he was far from alone.

To achieve a healthy economy within a strong state, Rstow and others tolerated, even proposed to use authoritarian means. Mller-Armack, who was later to become the first section chief of the newly founded Grundsatzabteilung (planning section) of the ministry of economic affairs and state secretary under Ludwig Erhard from 1958 to 1963, sympathized with Italian fascism …… and after 1933 warmly welcomed the new order …….. He joined the Nazi party the very same year. Eucken had become a sympathizer of the National Socialist party as early as 1931 …… His 1932 article was nothing less than a total damnation of the system of Weimar. For Eucken, parliamentarism and particularism had become synonyms. He shared with Rstow, Mller-Armack and Rpke the profound distaste for the amorphous mass and favored a strictly elitist conception of political leadership.[20]

Of course, these were authoritarian liberal intellectuals Roepke was driven into exile by nazism but in terms of the impact of their ideas on nazi thinkers and bureaucrats, there is a case perhaps to be made for a distinctive German authoritarian doctrine of national economic development.[21]

Be sure to check out the rest the above article. It’s a great resource. A key point to take from the above excerpt is that while the early years of fascist thought included a number of anti-capitalist/anti-communist radicals yearning for a return to a more patriarchal system and a collectively corporate state, it was the staunchly elitist, pro-big-capitalist ordoliberal thinkers that really made a lasting impression on the eventual development of fascist economics. AND some these same ordoliberal thinkers went on play key roles in crafting the West German post-war economic policy.

Then And Now
As we saw in the second excerpt, the ordoliberal thinkers like Wilhelm Röpke viewed the defense of “capitalism” (his elitist conception of capitalism) against the whimsies of the devolved rabble or greedy capitalist predators as a paramount goal of ordoliberalism. And as we saw in the above excerpt, Röpke and his ordoliberal cohorts were also sympathetic influential on both the Nazi’s eventual economic policies and in the post-war era. And they were also apparently sympathetic to fascist ideals and methods. It’s against this historical backdrop that we should be viewing contemporary policy-making decisions emanating from Frankfurt and Berlin. It’s a policy-making backdrop with an ordoliberal inspiration:

The New Yorker
May 20, 2013
Why Is Europe So Messed Up? An Illuminating History
Posted by John Cassidy

The big news of the past week had nothing to do with the I.R.S. or Benghazi. It was the confirmation that, while the American economy continues to recover from the disastrous financial bust of 2008 and 2009, Europe remains mired in a seemingly endless slump.

On this side of the pond, the Congressional Budget Office announced that, with the economy expanding, tax revenues rising, and federal spending being restrained, the budget deficit is set to fall to about four per cent of Gross Domestic Product this year, and to 3.4 per cent next year. The latter figure is pretty close to the average for the past thirty years. At least for now, the great U.S. fiscal scare is over—not that you’d guess that from listening to the public debate in Washington. In Europe, things are going from bad to worse. New figures show that in the seventeen-member euro zone, G.D.P. has been contracting for six quarters in a row. The unemployment rate across the zone is 12.1 per cent, and an economic disaster that was once confined to the periphery of the continent is now striking at its core. France and Italy are both mired in recession, and even the mighty German economy is faltering badly.

Why the sharp divergence between the United States and Europe? When the Great Recession struck, U.S. policymakers did what mainstream textbooks recommend: they introduced monetary and fiscal-stimulus programs, which helped offset the retrenchments and job losses in the private sector. In Europe, austerity has been the order of the day, and it still is. Nearly five years after the financial crisis, governments are still trimming spending and cutting benefits in a vain attempt to bring down their budget deficits.

The big mystery isn’t why austerity has failed to work as advertised: anybody familiar with the concept of “aggregate demand” could explain that one. It is why an area with a population of more than three hundred million has stuck with a policy prescription that was discredited in the nineteen-twenties and thirties. The stock answer, which is that austerity is necessary to preserve the euro, doesn’t hold up. At this stage, austerity is the biggest threat to the euro. If the recession lasts for very much longer, political unrest is sure to mount, and the currency zone could well break up.

So why is this woebegone approach proving so sticky? Some of the answers can be found in a timely and suitably irreverent new book by Mark Blyth, a professor of political economy at Brown: “Austerity: The History of a Dangerous Idea.” Adopting a tone that is by turns bemused and outraged, Blyth traces the intellectual and political roots of austerity back to the Enlightenment, and the works of John Locke, David Hume, and Adam Smith. But he also provides a sharp analysis of Europe’s current predicament, explaining how an unholy alliance of financiers, central bankers, and German politicians foisted a draconian and unworkable policy on an unsuspecting populace.

The central fact about Europe’s “debt crisis” is that it largely originated in the private sector rather than the public sector. In 2007, Blyth reminds us, the ratio of net public debt to G.D.P. was just twelve per cent in Ireland and twenty-six per cent in Spain. In some places, such as Greece and Italy, the ratios were considerably higher. Over all, though, the euro zone was modestly indebted. Then came the financial crisis and the fateful decision to rescue many of the continent’s creaking banks, which had lent heavily into property bubbles and other speculative schemes. In Ireland, Spain, and other countries, bad bank debts were shifted onto the public sector’s balance sheet, which suddenly looked a lot less robust. But rather than recognizing the looming sovereign-debt crisis for what it was—an artifact of the speculative boom and bust in the financial sector—policymakers and commentators put the blame on public-sector profligacy.

“The result of all this opportunistic rebranding was the greatest bait-and-switch operation in modern history,” Blyth writes. “What were essentially private-sector debt problems were rechristened as ‘the Debt’ generated by ‘out-of-control’ public spending.”

The obvious alternative to rescuing the bad banks in the periphery countries was to let them go bust, but that was a risky option. As we saw in the United States after Lehman Brothers was allowed to fail, once one domino goes down the others get very shaky. Preventing a wholesale U.S. banking collapse took the Fed launching all sorts of emergency lending programs and Congress approving a seven-hundred-billion-dollar bailout. In Europe, such policies weren’t available. The E.C.B.’s charter didn’t provide for it acting as a lender of the last resort. And the European universal banks were simply too big to rescue. In 2008, Blyth recalls, the combined assets of the six largest U.S. banks came to sixty-one per cent of U.S. G.D.P. Compare that with Germany, where the biggest financial institutions (Deutsche Bank and Commerzbank) had assets equal to a hundred and fourteen per cent of German G.D.P., or France, where the three biggest banks (BNP Paribas, Société Générale, and Crédit Agricole) had assets equal to three hundred and sixteen per cent of France’s G.D.P.

Note that shifting massive amounts of private debt onto public balance-sheets could be seen as not just sleazybut also consistent with the “defence of capitalism” ordoliberal-ethos. Germany’s two largest banks had assets equal to 114% of Germany’s GDP and if they collapsed you can bet that capitalism in Germany, at least the form of ordoliberal capitalism preferred and protected by policy-makers, would probably collapse. And a similar threat existed for the other large European banks and their home economies. So, from this perspective, transferring private debt for ‘too big to fail’ institutions into the public debt of the eurozone’s smaller, weaker economies represents a kind of ordoliberal act of ‘saving the system’. A financial crisis response that results in greater public accountability, better government services, less inequality, and a more vibrant middle-class at the expense of an all-powerful business-government axis would be seen as a failure and abondonment of ‘the pro-entrepreneur system’.

Continuing…

With defaults and a wholesale bailout off the table, Europe was condemned to muddling through as best it could. Coming out of the first stage of the crisis, which lasted until the first half of 2011, it was saddled with a periphery—Greece, Ireland, Portugal—that had been bailed out but that was still sinking under enormous debts, and a financial system that was highly leveraged and loaded up with suspect government bonds. What the continent desperately needed was a return to growth-oriented policies of the sort adopted in the United States. Higher growth would have raised tax revenues, boosted job growth, and shored up the banks’ balance sheets. But largely due to the euro, Europe was stuck in an austerity vice.

Membership of the common currency prevented individual countries from printing money and devaluing their currencies, which is what the United States had done. Blyth notes:

If states cannot inflate their way out of trouble (no printing press) or devalue to do the same (non-sovereign currency), they can only default (which will blow up the banking system, so it’s not an option), which leaves internal deflation through prices and wages—austerity.

Theoretically, there is another option: fiscal stimulus in the form of tax cuts and more government spending. But that, too, is effectively ruled out. Under the terms of the euro zone’s comically misnamed Stability and Growth Pact, countries like France and Italy, which have budget deficits larger than three per cent of G.D.P., are legally obliged to cut spending, even though doing so is sure to depress the economy further, leading to lower tax revenues and bigger deficits. Meanwhile, member countries that have a budget surplus, particularly Germany, refuse to help their neighbors by introducing a stimulus.

It’s all quite mad, but that doesn’t mean it will end anytime soon. Indeed, about the only things that seem likely to change the situation are another blow up in the bond markets or a political revolution in a member state. So far, Mario Draghi, the Italian financier who took over as the chairman of the E.C.B. in 2011, has managed to prevent the first of these things from happening. And despite mass protests from Athens to Madrid, the pro-euro political establishment has held onto power.

Blyth rightly describes this whole sad story as an attempt to recreate a European version of the gold standard, the “barbarous relic” (Keynes) that helped bring about the Great Depression. But rather than confine himself to explaining and bemoaning the enduring appeal of austerity policies, Blyth explores their roots in the laissez-faire writings of Locke, Smith, and David Ricardo; the Treasury view of the nineteen-twenties; the Austrian business cycle theory of Friedrich Hayek and Joseph Schumpeter; the monetarism of Milton Friedman; the Washington Consensus of the I.M.F. and the World Bank; and the “expansionary austerity” school that emerged from Bocconi University, in Milan. With so much hinging on Germany, the discussion of postwar German ordoliberalism, which underpins Berlin’s hostility to expansionary policies, is particularly valuable.

The parallel drawn between the gold standard and what appears to be taking place in eurozone (and larger EU to a lesser extent) is an apt analogy. Under ordoliberal doctrines inflation and monetary instability as viewed as deep sins to be avoided at all costs, so it could be thought as a “good-as-gold standard”. And when you factor in that the gold standard didn’t actually bring about price stability we could almost think of the eurozone project as a “better-than-gold standard”. And when you consider how much the gold standard sucks in practice and clear follies of focusing on price-stability alone (which is the sole mandate of the ECB), we might rechristen it the “better-than-gold-but-still-woefully-inadequate standard”.

Continuing…


As Blyth points out, German politicians influenced by ordoliberalism, such as Chancellor Angela Merkel and Wolfgang Schäuble, the finance minister, aren’t hostile to government activism in the same way conservatives in the United States and Britain are. To the contrary, they believe in a social market economy, where the state sets the rules, including the generous provision of entitlement benefits, and vigorously enforces them. But encouraged by Germany’s success in creating an export-led industrial juggernaut, they believe that everybody else, even much less efficient economies, such as Greece and Portugal, should copy them rather than rely on the crutch of easy money and deficit-financed stimulus programs.

That’s all very well if you are an official at the Bundesbank, or one of the parsimonious Swabian housewives beloved of Merkel, but it ignores a couple of things. First, it’s the very presence of weaker economies in the euro zone that keeps the value of the currency at competitive levels, greatly helping German industry. If Greece and Portugal and other periphery countries dropped out, the euro would spike up, making Volkswagens and BMWs a lot more expensive. Second, it isn’t arithmetically possible for every country to turn into Germany and run a big trade surplus. On this, Blyth quotes Martin Wolff, of the Financial Times: “Is everybody supposed to run a current account surplus? And if so, with whom—Martians? And if everybody does indeed try to run a savings surplus, what else can be the outcome but a permanent global depression?”

You have to love how it’s now widely recognized that the crisis strategy championed by Merkel & Friends is arithmetically impossible. And yet it all continues day after day without the entire continent suffering some sort of cognitive dissonance-induced nervous breakdown. It’s kind of medical miracle.

Welcome To The Funhouse
Unfortunately, while trying to achieve the impossible can be noble goal, it sort of becomes a stupid and mean Sisysphian hell when the method to the madness centers around pointless austerity and junk economic supply-side theories like ‘If governments send signals to the markets that governments were serious about cutting deficits this would induce “confidence” in the financial markets. This deficit-cutting turnaround in the financial markets would, in theory, alleviate the underlying jobs crisis as businesses started hiring again‘. The austerity was supposed to literally be inspiring enough to create its own net job growth according to ordoliberal theory. All that was needed for the magic of the market to work was the creation of the right “conditions” by the EU-ECB-IMF Troika. And no stimulus spending because that’s apparently anti-ordoliberal for any state that hasn’t yet achieved its ordoliberally-deemed optimal state of competitiveness. As long as inflation is under control and the market structure is deemed to be fundamentally sound (according to ordoliberal principles) whatever happens happens. No intervention is deemed necessary. The system is sound. A ‘healthy’ economy doesn’t necessarily include a healthy, employed populace but it must include ‘healthy’ public finances before the economy can ever heal, hence the prohibition on stimulus spending. Plus, stimulus spending prevents a populace from engaging in the necessary “structural reforms” that typically involve making the poor and middle-class poorer along with various forms of “pro-business” deregulations. At least that’s theory theory fluttering about inside the mind of a madman:

Capitalism and Freedom
Inside The Mind Of Jens Weidmann
Christopher T. Mahoney
Sunday, July 7, 2013

Jens Weidmann is the president of the Bundesbank and a member of the ECB Governing Council. He is seen as the leader of the Hawkish Group at the ECB. He holds views that are diametrically different from mine (not that he knows or cares). But it is crucial to understand how he thinks, because he holds an effective veto over ECB policy. That makes him one of the most important central bankers in the world. His views cannot be ignored.

Weidmann has provided us with two recent insights into his thinking: a speech today (7/7) in France, and a recent interview (6/24) with Suddeutsche Zeitung. Helpfully, both documents are available in English on the Bundesbank website.

Weidmann speaks in plain language and doesn’t mince words, or at least no more than he must. It appears that he regrets EMU, although he denies that (as he must as a board member of the ECB). His official posture is: effective monetary union will require greater fiscal discipline and structural reform; easy money is not the answer. His views about EMU can be summed up as: In the absence of fiscal union, EMU remains a looser grouping of countries that will face the discipline of the financial markets if they fail to produce economic convergence.

With respect to monetary policy, Weidmann adheres to a strict interpretation of the ECB Treaty which provides for a single mandate, price stability, and which excludes “monetary financing” or deficit monetization.

Weidmann’s attitude is: EMU was founded on the explicit understanding that the ECB would be as single-minded as the Bundesbank in its focus on the single mandate. His view is that not only does the ECB lack a growth mandate, it should not have one (and nor should any central bank). He is a supply-sider: growth results from sound fiscal, structural and monetary policies, not from “artificial stimulus”.

There is nothing radical or heterodox about Weidmann’s views. They are shared by a number of members of the FOMC. Indeed, his views are orthodox. I think that his true desire is a federal eurozone, modeled on the dollar zone. This would be a eurozone without national central banks and without national banking systems. South Dakota does not have a central bank, nor does it have a financial system. The Fed and the FDIC could not care less if South Dakota defaulted on its muni bonds.

Note that, while it’s true that Bundesbank Chief Jens Weidmann’s supply-sider views on these matters are in keeping with a type of economic orthodoxy, it happens to be the supply-side orthodoxy that keeps trashing economies.

Continuing…


Here are his words:


“We need to make sure that in a system of national control and national responsibility [federalism] , sovereign default is possible without bringing down the financial system. Only then will we really do away with the implicit guarantee for sovereigns. To achieve this, we have to sever the excessively close links between banks and sovereigns. Currently, European banks hold too many of their own governments’ bonds.”

Weidmann desires a eurozone where governments can default without collapsing their financial systems. He also desires a eurozone where banks can fail without becoming contingent liabilities of their governments:

“Getting to grips with the implicit guarantee for sovereigns would be a big step towards eliminating the inherent tensions in the monetary union’s structure. Removing the implicit guarantee for banks would be another one. To make that happen, we have to ensure the resolvability of banks. Defining a clear hierarchy of creditors is crucial. Shareholders and creditors will have to be first in line when it comes to bearing banks’ losses – instead of taxpayers.”

This is American federalism: states can go bankrupt without destroying their financial systems, and banks can fail without having any claim on their state. (Washington State did not shudder when WaMu failed.) We know that such a system could work because the dollar zone has worked for a couple of centuries.

But next we come to the crux: eurozone monetary policy. As a monetarist, I adhere to the view that the quantity theory operates, and that real growth is a derivative of money growth. In a nutshell: you can’t have 4% real growth with 1% nominal growth, and you can’t have 6% nominal growth without some inflation. That’s Market Monetarism, although it is really both Fisherian and Keynesian.

Here is Weidmann’s view: “The best contribution a central bank can make to a lasting resolution of the crisis is to fulfil its mandate: that of maintaining price stability.” In other words, there is no reason why the eurozone periphery cannot resume strong growth with 0% inflation and 0% nominal growth. I don’t mean to caricature his view, but it comes pretty close to that.

Has Weidmann read Fisher lately (or Bernanke, or Sumner)? To my knowledge he has not refuted the necessity of reflation in ending a depression. Indeed, I think that he is a sincere liquidationist, who views depressions and defaults as prophylactic. He wants to remake Southern Europe in the image of Northern Europe. He believes that, in the long run, it is in their own interest. He should read a financial history of the last three years of the Weimar Republic.

To summarize, the unrepentant Ghost of Andrew Mellon is now one of the most powerful bankers in the world. But as disturbing as it is to contemplate the fact that the guiding philosophy of the Bundesbank – and therefore the ECB – is stunningly similar to philosophy of Depression-era Republican economists, it is far more disturbing to realize that Jens Weidmann’s worldview appears to be shockingly similar to the modern day GOP. That’s right, the forced implosion of the eurozone economies could be thought of as part of Europe’s very own Supply-Side Revolution:

The New York Times
The Urge to Purge
By PAUL KRUGMAN
Published: April 4, 2013

When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. … It will purge the rottenness out of the system.” Don’t try to hasten recovery, warned the famous economist Joseph Schumpeter, because “artificial stimulus leaves part of the work of depressions undone.”

Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn’t repeat the mistakes of the 1930s, would we?

How naïve we were. It turns out that the urge to purge — the urge to see depression as a necessary and somehow even desirable punishment for past sins, while inveighing against any attempt to mitigate suffering — is as strong as ever. Indeed, Mellonism is everywhere these days. Turn on CNBC or read an op-ed page, and the odds are that you won’t see someone arguing that the federal government and the Federal Reserve are doing too little to fight mass unemployment. Instead, you’re much more likely to encounter an alleged expert ranting about the evils of budget deficits and money creation, and denouncing Keynesian economics as the root of all evil.

Now, the fact is that these ranters have been wrong about everything, at every stage of the crisis, while the Keynesians have been mostly right. Remember how federal deficits were supposed to cause soaring interest rates? Never mind: After four years of such warnings, rates remain near historic lows — just as Keynesians predicted. Remember how running the printing presses was going to cause runaway inflation? Since the recession began, the Fed has more than tripled the size of its balance sheet, but inflation has averaged less than 2 percent.

But the Mellonites just keep coming. The latest example is David Stockman, Ronald Reagan’s first budget director, who has just published a mammoth screed titled “The Great Deformation.”

But that prescription is, of course, anathema to Mellonites, who wrongly see it as more of the same policies that got us into this trap. And that, in turn, tells you why liquidationism is such a destructive doctrine: by turning our problems into a morality play of sin and retribution, it helps condemn us to a deeper and longer slump.

The bad news is that sin sells. Although the Mellonites have, as I said, been wrong about everything, the notion of macroeconomics as morality play has a visceral appeal that’s hard to fight. Disguise it with a bit of political cross-dressing, and even liberals can fall for it.

But they shouldn’t. Mellon was dead wrong in the 1930s, and his avatars are dead wrong today. Unemployment, not excessive money printing, is what ails us now — and policy should be doing more, not less.

Sin Sells. So Does Sinn
Paul Krugman’s above op-ed was written about the policy advocated by US Republicans but notice how easily it could just have easily described the mindset emanating from the Bundesbank and ECB. Sure, there are real differences between the laissez faire true-believers like Andrew Mellon (and the GOP) vs the ordoliberal followers like Bundesbank chief Jens Weidmann (and virtually all of his predecessors at the Bundesbank). Weidmann and his fellow ordoliberalists probably have a much more open-minded attitude towards government regulations than their purely-supply-side-oriented counterparts. But those differences in methods shouldn’t be confused with a rejection of the belief in the universal supremacy of “markets” for determining social outcomes. The business of ordoliberalism is protecting business, not creating a better society(that’s the job of business). It’s just a question of whether or not the markets are unregulated or ordoliberally-regulated. Market outcomes will still dominate the fate of the individual in the society, even when it results in social catastrophe. As Krugman pointed out above, “The bad news is that sin sells”. And as he’s pointed out before, Sinn sells too:

The New York Times
Economix
April 6, 2009, 3:11 pm
Why Germany Prefers Regulation to Stimulus
By CARTER DOUGHERTY

Americans struggling to understand why Germans seem to care little about economic stimulus these days, and yet so much about regulation, could do worse than to read a recent essay by Hans-Werner Sinn, head of the Ifo Institute in Munich.

Mr. Sinn makes a brief appeal to John Maynard Keynes — somewhat oddly since that name is usually associated with stimulus — in arguing that governments need to step in and forcibly recapitalize hard-hit banks with equity. Sweetheart loans are a bad idea, says Mr. Sinn. Instead, only issuing new shares will do, and we should not cry for chief executives who have to water down their shares. That is the most pressing need, Mr. Sinn writes.

But take careful note of the name Walter Eucken, whom Mr. Sinn references with a reverential tone that could be found only in Germany. Mr. Eucken, who died in 1950, is closely associated with a school of economics known as ordoliberalism, which teaches that state regulations can help the free market produce results close to its theoretical potential.

After World War II, ordoliberals (also known, confusingly given the argot of today’s anti-globalization protesters, as neoliberals) defended capitalism but said the state needed to play a strong role in regulating what did not come naturally. That meant ensuring stable prices, protecting property rights and – oh, how prescient this sounds today! – ensuring unlimited liability for those daring capitalists so that they bear the rewards, but also the risks, of their behavior..

It’s worth recalling that while there has been an extensive amount of public discussion over the last few years by folks like Angela Merkel and Jens Weidmann about forcing an investor “bail-in” in the various eurozone bank bailouts and other “tough love” approaches that are intended to use socioeconomic pain as catalyst for “structural” “reform“. But those plans were always abandoned when it became clear that such “tough love” approaches would cause a market meltdown. That whole dynamic all changed in March of this year, of course, when it Russian oligarchs finally got “bailed-in” in Cyprus and the markets only almost melted down (and it doesn’t look like the banks that the Russian oligarchs were actually investing in even had much to do with the Cypriot banking crisis). The “float a bad idea, tanks the markets” phenomena hasn’t been limited to the eurozone, but it’s been a policy-making theme in recent years. At the same time, Sinn’s concerns about the public paying the price for private risks and the related dangers of a vastly over-leveraged financial sector warping the self-correcting nature of the market are concerns that should not be dismissed.

Also note that Sinn’s attitude towards financial executives in the wake of the 2008 meltdown was surprisingly supportive given his stance on bailing out banksters.

Continuing…

It is important to remember the historical context here. After the war, and the Depression that preceded it, capitalism looked discredited (and Communist armies occupied half of Europe). Ordoliberalism offered a credible argument that stemmed the socialist tide by essentially arguing for capitalism, but with a strong state. It helped cement a political coalition against widespread nationalization and central planning, two approaches very much in favor when Germany lay in ruins in 1945.

In his essay, Mr. Sinn writes that “a time bomb is ticking” because if banks shrink themselves back to health, they will drag down economies with them. “And all this just because banks, hedge funds, special purpose vehicles, investment funds and real-estate financers were allowed to conduct their business with only tiny amounts of equity capital,” he continues. “Without equity, there is no liability, and without liability, people gamble.”

This is a good jumping-off point to understand why Germans see regulation as part of the solution to today’s crisis — this was a major point at the recent G-20 summit — even as the United States tut-tuts that the Germans are not stimulating enough. The most successful economic order that Germany – and some would say Europe – has ever seen put stability first and last. It did not encourage financial wheeling and dealing for its own sake, but put it in the context of the entire economy. Mr. Eucken would have asked what financial innovation did for the real economy, and whether the innovators were taking risks the rest of us would pay for, Mr. Sinn suggests.

And by the way: In case you are inclined to dismiss Mr. Eucken as a guru of some irrelevant talking heads, think again. Jürgen Stark, an executive board member of the European Central Bank, has praised Mr. Eucken as a thinker whose main work, Principles of Economic Policy, “has been a constant source of inspiration throughout my career.”

The Third Ordoliberal Way Still Leads To Austerity
Ordoliberalism’s mix of a strong belief in the primacy and necessity of market competition as the tool for achieving social justice which is why the term “competitiveness” gets endlessly used by the EU’s austerity-advocates. But the elevation of market competition is coupled with an ideological rejection of laissez faire capitalism. This naturally leads to much of the confusion outside observers have regarding the German government’s strenuous rejections of stimulus spending or any other state-directed efforts at rebuilding eurozone economies. On the surface it’s hard to discern large differences between ordoliberalism and the regulated capitalism found in most other developed economies so it’s no surprise that so many observers have been caught off guard in recent years by the intensity of the opposition to state stimulus spending and higher inflation coming from German ordoliberal economists like Mr. Sinn. German workers, after all, are generally perceived as being very well treated compared to their counterparts elsewhere. So how is it that an economy guided by the principles of ordoliberalism could generate would of the most robust welfare states on the planet while simultaneously demanding that its eurozone partners engage in brutal austerity for the masses? Well, one explanation is that the legendary German social safety-net is a lot less safe than it used to be:

Insight: The dark side of Germany’s jobs miracle

By Sarah Marsh and Holger Hansen

STRALSUND, Germany | Wed Feb 8, 2012 9:42am EST

(Reuters) – Anja has been scrubbing floors and washing dishes for two euros an hour over the past six years. She is bewildered when she sees newspapers hailing Germany’s “job miracle.”

“My company exploited me,” says the 50-year-old, sitting in the kitchen of her small flat in the eastern German town of Stralsund. “If I could find something else, I’d be long gone.”

Stralsund is an attractive seaside town but Anja, who preferred not to use her full name for fear of being fired, cannot afford the quaint cafes.

Wage restraint and labor market reforms have pushed the jobless rate down to a 20-year low, and the German model is often cited as an example for European nations seeking to cut unemployment and become more competitive.

But critics say the reforms that helped create jobs also broadened and entrenched the low-paid and temporary work sector, boosting wage inequality.

Labor office data show the low wage sector grew three times as fast as other employment in the five years to 2010, explaining why the “job miracle” has not prompted Germans to spend much more than they have in the past.

Pay in Germany, which has no nationwide minimum wage, can go well below one euro an hour, especially in the former communist east German states.

“I’ve had some people earning as little as 55 cents per hour,” said Peter Huefken, the head of Stralsund’s job agency, the first of its kind to sue employers for paying too little. He is encouraging other agencies to follow suit.

Data from the European Statistics Office suggests people in work in Germany are slightly less prone to poverty than their peers in the euro zone, but the risk has risen: 7.2 percent of workers were earning so little they were likely to experience poverty in 2010, versus 4.8 percent in 2005.

It is still lower than the euro zone average of 8.2 percent. But the number of so-called “working poor” has grown faster in Germany than in the currency bloc as a whole.

In response, as other European countries rush to deregulate, Germany is re-regulating.

Angela Merkel’s conservative government is trying to water down the effects of some labor reforms brought in by her Social Democrat (SPD) predecessor Gerhard Schroeder, a year-and-a-half before the next federal election, when she is expected to seek a third term.

PRECOCIOUS REFORMER

The contrast between Germany’s record levels of employment and the dire jobs situation elsewhere in Europe is stark.

Last year, the number of people in employment in Germany rose above the 41 million mark for the first time. The jobless rate has been falling steadily since 2005 and now stands at just 6.7 percent, compared to 23 percent in Spain and 18 percent in Greece.

It has been a tough battle since German unemployment peaked after reunification in 1990. Many east German businesses floundered in a free market once the Berlin Wall fell, sending joblessness there soaring over 20 percent.

Globalization put Germany’s export-reliant economy under competitive pressure, forcing it to adjust quickly.

By 2003, Germany was embarking on reforms hailed as the biggest change to the social welfare system since World War Two, even as many of its peers were moving in the opposite direction.

While the French Socialists were introducing the 35-hour week and cranking up minimum wages, Germany’s Social Democrats (SPD) were deregulating the labor market and raising pressure on the jobless to find work.

Unions and employers agreed wage restraint in return for job security and growth. Flexible working practices and government-subsidized reduced working hours enabled employers to adjust to the economic cycle without hiring and firing.

From 2005, joblessness started to fall and is nearing pre-reunification levels. Elsewhere in Europe, governments tackling high unemployment are playing catch-up, making labor reforms the number one priority.

France’s conservative President Nicolas Sarkozy has repeatedly cited Schroeder’s “Agenda 2010” reforms as an example for his country over the past few months. Labor reforms being introduced in Spain and Portugal have also borrowed heavily from Germany.

“BEST LOW WAGE SECTOR IN EUROPE”

Job growth in Germany has been especially strong for low wage and temporary agency employment because of deregulation and the promotion of flexible, low-income, state-subsidised so-called “mini-jobs.”

The number of full-time workers on low wages – sometimes defined as less than two thirds of middle income – rose by 13.5 percent to 4.3 million between 2005 and 2010, three times faster than other employment, according to the Labour Office.

Jobs at temporary work agencies reached a record high in 2011 of 910,000 — triple the number from 2002 when Berlin started deregulating the temp sector.

Economists say it was Schroeder’s intention to bring about a rapid expansion of these sectors in order to get the poorly-qualified and long-term unemployed back into the workforce.

In 2005, Schroeder’s last year as chancellor, he boasted at the World Economic Forum in Davos: “We have built up one of the best low wage sectors in Europe.”

Seven years later, employers praise the reforms that led to the growth of mini-jobs and temping.

..

ROAD TO NOWHERE

Critics say Germany’s reforms came at a high price as they firmly entrenched the low-wage sector and depressed wages, leading to a two-tier labor market.

New categories of low-income, government-subsidized jobs – a concept being considered in Spain – have proven especially problematic. Some economists say they have backfired.

They were created to help those with bad job prospects eventually become reintegrated into the regular labor market, but surveys show that for most people, they lead nowhere.

Employers have little incentive to create regular full-time jobs if they know they can hire workers on flexible contracts.

One out of five jobs is a now a “mini-job,” earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.

RE-REGULATING

While wage inequality used to be as low in Germany as in the Nordic countries, it has risen sharply over the past decade.

Low wage workers earn less relative to the median in Germany than in all other OECD states except South Korea and the United States.

“The poor have clearly lost out to the middle class, more so in Germany than in other countries,” said OECD economist Isabell Koske.

Depressed wages and job insecurity have also kept a lid on domestic demand, the Achilles heel of the export-dependent German economy, much to the exasperation of its neighbors.

ILO’s Ernst says Germany can only hope that other European countries do not emulate its own wage deflationary policies too closely, as demand will dry up: “If everyone is doing same thing, there won’t be anyone left to export to.”

So part of the answer to the question “how could ordoliberalism create a worker-friendly economy in Germany but an austerity wasteland elswhere?” is that Germany hasn’t actually been a worker-paradise over the last decade specifically because it has embreaced ordoliberal dogma. But another part of the answer can be found with another look at the exellent paper “Freedom, Crisis and the Strong State: On German Ordoliberalism” by Werner Bonfeld. As we’ll see, the opposition towards state welfare policies held by the early ordoliberal thinkers like Walter Eucken included an deep opposition to the general character of ‘mass man’. And ‘mass man’ happens to be the general public:

www.bisa.ac.uk
Freedom, Crisis and the Strong State: On German Ordoliberalism
Werner Bonfeld

Ordo-liberalism saw itself as a third way between collectivism and laissez-faire liberalism ‘ a new liberalism that commits itself to battle to secure liberty in the face of selfish interest groups and the proletarian adversary. That is to say, laissez-faire is neither an answer „to the hungry hordes of vested interests’ (Röpke, 2009, p. 181) nor to the ‘disease of statism’ (Barry, 1989, p. 118) that the proletarian masses exact when in the face of class conflict the state weakens in its liberal resolve by conceding collective welfare provisions. Nor is it an ‘answer to riots’ (Willgerodt and Peacock, 1989, p. 6). That is, laissez-faire liberalism is unable to posit either political aims or definite social values. In the end, then, the laissez faire liberalism ‘dissolves [the state] into an apolitical exchange society’ (Müller-Armack, 1933, p. 21). Instead of defending liberty, the apolitical state becomes the prey of vested interests, and succumbs to proletarian demands. Laissez-faire conceptions of freedom are inherently self-destructive. For freedom to prevail a more or less ‘authoritarian direction of the state’ is necessary (Böhm, 1937, p. 67) to facilitate the utility of freedom within the limits of its form, that is, the individual as entrepreneur.

II Social Policy: Freedom and Enterprise
Social policy is about the provision of a ‘stable framework of political, moral and legal standards’ (Röpke, 1959, p. 255). It is a means of liberal governance. Its purpose is to secure a market economy within the confines of what Adam Smith called the ‘laws of justice’ (1976, p. 87). A social policy that concedes to working class demand for social justice ‘by wage fixing, shortening of the working day, social insurance and protection of labour…offers only palliatives, instead of a solution to the challenging problem of the proletariat’ (Röpke, 1942, p. 3). It leads to the „rotten fruit? of the welfare state (Röpke, 1957, p. 14) which is „the “woddenleg” of a society crippled by its proletariat? (ibid., p. 36). The welfare state is the institution of ‘mass man’ who ‘shirk their own responsibility’ (ibid., p. 24). That is, social policy aims at transforming the proletarian into a citizen ‘in the truest and noblest sense’ (Röpke, 2009, p. 95).

Haselbach (1991) has rightly pointed out that Schumpeter’s identification of capitalism with entrepreneurial freedom is key to the ordo-liberal conception of the free economy. For Eucken (1932, p. 297) the well-being of capitalism is synonymous with the well-being of the entrepreneurial spirit – innovative, energetic, enterprising, competitive, risk-taking, self-reliant, self-responsible, eternally mobile, always ready to adjust to price signals, etc. Müller-Armack (1932) speaks of the ‘doing’ of the entrepreneur, whom he likens to civilisation’s most advanced form of human self-realisation. Ordo-liberalism identifies capitalism with the figure of the entrepreneur, a figure of enduring vitality, innovative energy, and industrious leadership qualities. This then also means that they conceive of capitalist crisis as a crisis of the entrepreneur. Things are at a standstill because the entrepreneur is denied – not just by ‘mass man’ but by a state that yields to mass man. Crisis resolution has thus to restore the entrepreneurial vitality of society. For the ordo-liberals this task entailed a ‘policy towards the organisation of the market’ (Eucken, 1948, p. 45, fn 2) that secures ‘the possibility of spontaneous action’ without which ‘man was not a “human being”’ (ibid. p. 34). In this conception, ‘state-organised mass welfare’ (Röpke, 1957, p. 14) amount to a ‘revolt against civilisation’ (Röpke, 1969, p. 96) – it expresses a state of profound ‘devitalisation and loss of personality’ (Röpke, 2002, p 140), which for the ordo-liberals characterises proletarianised social structures.

Whether or not one happens to be a member of the ‘mass man’ segment of society, the idea of running a society based philosophy that views anyone that isn’t an entrepreneur as some sort of degenerate parasite seems like an ill-advised solution to society’s challenges. And yet the entire eurozone appears to be rushing to implement a zone-wide set of new permanent rules that look like they could be pulled from the pages of the ordoliberal playbook without any general recognition that ordoliberalism is a far-right, elitist philosophy dedicated to the protection of ‘capitalism’ by protecting the biggest ‘capitalist’ under the guise of safeguarding a healthy market for the idealized hypothetical small entrepreneur. Ordoliberalism shares a lot of traits with its zany cousins in the Austrian Schools of thought but ordoliberalism is, in many ways, a much scarier variant of far-right thought. Ordoliberalism doesn’t contain the overt insanity of an adherence to anti-government solutions to societies problems. And ordoliberalism can even claim to be actively working to ensure a type of social justice even if it’s social justice exclusively for “the entrepreneur” that is ideologically achieved primarily through state-enforced competition. Selling ‘mass man’ on some sort of “Ordoliberal Populism“, in other words, is simply a much more plausible way to get the ‘mass man’ to accept a far-right economic paradigm than the “Libertarian Populism” far-right alternatives currently being peddled in the US. Compared to its laissez faire alternatives, ordoliberalism really is a more realistic approach to managing an economy and society. It’s still a hopelessly inadequate and flawed approach, but it’s less hopelessly inadequate and flawed than its far-right alternatives. And considering that it’s only far-right policy options that get any serious consideration across much of the world these days, we should probably expect the stealth adoption of ordoliberal principles and policies to continue. This stealth campaign shouldn’t continue, but as as long as ordoliberalism remains generally unrecognized as a far-right ideology, it probably will.

Update 7/26/2013

Here’s an excerpt from the book The Road from Mont Pèlerin: the making of the neoliberal thought collective, available on Amazon and Google Books (with an excellent review here). The chapter “Neoliberalism in Germany” contains some great examples of the ordoliberal theoreticians were able to obtain the “anti-Nazi” mantle and wield such influence in the post-war era.

So, here’s a few excerpts form The Road from Mont Pèlerin: the making of the neoliberal thought collective
edited by Philip Mirowski, Dieter Plehwe
2009, Harvard University Press

p. 112:


The Nazi Era: Working on the Theoretical Foundations of Ordoliberalism

After its early formulations of culturally pessimistic perspectives during the early 1930s, German ordoliberalism assumed the format of an economic school of thought during the Nazi era. Its ambitions were to formulate universal economic policy principles with an eve to the whole of society. The circle aroundEurchn in Freiburg came to be considered both the point of departure and the theoretical backbone of later German ordoliberalism.

The work done by Eucken’s group between 1933 and 1945 fostered the precondiations for the Freiburger Schules, which became the most highly regarded academic institution of ordoliberalism after World War II-despite the rather close entanglement of manry of its members with the Nazi regime. The most relevant basic texts and the preliminary work for subsequent manuscripts came out of this period, yielding the broad theoretical foundation of ordoliberalism immediately after the end of World War II.

p.115


Articles published by Bohm, Eucken, and Miksch in a 1942 book, Der Wettbewerb als Mittel volkswirtschaftlicher Leistungssteigerung und Leistungsauslese ( Competiton as a means to increase and select national economic efficiency), edited by Klasse IV der Akademie fur Deutsches Recht (AfDR),21 took up a variety of topics closely connected to the Freiburg school’s perspective on competition theory and policy. These contributions did not cover new ground in terms of theory, but they were nonetheless politically important. The involvement of ordoliberals in Nazi Germany’s most important academic institution has been a subsequent topic of heated discussion in the historical literature. Ther ordoliberal contributions did indeed discuss the Nazi regime’s economic policies in the most concrete ways, but they show no evidence for the frequent claims22 that they were in fundamental opposition against the Nazis. Their contributions, rather, provide evidence that the ordoliberals constructively contributed to solutions of specific problems of the war economy, and they even seem to indicate their ability to grasp an opportunity “to gain influence on the programmatic efforts to plan for a post-war economic policy” (Haselbach 1991, 95). Arguments claiming that their activites in the these circles should be regarded as secret resistance efforts and promotion of an “underground economy” (Schlecht 1981, 15) are unconvincing. Because of the importance of the issue, we will present a separate discussion of the relationships between ordoliberals and the Nazis in the next section.

p. 117-119

Ordoliberalism and Nazism

The very fact that ordoliberalism developed a large part of its theoretical foundations within the temporal and geographical bounds of Nazi Germany raises the important question, If and to what extent were ordoliberals influenced by Nazi Germany in general and by Nazi economic policy considerations in particular? Repeated claims that the Freiburg school and Ludwig Erhard were a staunch part of the opposition to the Nazis – claims that buttressed the legitimacy of the social market economy – deserve closer scrutiny[24].

What certainly can be rejected as a mere cover-up is the claim that the ordoliberals who did not emigrate from Germany opposed, or even persistently resisted, the national socialist regime (e.g., Willgerodt 1998; Wegmann 2002, 55-72; Goldschmidt 2005). With the exception of the documented emigrants (Wilhelm Ropke and Alexander Rustow), such a revionist history of the wartime ordoliberals is not supported by facts. Papers published in Freiburg between the mid-1930s and the beginning of the 1940s unquestionalby reveal the ordoliberal concepts were designed to be implemented under the auspices of a Nazi government. In particular, Bohm’s book o the order of the (Die Ordnung der Wirtschaft als geschichtliche Aufgabe und rechtschopferische Leistung), published in 1937, leaves no room for speculation in this regard (Abelshauser 1991; Haselbach 1991, 84f,; Tribe 1995, 212; Ptak 2004, 90f.). The very lack of a consistent economic policy under the Nazis – the Nazis’ economic policy oscillated wildly between planning and competition at least until the war – reinforced the ordoliberals’ hope of finding a sympathetic hearing for their authority-suppoerted model of competition (Herbst 1982; Abelshauser 1999).

At the same time, the economists who were on the road to ordoliberalism were not (necessarily) National Socialist economists. In spite of the totalitarian character of Nazi-Germany, it is very important to recognize and understand that different lines of economic thinking coexisted in Nazi Germany. Any analysis should therefore address the question of economics in Nazi-Germany in order to adequately address distance from and complicitness with the ruling powers and philosophies, as well as the changing perspectives and fortunes of individual economists over time. One must consider the multiform ways of relating to the Nazi regime (1) before and after 1933, when parliamentarian democracy and labor movement opposition were eliminated; (2) before and after 1938, when the pogroms against the Jewish population stated in earnest; and (3) before and after 1942, which marked both the year when the Holocaust decision was taken and when the war fortunes turned against the Nazis in Stalingrad (Walpen 2004, 93f).

After 1942, many people in Nazi Germany recognized that the war was lost and so attempted to distance themselves from the ruling Nazis (Roth 2004). Even if this was in a sense opportunistic, moving into opposition against the regime at that juncture did cost many lives, including the liberal economist Jens Jessen. Several members of the Freiburg school were questioned by the Gestapo, and some were imprisoned. However, any late participation in oppositional activities can hardly exonerate those right-wing liberal economists who had accommodated themselves to the regime before 1942 and deliberately lent their economic expertise to the Nazis for the bulk of the era. While early theoretical considerations of ordoliberalism were congenial to Nazi efforts to curtail certain special interests and trade unions in particular, the ordoliberal framework that promoted a strong and independent state could just as well be turned against the Nazi usurpation of power. This perspective was easier to articulate after the Nazies were toppled, but it should be noted that few expressed it before 1942.

With regard to more narrowly defined economic issues, the early ordoliberals were continually at odds with other schools of economic reasoning that operated during the Nazi era. As a coherent theoretical circle within the ordoliberal spectrum, the Freiburger Schule particular tried to promote a competitive order before and even during wartime. By developing policy advisory roles, they saw a chance to fill the economic theory vacuum in Nazi Germany with an authoritarian competitive order. Even though one cannot assume a broad, overall congruence between ordoliberal positions and National Socialist ideology, the authoritarian element, which Bohm characterized as kombinierte Wirtshaftsverfassung[25] (“combined economic constitutino”) (1937), represents a much visited point of intersection with National Socialist ideology regarding regional self-sufficiency. Despite the ordoliberals’ growing skepticism about Nazi Germany during the later phases of the wartime economy in particular, hope remained that the residual market economy could be preserved to create pro-market conditions that could be implemented after the war. Miksch as a journalist and Muller-Armack and Erhard as political advisers directly dealt with issues concerning the wartime economy and planning for the postwar period, and like many other economic professionals were at least indirectly entangled in National Socialist policies of expansion during much of the 1930s and 1940s (Ptak 2004). Tribe (1995) has mapped the respective attitudes of neoliberals ranging from Republican resistance (Ropke) to staunch conservatism (Eucken) and active Nazism (von Stackelberg). Other researchers try to excuse cooperating ordoliberals by speking in rather obscure ways of exiles and “half exiles”.[26] In any case, Wegmann (2002) and others who insist that a huge distance be maintained between ordoliberals and the Nazis fail to understand the considerable overlap of ordoliberal and Nazi critiques of parliamentarian democracy, trade unions, and the Communist Party in particular.[27]

Reading the early critiques of parliamentarian democracy in the ouvre of German ordoliberals and Austrian school neoliberals reveals the obscure authoritarian tendencies that were operating just beneath the surface of many neoliberals. These tendencies have reemerged time and again in eras of perceived danger to the neoliberal cause. These weaknesses for repressive regimes and recur in the history of neoliberalism, as evidenced by Hayek’s and Frieman’s support of “free market economic policies” under the leadership of Pinochet in Chile, for exaumple (see Fischer, Chapter 9 in this volume).

Discussion

35 comments for “The New World Ordoliberalism Part 2: A ‘Third Way’ to Fascism”

  1. Internal note glaring type.o at the top there “Fasism” In the “Lasting Legacy” portion of the “broadcast.”:) Frosty is on the lookout.

    Posted by frosty the snow job | July 21, 2013, 2:41 pm
  2. @Frosty–

    You got your wish! Your comment about Greenwald being part of an “Israeli” operation was more than revealing–about you.

    It’s in the trash, where it belongs.

    Cheers!

    U R Made

    Posted by Dave Emory | July 21, 2013, 2:58 pm
  3. @Dave: Ugh, I used to be a dupe of the “Mossad helped pull off 9-11/Zionists control the U.S. government” school myself…..never again (Frosty really needs to wake up, though).

    Posted by Steven L. | July 22, 2013, 11:16 am
  4. Just stumbled across this article that covers the ongoing influence of ordoliberalism on Merkel on crafting a crisis response. The article was written in 2011. Notice how little the overall situation has changed:

    Bloomberg
    Will Angela Merkel Act, or Won’t She?
    By Peter Coy on November 30, 2011

    It was Thanksgiving Day in the U.S., but just another tension-filled Thursday in Strasbourg, part-time home to the European Parliament and thus the fulcrum upon which the world’s financial future teeters. Angela Merkel arrived uncharacteristically late, keeping Nicolas Sarkozy and Mario Monti waiting. No matter. The press conference couldn’t start without Merkel any more than a performance of Hamlet could begin without the prince.

    The day before, the debt crisis that’s been spreading for two years singed Germany, as investors shied away from an auction of 10-year government bonds. By the market close, Germany’s 10-year borrowing costs stood at 2.2 percent a year, three-tenths of a percentage point higher than those of the wastrel U.S. For Merkel, it seemed like a moment of truth. Germany is the sole country in a position to prevent a collapse of the euro currency—an event that could trigger a financial crisis and perhaps another global recession. It’s only a slight exaggeration to say that the fate of the world is in one woman’s hands. Yet to the frustration, bewilderment, and mounting anger of leaders from Paris to Beijing to Washington, Merkel repeatedly has refused to act.

    Ten minutes into the news conference, as Merkel’s turn to speak arrived, markets and fellow politicians were parsing her German for a sign that the Chancellor was ready to quell the panic by finally agreeing to issue euro bonds, perhaps, or supporting unlimited bond purchases by the European Central Bank. Or something.

    Merkel yielded not a millimeter. Euro bonds—by which German taxpayers would become jointly liable for debts incurred by the likes of Greece and Italy—were “not needed and not appropriate.” She called once again for fast-tracking European Union treaty revisions that would force debtor nations to fix their finances. And she scored a diplomatic victory when Sarkozy, the French President standing at the podium to her left, promised to stop pressuring the ECB to step up its response to the debt crisis.

    Merkel succeeded on her own terms, but outside the bubble of German decision-makers her Strasbourg performance was a groaner. “The veil has been torn off Merkel’s policy of muddling through,” said Sebastian Dullien, a senior fellow at the European Council on Foreign Relations in Berlin. “It’s only got us closer to the endgame, either the breakup of the euro or euro bonds. The strategy has failed.”

    The contagion that began in Greece and then took out Ireland and Portugal has spread to the core of Europe. Budget-cutting austerity is slowing economic growth and thus tax receipts. Borrowing costs are rising because skittish investors are demanding higher yields on government bonds. The Continent’s banks have been infected by huge losses on their holdings of sovereign debt. One red flag is that European banks are having the most trouble borrowing in dollars since 2008. In an emergency action on Nov. 30, the Federal Reserve lowered the rate on loans of dollars to the ECB and four other central banks for relending to their member banks. Central banks “are seeing something in the functioning of the banking system that worries them,” Mohamed El-Erian, chief executive of bond investor Pacific Investment Management, told Bloomberg Television.

    There is a whiff of August 1914 in the air. That was the month when Europe’s leaders stumbled into World War I through arrogance, nationalism, entangling alliances, and myopia. The operating assumption is that Merkel will bend before the onset of a financial conflagration, but there’s no assurance of that. In calling for treaty revisions, the Chancellor referred to “construction weaknesses in the euro zone” that need fixing. She perceives herself as a builder, not a firefighter. The question is whether, by the time Merkel has perfected the blueprints for the high-class renovation of Europe she and her supporters crave, the building will have burned down.

    Modern German politics continues to be influenced by a philosophy that originated at the University of Freiburg in the 1930s: ordoliberalism, a conceptual blend of free markets and strong government. It says rigorous regulation is necessary, but only to help the free market achieve its full potential.

    Ordoliberals detest stimulative Keynesian policies. Jürgen Stark, a Merkel ally who has tendered his resignation from the European Central Bank’s executive board in protest against its easy-money policies, once said that ordoliberalism theoretician Walter Eucken (who died in 1950) “has been a constant source of inspiration throughout my career.” In a speech in Freiburg last February, Merkel said: “Unfortunately there aren’t Euckens in all the countries of the world.”

    Sound money is the polestar of the ordoliberal tradition. West Germany’s first Chancellor, Konrad Adenauer, once said, “Safeguarding the currency forms the prime condition for maintaining a market economy and, ultimately, a free constitution for society and the state.” Germans regard the 17-nation euro currency as the descendant and inheritor of one of their most cherished symbols, the Deutschmark.

    During its half-century of existence, the Deutschmark, launched in 1948, was one of the few fixtures of postwar national life that Germans allowed themselves to be proud of. Thomas Kleine-Brockhoff, who played on Germany’s national basketball team in 1980-81, recalls that he and his teammates rolled down their socks at games to hide the black, red, and gold, and wouldn’t put their hands over their hearts when the national anthem was played. “The only accepted version of nationalism was what [philosopher] Jürgen Habermas called Deutschmark nationalism,” says Kleine-Brockhoff, a former correspondent for Die Zeit who is senior strategy director for the German Marshall Fund of the United States.

    It was wrenching for many Germans when the Deutschmark was lashed to the euro in 1999 and done away with entirely in 2002. Those who opposed the common currency are claiming vindication now that the pressure for money printing and bailouts is rising and the Bundesbank wields but one vote at the European Central Bank, the same as Greece and Malta. The resentment of ordinary Germans toward what they view as southern European profligacy would tie the hands of any Chancellor—and Merkel is acutely aware that she faces re-election in two years.

    The problem is that deliberation is a luxury Europe can no longer afford. The risk of bank failures and sovereign defaults in the weaker euro zone countries is now measured in weeks, not months. “I will probably be the first Polish Foreign Minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity,” said Radoslaw Sikorski in a Nov. 28 speech in Berlin.

    What Europe needs urgently is a lender of last resort, a function that Merkel and Bundesbank President Jens Weidmann insist is out of the question. Weidmann, 43, a onetime economic adviser to Merkel, has variously described euro bonds as a “sweet poison” and as “seawater” that can’t quench one’s thirst.

    In their opposition, the Germans are fighting against more than a century of central banking theory and practice. No less a conservative hero than Milton Friedman chalked up the Great Depression in the U.S. to the failure of the Federal Reserve to fulfill its role as a lender of last resort. Simple deduction says that a banking system that lacks an institution with unlimited lending power will be destroyed eventually by exactly the kind of bank run that is gathering speed in Europe today. Here’s the stomach-churning sequence: A weak bank fails. Depositors begin to worry about the stronger banks. The most anxious pull out their money, knowing the banks’ assets are tied up in long-term loans and there isn’t enough cash in the vault to pay off all depositors on demand. Others quite rationally follow suit. The prediction of failure is self-fulfilling: The banks run out of cash and go under even though their businesses, absent the panic, would have been perfectly healthy. Kaputt!

    If it had the blessing of Merkel and other monetary hawks, the ECB could arrest the panic overnight by promising to print as many euros as necessary to buy the bonds of European nations, such as Italy and Spain, that are fundamentally healthy but wilting under attack. A related idea is to issue euro bonds, for which all euro zone members would be liable. If sovereign debt regained value, the banks that own their bonds would also be restored to health. Inflationary? Perhaps in the long run. But the printing press might never be needed; its mere existence would be enough to reassure depositors and scare off speculators.

    Still, Germany resists. “Markets are going up a blind alley thinking there’s going to be a common euro bond or thinking that the ECB is going to act as a lender of last resort,” said Norman Lamont, the former British Chancellor of the Exchequer, on Bloomberg Television. “I think Germany would rather leave the euro than see the ECB’s integrity affected.”

    Depending on where you sit, a breakup of the euro zone would be anywhere from ugly to catastrophic. If a deficit country such as Greece dropped out and brought back the drachma as its currency, Athens would be forced to default on its €277 billion of sovereign debt. The Greek government and Greek banks and companies would be shut out of foreign borrowing, crippling the economy. If Germany, on the other hand, left the euro, its new Deutschmark would likely soar in value, causing its export economy to shrink.

    Some observers believe that Merkel is allowing the crisis to fester in order to gain financial control over the rest of the euro zone. Hans Kundnani, editorial director of the European Council on Foreign Relations, quotes the Cold War theoretician Edward Luttwak, who coined the term “geo-economics” to describe the “admixture of the logic of conflict with the methods of commerce—or, as Carl von Clausewitz would have written, the logic of war in the grammar of commerce.” Germany, with its perpetual trade surplus and financial grip on the rest of the euro zone, “may be the purest example of a geo-economic power in the world today,” Kundnani wrote in the Summer 2011 issue of the Washington Quarterly.

    That may be going a step too far. If Merkel were thinking strategically, she probably wouldn’t risk the European economy falling into a recession. Jeffrey Sachs, director of Columbia University’s Earth Institute, says, “I’ve come to the conclusion that they don’t understand very much of these issues. Apparently some of the key figures have strong, self-contained views and are not interested in much discussion.” Sachs concludes: “This is really a disaster.”

    Merkel could learn about coping with confusion from one of Germany’s greatest thinkers, psychologist Dietrich Dörner. In research at the University of Bamberg, Dörner tested Germans’ decision-making skills with a SimCity-like game that made them benevolent dictators of a fictional West African nation. His 1989 book on the game, published in English in 1996 as The Logic of Failure, cries out to be read by everyone enmeshed in the European debt crisis. One player became absorbed in building an irrigation canal, setting all other objectives aside. “When the experiment director reported that a great famine had broken out and that many inhabitants of Lamu were suffering from malnutrition or had already died from it,” Dörner writes, “this participant’s response was, ‘Yes, yes, but how is the construction of the major side canal in the Nehutu Steppe coming along?’ And he never gave another thought to the famine.”

    Dörner’s bottom line is relevant to Merkel’s righteous defense of austerity. “The conviction that our intentions are unquestionably good,” he wrote, “may sanctify the most questionable means.”

    What Merkel has so far seemed unable or unwilling to grasp is that her obduracy is self-defeating. From the start, the European project has been driven by Germany; but if the euro fails, Europe fails—which means Germany has failed. Jean Monnet, the French diplomat who was one of the fathers of European unity, once stated that Europe would be “established through crises.” Faced with existential threats, postwar Europeans have always chosen to huddle closer together, surrendering bits of their sovereignty in the process. Even Merkel repeatedly says that the solution to the current crisis is “more Europe.” It’s just that she demands stronger fiscal controls—which require time-consuming negotiations, treaty revisions, and national referenda to implement—before she’ll even consider more emergency assistance.

    Increasingly isolated, Merkel is forging ahead with her renovation plan for Europe. “She’s trying to actually solve the problems instead of fighting the crisis,” says Ferdinand Fichtner, chief economist at the German Institute for Economic Research in Berlin. Fichtner says there’s plenty of blame to go around for the euro mess, but argues that Merkel is making a mistake by exploiting the crisis to force discipline on the laxer nations of the euro zone. “She’s obviously using German economic traditions,” Fichtner says. “She has made the crisis much worse than it would necessarily have been.”

    Merkel could save face by embracing a plan that couples the tough fiscal rules she wants with the emergency aid that the markets demand. On Nov. 29 there were reports that euro-area finance ministers were exploring greater roles for the International Monetary Fund and the European Central Bank to insulate Spain and Italy from the debt crisis. Any new plan adopted at the next euro leaders’ summit on Dec. 9 would be the fifth “comprehensive” fix since May 2010 for a continent that keeps going back to the drawing board. Whether Merkel will smile on the latest gambit remains unclear.

    The paradox at the heart of the crisis in Europe is that Merkel’s fetish for stability has become deeply destabilizing. There was a telling moment last February during Merkel’s speech in Freiburg to the Stiftung Ordnungspolitik, the organization that carries the torch for ordoliberalism. According to the prepared remarks, Merkel questioned how ordoliberalism should be implemented internationally when Germany is out of step with other countries. For the sake of international order, how far should Germany adjust to the way other countries do things, and when should it stick with what it believes is best? Although Merkel was referring to differences over narrow topics like tax breaks for scientific research, the implications of her musings were far-ranging. “That’s an eternal question that plagues me,” she said, “when I wake up in the morning and when I go to bed at night.”

    Posted by Pterrafractyl | July 23, 2013, 11:31 am
  5. See 7/26/2013 update for more on ties between the Nazi regime and ordoliberal theoreticians and how they avoided a post-war Nazi-taint.

    Posted by Pterrafractyl | July 25, 2013, 9:55 pm
  6. Searched the Spitfire blog with keyword ‘poverty’ for a place to post this documentation of post-WWI German poverty, desperation; and it’s groundwork staging for a future “strong leader” to represent their vital, yet alarmingly and rapidly declining racial interests across a racially and culturally mixed continent…

    http://bigstory.ap.org/article/exclusive-4-5-us-face-near-poverty-no-work-0

    EXCLUSIVE: 4 IN 5 IN US FACE NEAR-POVERTY, NO WORK
    By HOPE YEN
    — Jul. 28 8:36 AM EDT

    Home » Barack Obama » Exclusive: 4 in 5 in US face near-poverty, no work

    WASHINGTON (AP) — Four out of 5 U.S. adults struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.

    Survey data exclusive to The Associated Press points to an increasingly globalized U.S. economy, the widening gap between rich and poor and loss of good-paying manufacturing jobs as reasons for the trend.

    The findings come as President Barack Obama tries to renew his administration’s emphasis on the economy, saying in recent speeches that his highest priority is to “rebuild ladders of opportunity” and reverse income inequality.

    Hardship is particularly on the rise among whites, based on several measures. Pessimism among that racial group about their families’ economic futures has climbed to the highest point since at least 1987. In the most recent AP-GfK poll, 63 percent of whites called the economy “poor.”

    “I think it’s going to get worse,” said Irene Salyers, 52, of Buchanan County, Va., a declining coal region in Appalachia. Married and divorced three times, Salyers now helps run a fruit and vegetable stand with her boyfriend, but it doesn’t generate much income. They live mostly off government disability checks.

    “If you do try to go apply for a job, they’re not hiring people, and they’re not paying that much to even go to work,” she said. Children, she said, have “nothing better to do than to get on drugs.”

    While racial and ethnic minorities are more likely to live in poverty, race disparities in the poverty rate have narrowed substantially since the 1970s, census data show. Economic insecurity among whites also is more pervasive than is shown in government data, engulfing more than 76 percent of white adults by the time they turn 60, according to a new economic gauge being published next year by the Oxford University Press.

    The gauge defines “economic insecurity” as a year or more of periodic joblessness, reliance on government aid such as food stamps or income below 150 percent of the poverty line. Measured across all races, the risk of economic insecurity rises to 79 percent.

    “It’s time that America comes to understand that many of the nation’s biggest disparities, from education and life expectancy to poverty, are increasingly due to economic class position,” said William Julius Wilson, a Harvard professor who specializes in race and poverty.

    He noted that despite continuing economic difficulties, minorities have more optimism about the future after Obama’s election, while struggling whites do not.

    “There is the real possibility that white alienation will increase if steps are not taken to highlight and address inequality on a broad front,” Wilson said.

    ___

    Sometimes termed “the invisible poor” by demographers, lower-income whites are generally dispersed in suburbs as well as small rural towns, where more than 60 percent of the poor are white. Concentrated in Appalachia in the East, they are also numerous in the industrial Midwest and spread across America’s heartland, from Missouri, Arkansas and Oklahoma up through the Great Plains.

    More than 19 million whites fall below the poverty line of $23,021 for a family of four, accounting for more than 41 percent of the nation’s destitute, nearly double the number of poor blacks.

    Still, while census figures provide an official measure of poverty, they’re only a temporary snapshot. The numbers don’t capture the makeup of those who cycle in and out of poverty at different points in their lives. They may be suburbanites, for example, or the working poor or the laid off.

    In 2011 that snapshot showed 12.6 percent of adults in their prime working-age years of 25-60 lived in poverty. But measured in terms of a person’s lifetime risk, a much higher number — 4 in 10 adults — falls into poverty for at least a year of their lives.

    The risks of poverty also have been increasing in recent decades, particularly among people ages 35-55, coinciding with widening income inequality. For instance, people ages 35-45 had a 17 percent risk of encountering poverty during the 1969-1989 time period; that risk increased to 23 percent during the 1989-2009 period. For those ages 45-55, the risk of poverty jumped from 11.8 percent to 17.7 percent.

    By race, nonwhites still have a higher risk of being economically insecure, at 90 percent. But compared with the official poverty rate, some of the biggest jumps under the newer measure are among whites, with more than 76 percent enduring periods of joblessness, life on welfare or near-poverty.

    By 2030, based on the current trend of widening income inequality, close to 85 percent of all working-age adults in the U.S. will experience bouts of economic insecurity.

    “Poverty is no longer an issue of ‘them’, it’s an issue of ‘us’,” says Mark Rank, a professor at Washington University in St. Louis who calculated the numbers. “Only when poverty is thought of as a mainstream event, rather than a fringe experience that just affects blacks and Hispanics, can we really begin to build broader support for programs that lift people in need.”

    Rank’s analysis is supplemented with figures provided by Tom Hirschl, a professor at Cornell University; John Iceland, a sociology professor at Penn State University; the University of New Hampshire’s Carsey Institute; the Census Bureau; and the Population Reference Bureau.

    Among the findings:

    —For the first time since 1975, the number of white single-mother households who were living in poverty with children surpassed or equaled black ones in the past decade, spurred by job losses and faster rates of out-of-wedlock births among whites. White single-mother families in poverty stood at nearly 1.5 million in 2011, comparable to the number for blacks. Hispanic single-mother families in poverty trailed at 1.2 million.

    —The share of children living in high-poverty neighborhoods — those with poverty rates of 30 percent or more — has increased to 1 in 10, putting them at higher risk of teen pregnancy or dropping out of school. Non-Hispanic whites accounted for 17 percent of the child population in such neighborhoods, up from 13 percent in 2000, even though the overall proportion of white children in the U.S. has been declining.

    The share of black children in high-poverty neighborhoods dropped sharply, from 43 percent to 37 percent, while the share of Latino children ticked higher, from 38 to 39 percent.

    ___

    Going back to the 1980s, never have whites been so pessimistic about their futures, according to the General Social Survey, which is conducted by NORC at the University of Chicago. Just 45 percent say their family will have a good chance of improving their economic position based on the way things are in America.

    The divide is especially evident among those whites who self-identify as working class: 49 percent say they think their children will do better than them, compared with 67 percent of non-whites who consider themselves working class.

    Last November, Obama won the votes of just 36 percent of those noncollege whites, the worst performance of any Democratic nominee among that group since 1984.

    Some Democratic analysts have urged renewed efforts to bring working-class whites into the political fold, calling them a potential “decisive swing voter group” if minority and youth turnout level off in future elections.

    “They don’t trust big government, but it doesn’t mean they want no government,” says Republican pollster Ed Goeas, who agrees that working-class whites will remain an important electoral group. “They feel that politicians are giving attention to other people and not them.”

    ___

    AP Director of Polling Jennifer Agiesta, News Survey Specialist Dennis Junius and AP writer Debra McCown in Buchanan County, Va., contributed to this report.

    Posted by participo | July 28, 2013, 7:21 am
  7. neglected to embolden this:

    “They don’t trust big gov­ern­ment, but it doesn’t mean they want no gov­ern­ment,” says Repub­li­can poll­ster Ed Goeas, who agrees that working-class whites will remain an impor­tant elec­toral group. “They feel that politi­cians are giv­ing atten­tion to other peo­ple and not them.”

    Posted by participo | July 28, 2013, 8:03 am
  8. @Participo–

    The stage is certainly set for a first class horror show, if the GOP gets back in power.

    Doing just that is one of the goals of the “Snowden” psy-op.

    Best,

    Dave

    Posted by Dave Emory | July 28, 2013, 5:37 pm
  9. @Pterrafractyl–

    With regard to the 7/26 update–Mont Pelerin is an interesting place.

    Check out FTR #456 (among other programs) for the conference there in April of 2002.

    VERY interesting.

    Best,

    Dave

    Posted by Dave Emory | July 28, 2013, 5:41 pm
  10. @participo: Here’s a recent article that’s a reminder of the split in the Federal Reserve’s Board of Governors, with the inflation hawks holding a Merkel/Weidmann-esque mindset where austerity now (for the proles) to prevent possible future inflation is the only acceptable course of action. No matter what. It’s the kind of mindset that leads one to suggest that the economy is doing well enough now that it would be desirable for the to Fed intentionally raise interest rates in order to increase borrowing costs and, in turn, increase the deficit at a fast enough rate to “force” the US Congress to find “a sustainable solution” to the deficit. And it must be implemented ASAP for the markets to have enough confidence in the future to begin making new investments now. It the kind of mindset held by the inflation hawks that leads one to conclude that only after we officially make long-term plans for long-term austerity will the job creation truly begin:

    Fed’s Lacker says exit from bond-buying should be quick

    BERLIN | Sat Jul 27, 2013 6:01am EDT

    (Reuters) – The U.S. central bank must end its bond-buying program quickly and an end to the program was “in sight”, a senior Federal Reserve official said in a German magazine on Saturday.

    Fed Chairman Ben Bernanke jolted markets in late May with plans to ease back on stimulus efforts once the economy improves. The Fed is likely to reduce its monthly bond purchases later this year and stop them altogether by mid-2014, as long as the economic recovery unfolds as expected, Bernanke has said.

    “We must make our exit from the bond-buying program quick,” Richmond Fed President Jeffrey Lacker, one of the Fed’s most fiscally conservative officials and a persistent critic of the latest round of bond buying, said in WirtschaftsWoche.

    “An end to these bond purchases came into sight at the latest Fed meeting,” said Lacker, who is not among the Fed policymakers who will vote on monetary policy this year.

    Lacker pointed to relatively low inflation and said a faster-than-expected fall in the U.S. jobless rate was sufficient to start winding down the program.

    Note that the threat of higher inflation is the usual argument for ending the Fed’s market interventions. We can now apparently had low inflation to that list of reasons.

    Also, note that an +8% unemployment rate is apparently not very alarming anymore and a lower priority than the threat of maybe possibly some non-ultra-low inflation in the future.

    Continuing…


    “First of all we should end the monthly purchases of mortgage bonds as quickly as possible,” Lacker said in the interview. It was not the central bank’s role to give any sector preferential support, he said.

    Lacker said the United States had made hardly any progress in cutting its debt and had instead only come up with temporary solutions for several months at a time.

    He said he hoped the Fed’s planned scaling back of bond purchases this year and rising interest rates would force the U.S. Congress to agree more quickly on reducing debt. “We need a sustainable solution and the sooner the better,” he said.

    “He said he hoped the Fed’s planned scaling back of bond purchases this year and rising interest rates would force the U.S. Congress to agree more quickly on reducing debt”. Now where have we heard that before?

    Posted by Pterrafractyl | July 28, 2013, 6:32 pm
  11. @Dave:
    That book contains quite a bit on the extensive help the ordoliberal thinkers received from both thier laissez faire counterparts like Friedrich von Hayek, one of the founders of the Mont Pelerin Society, as well as Germany’s big corporations intent on squashing any “collectivist” sentiment in post-War Germany. From p.119-122 of The Road from Mont Pèlerin: the making of the neoliberal thought collective:


    Supporting the ordoliberals’ efforts in Germany were neoliberal refugees who had obtained powerful academic positions in the UK (Hayek), the United States (Karl Brandt, Gottfried Haberler), and Switzerland (Ropke). The involvement of prominent ordoliberals (Eucken, etc.) in the post-1942 oppositional activities a national conservative forces provided legitimacy for the cadres, despite their considerable roles in economic policy making during the Nazi era. It was the Cold War constellation, however, that cleared the war for the prevailing one-sided representation of ordoliberal opposition to Nazi rulers: nearly everyone was welcome in the alliance against the widely perceived communist threat.

    Ordoliberals had occupied themselves with questions of postwar planning from 1942 to 1943 (Ptak 2004, 136ff.), Although few in number, they know how to take advantage of the institutional vacuum of those chaotic days and rapidly gained influenced over the elites in economics, politics, and academia. …

    The disastrous postwar situation regarding food and health colored the entire situation in Germany, and an enormous shortage of supply would have been deciding factors in implementing domestic reforms after 1948. For Phillip Herder-Dorneich (1993, 13), the success of liberal reforms goes back to the German people, “who had experienced three years of social learning while almost starving to death.” Economic planning experienced then reflected a kind of “children’s fear” (Wallich 1955, 13). But the reforms were also facilitated by massive neoliberal propaganda, which denounced all manner of economic planning as another step towards poverty and deprivation. The Ordo postwar propaganda campaign succeeded in opening space for capitalism in the refined shape of the social market economy.

    After the currency and the Leitsatzegesetz dating from 1948, ordoliberal implementation strategies with their veiled multilayer networks turned out to be quite effective. These strategies involved founding market-oriented think tanks at universities, intensifying international political networks via the Mont Pelerin Society, and supporting economic journalism in the mass media. Ordoliberalism was avidly promoted in the pages of Frankture Allgemeine Zeitung, whose publisher, Erich Welter, had been Miksch’s superior at the Wirtschaftskurve journal during the war. Many of the Ordos were swiftly integrated into the neoliberal thought collective. Practically all of the leading ordoliberals, including Welter, Miksch, Ropke, Eucken, Muller-Armack, Bohm, Pfister, Dietze, K. F. Maier, F. W. Meyer, Hau, Hensel, and of course Erhard, joined the Mont Pelerin Society. Ultimately, ordoliberal positions on economic policy were significantly reinforced by the rapid increase in prosperity from the late 1940s onward.[28] The market-oriented reforms in postwar Germany were to a great extent stabilized and politically accepted because they were intellectually wedded to the concept of the social market economy. This concept was launched, no least as a result of the campaign launched by the dedicated employer organization Die Waage. Between 1952 and 1965, large West German enterprises channeled DM 16.11 million for a political publicity campaign, with the purpose of establishing the social market economy according to ordoliberal principles. The campaign proved quite successful, contributing to general election results that were highly favorable to the conservative-liberal parties, which were closely tied to the corporate sector (Schendelbeck and Ilgen 1999: Ptak 2004)

    And here’s an article about a Mont Pelerin Society gathering last year where the eurozone crisis and the legitimacy/usefulness of eurozone itself was discussed. The discourse was revealing:

    Business Spectator
    A right-wing euro rescue
    Oliver Marc Hartwich, 6 Sep 2012, 6:31 AM

    Founded in 1947 by distinguished economists such as Friedrich Hayek, Milton Friedman and Ludwig von Mises, the Mont Pelerin Society has long been a forum for critics of big government, defenders of the free market and believers in individual liberty.

    As the society’s general meeting in currently being held in Prague (hosted by Vaclav Klaus, the fiercely euro sceptical Czech president), it was clear that the euro crisis would be a dominant theme during the week-long conference. But you would not have expected to find the most passionate supporter of the euro currency among these arch-libertarians and capitalists.

    As if to confirm that no two classical liberals ever share the same beliefs, Spanish economist Jess Huerta de Soto delivered a fervent plea to keep European Monetary Union alive. It was a more determined defence of the euro than anything ever voiced by Europe’s political class. But it was based on a completely different logic.

    De Soto is certainly not a believer in the European superstate. Nor does he trust the wisdom of the ever growing EU bureaucracy. The economics professor from Madrid’s Rey Juan Carlos University is as free market minded as economists come. And precisely because of his anti-government attitude he supports European monetary integration and wants to keep it at all costs.

    At first this sounds like a paradox. How could the most top-down economic policy ever designed by European leaders gets a seal of approval from a radical liberal economist? President Klaus, who chaired de Soto’s session, could hardly believe his ears.

    But de Soto was entirely serious, and his argument goes something like this. For his whole professional life as a Spanish economist, he has advocated economic reforms for his home country. He saw that Spain needed product and labour market reforms; that the power of trade unions had to be curtailed; that the size of government needed to be reduced and government bureaucracies had to shrink. And though these reforms may have been obvious to economists like him, they were never implemented … until the euro crisis came along.

    Under the pressure of the crisis, and as the price Spain had to pay for European assistance, Spanish governments have embarked on the most far-reaching economic reforms the country has ever seen.

    A balanced budget clause has been inserted into the constitution; additional government projects put on hold; the public payroll slashed; the retirement age increased; unemployment benefits were cut; the government budget was reduced by 15 per cent; and a number of product markets were deregulated.

    To sum it up: The euro crisis has forced the implementation of policies that are a liberal economist’s dream – and policies that would have never been feasible without the pressure the euro crisis provided.

    De Soto even went further. While most Spaniards would blame the Germans for their current problems, he praised them for insisting on the harsh austerity programs. “We should all forget what terrible things they have done in the past and be grateful to them for forcing us to reform,” he told the conference.

    In de Soto’s ideal world, a gold standard would keep government spending under control as governments could not just print money to balance their books. As a second best solution, he sees a regime of fixed exchange rates exerting discipline on deficit prone countries.

    But if you can’t have a gold standard or fixed exchange rates, the euro is the next best thing, he argued. If it had not been for the euro, de Soto said, governments in Europe’s crisis countries would have already started to monetise their problems away in their national currencies: they would have just printed the money they needed. Indeed, that’s what they had done all those decades prior to the euro’s introduction – which he sees as precisely the reason for not tackling any of Spain’s reform needs before the euro crisis.

    As much as one can understand why liberal economists would like to use the euro as a catalyst for economic reforms, it may result in the precise opposite. But if there is one place where a little liberal daydreaming is allowed, it is the general meeting of the Mont Pelerin Society.

    You have to wonder how many ‘dreamers’ of the Jean Marie Le Pen/Ahmed Huber variety were in the audience for that one.

    Posted by Pterrafractyl | July 28, 2013, 7:49 pm
  12. Here’s another reminder of how the dire warnings in the US by people that should know better about Social Security and Medicare being perpetually on the verge of burying the nation in unsustainable spending have been perpetually wrong:

    Hullabaloo
    Zombie rising

    by digby 7/29/2013 04:30:00 PM

    Apparently, no matter how low the deficit goes or how much the president publicly repudiates the deficit framework, the White House is still offering what it offered back when the deficit was widely considered the greatest threat the world has ever known:

    During an hour long interview looking back on his time at the White House and on the economic challenges that lay ahead, Krueger said Obama has not given up on reaching a so-called “grand bargain” debt and deficit deal with congressional Republicans.

    “The president’s last offer to Speaker [John] Boehner is still on the table,” he said. “I think he had a very sensible balanced compromise on the table.”

    The president admitted in his NY Times interview that the deficit “framework” has been “damaging” and perhaps he finally believes that. But that means he must really believe that the elderly are living high on the hog on their Social Security and need to be forced to shop a little more smartly. How else to explain why they continue to offer this deal?

    Certainly that’s what the Washington Post editorial board believes. Here’s their comment on the President’s speech:

    By the tendentious standards of politics, it was okay for the president to challenge Republicans to come up with better ideas than his, while simultaneously portraying most of them as mindlessly bent on a government shutdown. What’s rather less forgivable, however, is that, even though the president of the United States is well into a highly promoted series of major addresses on the future of the U.S. economy, searching the text of his speeches for “entitlement reform” or “entitlement” yields nothing but “phrase not found.”

    Yes, Mr. Obama told Democrats that they “can’t just stand pat and just defend whatever government is doing.” Addressing Republicans, he pronounced himself “ready to work” on tax reform, or a “balanced, long-term fiscal plan that replaces the mindless cuts currently in place.”

    But that’s a far cry from leveling with the public about the fact that Social Security, Medicare and the rest are crowding out other domestic priorities — including those that the president emphasized in his speeches — and that these programs are at the heart of the country’s long-term fiscal challenges, which have still not been addressed even as the deficit has declined in the short term.

    Absent that kind of candor, Mr. Obama’s demand for “a long-term American strategy, based on steady, persistent effort, to reverse the forces that have conspired against the middle class for decades” rang hollow.

    The Villagers are far from willing to give up their favorite stale tropes. They never are. Remember, there was a time not long ago when the deficit was gone and we had a projected surplus. They still fretted about the old people stealing the food out of baby’s mouths.

    Here’s a little reminder of the deficit hawk record on these projections:

    August 28, 1996

    CHICAGO – Sen. Bob Kerrey smells an odor coming from the Republican and Democratic stands on entitlements.

    “It’s one of the cruelest things we do, when we say, Republicans or Democrats, `Oh, we can wait and reform Social Security later,’ ” the Nebraska Democrat said.

    Mr. Kerrey says that without reform, entitlements will claim 100 percent of the Treasury in 2012.

    “This is not caused by liberals, not caused by conservatives, but by a simple demographic fact,” Mr. Kerrey warned at a meeting of the Democratic Leadership Council.

    “We [will have] converted the federal government into an ATM machine.”

    Even official projections have been, shall we say, off the mark …

    [see img]

    And in other news about being perpetually wrong…

    Posted by Pterrafractyl | July 29, 2013, 7:05 pm
  13. Wait, so the official Greek bailout plan that mandates economy-crushing “reforms” also assumes a 3% annual rate of economic growth?! And if Greece doesn’t achieve that 3% growth it’s forced to endure more austerity? How could that be?

    Oh yeah, I forgot for a moment that we’re living in a world managed by “supply-side” nut jobs:

    Brazil refused to back new IMF aid for Greece, says billions at risk

    By Anna Yukhananov and Harry Papachristou

    WASHINGTON/ATHENS | Wed Jul 31, 2013 8:02am EDT

    (Reuters) – Eleven Latin American countries refused to back an IMF move this week to keep bankrolling Greece, citing risks of non-repayment, and the Fund itself said Athens might need faster debt relief from Europe.

    The abstention by Latin American states from the IMF decision was revealed by their Brazilian representative in an unusual public statement on Wednesday, highlighting growing frustration in emerging nations with Fund policy to rescue debt-laden Europeans.

    “Recent developments in Greece confirm some of our worst fears,” said Paulo Nogueira Batista, Brazil’s executive director at the IMF, who also represents 10 small nations in Central and South America and the Caribbean.

    “Implementation (of Greece’s reform program) has been unsatisfactory in almost all areas; growth and debt sustainability assumptions continue to be over-optimistic,” said Batista, criticizing the IMF executive board’s decision on Monday to release 1.7 billion euros of rescue loans to Greece.

    This raised to 28.4 billion euros ($37.6 billion) the total amount of funds the IMF has so far committed to Greece – an amount that Athens might default on if it gets ditched by its euro zone partners, Batista warned.

    He was pointing to a separate report published by the IMF on Wednesday, which said that if Greek reforms derail and European governments withdraw their support, then Athens’ “capacity to repay the Fund would likely be insufficient”.

    “This statement is one step short of openly contemplating the possibility of a default or payment delays by Greece on its liabilities to the IMF,” Batista said, referring to the Fund’s cornerstone policy of barring countries from defaulting on it.

    The Europeans and the United States, which have a majority of voting rights at the IMF’s executive board, have so far solidly backed Greece. U.S. Treasury Secretary Jack Lew flew to Athens earlier this month to reiterate Washington’s support.

    Despite having used up almost 90 percent of its 240 billion euro bailout since mid-2010, Athens is still shut out of bond markets and remains in its creditors’ emergency ward.

    The country’s debt sustainability still depends on a pledge by euro zone partners to provide it with further debt relief – on condition that it sticks to painful budget cuts and reforms imposed by lenders that helped cause a crippling recession.

    Led by Germany, the euro zone has pledged to consider mild debt cut relief measures for Greece next year, such as extending maturities on its rescue loans, to reduce its debt-to-GDP-ratio to 120 percent by 2020 from a currently projected 124 percent.

    The euro zone also committed itself to reduce Greece’s debt-to-GDP-ratio further, to “substantially below” 110 percent by 2022.

    But Athens may need a faster, bigger debt cut, the IMF warned, to spur investor confidence and achieve the annual growth rates of about 3 percent which underpin its bailout plan.

    “Should debt sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed,” the report said.

    Despite impressively reducing its budget deficit since 2010, Athens must still improve tax collection and cut government waste to hit fiscal targets, according to the IMF.

    If not, it will need fresh austerity measures of the kind that would test the cohesion of its fragile coalition government.

    “Unless the authorities tackle the problems of revenue administration with much greater urgency in the coming months, a credible 2014 budget would again need to be centered on painful expenditure cuts”, the IMF’s mission chief for Greece, Poul Thomsen, said in a conference call with reporters.

    Posted by Pterrafractyl | August 1, 2013, 12:24 pm
  14. It’s often said that the rest of Europe needs to become more like Germany to fix their economies. Are folks sure about that?

    Irish Times
    Germany’s working poor put Merkel on the defensive
    Growing low-wage economy sparks election minimum wage promises
    Derek Scally

    September 7, 2013

    Two women have given Germany’s wan election campaign an emotional punch, attacking chancellor Angela Merkel at her most vulnerable point: the rise of Germany’s working and old-age poor.

    Christel Pawelski, a 70-year-old retired nurse, broke down in tears before Angela Merkel and a three million primetime television audience as she told her reward for 40 years of shift work and a broken marriage.

    “I have €695 a month, €356 to live on after fixed costs,” she said. “I am not socially weak, Frau Merkel, I am poor. Have you forgotten us down here?”

    Sitting opposite her, the German leader wore an expression you rarely see in public: helpless.

    Pawelski is not alone. For the last week, eight million readers of Germany’s Bild tabloid have followed extracts from a new book by 33 year-old author Undine Zimmer.

    Unpaid internships

    She grew up on welfare and struggled for years as an adult on unpaid internships, going shopping with €3 in her wallet. Zimmer is not the usual underclass welfare recipient you see in the German media – she’s fluent in three languages with a degree in PR and literature – making all the more poignant her portrait of a childhood without Sunday roasts, holidays or even an occasional kebab.

    “For me my parents are the invisible heroes of this country who have to battle for their survival every day, who have kept their dignity despite often feeling humiliated,” she said.

    For anyone who thinks Germany is an island of prosperity in the euro crisis, the public confessions of Pawelski and Zimmer are a rude awakening. For Merkel, promising voters “another four good years”, they are electoral dynamite.

    In the last decade the Germany we knew – a prosperous place of expensive cars and high-end kitchens – has been quietly rewired. While still a well-off country with record low employment of under 7 per cent, it is also a country where a growing army of working poor reach into public bins to reclaim bottles and collect the 10 cent deposit.

    Germany is a place where anyone on the dole for more than a year drops down from two-thirds of their last salary to the welfare minimum of €382 plus housing and other benefits.

    While welfare is tough, work is not always much better. Jobseekers who are taken on by companies are often handed a short-term work contract as well as directions to the nearest welfare office.

    Over 1.3 million working Germans are so-called “Aufstocker”, earning so little they are entitled to top up their salaries to bring them up to the minimum level of the “Hartz” welfare system.

    The average hourly wage of an “Aufstocker” is €6.20, some 60 per cent work less than 22 hours a week in precarious employment. These so-called mini-jobs, with a typical €400 monthly payslip, are free of tax, healthcare and social welfare contributions.

    A recent study by the Institute for Employment Research (IAB) confirmed what anecdotal evidence already made clear: Germany’s labour market is splitting in two, between traditional, permanent employment and precarious, contract employment.

    The IAB research said that one in four German workers is on a low income, classified as less than two-thirds of the median. In a study of 17 EU countries, only Lithuania fared worse.

    “The Hartz system is being abused by companies as an open-ended wage subsidy that distort the price of fair-paying work,” wrote the Germany’s federation of trades union (DGB) in a recent report. It warns that Germany is facing a time bomb as millions of low-wage mini-job employees face old-age without any pension contributions.

    Germany’s three main opposition parties have launched an electoral attack on the government’s record of social cohesion and have promised to introduce a statutory minimum wage if elected. The Social Democrats (SPD) and Greens want €8.50, the far-left Linke want €10.

    “We have the biggest low-wage sector in Europe: bigger than Cyprus, bigger than Greece, ” said Gregor Gysi, lead candidate for the Linke, in a televised election debate on Monday evening watched by 18 million people.

    Rainer Brüderle, heading the campaign of the ruling Free Democrats (FDP), deflected the attack by saying that low-paid work was often a road back into the labour market.

    His liberal FDP is vehemently opposed to state intervention in the labour market, arguing that employers and unions are best-placed to strike differentiated wage deals based on regional factors such as the cost of living.

    But Green Party politician Jürgen Trittin countered that the free market was not working because employers were deliberately pitching their wages low to avail of “Aufstocker” top-up payments.

    Vowed to intervene

    The chancellor, sensing danger, has vowed to intervene and set a minimum wage floor in sectors where no tariff agreements exist.

    At the end of the television discussion she promised Christel Pawelski, if re-elected, to set up a commission to examine Germany’s new working poor. Insisting it was not a campaign stunt, she said: “I’m not mad, I’m not going to make a promise before millions of witnesses and not keep it.”

    Posted by Pterrafractyl | September 10, 2013, 12:55 pm
  15. Krugman gives credit where credit is due: Art Laffer just admitted that “Inflation does not appear to be monetary base driven”:

    The Conscience of a Liberal
    January 3, 2014, 4:25 pm
    In Praise of Art Laffer
    Paul Krugman

    No, really. Business Insider contacted him about his 2009 warning that soaring inflation and interest rates were just around the corner — and he not only admits that he was wrong, he admits that his error signified something wrong with his overall economic model:

    “Usually when you find the model this far off, you’ve probably got something wrong with the model, not that the world has changed,” he said. “Inflation does not appear to be monetary base driven,” he said.

    This is a remarkable act of intellectual honesty — remarkable because it happens so rarely.

    I do wonder exactly what model Laffer was using. As I pointed out again and again, basic IS-LM analysis said that even huge increases in the monetary base aren’t inflationary in a liquidity trap; and yes, I was making that prediction in advance. From where I sit, our models have worked just fine.

    But still, credit where it’s due — Laffer, unlike almost everyone else in the inflationista camp, has admitted both that he was wrong and that some rethinking is needed.

    Keep in mind that the “Laffer Curve” is the popularized term for the general economic relationship between tax rates and government revenues but with a Reaganomics/tax-cuts-for-the-rich-friendly interpretation. Also keep in mind that Art Laffer has been using his celebrity economist status on the right to advocate junk economic-policies for decades, so this really was a pretty great comment for Laffer to make. Especially because the idea Laffer publicly questioned – that the expansion of the money supply/monetary base (which is often required for government stimulus programs or deficit spending) must necessarily lead to inflation – is some sort of unstoppable and unkillable zombie cockroach idea that’s long been used to justify all sorts of really bad policies for years and still gets used to this day (Just ask the eurozone).

    So, in the spirit of evidence-based open-mindedness towards inflation-related economic ideas…I would like to preemptively and simultaneously endorse both Bitcoin and The Venus Project, but it’s a package deal with conditions: If humanity should someday create a society where the consumption of vital non-renewable resources is anonymously tracked using a fixed-supply digital crypto-currency and then equitably shared amongst all using a giant supercomputer and this future economy doesn’t end up giving Jean-Luc Picard a concussion then Bitcoin and The Venus Project totally get my endorsement. Consider this a cautious putative thumbs up.

    Posted by Pterrafractyl | January 5, 2014, 7:42 pm
  16. Krugman reminds us of a historical fun-fact that remains tragically topical: Historically speaking, the gold-standard mostly sucked even during the best of times:

    The New York times
    The Conscience of a Liberal

    The Glittering Crises
    Paul Krugman
    Jan 17, 9:04 am 22

    Many people have pointed out that the euro has ended up functioning a lot like the gold standard — and in so doing has replicated the “gold fetters” that many economic historians say played a big role in the propagation of the Great Depression.

    Among other things, this whole discussion has ushered in, um, a golden age for economic history: I can’t think of a time when history has been as useful as a guide to current events (and current action, if only policymakers would listen) as it has since 2008.

    And the historians still have more to teach us. Kevin O’Rourke goes back to the gold standard in its pre-1914 heyday, and points out that even under the favorable conditions of the day — relatively flexible wages and prices, a limited franchise so that the great unwashed couldn’t effectively complain — the system only worked even passably well during periods of inflation.

    This is, as he says, all the more reason leaders in the euro zone should be deeply alarmed about the slide toward overall deflation.

    Well, if ‘passably well’ economic performance isn’t going to be an option for the eurozone, there are always the unpassably well options.

    Posted by Pterrafractyl | January 17, 2014, 9:03 pm
  17. Here’s some good news for Germany’s youth and maybe even the global youth…if they happen to live in Germany:

    Think Progress
    This Country Just Abolished College Tuition Fees

    by Joaquim Moreira Salles Posted on October 1, 2014 at 1:49 pm Updated: October 2, 2014 at 9:18 am

    Prospective students in the United States who can’t afford to pay for college or don’t want to rack up tens of thousands in student debt should try their luck in Germany. Higher education is now free throughout the country, even for international students. Yesterday, Lower Saxony became the last of seven German states to abolish tuition fees, which were already extremely low compared to those paid in the United States.

    German universities only began charging for tuition in 2006, when the German Constitutional Court ruled that limited fees, combined with loans, were not in conflict the country’s commitment to universal education. The measure proved unpopular, however, and German states that had instituted fees began dropping them one by one.

    “We got rid of tuition fees because we do not want higher education which depends on the wealth of the parents,” Gabrielle Heinen-Kjajic, the minister for science and culture in Lower Saxony, said in a statement. Her words were echoed by many in the German government. “Tuition fees are unjust,” said Hamburg’s senator for science Dorothee Stapelfeldt. “They discourage young people who do not have a traditional academic family background from taking up study. It is a core task of politics to ensure that young women and men can study with a high quality standard free of charge in Germany.”

    Compared to American students, Germans barely had to pay for undergraduate study even before tuition fees were abolished. Semester fees averaged around €500 ($630) and students were entitled to many perks, such as cheap (often free) transportation within and between cities.

    Free education is a concept that is embraced in most of Europe with notable exceptions like the U.K., where the government voted to lift the cap on university fees in 2010. The measure has reportedly cost more money than it brought in. The Guardian reported in March that students are failing to pay back student loans at such a rate that “the government will lose more money than it would have saved from keeping the old £3,000 ($4,865) tuition fee system.”

    UK students often compare their plight to their American counterparts, but most Americans would be fortunate to pay as little as the British do: a maximum of $14,550 per year. High tuition fees in the U.S. have caused student loan debt, which stands at $1.2 trillion, to spiral out of control. It is now the second-highest form of consumer debt in the country. According to the Institute for College Access and Success, two thirds of American college students will leave their alma mater in significant debt (averaging at $26,600).

    While there are many government measures that could ease the massive burden of student debt, some straightforward steps could make higher education accessible to all. Tennessee, for example, recently voted to make two-year colleges free for all high school graduates. The U.S. as whole could take a note from Germany and make public universities free with relative ease. The government spends around $69 billion subsidizing college education and another $107.4 billion on student loans. Tuition at all public universities comes to much less than that, around $62.6 billion in 2012. By restructuring the education budget, the cost of attending public universities could easily be brought down to zero. This would also put pressure on private universities to lower their cost in order to be more competitive.

    Well, you can’t complain about that! Although let’s hope those students studying in Germany’s economics departments stay away from the economics programs with an ordoliberal bias. That kind of education in ‘ordoarithmetic’ might not be worth it even if it’s free:

    The New York Times
    The Concience of a Liberal
    Ordoarithmetic
    October 1, 2014 5:25 pm

    Francesco Saraceno is furious and dismayed at Hans-Werner Sinn, who says among other things that deflation in southern Europe is necessary to restore competitiveness. Why not inflation in Germany, he asks?

    But Saraceno fails to understand German logic here. As they see it, their economy was in the doldrums at the end of the 1990s; they then cut labor costs, gaining a huge competitive advantage, and began running gigantic trade surpluses. So their recipe for global recovery is for everyone to deflate, gaining a huge competitive advantage, and begin running gigantic trade surpluses.

    You may think there’s some kind of arithmetic problem here, but in Germany they have their own intellectual tradition.

    Yes, let’s hope those young econ students, especially the international students that might take their new knowledge back home, stay away from the courses offering ordoarithmetic. Otherwise we could see a growing international contingent of new economists dedicated to same old ideas that brought us this:

    The Guardian
    Austerity has been an utter disaster for the eurozone
    All of the suffering in Europe – inflicted in the service of a man-made artifice, the euro – is even more tragic for being unnecessary, writes Joseph Stiglitz

    Joseph Stiglitz
    Tuesday 30 September 2014

    “If the facts don’t fit the theory, change the theory,” goes the old adage. But too often it is easier to keep the theory and change the facts – or so German chancellor Angela Merkel and other pro-austerity European leaders appear to believe. Though facts keep staring them in the face, they continue to deny reality.

    Austerity has failed. But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working! But if that is the benchmark, we could say that jumping off a cliff is the best way to get down from a mountain; after all, the descent has been stopped.

    But every downturn comes to an end. Success should not be measured by the fact that recovery eventually occurs, but by how quickly it takes hold and how extensive the damage caused by the slump.

    Viewed in these terms, austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in many countries remaining below pre-recession levels. In even the best-performing economies, such as Germany, growth since the 2008 crisis has been so slow that, in any other circumstance, it would be rated as dismal.

    The most afflicted countries are in a depression. There is no other word to describe an economy like that of Spain or Greece, where nearly one in four people – and more than 50% of young people – cannot find work. To say that the medicine is working because the unemployment rate has decreased by a couple of percentage points, or because one can see a glimmer of meager growth, is akin to a medieval barber saying that a bloodletting is working, because the patient has not died yet.

    Extrapolating Europe’s modest growth from 1980 onwards, my calculations show that output in the eurozone today is more than 15% below where it would have been had the 2008 financial crisis not occurred, implying a loss of some $1.6 trillion this year alone, and a cumulative loss of more than $6.5 trillion. Even more disturbing, the gap is widening, not closing (as one would expect following a downturn, when growth is typically faster than normal as the economy makes up lost ground).

    Simply put, the long recession is lowering Europe’s potential growth. Young people who should be accumulating skills are not. There is overwhelming evidence that they face the prospect of significantly lower lifetime income than if they had come of age in a period of full employment.

    Meanwhile, Germany is forcing other countries to follow policies that are weakening their economies – and their democracies. When citizens repeatedly vote for a change of policy – and few policies matter more to citizens than those that affect their standard of living – but are told that these matters are determined elsewhere or that they have no choice, both democracy and faith in the European project suffer.

    France voted to change course three years ago. Instead, voters have been given another dose of pro-business austerity. One of the longest-standing propositions in economics is the balanced-budget multiplier – increasing taxes and expenditures in tandem stimulates the economy. And if taxes target the rich, and spending targets the poor, the multiplier can be especially high. But France’s so-called socialist government is lowering corporate taxes and cutting expenditures – a recipe almost guaranteed to weaken the economy, but one that wins accolades from Germany.

    The hope is that lower corporate taxes will stimulate investment. This is sheer nonsense. What is holding back investment (both in the United States and Europe) is lack of demand, not high taxes. Indeed, given that most investment is financed by debt, and that interest payments are tax-deductible, the level of corporate taxation has little effect on investment.

    Likewise, Italy is being encouraged to accelerate privatisation. But prime minister Matteo Renzi has the good sense to recognise that selling national assets at fire-sale prices makes little sense. Long-run considerations, not short-run financial exigencies, should determine which activities occur in the private sector. The decision should be based on where activities are carried out most efficiently, serving the interests of most citizens the best.

    All of the suffering in Europe – inflicted in the service of a man-made artifice, the euro – is even more tragic for being unnecessary. Though the evidence that austerity is not working continues to mount, Germany and the other hawks have doubled down on it, betting Europe’s future on a long-discredited theory. Why provide economists with more facts to prove the point?

    Of course, prospective economics students should keep in mind that the ordoliberal school of economics is far from the only one in need of significant revisions. So choose wisely young economists because many of your prospective professors didn’t. Also, when in doubt reread your basic macroeconomic textbooks.

    Posted by Pterrafractyl | October 2, 2014, 2:24 pm
  18. In the latest futile effort to drag the EU out of the austerity-induced deflationary death trap, France has given up declaring “No more!” to further austerity. Instead, France has a new proposal: France cuts 50 billion euros in public spending with an offsetting 50 billion euro increase in spending by Germany so at least the austerity madness doesn’t continue to drag down the total EU aggregate demand. This never really had a chance of success, but it couldn’t hurt to try….assuming another round of futile negotiations doesn’t hurt:

    The Wall Street Journal
    France Puts Pressure on Germany for Stimulus Plan
    French Ministers Urge Germany to Spend More to Revive Europe’s Economy

    By
    Anton Troianovski And Marcus Walker
    Updated Oct. 20, 2014 1:51 p.m. ET

    BERLIN—France and Germany struggled to show unity Monday in the face of growing fears in the eurozone that the two largest members can’t agree on how to address mounting economic malaise.

    But French Finance Minister Michel Sapin and Economics Minister Emmanuel Macron underscored the rift even before they arrived in Berlin to meet their German counterparts. In an interview with a German newspaper, the two Frenchmen urged Germany to invest an additional €50 billion ($63.8 billion) over three years as a way of countering budget cuts in France.

    Some Germans responded with dismay, arguing that France needed to boost economic confidence by loosening up its labor market and cutting spending rather than by telling comparatively healthy Germany to spend more taxpayer money.

    The tension has unsettled investors as a growing body of evidence suggests the 18-member eurozone is on the verge of its third recession since 2008.

    At best, the German economy, Europe’s largest, barely grew in the third quarter, as industrial production slowed and business sentiment deteriorated, the German central bank said Monday. The blue-chip DAX index in Frankfurt declined 1.5%.

    Leaders across Europe, as well in the U.S. government and the International Monetary Fund, are calling for Germany to boost public spending to help reverse the slowdown. But in Berlin, policy makers are sticking to the view that the eurozone crisis and sluggish growth result from a lack of sufficient economic overhauls in struggling countries, especially France and Italy.

    Monday’s back-and-forth coincided with the visit by the French ministers to Berlin. Afterward, the four tried to paper over their differences while promising to present by December ideas for new public and private investment.

    “Growth has slowed, so we must now react,” Mr. Macron said. “What is good for France is also good for Germany and what is good for Germany is also good for France.”

    But there was no sign that Germany would give up its insistence on austerity. German Economics Minister Sigmar Gabriel said that while boosting European growth was necessary, “flash-in-the-pan, short-term stimulus programs” weren’t the way to do it.

    Instead, he and German Finance Minister Wolfgang Schäuble said, Europe needed to focus on building foundations for more private investment.

    Chancellor Angela Merkel ’s promise to deliver a balanced budget in 2015 for the first time since 1969 continues to play well domestically. A Forsa poll of 1,001 German citizens published last week found 54% supported a balanced budget despite new signs of weakness in the German economy.

    But the view from Paris, shared in Rome and Washington, is that the eurozone is suffering from a chronic lack of domestic demand, on top of structural problems at the national and European level.

    France faces a struggle to win the approval of the European Commission, the European Union’s executive arm, for its 2015 budget, which foresees running a larger budget deficit than EU rules ostensibly allow. The French government argues that its draft budget complies with the fine print, which allow economic circumstances to be taken into consideration, and that cutting its deficit faster would harm already weak growth.

    Senior German officials, however, are privately scornful of France’s large deficit and the lack of ambition behind economic measures announced so far. In the Berlin view, higher public spending or central bank money-printing would merely be a palliative that gives growth at best a temporary boost while letting French and Italian politicians off the reform hook.

    In the interview with Frankfurter Allgemeine Zeitung, one of Germany’s leading newspapers, the French argued against excessive austerity.

    Mr. Macron said that while Paris has been floating the idea of cutting spending by €50 billion over three years, better-off Germany should counterbalance that. “Fifty billion euro savings for us and 50 billion additional investment for you—that would be a good balance,” he was quoted as saying.

    Allies of Ms. Merkel responded with frustration.

    “For starters, everyone needs to be doing their own homework,” said Herbert Reul, a member of Ms. Merkel’s conservative bloc in the European Parliament. “I can’t tell the others to spend more money.”

    So after all of France’s huffing and puffing about “no more austerity!”, we get this offer: How about France cuts 50 billion euros from its public spending with an offsetting 50 billion in investments by Germany. And these aren’t investments in France by Germany. France is simply calling for Germany to make investments in Germany’s infrastructure. And, as expected, such calls were met with dismay.

    Also note that German finance minister Wolfgang Schaeuble ruled didn’t rule out a German stimulus package entirely. As we’ll see below, he just ruled out any form of stimulus that might increase Germany’s debt (because who cares about collapsing aggregate EU demand when Germany’s first balanced budget since 1969 might be achieved next year). So he basically ruled out a stimulus, but he’s open to magical spending-free stimulus programs. Also, he’d like to see Germany implement more measures to increase its “competitiveness”, which, as we know by know, is a call for further wage suppression and austerity. Yes, France requests more spending by Germany in exchange for ongoing French austerity and Berlin responds with calls for no increases in spending and more Germany austerity. How helpful:

    Germany’s Schaeuble wants more investment but no new debt

    Sun Oct 19, 2014 9:09am EDT

    * Finance minister says Germany must also improve competitiveness

    * Still expects balanced budget next year, first since 1969

    * Germany has slashed its growth forecasts for 2014/2015

    * Defence budget may increase due to “geopolitical risks”

    By Madeline Chambers

    BERLIN, Oct 19 (Reuters) – German Finance Minister Wolfgang Schaeuble told a newspaper on Sunday that he wanted to increase investment spending and improve competitiveness in Europe’s biggest economy but not at the expense of achieving a balanced budget next year.

    A raft of gloomy economic data and expectations of a slowdown in German growth has contributed to jitters on world markets and Schaeuble is under pressure to spend on roads, railways, broadband networks and energy grids to help growth.

    In an interview with the Welt am Sonntag, Schaeuble said criticism of the government on insufficient investment or lacking competitiveness was justified, but that Berlin was working on these at both the national and European levels.

    “We must invest more and improve our competitiveness. We must get to work on this — quickly and in a concrete way,” Schaeuble told the paper.

    “It will not all happen overnight. But we must work on certain things now, like the European digital union, the energy union or the sustainable maintaining of our infrastructure.”

    Hit by the effect of crises abroad, a weak euro zone and limp domestic demand, Germany has slashed its growth forecasts to 1.2 percent in 2014 from 1.8 percent and to 1.3 percent in 2015 from 2.0 percent.

    But Schaeuble, who is known for his tough line on budget discipline, insisted Germany would not achieve growth on credit and that he still expected to reach a balanced budget next year for the first time since 1969.

    “We must keep to what we have promised,” he said.

    So here we are: European economies can’t even convince Germany to end austerity plans for itself while growth forcasts are getting slashed and the continent is about to fall into outright deflation. Why? Because “we must keep to what we have promised,” says Schaeuble. Keep in mind that this “promise” was a Merkel campaign promise. That’s it. And yet somehow other campaign promises don’t seem to get the same kind of priority in the new EU. Funny how that works.

    Posted by Pterrafractyl | October 20, 2014, 2:27 pm
  19. When parallel universes collide all sorts of crazy things can happen. It might even create the kinds of conditions you’d find in a sci-fi fantasy flick, although a horror movie scenario is what you should probably expect:

    Financial Times
    The wacky economics of Germany’s parallel universe

    The Council of Economic Experts says nothing about investment. It wants Merkel to be tougher

    Wolfgang Münchau

    November 16, 2014 1:57 pm

    German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes. To describe the economic mainstream in Germany as conservative misses the point. There are some overlaps with the various neoclassical or neoconservative schools in the US and elsewhere. But as compelling as a comparison between the German mainstream and the Tea Party may appear, it does not survive scrutiny. German orthodoxy straddles the centre-left and the centre-right. The only party with some Keynesian leanings are the former communists.

    A good example of orthodox dogma was last week’s annual report of the Council of Economic Expertss, an official body that advises the government. They did not criticise a lack of investment, excessive current account surpluses or overzealous fiscal rectitude. Instead they criticised the minimum wage and some minor relaxation to the retirement age. In other words: they want the government of Angela Merkel, chancellor, to be even tougher.

    The Germans have a name for their unique economic framework: ordoliberalism. Its origins are perfectly legitimate – a response of Germany’s liberal elites to the breakdown of liberal democracy in 1933. It was born out of the observation that unfettered liberal systems are inherently unstable, and require rules and government intervention to sustain themselves. The job of the government was not to correct market failures but to set and enforce rules.

    After 1945, ordoliberalism became the dominant economic doctrine of the centre-right. In the 1990s, the Social Democrats started to embrace it, culminating in Gerhard Schröder’s labour and welfare reforms in 2003. Today the government is ordoliberal. The opposition is ordoliberal. The universities teach ordoliberal economics. In the meantime, macroeconomics in Germany and elsewhere are tantamount to parallel universes.

    In practice, German macroeconomic exceptionalism did not really matter all that much – until recently, when it started to matter a lot. When you have your own currency and engage with the rest of the world mainly through trade, a wacky ideology is your problem. That changes when you enter a monetary union, which is when policy makers have to work together.

    Nobody had paid much attention to this issue. Much of the early theoretical discussion about the eurozone centred on the notion of an optimal currency area: which countries are fit to join a monetary union? What turned out to be far more important is a common understanding that allows people to communicate and act with one another.

    For example, German ordoliberals simply refuse to acknowledge the presence of a liquidity trap where the central bank becomes powerless in affecting market interest rates. Ludwig Erhard, Germany’s revered economics minister in the 1950s, once tried to explain the Great Depression in terms of cartels. It was an ordoliberal attempt to bring something into their mental framework for which they have no obvious explanations. Erhard’s successors repeated the mistake in the eurozone crisis, which they see as a story of fiscal indiscipline.

    My third criticism is more fundamental. It is far from clear whether ordoliberal dogma translates from a relatively small open economy like Germany to a large closed one like the eurozone. The ordoliberal world view is asymmetric. Current account surpluses are considered more acceptable than deficits. Since the rules are based on national law, ordoliberals do not care about their impact on the rest of the world. When they adopted the euro, the rest of the world suddenly did start to matter.

    The ordoliberal doctrine may even have worked well for Germany, though I suspect that the country’s economic success is due mostly to technology, high skills and the presence of some excellent companies, rather than to economic policy. Through its dominance of the euro system, Germany is exporting ordoliberal ideology to the rest of the single currency bloc. It is hard to think of a doctrine that is more ill suited to a monetary union with such diverse legal traditions, political system and economic conditions than this one. And it is equally hard to see Germany ever giving up on this. As a result the economic costs of crisis resolution will be extremely large.

    This last part pretty much summarizes the situation:


    The ordoliberal doctrine may even have worked well for Germany, though I suspect that the country’s economic success is due mostly to technology, high skills and the presence of some excellent companies, rather than to economic policy. Through its dominance of the euro system, Germany is exporting ordoliberal ideology to the rest of the single currency bloc. It is hard to think of a doctrine that is more ill suited to a monetary union with such diverse legal traditions, political system and economic conditions than this one. And it is equally hard to see Germany ever giving up on this. As a result the economic costs of crisis resolution will be extremely large.

    Yes, “As a result [of the unrelenting parallel universe policies], the economic costs of crisis resolution will be extremely large”. Much like ordoliberalism, the parallel universe phenomena is unfortunately asymmetric. The nice parallel universe policies that care about everyone tend to stick to their own planes of existence.

    Posted by Pterrafractyl | November 17, 2014, 11:02 am
  20. Bloomberg has a piece on lingering French/German trust issues and how it’s bleeding into today’s EU economic policy debates. It’s a rather significant complication for the EU era when multinational consensus is required to create any sort of meaningful policy shift. But if no actual policy shift is desired and the austerity and deflation that arise from policy inertia are the actual goals, these trust issues are exactly the kind of hurdle that should give one deep faith that nothing will change. Except for the lingering trust issues. They’ll presumably change as the economy continues to erode. For the worse:

    Bloomberg
    1,200 Years of History Can’t Make Germans Trust French
    By Ian Wishart Dec 2, 2014 5:00 PM CT

    In the ancient German city that first symbolized European unity, the French government has an image problem.

    Aachen, the capital of Charlemagne’s Holy Roman Empire from the year 800, is steeped in the history of a unified European identity. French pleas for understanding as they seek to fix their economy and narrow the deficit are testing the patience of Aachen’s people, echoing the concerns of many Germans over what they see as their neighbor’s foot-dragging.

    “I don’t trust the French at all,” said Pazashk Ali in the narrow bar he owns in the shadow of Aachen’s imposing octagonal cathedral, where Charlemagne is buried. “If someone doesn’t do their homework, you have to put the pressure on.”

    While the European Union has helped banish the threat of war that scarred the continent from before Charlemagne’s time, the bloc’s two indispensable nations — France and Germany — are increasingly at odds over their economic direction as the continent struggles to shake off its slump.

    Those differences were on display in Berlin yesterday at the 47th “Franco-German Financial and Economic Council,” as the French side pressed Germany to ease spending limits to spur Europe-wide growth. That clashes with German Chancellor Angela Merkel’s stance — shared by the majority of voters — that Europe’s biggest economy set an example with a balanced budget.

    French Model

    Historical disagreements are “rooted in different conceptions of the state and different conceptions about political economy,” Simon Green, a professor of European politics at Aston University in Birmingham, England, said in an interview. “The French model of capitalism is always different from the German one.”

    Charlemagne Prize

    Whereas Kohl and Mitterand were recognized in 1988 with a joint award for promoting European unification — known as the Charlemagne Prize and made by the city of Aachen — their latter-day heirs, Merkel and French President Francois Hollande, disagree on the prescription for Europe’s ills. While German Finance Minister Wolfgang Schaeuble in October spoke of his “trust” in France, the political class is struggling to bridge the divide that separates their peoples so long as the economic differences prevail.

    “It shouldn’t be a question of trust,” said Markus Ziemer, a retired optician, enjoying two scoops of Italian ice cream outside Aachen’s white colonnaded theater. “There should be rules to ensure that countries keep their economy in a good order — because they are not doing that.”

    Targets Missed

    Fiscal rules do exist in the euro area, it’s just that France has struggled to follow them. The EU has already given the French government an extended deadline of 2015 to bring its deficit in below the 3 percent of gross domestic product limit. Latest forecasts show it won’t reach that target until 2017 and will become the widest in the euro area in 2016.

    Even as the EU commission last week sounded the alarm over France’s 2015 spending plan, officials in Brussels decided not to sanction the French government.

    The German public’s distrust of French economic management is a consequence of a convenient “narrative” propagated by Germany’s politicians and media, said Sebastian Dullien, a senior policy fellow at the European Council of Foreign Relations, and professor of international economics at HTW University of Applied Sciences Berlin.

    “The Germans think they did everything right, and in reality they benefited a lot from a combination of good luck and wage moderation,” he said. “If you speak to senior politicians and policy makers in Germany, they are well aware that this isn’t as easy for France as people might believe.”

    Wow, so according to senior policy fellow at the European Council of Foreign Relations, the German public’s distrust of French economic management is a consequence of a convenient “narrative” propagated by Germany’s politicians and media and the“Germans think they did everything right, and in reality they benefited a lot from a combination of good luck and wage moderation…If you speak to senior politicians and policy makers in Germany, they are well aware that this isn’t as easy for France as people might believe.” It seems like some of those trust issues might be a bit misdirected.

    In other news…

    Posted by Pterrafractyl | December 3, 2014, 9:51 am
  21. Our Chillingly Ironic New World Ordoliberalism:

    The Week
    The chilling irony of German austerity
    Mass unemployment is the fuel of fascism
    By Ryan Cooper | November 19, 2014

    The competition for which nation can have the worst post-2008 economic policy is a stiff one. The United States has literally free money money on the table for years. Argentina is monetizing its debt, and inflation is a serious problem as a result.

    But the victor in these failure sweepstakes is undoubtedly Germany, with its till-death-do-us-part love of austerity and tight money. German political and economic pressure has created a continent-wide depression that is now worse than that of the 1930s. Though Germany has managed to avoid the worst of the crisis itself, it is also just barely staying out of recession, and letting its own infrastructure rot for no reason. And now German policymakers are moving to quash the only tentative, hesitant action to fight the depression that is on deck.

    These actions are not only grotesquely immoral and wasteful, they directly call to mind Germany’s greatest failure as a society: the rise of Adolf Hitler. Nazism was birthed from the economic calamity of the Great Depression, and German elites are repeating the mistakes that paved the way for Hitler’s rise.

    So what is under discussion? The European Central Bank, only about 6 years too late, is considering some monetary stimulus in the form of quantitative easing. As Steve Randy Waldman argues, QE is a crappy policy that is nonetheless much, much better than nothing. Fiscal stimulus through public investment and/or transfers is better. But as the Eurozone shows today, no stimulus in the wake of a financial crisis is a straight road to depression. Unemployment is at 11.5 percent across the Eurozone, and still at Great Depression levels in Spain and Greece. Those numbers have been improving with glacial slowness. On current trends, Spain might reach full employment in 25 years — and that’s if the Eurozone manages to avoid a triple-dip recession, which looks increasingly unlikely.

    But Jen Weidmann, the head of the Bundesbank (Germany’s central bank) thinks QE is too risky:

    “Such purchases might create new incentives to run up debt, besides adding to the reform fatigue in a number of countries,” he cautioned. Nor was there any guarantee that quantitative easing would indeed have the intended impact on the economy, Weidmann pointed out. [Business Insider]

    There has perhaps never been such a perfect encapsulation of the blinkered philistine pig-ignorance that has characterized German economic policy since 2008. A focus on debt as the only important economic indicator. Utter lack of concern with a world-historical depression. An anti-democratic desire to stuff objectively useless neoliberal “reforms” down the throats of nations that wouldn’t stand for it otherwise. And blithely ignoring the evidence that QE, in fact, would probably do at least some good. (Hey, just compare the U.S. to Europe.)

    Germany has been down this road before. Most casual observers of the EU will tell you that Germany will never support QE because it’s deathly afraid of the kind of inflation that enabled the Nazis to swoop in and assume power. The only problem is, that myth is off by 6 years or so.

    Germany had licked hyperinflation by 1924. The Great Depression didn’t strike the Weimar Republic until late 1929 — and when it did, it was deflation, not inflation, that shocked the German economy. That year, newly-appointed Chancellor Heinrich Brüning implemented a savage austerity policy by decree. It was a massive failure. Unemployment soared, eventually topping 30 percent by 1932, and the Nazi party leapt to first place in the elections. Though there were many other causes behind the rise of Nazism — the complicity of German conservatism being a big one — the abject failure of democratic institutions to provide employment for the masses was the single most important root factor. Mass unemployment discredited the Weimar regime and democracy itself, dramatically enhancing the political viability of Hitler.

    The major economic difference between then and now, of course, is that the Eurozone depression is mostly happening outside of Germany. Things might change if unemployment starts to skyrocket inside that country — though by that time it might be too late for the European project. And as Wolfgang Münchau details, practically the entire German political spectrum is in thrall to some crackpot economic doctrine called “ordoliberalism” that nobody else thinks is remotely credible.

    Because it’s always 1923. Always.

    Posted by Pterrafractyl | December 12, 2014, 7:55 am
  22. Of all the macroeconomic BS to emerge from the poor-kicking trans-Atlantic pro-austerity economic establishment in the last few years, one of the worst is the new notion that near-zero inflation or even a little outright deflation isn’t so bad after all, despite all the empirical evidence to the contrary. What’s wrong with lower prices? Aren’t lower prices a good thing? That’s one of the new memes that, curiously, we hear more and more from the defenders of austerity as the eurozone slips closer and closer to outright deflation.

    Well, here’s an example of what’s wrong with a little deflation: “less investment, which in turn reduces potential growth, the future becomes even grimmer and investment is reduced even further”. You know, the classic deflation trap that is now gripping Europe:

    The Telegraph
    EMU deflation is the final betrayal of southern Europe
    The victim states of southern Europe have retrenched heroically, yet deflation effects are overwhelming them

    By Ambrose Evans-Pritchard

    9:02PM GMT 07 Jan 2015

    The eurozone has let it happen. Europe’s authorities have so mismanaged monetary and fiscal strategy that the whole currency bloc has tipped into deflation.

    The drop in the eurozone’s headline price index to -0.2pc in December scarcely captures the significance of what is happening. Deflationary forces have been gaining a grip on all the crisis states of the South for 18 months.

    A chorus of economists began warning two years ago that the region was sailing close to the wind by letting inflation drift ever lower, leaving itself one shock away from a loss of policy traction. That shock is now hitting in successive waves: the Russia crisis; China’s over-investment glut; and now the collapse of oil prices.

    Textbook theory suggests that a halving of energy costs should be cause for celebration, a tax cut for consumers. It is very different calculus when inflation is already zero, bond yields are plummeting to 14th century lows across the world, and market psychology is becoming “unhinged” – to use central banking vernacular.

    “Normally, any central bank would prefer to look through a positive supply shock,” said Peter Praet, the European Central Bank’s chief economist. “But we may not have that luxury at present. Shocks can change: in certain circumstances supply shocks can morph into demand shocks via second-round effects.”

    Mr Praet said families and firms are already adapting pre-emptively to the new order, describing what amounts to a classic deflation trap. “There is a risk of a real economic vicious cycle: less investment, which in turn reduces potential growth, the future becomes even grimmer and investment is reduced even further,” he told Börsen-Zeitung.

    Mr Praet warned that an “underemployment equilibrium” is setting in, invoking the term used by Keynes in the 1930s. He exhorted “all the authorities”, including governments, to step up to their responsibilities and take “urgent action”. This is a man who knows that monetary union is in deep crisis.

    There have been incessant promises of ECB stimulus since that speech in Berlin but little has been done, despite Mr Draghi’s valiant efforts. The ECB’s balance sheet has contracted further due to “passive tightening”, falling by €143bn to €2.15 trillion.

    The optimal moment for quantitative easing has passed. It is late in the day, even if the ECB council plucks up the courage this month to force through full-blown QE against guerrilla resistance from the Bundesbank. Yields on 10-year German Bunds have already dropped to a historic low of 0.46pc. Finland is down to 0.54pc, Holland to 0.57pc and France to 0.73. Even Spain has fallen to 1.63pc.

    Little can be done by compressing yields yet further, and the ECB is prohibited by treaty law from carrying out more radical action that injects money directly into the veins of the economy. Most likely it will be another fudge, an overly complex formula that avoids any real sharing of risk. Hedge funds may pocket a profit. But it will not create many jobs in Naples.

    Without such jobs, Italy’s political system is going to blow up soon. Its unemployment rate has just reached a modern-era high of 13.4pc, with youth unemployment hitting a record 43.9pc. The Mezzogiorno is sliding from depression towards social collapse. The Bourbons made a better fist of it.

    By cruel contrast, Germany generated 27,000 fresh jobs in December. Unemployment has fallen to a 23-year low of 5pc. Things have never been so good since reunification. There could hardly be clearer evidence that monetary union is unworkable.

    The victim states of southern Europe have retrenched heroically, yet deflation effects are overwhelming them. Their debt trajectories are still spiralling up due to the mechanical effect of sticky interest costs on a base of catatonic nominal GDP.

    Spain’s inflation rate has fallen to -1.1pc, a curse oddly welcomed by the pre-modern Partido Popular as proof that the country’s “internal devaluation” within EMU is gaining traction. It certainly is, but the final outcome may not be what they think.

    Mr Draghi issued his own cri de coeur in Helsinki six weeks ago, laying out the “minimum requirements for monetary union”. His prescription amounts to an EU superstate, with economic sovereignty to be “exercised jointly”.

    His plea is Utopian. There is no popular groundswell anywhere for such a vaulting leap forward, and it would imply a technocrat dictatorship beyond democratic control if ever attempted. The northern creditor states have in any case spent the past four years methodically preventing any durable pooling of risk or any step towards fiscal union.

    In airing such thoughts, Mr Draghi is really telling us that he no longer thinks EMU can work. Nobody can fault him for lack of effort.

    Yep, the classic deflationary trap is already manifesting. And that’s according to Peter Praet, the European Central Bank’s chief economist. And the “minimum requirements for monetary union” laid out by ECB chief Mario Draghi is a European superstate that has no chance of being implemented and could easily result in a technocratic nightmare if ever implemented (it wouldn’t have to be a technocratic nightmare but it would probably end up that way given the current leadership).

    So it’s not really debatable whether or not a deflationary trap is beginning. Instead, we get debates from policy makers over whether or not the deflation is a bad thing:


    Spain’s inflation rate has fallen to -1.1pc, a curse oddly welcomed by the pre-modern Partido Popular as proof that the country’s “internal devaluation” within EMU is gaining traction. It certainly is, but the final outcome may not be what they think.

    You read that correctly: Mariano Rajoy’s ruling right-wing Partido Popular (People’s Party) of Spain welcomes deflation as an example of the success of the insane “internal devaluation” strategy. Feel the optimism:

    The Spanish Report
    3% Of Spaniards Say Spain’s Economy Is Working
    By Matthew Bennett | Wednesday, December 17th, 2014

    NEWS: 97% of Spaniards think Spain’s economic situation is bad and 78% are worried about unemployment, according to new European survey data. Only Greeks and Cypriots worry more.

    New Standard Eurobarometer data from 35 countries published by the European Commission shows that most people in Europe currently believe their own national economic situation to be suboptimal, and that Europeans’ major worries are still “unemployment” and “the economic situation”.

    97% of Spaniards think Spain’s economic situation is bad, a worsening of one percentage point since the spring. Just 3% are optimistic. Only Greek citizens are less hopeful.

    78% of Spanish people are worried about unemployment. Only Cypriots worry more about not having a job.

    These figures are in line with the October installment of Spain’s national CIS survey, in which the two most important problems for Spaniards were unemployment and corruption.

    Spanish Prime Minister Mariano Rajoy said last week that: “The economic crisis is now a thing of the past”, adding that: “Spain has gone from being the sick man of Europe to being in the vanguard of the recovery”.

    The last seven years of economic crisis across the continent have seen a general decline in citizens’ trust of their respective national governments.

    In the CIS survey, 68.9% of citizens thought Mariano Rajoy’s Popular Party government was doing “badly” or “very badly” after three years in power, and 63.8% held the same opinion of the main opposition Socialist Party.

    Mr. Rajoy himself now inspires “little” or “no” confidence amongst 86.6% of Spanish voters with 12 months to go before the next general election.

    Despite the economic gloom, thought, the new Eurobarometer shows Spanish citizens reported they held a more positive image of the EU now than they did six months ago (31%), although most consider themselves to hold a neutral image of the EU (46%) or a negative one (21%), and 66% of Spanish citizens believe their voice does not count for anything in the European Union

    A slight majority (53%) are optimistic about the continent’s future.

    Spaniards support for the European single currency increased by 5 percentage points to 65%, and 71% of them feel they are “citizens of the EU”, a similar level to Irish or Lithuanian citizens.

    The report concludes that: “It is the first time since spring 2011 that the proportion of Europeans for whom the EU conjures up a positive image exceeds the proportion with a neutral image”, but only four in ten people “feel that their voice counts”.

    “Around a third of Europeans believe their national economic situation is ‘good’, while close to two-thirds consider that it is ‘bad’”, and a majority of EU citizens “consider that ‘the worst is still to come’” in terms of job losses.

    Note that the above poll results were published by the European Commission, an entity that would have an incentive to skew polling towards more positive EU views if anything. And yet 66% of Spanish citizens believe their voice does not count for anything in the European Union, 65% support the euro, and 53% are optimistic about the continent’s future. And more generally, only four in ten EU citizens “feel that their voice counts”. And a majority of EU citizens expect that ‘the worst is still to come’ economically.

    So we’re seeing a popular psychology where a significant percentage of those that the support the current structure of the European Union and eurozone also view themselves as voiceless and think a bad situation is going to get worse and this pattern is true even in the most austerity-ravaged nations. So basically the EU citizens’ appear to be stuff in a strange head space of plummeting hope for their own personal futures but tepid hope for the continent as a whole. Remember when Merkel was pushing a 25 year economic consolidation package for Greece back in 2012? Well, it looks like a large chunk of the EU populace is already internalizing that set of expectations: a lost generation as the only source of hope.

    So given the incredible betrayal of the EU elites in the obvious damage they’ve inflicted in civic spirits across the continent, here’s a reminder from Paul Krugman that EU policy makers’ betrayals includes a betrayal of basic economics:

    The New York Time
    The Conscience of a Liberal

    Deflation As Betrayal

    Paul Krugman
    January 10, 2015 8:01 am

    Ambrose Evans-Pritchard writes that Europe’s slide toward deflation amounts to a “betrayal” of Southern Europe. This sounds over the top, but it is the simple truth. So let me elaborate with a picture I find illuminating.

    The attached chart shows core inflation (excluding energy, food, alcohol, and tobacco) in Germany, Spain, and the euro area as a whole. As you can see, there have been two distinct eras for the euro system.

    In the first era, up to the crisis, capital was flooding into southern Europe. In retrospect, this was a bad thing, but few in positions of authority were complaining at the time — oh, and in Spain it was private borrowing, not public. The result was a boom in the south, and also somewhat elevated inflation. Again, however, this was regarded as perfectly normal and good at the time. After all, you don’t expect everyone in a currency union to have the same inflation rate. Overall inflation was fine — and rising prices in southern Europe helped Germany become super-competitive and emerge from the economic doldrums it was in at the end of the 90s, without needing actual deflation.

    Then the capital flows stopped, and it become necessary for southern Europe to reverse the rise in relative costs and prices that had taken place during the era of inflows. Both basic macroeconomics and the agreed-on rules of the game for the euro said that this adjustment should be symmetric with what went before — that overall euro area inflation should remain at target (or higher, says the economics, but leave that aside), with Germany running significantly higher inflation so that low inflation in the south could deliver the needed “internal devaluation”.

    In fact, however, there was no rise in German inflation, and at this point it amounts to a fall. Overall euro inflation, even using the core, is far below target. And southern Europe has been forced into deflation, which is very costly and also worsens the debt burden.

    And then you have the Germans saying that they dealt with their problems, so why can’t southern Europe do the same? Why, because southern Europe played by the rules, but in its time of need the rules were changed, hugely to its disadvantage.

    You might ask, what would have been needed to avoid this situation? The ECB should have been aggressively expanding as soon as it became clear that inflation was sliding. There should have been a determined effort to offset fiscal austerity in southern Europe with expansion in the north. Instead, inflation and deficit obsession were allowed to rule for years; and now the situation is very close to irretrievable.

    “Both basic macroeconomics and the agreed-on rules of the game for the euro said that this adjustment should be symmetric with what went before — that overall euro area inflation should remain at target (or higher, says the economics, but leave that aside), with Germany running significantly higher inflation so that low inflation in the south could deliver the needed “internal devaluation”.” And yet the rules got changed and Southern Europe and Ireland are now relegated to a new “lost generation” paradigm.

    It’s quite a betrayal and yet it seems to be working. Not working economically, but if enough people just lose hope and deflationary traps become redefined as acceptable or somehow unavoidable, the economic lessons of the Great Depression and the following seven decades (Keynesian economics, etc) just might become de facto dead. At least in Europe. So it’s been an incredible betrayal because it’s just a betrayal of the public trust. It’s also a betrayal of the idea that reason, knowledge, and compassion should determine public policy instead of ideology and superstitions. So it’s sort of a betrayal of The Enlightenment too:

    The New York Time
    The Conscience of a Liberal

    Orthodoxy, Heterodoxy, and Ideology

    Paul Krugman
    January 10, 2015 10:04 am

    Many economists responded badly to the economic crisis. And there’s a lot wrong with mainstream economic analysis. But how closely are these two assertions related? Not as much as you might think. So I’m very much in accord with Simon Wren-Lewis on the remarkable unhelpfulness of recent heterodox assaults on the field. Not that there’s anything wrong with being heterodox in general; but a lot of what we’ve been seeing misidentifies the problem, and if anything gives aid and comfort to the wrong people.

    The point is that standard macroeconomics does NOT justify the attacks on fiscal stimulus and the embrace of austerity. On these issues, people like Simon and myself have been following well-established models and analyses, while the austerians have been making up new stuff and/or rediscovering old fallacies to justify the policies they want. Formal modeling and quantitative analysis doesn’t justify the austerian position; on the contrary, austerians had to throw out the models and abandon statistical principles to justify their claims.

    Let’s look at several examples.

    I often see people who should know better claiming that the debate over whether fiscal stimulus can work involved the question of whether Ricardian equivalence — an implication of representative-agent, rational-expectations models — holds in practice. But that’s all wrong. Claims that a temporary rise in government spending crowds out an equal amount of private spending were based either on crude confusions between accounting identities and causation, or on a complete misunderstanding of what Ricardian equivalence means.

    What about expansionary austerity? That’s really hard to get out of any formal model, and by and large the advocates of that position didn’t even try. They invoked the confidence fairy pretty much on faith, backed by casual econometrics that fell apart as soon as anyone looked hard at the data.

    So if you go around claiming that model-oriented, quantitative economics gave rise to austerity mania, you’re getting the story all wrong. Worse, you are in effect covering up for the austerians’ intellectual sins. They were not orthodox economists following their models to their logical conclusion; instead, they revealed their true colors when they proved themselves either unable to understand their own models or willing to throw their analysis away the moment it conflicted with their political preferences.

    Uncritical embrace of austerity by economists has been a problem for the world. But don’t blame modeling or quantitative analysis; the fault lies not in models but in themselves.

    Yep. There’s no shortage of blame to throw around for the ongoing deflationary austerity disaster and incredible betrayals of civic trust, but you can’t really blame orthodox economics for this latest round of madness. Our new Dark Age of Macroeconomics has basically been an act of macroeconomic textbook burning.

    But here we are, betrayed and living in the Macroeconomic Dark Ages and forced to find a way out of this mess. Good luck. Sado-thetans don’t purge easily.

    Posted by Pterrafractyl | January 10, 2015, 7:40 pm
  23. Part of what makes the EU economic crises so alarming is that, with the collapse of the political center, we’re seeing a political landscape emerge where the newly rising left-wing parties HAVE to see significant changes to the prevailing austerity policies if they’re going to have any credibility at all with the voters, and yet ANY success by parties like Syriza or Podemos is going to be interpreted as political death for the parties in power that backed austerity. The pro-austerity parties simply cannot ever allow voters to find out that all this pain and suffering was totally pointless. It would be guaranteed political austerity.

    And yet the current situation, where economies just continue languishing in near-depressions, is also untenable and will only drive more and more voters into the hands of parties like Syriza or, alarmingly, the far right. Which basically means that the EU political elites have managed to box themselves into a corner with no obvious way out. Beware of feral elites busily backing themselves into corners:

    The Telegraph
    Germany faces impossible choice as Greek austerity revolt spreads
    EU elites who forced a currency experiment on countries not ready for it have only themselves to blame

    By Ambrose Evans-Pritchard

    9:53PM GMT 11 Feb 2015

    The political centre across southern Europe is disintegrating. Establishment parties of centre-left and centre-right – La Casta, as they say in Spain – have successively immolated themselves enforcing EMU debt-deflation.

    Spain’s neo-Bolivarian Podemos party refuses to fade. It has endured crippling internal rifts. It has shrugged off hostile press coverage over financial ties to Venezuela. Nothing sticks.

    The insurrectionists who came from nowhere last year – with Trotskyist roots and more radical views than those of Syriza in Greece – are pulling further ahead in the polls. The latest Metroscopia survey gave Podemos 28pc. The ruling conservatives have dropped to 21pc.

    The once-great PSOE – Spanish Workers Socialist Party – has fallen to 18pc and risks fading away like the Dutch Labour Party, or the French Socialists, or Greece’s Pasok. You can defend EMU policies, or you can defend your political base, but you cannot do both.

    As matters stand, Podemos is on track to win the Spanish elections in November on a platform calling for the cancellation of “unjust debt”, a reversal of labour reforms, public control over energy, the banks, and the commanding heights of the economy, and withdrawal from Nato.

    Europe’s policy elites can rail angrily at the folly of these plans if they wish, but they must answer why ex-Trotskyists threatening to dismantle market capitalism are taking a major EMU state by storm. It is what happens when 5.46m people lack jobs, when 2m households still have no earned income, and when youth unemployment is still running at 51.4pc, and home prices are down 42pc, six years into a depression.

    It is pointless protesting that Spain’s economy is turning the corner, a contested claim in any case. There comes a point when a society breaks and stops believing anything its leaders say.

    The EU elites themselves have run their currency experiment into the ground by imposing synchronized monetary, fiscal, and banking contraction on the southern half of EMU, in defiance of known economic science and the lessons of the 1930s. It is they who pushed the eurozone into deflation, and thereby pushed the debtor states into accelerating compound-interest traps.

    It is they who deployed the EMU policy machinery to uphold the interest of creditors, refusing to acknowledge that the root cause of Europe’s crisis was a flood excess capital flows into vulnerable economies. It is they who prevented a US-style recovery from the financial crisis, and they should not be surprised that such historic errors are coming back to haunt.

    The revolt in Italy has different contours but is just as dangerous for Brussels. Italians may not wish to leave the euro but political consent for the project but broken down. All three opposition parties are now anti-euro in one way or another. Beppe Grillo’s Five Star movement – with 108 seats in parliament – is openly calling for a return to the lira.

    Mr Grillo proclaims that Syriza is carrying the torch for all the long-suffering peoples of southern Europe, as it is in a sense.

    “What’s happening to Greece today, will be happening to Italy tomorrow. Sooner or later, default is coming,” he said.

    Premier Matteo Renzi staked everthing on a recovery that has yet to happen. He is running out of political time. Deflation is overwhelming the fiscal gains from austerity. Italy’s public debt has jumped from 116pc to 133pc of GDP in three years. The youth jobless rate is 44pc and still rising. Italian GDP has fallen 10pc in six years, and by 15pc in the Mezzogiorno. Italy’s industrial production has dropped back to the levels of 1980.

    The leaders of Spain and Italy know that their own populists at home will seize on any concessions to Syriza over austerity or debt relief as proof that Brussels yields only to defiance. They have a very strong incentive to make Greece suffer, even if it means a cataclysmic rupture and a Greek ejection from the euro.

    Yet to act on this political impulse risks destroying the European Project. Europe’s Left would nurture a black legend for a hundred years if the first radical socialist government of modern times was crushed and forced into bankruptcy by Frankfurt bankers – acting at the legal boundaries of their authority, or beyond – choosing to switch off liquidity support for the Greek financial system.

    It would throw the Balkans into turmoil and probably shatter the security structure of the Eastern Mediterranean. It is easy to imagine a chain of events where an embittered Greece pulled out of Nato and turned to Russia, paralysing EU foreign policy in a self-feeding cycle of animosity that would ultimately force Greece out of the union altogether.

    The charisma of the EU – using the Greek meaning – would drain away if such traumatic events were allowed to unfold, and all because a country of 11m people wanted to cut its primary budget surplus to 1.5pc from 4.5pc of GDP and shake a discredited Troika off its back, for that is what it comes down to.

    Currency guru Barry Eichengreen – the world’s leading expert on the collapse of the Gold Standard in 1931 – thinks Grexit might be impossible to control. “It would be Lehman Brothers squared,” he said.

    This is not the view in Germany, at least not yet. The IW and ZEW institutes both argue that Europe can safely withstand contagion now that it has a rescue machinery and banking union in place, and must not give in to “blackmail”.

    Such is the ‘moral hazard’ view of the world, the reflex that led to the Lehman collapse in 2008. “If we knew then what we know now, we wouldn’t have done it,” the then-US treasury secretary Tim Geithner told EMU leaders in early 2011, the first time they were tempted to eject Greece.

    As Evans-Pritchard points out:

    >
    The leaders of Spain and Italy know that their own populists at home will seize on any concessions to Syriza over austerity or debt relief as proof that Brussels yields only to defiance. They have a very strong incentive to make Greece suffer, even if it means a cataclysmic rupture and a Greek ejection from the euro.

    And that pretty much summarizes the situation. Even the austerity-riddled governments of Italy and Spain arguably have an incentive to be so uncompromising with Greece that a Grexit occurs and financial turmoil consumes their nations because that turmoil isn’t as scary to these governments as the possibility that the populace will realize that their leaders….

    … have run their currency experiment into the ground by imposing synchronized monetary, fiscal, and banking contraction on the southern half of EMU, in defiance of known economic science and the lessons of the 1930s. It is they who pushed the eurozone into deflation, and thereby pushed the debtor states into accelerating compound-interest traps.

    Yep. A complete disaster like a Grexit that risks the future of the European Project is apparently less scary to EU politicians than the possibility that voters wake up to their complete betrayal of known economic science and the lessons of the 1930s. Which, terrifyingly, suggests that Europe’s governments have by and large already crossed the Rubicon of mass deceit. The Big Lie of austerity-o-nomics has been so big and so contrary to reality that there is no going back. And it’s mostly been the center-right and center-left pushing this Big Lie.

    So beyond questions of what’s going to happen in the short or medium-term, you have to wonder what the long-term repurcussions are going to be for Europe to see its center-left and center-right governments all simultaneously discredit themselves in such an historic and epic manner. Especially in Germany. Because as much as we hear from German analysts that a Grexit would be acceptable, that’s still going to be a massive shock to the country, especially if its followed by an unwinding of the euro altogether. And if there’s one thing the German political establishment does not want to see, it’s a large amount of public attention on the very logic of the austerity policies and what could be more effective at garnering all that public attention than a dissolution of the eurozone?

    In addition, what’s going to happen to German workers if they lose the euro and the nation’s currency spikes as a result. Oh yeah: Austerity. A LOT more austerity, which will be needed if Germany’s export-oriented industries are going to keep their global edge. Keep in mind that Germany’s council of economic ‘Wise Man’ were calling for more austerity back in 2013 when the German economy was still doing quite well. What kind of austerity schemes are these ‘Wise Man’ going to have in mind for the German workers when the economy loses the massive export-edge gained from from using the euro?

    That’s all part of the impossible mess facing Europe right now. The EU elites crossed the Rubicon, backed garbage economic theories that were going to create long-term doom for the masses, ended up creating ongoing medium-term doom, and now find themselves in a situation where basically everyone is backed into a corner, including the EU elites.

    So with all that in mind, let’s take a look at a recent Paul Krugman piece on the American elite’s mental allergy to thinking about money:

    The New York Times
    The Conscience of a Liberal
    There’s Something About Money (Implicitly Wonkish)
    Paul Krugman
    February 10, 2015 11:39 am

    Continuing a family tradition, Rand Paul is saying crazy things about the Fed and monetary policy. It’s important to note, however, that he’s not that far out of the modern Republican mainstream. Remember this:

    I always go back to, you know, Francisco d’Anconia’s speech, at Bill Taggart’s wedding, on money when I think about monetary policy. Then I go to the 64-page John Galt speech, you know, on the radio at the end, and go back to a lot of other things that she did, to try and make sure that I can check my premises.

    Yes, that’s Paul Ryan citing a second-tier character in Atlas Shrugged as the ultimate authority on monetary policy; and we’re not talking about when he was an adolescent, we’re talking about someone who was already a rising Republican star.

    But why the craziness? It goes beyond class interest, I think, although that’s part of it. There’s something about money that promotes crazy thinking, backed with a lot of passion (and anger at anyone who doesn’t go along with the program). What makes money and monetary policy special?

    Here’s my current thought: in some sense money is a really weird thing, which can look to individuals like a real asset — cold, hard, cash — but is ultimately, as Paul Samuelson put it, a “social contrivance” whose value is more or less conjured out of thin air. Mainstream macroeconomics acknowledges the weirdness — in particular, makes heavy reliance on the ability of central banks to create more fiat money at will — but otherwise treats money a lot like ordinary goods. But that intellectual strategy doesn’t come naturally to many people, so there’s always a constituency for monetary cranks.

    Think about how most macroeconomists handle the role of money. First, we tell stories about the need for and emergence of mediums of exchange — transaction costs, double coincidence of wants, cigarettes in prisoner-of-war camps, etc.. Then we declare that we’re going to blur the details and introduce money into our models either with some stylized story like cash-in-advance constraints, or by deliberately burying the complexities and putting real balances in the utility function.

    This in turn leads to the basic Hicks model of an economy in which there are three markets — for money, bonds, and goods — which are treated symmetrically; add price stickiness and that model becomes IS-LM. New Keynesian economics pretty much takes that base and adds explicit modeling of intertemporal choices and rational expectations.

    Dealing with monetary economics this way lets you address monetary and fiscal policy in terms of lucid, elegant little models that are quite intuitive once you get used to them, but not at all intuitive to people who haven’t learned to think this way — witness the debates we’ve had since 2008. Still, there’s a bit of sleight of hand involved in the way we handle money itself: first acknowledge that it’s a special sort of good that people desire only because other people desire it, then ignore that specialness for the rest of the analysis. And you could imagine that this sleight of hand might lead you badly astray, that the predictions of those lucid little models would be all wrong, that you should only use models in which the role of money itself is microfounded.

    But the conclusion of generations of macroeconomists has been that for most purposes models that treat money as if it were an ordinary good are good enough; whereas attempts to ground everything in models in which the role of money is in some (weak) sense derived rather than assumed have been generally useless. Still, there’s always an undercurrent of unease. And you can find heterodox economists on the left as well as the right unhappy with the standard approach.

    Now, the elder and younger Pauls know nothing of this, nor, I suspect, does Paul Ryan. But that may be the point: having no contact with the intellectual tradition of macroeconomics, they find the role of money in the economy a great mystery and possibly an outrage — how dare banks/governments/the Illuminati pretend to create value out of nothing! Fiat money, whether created by the government or by banks, seems to them to be a violation of natural law; creating more fiat money in an attempt to relieve economic distress must surely lead to disaster.

    The sad thing is that this epistemological panic is gaining a growing hold over American conservatives at a time when the standard way of dealing with money has, in fact, been covering itself in glory. That Hicksian approach, in which money is treated symmetrically with bonds and goods, made strong predictions about what happens with interest rates near zero — predictions that the Fed could expand its balance sheet many times over without inflation, that governments could borrow vast sums without driving up interest rates, that slashing government spending would cause private spending to fall rather than rise. Those predictions were ridiculed five or six years ago, but they have come true. It’s hard to imagine a worse time to reject the standard approach and “audit” — actually, intimidate — the Fed.

    “The sad thing is that this epistemological panic is gaining a growing hold over American conservatives at a time when the standard way of dealing with money has, in fact, been covering itself in glory. ”
    And that same epistemological panic, or something analogous to it, has gripped Europe so tightly over the last six years that we might actually see the entire European Project fail because that would be less painful than an elite-rethink of the nature money. At least less painful to the elites. Others will probably be more open to a money rethink.

    Posted by Pterrafractyl | February 12, 2015, 9:36 pm
  24. Here’s a reminder that the eurozone is totally screwed unless the populace can come to terms with the fact that fiscal transfers from rich member states to poor members states is the only realistic way to make the eurozone work, and since there’s no realistic way to get the citizens of the wealthier nations to accept the notion that their poorer neighbors actually deserve fiscal transfers (in exchange for using an artificially high currency), there’s also no realistic way to actually solve this fundamental challenge for the eurozone. This sounds like a job for Superman Share Bear! If anybody sees Share Bear please let her know that Europe needs to learn the power of sharing:

    Mother Jones
    Two Paragraphs That Explain Greece vs. Germany

    —By Kevin Drum
    | Tue Feb. 17, 2015 5:09 PM EST

    Neil Irwin has a very short and sweet explanation of Europe’s continuing fiscal woes::

    Europe really does have a big and plausibly unsolvable macroeconomic problem. Germany and a couple of other countries are operating in a radically different economic gear than Southern Europe, and the ways you might normally expect those imbalances to work themselves out are not available. In pre-euro Europe, currency swings would have handled the job. In the United States, continuing fiscal transfers from rich states to poor states do the work. Neither is a palatable option in a Europe that has a single currency and deep aversion among Germans, Finns and Dutch to sending their hard-earned euros to Greece and Spain and Italy.

    Either Northern European governments will accept bigger fiscal transfers and higher inflation than their citizens want, or the Mediterranean nations with economic challenges will have to accept falling wages and high unemployment as they try to restore competitiveness, which their citizens very much do not want.

    Germany is the most inflation-averse of the big Northern European countries, and Greece is suffering the worst unemployment among the Southern European countries. This is why Greece vs. Germany has become the main front in the ongoing economic trench warfare of North vs. South.

    As for myself, I can’t bring myself to believe that the euro will break up. But I also find it hard to imagine that Greece can avoid open rebellion much longer if Germany continues to maintain policies that make economic balance nearly impossible. So I don’t know. What happens when an irresistible force meets an immovable object?

    What happens when an irresistible force meets an immovable object? They presumably pass through each other without interacting, which is sort of opposite of sharing but probably preferable to them interacting since that could create a super black hole or something.

    But at least if the super black hole eats us, it will also consume all of the other black holes in our vicinity, like the various socioeconomic and ethical black holes created by austerity policies and junk economic theories that are slowly consuming society. The silver linings are never easy to see when your society is being consumed by black hole policies, but they’re there. Could be worse!

    Posted by Pterrafractyl | February 18, 2015, 2:35 pm
  25. It’s Back!

    Remember the whole Reinhart-Rogoff debacle? That was the controversy that erupted in 2013 when it was discovered that the paper published by economist Carmen Reinhart and Kenneth Rogoff had some serious errors, which was a big deal since their 2010 paper concluded that once government debt surpasses 90% of GDP serious negative consequences will take place and austerity measures designed to bring down that public debt are totally justified to ward off the looming +90% disaster. So when it was discovered that this influential paper had a problem it was a very big deal since it was published right when right-wing governments around were looking for an excuse to slash public programs. So yes, flaws were found in the theory, Paul Krugman pointed these flaws out, Reinhard and Rogoff called him uncivilized, the IMF closed ranks around them, and the rest is history. Except for the austerity. That isn’t history.

    Still, at least it seemed like the world had sort of moved past the magical “90% of doom” thing. But as we’ve learned over the years, stopping the zombie hoards is easier said than done:

    ECB’s Weidmann says euro zone debt in ‘danger zone’
    FRANKFURT
    Business | Fri Mar 27, 2015 8:12am GMT
    Reuters

    (Reuters) – Debt in the euro zone has entered the “danger zone”, the head of Germany’s Bundesbank said on Friday, calling for banks’ exposure to the debt of individual countries to be capped.

    “In the euro area we are already in the danger zone – at least with regard to public debt standing at 91 percent and corporate debt at 105 percent,” Jens Weidmann said in the text of a speech to be delivered at a conference in Frankfurt.

    Sovereign debt needs to be backed by capital, and exposure to a single sovereign must be capped, just as is the case for any private debtor,” said Weidmann, who also sits on the European Central Bank’s decision-making Governing Council.

    91%! We’re in the danger zone people!

    Also, note that when Weidmann talks about how “Sovereign debt needs to be backed by capital”, he might be referring to another one of his pet zombies, the gold-standard zombie (Weidmann sees fiat currency as a Faustian bargain). But he’s also referring to another, related idea he’s been pushing for years: Systematically discouraging banks from buying sovereign debt for poorer countries:

    The Wall Street Journal
    Changes in Sovereign Debt Risk Rules Won’t Come Quickly
    By Paul Hannon
    11:21 am ET
    Mar 27, 2015

    A global agreement to end the long-standing treatment of all government bonds as automatically risk-free for banks will take some time, if it happens at all, the chairman of the Basel Committee on Bank Supervision said Friday.

    The Switzerland-based group that sets global banking rules has launched a review into how regulators should treat holdings of government bonds, and any change could force banks to raise billions of dollars in extra capital.

    But any agreement among regulators is unlikely to be reached soon, Stefan Ingves said during a conference hosted by Germany’s central bank.

    “We’re working on the issue,” Mr. Ingves said. “It’s high on the agenda in the sense that it’s on the agenda. It will take a while, that’s for sure.”

    Speaking earlier, Bundesbank President Jens Weidmann called for an end to the treatment of government debt as being risk free.

    “Sovereign debt needs to be backed by capital, and exposure to a single sovereign must be capped, just as is the case for any private debtor,” he said.

    Mr. Ingves, who is governor of Sweden’s Riksbank, said that not all regulators are as convinced of the need for change.

    “There needs to be an agreement that something needs to be done,” he said. “At a global level, there’s an agreement this needs to be looked into.”

    Banks’ treatment of government bonds as without risks became problematic during Europe’s financial crisis, when Greece defaulted on its widely held debts. Some European policy makers believe banks were encouraged to take on too much risk by loading up on government bonds, in turn making it easier for governments to accumulate larger debts.

    Indeed, Mr. Weidmann said that Europe should go it alone if global agreement on the treatment of government bonds proves impossible.

    “I welcome that the regulatory treatment of sovereign debt is now being discussed by the Basel Committee,” he said. “But if these discussions fail to produce an agreement, we need to move forward with a European solution.”

    “Indeed, Mr. Weidmann said that Europe should go it alone if global agreement on the treatment of government bonds proves impossible.” So that’s probably going to happen at some point.

    Also keep in mind that part of Weidmann’s long-term plans don’t just include systematically raising public borrowing costs (especially for the poorest nations) and forcing nations to hold higher levels of capital to back up their debt. The ability for nations to go bankrupt is very important for his vision of the future:

    Dow Jones
    ECB Weidmann: Sovereign Default Must Be a Possibility

    in World Economy,World Economy News 26/05/2013

    European Central Bank Governing Council member Jens Weidmann Friday said it is important for sovereign defaults to be possible in the euro zone so as to ensure market discipline.

    “In the long term, we have to ensure that at the end a state can go bankrupt,” Mr. Weidmann said at a conference at the Bank of France in Paris. “The possibility of default is a key ingredient for market discipline.”

    The need to ensure such a possibility is why the euro zone is working on financial regulation and building a banking union that would break the link between banks and sovereign states, he added.

    During a speech at the conference, Mr. Weidmann also said fiscal consolidation is crucial for anchoring inflation expectations and supporting long-term economic growth.

    He urged governments not to delay fiscal consolidation as this could lead to market uncertainty.

    “True, in the short run, consolidation can dampen growth; that is undisputed. Nevertheless, a credible commitment to sound public finances will also inspire confidence. And confidence is what is lacking in the euro area,” he said.

    That’s right, according the head of the Bundesbank, not only do we need to jack up borrowing costs for the poorest nations, but we also need to ensure those nations can default. Now, presumably he isn’t imagining that non-eurozone nations adopt this model since it would basically involve nations that still have their own central banks (the non-eurozone zone of the world) self-imposing a synthetic gold-standard and refusing to print money when the situation calls for it. But still, for the eurozone members, the possibility of default is pretty much already reality thanks to folks like Jens Weidmann:

    ekathimerini
    Bundesbank’s Weidmann says euro zone debt in ‘danger zone,’ opposes more aid for Greece
    Friday March 27, 2015 (11:53)

    Debt in the euro zone has entered the “danger zone,” the head of Germany’s Bundesbank said on Friday, calling for banks’ exposure to the debt of individual countries to be capped.

    As regards Greece, in an interview with Germany’s Focus magazine, Weidmann said he was against an increase in emergency loans to the country. He accused the new government of losing a lot of trust. “Until last autumn, an improvement in the economy could be seen. But the new government has gambled away a lot of trust,” he was quoted as saying.

    Weidmann rejected Greek claims that it will have trouble meeting its financial obligations. “I don’t buy the argument that they are financially overburdened,” he said.

    He accepted that Greece’s overall debt is very high, but said the burden was more manageable due to lower interest rates and deals to extend repayment deadlines.

    Asked whether Greece was in imminent danger of default, Weidmann replied: “Clearly, the governments of the other countries have the impression that a solution can be found. But we don’t have a lot of time.” He added that if a member of the currency union decides not to meet its commitments…then a disorderly default cannot be ruled out.”

    The Bundesbank chief also expressed skepticism about the public statements of Greek government officials. “Generally speaking, I get the impression that the statements given by various members of the government can be very different, depending on the day and the audience,” he said. “Ultimately, that doesn’t inspire much confidence.”

    That’s right, the same guy that wants to systematically raise rates for countries like Greece AND wants them to be able go bankrupt ALSO accepts “that Greece’s overall debt is very high, but said the burden was more manageable due to lower interest rates and deals to extend repayment deadlines”.

    He also doesn’t “buy the argument that they are financially overburdened,” but then warns that Greece is about to default, but opposes an increase in emergency loans.

    So it looks like we might be entering into a new phase of the Europe’s descent into madness: First we got that brutal “we’re imposing austerity so you can get your debt under control phase”-austerity phase. And now that all the austerity has caused a rise in debt-to-GDP ratios, it looks like we might be entering the “how about we just let you default”-phase.

    The future awaits!

    Posted by Pterrafractyl | March 27, 2015, 12:16 pm
  26. Ambrose Evans-Pritchard has another piece on the crisis in Europe over what to do about the the biggest single violator of the eurozone stability rules. And no, it’s not Greece:

    The Telegraph
    Germany’s record trade surplus is a bigger threat to euro than Greece
    If EU law were properly enforced, Germany would face fines for endangering eurozone stability and breaching the Macroeconomic Imbalance Procedure for the fifth year in a row

    By Ambrose Evans-Pritchard

    6:35PM BST 05 May 2015

    Germany’s current account surplus is out of control. The European Commission’s Spring forecasts show that it will smash all previous records this year, reaching a modern-era high of 7.9pc of GDP. It will still be 7.7pc in 2016.

    Vague assurances that the surplus would fall over time have once again come to nothing. The country is now the biggest single violator of the eurozone stability rules. It would face punitive sanctions if EU treaty law was enforced.

    Brussels told Germany to do its “homework” a year ago,, but recoiled from taking any action. We will see if Jean-Claude Juncker’s commission does any better this time.

    If not, cynics might justifiably conclude that big countries play by their own rules in Europe, and that Germany can defy all rules.

    The EMU punishment machinery is highly political, in any case. The story of the EMU debt crisis is that the authorities persistently enforce a creditor agenda rather than macro-economic welfare (an entirely different matter).

    This is the fifth consecutive year that Germany’s surplus has been above 6pc of GDP. The EU’s Macroeconomic Imbalance Procedure states that the Commission should launch infringement proceedings if this occurs for three years in a row, unless there is a clear reason not to.

    There are few extenuating circumstances in this case. Germany’s surplus is not caused by a one-off shock. The surplus remains huge even if adjusted for lower energy import costs. It is a chronic structural abuse, rendering monetary union unworkable over time, and is surely more dangerous for eurozone unity than anything going on in Greece.

    “The European Commission should stop pulling its punches: Germany should be fined,” said Simon Tilford, from the Centre for European Reform..

    “Their surplus should be treated in the same way as the southern deficits were treated earlier, as a comparable threat to eurozone stability. What is so worrying is that the surplus would normally be falling rapidly at this stage of the economic cycle,” he said.

    Germany’s jobless rate is at a post-Reunification low of 4.7pc. It should therefore be enjoying a surge of consumption. This it is not happening because the rebalancing mechanism is jammed. What this shows is the EMU remains fundamentally out of kilter, and doomed to lurch from crisis to crisis even if there is a recovery.

    Any rebound in southern Europe will lead to the same build-up in intra-EMU trade imbalances, and therefore in the same offsetting capital flows, vendor-debt financing, and asset bubbles that led to the EMU crisis in the first place.

    The International Monetary Fund warned last year that the German surplus – then 8.25pc of GDP when adjusted for the cycle – is destructive for EMU as a whole. It is between three and six percentage points higher than is either “desirable” or justified by fundamentals. It is not in Germany’s own economic interest, and makes it even harder for the EMU crisis-states to claw their way out of trouble.

    The IMF said Germany’s exchange rate is undervalued by as much as 18pc under trade elasticity theory even then, before the more recent plunge in the euro. This was achieved by squeezing wages in the early years of EMU, undercutting the South.

    Efforts by France, Spain, Italy, Portugal and Greece (super-competitive Ireland is irrelevant to this debate) to claw back lost ground by doing the same at this late stage is precisely what pushed the EMU system as a whole into a quasi-deflationary slump from 2011 to 2014.

    Germany denies that it is a serial violator of the Macroeconomic Imbalance Procedure. It admits that EMU effects have left the country with an undervalued exchange rate but denies that this is the result of “policy distortions”, let alone a deliberate, cynical, self-interested strategy of mercantilist exploitation.

    It is no mystery why the imbalance is getting worse. The German regulatory and tax structure is geared in favour of output and exports, and against consumption. It is the mirror image of Britain. Neither formula is healthy.

    “Germany should cut taxes on low incomes and VAT. It has plenty of fiscal scope to do so. It chooses not to,” said Mr Tilford.

    Berlin has refused to offset anemic demand with extra government spending. The “Ordoliberals” in the German finance ministry are instead running a budget surplus of 0.6pc of GDP in a near-religious glorification of savings.

    They are doing this even as the Kiel Canal crumbles into the water and Germany’s infrastructure slowly falls apart. Marcel Fratzscher, head of Germany’s DIW Institute, and the author of Die Deutschland Illusion says investment has fallen from 23pc to 17pc of GDP since the early 1990s. Net public investment has been negative for 12 years.

    German surpluses did not matter in the days of the D-Mark. The country revalued from time to time, correcting the problem. How Germany ran its own internal affairs were largely its own business. But as the IMF has repeatedly stated, it is an entirely different matter in a monetary union. The German surplus lies at the root of EMU’s North-South divide.

    We watch with interest to see how Mr Juncker chooses to navigate these treacherous political reefs, especially since he holds his current job by German patronage. It was Chancellor Angela Merkel who shoe-horned him into the Berlaymont last year against British objections.

    With a few honourable exceptions – such as Mr Fratzscher – the German policy elites refuse to acknowledge that there is anything wrong with their surplus policy, or even that there is any need to discuss the subject at all.

    This refusal to view matters from anybody else’s point of view is testing patience around the world. Germany has displaced China as the arch-villain in the US Treasury’s reports to Congress on currency manipulation, and for obvious reasons.

    Chronic surpluses are a way of stealing demand from elsewhere. They export unemployment to other countries. This matters in an era of “secular stagnation” and excess global savings. Societies are entitled to retaliate once this gets out of hand.

    Nor does this mercantilist policy make any sense for Germany itself. The surpluses are being recycled into capital flows abroad with a negative rate of return, eroding the wealth base that the country will need over the next 10 years as it goes into precipitous demographic decline. Historians will view the Schroder/Merkel era as a series of policy blunders.

    The sooner Germany abandons fiscal fetishism and invests its own money in its own country for its own good, the better it will be for everybody.

    Well that was typically shocking, but here’s the real kicker:


    Chronic surpluses are a way of stealing demand from elsewhere. They export unemployment to other countries. This matters in an era of “secular stagnation” and excess global savings. Societies are entitled to retaliate once this gets out of hand.

    Nor does this mercantilist policy make any sense for Germany itself. The surpluses are being recycled into capital flows abroad with a negative rate of return, eroding the wealth base that the country will need over the next 10 years as it goes into precipitous demographic decline. Historians will view the Schroder/Merkel era as a series of policy blunders.

    Yep! One of the excuses you often hear of late to these kinds of criticisms is that Germany’s trade is almost in balance with the rest of its eurozone members which is true now, but that’s only because demand for German goods evaporated in the austerity-addled countries after they fell into depressions. Instead of reducing its trade surpluses by raising wages and importing more from its neighbors, Germany continued largely suppressing wages and demanded that its ailing neighbors follow the “internal devaluation” path to trade rebalancing where all of the eurozone’s ‘periphery’ economies ended up ‘devaluing’ their internal economies so much that the public simply couldn’t afford to import. That’s how the intra-eurozone surpluses were dealt with.

    And now, instead of using those surpluses to import more from its neighbors and rebalancing the eurozone or just engaging in fiscal transfers (which are politically toxic but probably the most effective and fairest long-term solution), those German surpluses are getting reinvested in neighboring economies that are so weak that the rates of return are a pittance. In other words, by pursuing a mercantilist economic strategy, German’s economy gained relative strength within the eurozone in a manner that weakens the overall eurozone itself. There’s a word for that.

    And going forward, pretty much the best case scenario for the rest of eurozone ‘periphery’ is the worst case scenario for the world, especially given all of the grand global free trade agreements under consideration. The only path to healing for the eurozone periphery that the troika allows is that they redesign their economies under the German ‘Ordoliberal’ model to promote exports, suppress wages and domestic consumption, and then run massive surpluses with the world too and pulling that off is the best case scenario under these rules. And if they all accomplish that, the whole world is f@#ked. There’s a word for that too.

    Posted by Pterrafractyl | May 6, 2015, 11:03 am
  27. The London School of Economics and Political Science’s European Politics and Policy Blog has an interesting post summarizing the work of two researchers that just interviewed a number of senior German finance and foreign ministry officials and examined how the dominant role ordoliberalism plays in Germany policy-making decisions has basically become the new overriding framework across Europe with all sorts of negative unintended consequences (they actually frame their analysis within an “unintended consequences” model). Putting aside whether or not all those negative consequences were actually unintended, it sounds like some interesting new research:

    The London School of Economics and Political Science
    European Politics and Policy Blog
    Germany is stuck with a crisis it did not foresee and can no longer control

    Germany is often described as a ‘reluctant hegemon’ in the sense that it has found itself pushed to the centre of EU affairs by the Eurozone crisis. Peter Nedergaard and Holly Snaith write that the increasing importance of Germany in the EU has resulted in a particular brand of German ‘ordoliberal’ thinking becoming institutionalised at the European level. They argue that this has had some unintended consequences for Germany, which now finds itself trapped in the centre of a crisis that it can no longer control.

    Few could look at the contemporary shape of the Eurozone and argue that there have not been some fairly major unintended consequences. Indeed, one would rather hope that is the case, because the reverse would imply that policymakers intended to create the conditions for the chaos that has resulted.

    In a recent study, we explore how the current or historic state of integration fits with actors’ preferences, and how the integration of those preferences may ultimately produce perverse outcomes. Ultimately, our primary concern is Germany: Germany has of course been a key player in designing and maintaining, not always successfully, the rules-based framework of the Eurozone and its predecessors. Our analysis is based in part on a series of interviews obtained with senior civil servants within the German finance and foreign ministries (the Bundesministerium der Finanzen and Auswärtiges Amt). And we ultimately conclude that, like the travellers in Rimbaud’s famous poem ‘The Drunken Boat’, Germany is increasingly akin to the protagonist who laments their experience, ‘As I drifted on a river I could not control, No longer guided by the bargemen’s ropes…’

    We use a perspective based on Robert Merton’s classic, and elegantly simple, analysis of unintended consequences in order to frame Germany’s engagement with the Eurozone. Merton’s ultimate insight is that when actors engage in ‘purposive social action’ to effect a certain end, these actions often do not produce the effects desired by the original actor, for four reasons. The most obvious hindrance is provided by the existing state of knowledge (or lack of knowledge), as the information on which we base our action is inevitably incomplete.

    Other fields from which unintended consequences can arise include error (a failure to recognise that procedures that have been successful in certain contexts need not to be so under all circumstances); the ‘imperious immediacy of interest’ (an overriding concern with anticipated positive consequences that stifles other possible consequences: in other words, wilful ignorance); and the influence of ‘basic values’ (where actors are so wedded to the necessity of ‘certain actions conjoined by certain fundamental values’ that they cannot conceive of alternatives). Using Merton’s framework, we would argue that whilst all of these facets can be seen in the case of the Eurozone, many of the pathologies witnessed during the crisis can be attributed to ordoliberalism functioning as a ‘basic value’ of German policy-makers, which functions to shut out alternatives.

    The Freiburg, or ‘Ordoliberal’ School, originated in a highly influential group of German economists and lawyers operating from 1936 onwards, with Walter Eucken (1891-1950) and Franz Böhm (1895-1977) as the key scholars. Under an ordoliberal conception, the basis of a successful economic policy is the establishment of a strong legal and institutional framework, which Eucken termed ‘Ordnungspolitik‘ – literally, ordered politics. The distinctiveness of ordoliberalism comes into sharp relief when it is compared to Keynesianism and neoliberalism. Ordoliberal philosophy does not, for example, authorise unlimited intervention in the market. Instead it advocates a specific type of state intervention (namely, that it should provide the circumstances that best facilitate a competition oriented market), which differentiates it strongly from Keynesianism.

    Ordoliberalism is nonetheless more committed to state activity than laissez-faire liberalism (often equated in a contemporary context to neoliberalism) in particular to prevent the emergence of cartels. Five principles of ordoliberalism can be delineated (injunctions to avoid limits on liability, and effect price stability, constitutional predictability in economic policy, and restraints on economic steering). As our interviews found, self-proclaimed ordoliberals are rife within the German Ministry of Finance and Ministry of Foreign Affairs, with responses stating, for instance, that ‘there is a very strong ordoliberal tradition within the administration, which is irrespective of left-right patterns’, and that there is ‘a deep ingrained preference for a kind of German ordoliberal crisis management’.

    It was not until the Eurozone crisis that ordoliberalism really gained recognition as a model of state organisation beyond Germany’s borders. The obvious cause of this resurgence was the spread of austerity across Europe accompanied by the widespread perception that this was the result of a set of distinctively Germanic economic norms. We have traced the presence of ordoliberal political involvement in the history of European monetary integration, through the Werner plan and ‘snake in the tunnel’ of 1971-1973, the European Monetary System, and the negotiations over Maastricht (in particular, the Stability and Growth Pact).

    The incipient ordoliberalism emerging within European monetary integration has proven a motor for further action. As German economic strength was traded for a greater reliance on binding EU rules, this has over time resulted in pressure for further integration, and not necessarily in a direction that Germany might ultimately have wished for. Our analysis demonstrates how the four sources of error have impacted German policy-making, and not necessarily for the better.

    Germany has, in the eyes of many observers, come out of the Eurozone crisis in a position of particular strength. The configuration of European economic integration – and in particular EMU since the crisis – exhibits evidence of incremental ‘ordoliberalisation’, which is especially apparent when the possible alternatives are considered. Nonetheless, our interviews did suggest tensions between the competing objectives of German domestic politics, and the country’s role in Europe, that seem to stem at least partially from the uploading of ordoliberal ideas to the EU level.

    It became clear to us through the interviews that there was a perceived correspondence between economic success at home and the strength, credibility and legitimacy of a country’s voice in Europe – thus, translating ordoliberal values to the EU level may be regarded as an end in itself for Germany. However, this has not come without a cost. In adopting the ordoliberal precepts of EMU, periphery countries first benefited from importing German-influenced economic policies, and then suffered when the removal of their monetary and fiscal room for manoeuvre exposed severe structural weaknesses in their economies.

    In this vein, many of the interviewees within the German ministries expressed a sense of bathos that although Germany, as both a political actor and a source of institutional norms has effectively ‘won’; this has resulted in a large number of consequences that Germany neither foresaw nor wished for.

    “In this vein, many of the interviewees within the German ministries expressed a sense of bathos that although Germany, as both a political actor and a source of institutional norms has effectively ‘won’; this has resulted in a large number of consequences that Germany neither foresaw nor wished for.”
    Bathos in the halls of power from the folks that have consistently insisted on the very policies that keep the crisis going. Imagine that.

    And note this key insight gathered from their interview of senior German finance and foreign ministry civil servants:


    It became clear to us through the interviews that there was a perceived correspondence between economic success at home and the strength, credibility and legitimacy of a country’s voice in Europe – thus, translating ordoliberal values to the EU level may be regarded as an end in itself for Germany. However, this has not come without a cost. In adopting the ordoliberal precepts of EMU, periphery countries first benefited from importing German-influenced economic policies, and then suffered when the removal of their monetary and fiscal room for manoeuvre exposed severe structural weaknesses in their economies.

    First, keep in mind that one of the most severe structural weaknesses across almost all of the eurozone economies at this point is the fact that the eurozone has removed their monetary and fiscal room for manoeuvre. But also note the key paradox at work in the worldviews the researchers found held by senior German foreign and finance ministry officials: in order for Germany to be an effective leader, it needs to have a strong economy. And therefore, policies that keep Germany’s economy strong are needed in order to ensure Germany has the credibility and legitimacy it needs to steer Europe through this period of crisis. How exactly policies that might harm Germany’s economy somewhat but help the rest of the eurozone get interpreted within this framework is a bit of a mystery which is rather problematic for something like the eurozone. And it’s a reminder that, when it comes to crafting crisis-response policies for the eurozone, there’s a rather fine line between “unintended consequences” and acceptable collateral damage.

    Posted by Pterrafractyl | August 25, 2015, 10:04 pm
  28. In the long run, we’re all dead. But at least before we die we get to learn a lesson or two and hopefully carry on those lesson to the next generation. So in the long run, we may be dead, but hopefully humanity is more knowledgeable too.

    Of course, as this 2010 post by Paul Krugman reminds us, when those lessons of the past involve things like adopting a Keynesian-style short-term stimulus response in order to deal with a major consumer demand shortfall that logically results from a major recession so we can avoid a deflationary death-spiral, there’s no shortage of economist that would gladly choose long run deflationary damage as long as it involves the kinds of supply-side “structural reforms” (like gutting pensions and public spending and cutting taxes on business) that the right-wing has been pining for for a long, long time and would only help (in theory) in the long run unless “expansionary austerity” is actually a valid concept and the implementation of long run supply-side “reforms” somehow leads to a short-term stimulus.

    In other words, in the long run we may all be dead, but the ideological zombies of the pro-austerity supply-side crowds don’t learn and never die:

    The New York Times
    The Conscience of a Liberal

    In The Long Run, We Are Still All Dead

    Paul Krugman
    June 25, 2010 5:04 am

    So, reading Mohamed El-Erian, I’m somewhat at a loss about what he’s actually saying; what, exactly, is the policy recommendation? But in any case, here’s what struck me: he writes,

    The world is facing deep structural challenges yet its leaders are stuck in a short-term, cyclical mindset.

    I disagree. If anything, we’re suffering from the opposite problem. Talk to German officials about high unemployment and the looming threat of deflation, and they ramble on about the demographic challenge and the cost of pensions.

    I mean, why shouldn’t we be focused on the business cycle? We’ve suffered the worst cyclical downturn since the Great Depression; in terms of unemployment and output gaps, we have recovered almost none of the lost ground. Millions of willing workers are idle because of lack of demand; let them stay idle, and we can turn this into a long-term structural problem, but right now it is precisely a short-term, cyclical problem.

    So saying that we need to focus on the long term, and not worry our little heads about trivial short-term issues like the highest long-term unemployment rate since the Great Depression, may sound like wisdom — but it’s actually folly.

    Oh, and one more point — not about El-Erian, but about quite a few policymakers and economists: the attempt to shift the discussion away from the short run is not, as often portrayed, an act of vision of courage. On the contrary, it’s an act of cowardice, an attempt to evade responsibility for a disastrous state of affairs that we could fix, but choose not to.

    Keynes had it right:

    But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

    So that was 2010, when the US’s fiscal stimulus (which, as Krugman pointed out when it was being proposed, was too small for the task at hand) was winding down and Europe was just getting started in its quest to prove Keynes wrong and supply-side Ordoliberalism right. As we already know, it’s a long run quest:

    Irish Times
    Germany’s approach to crisis lost in translation

    Derek Scally

    Thu, Mar 1, 2012, 00:00

    AMERICA’S FIRST Nobel Prize winner for economics, the late Paul Samuelson, was fond of saying that God gave economists two eyes and it was up to them to use them. The euro zone crisis is, among other things, an academic argument between two economic traditions, each accusing the other of limited vision while themselves having only one eye open.

    hDominating the English-language debate is a Keynesian tradition, which believes that anti-cyclical stimulus is key to reviving euro zone growth. When Germany rejects this thinking, few bother to ask why. Germany is not very good at arguing its case, nor can it fall back on syndicated economists to make its case. And so Berlin is written off as “difficult”, its economic thinking misguided or even malicious.

    Yet Germany’s strategy in the euro zone is informed by an economic school as legitimate, it believes, as Keynesianism: ordoliberalism. Its core idea is that the state provides an overall economic framework but keeps out of economic development.

    Ordoliberalism is, in one sense, anti-Keynesian, and shares the neo-liberal objection to expansive fiscal and monetary policy to steady recession-hit economies. But Germany’s postwar application of ordoliberalism – Soziale Marktwirtschaft(social market economy) – departs from neo-liberalism in giving the state a role in income redistribution, hindering cartels and monopolies and managing a robust welfare safety net.

    This economic model is the foundation of post-war German prosperity and is embraced by almost all German economists and politicians. Understanding ordoliberal thinking is key to understanding – if not accepting – Germany’s euro zone crisis strategy.

    The starting point of ordoliberalism is the focus on an economy’s supply side as the key to output, growth and employment. Markets always work smoothly but if shocks come, and demand falls below supply, wages and prices will automatically adapt to correct this – unless barriers such as a minimum wage get in the way.

    Thus Berlin’s reluctance to support bailouts was not simply motivated by a hard heart, but by a deeply held belief that the state should stay out of economies as far as possible.

    Critics say ordoliberalism is overly rigid, with an in-built blindness to how economic decisions in one country have a knock-on effect in another. For instance, well-intentioned German reforms a decade ago – cutting costs and promoting wage restraint – dramatically drove down the cost of its own products, critics say, while strangling domestic demand and creating a huge trade surplus.

    Their demands that Germany intervene to reverse this trend, however, simply do not compute in Berlin. Drawing on their own economic tradition, Germans argue that boosting German wages would only harm its own competitiveness. The solution, they argue, lies with those who have the problem: welfare reforms, wage restraint and pay cuts to boost exports while reducing domestic demand, imports and deficits.

    The ordoliberal conviction that growth can be generated by cutting budget deficits and public spending defies all logic, the Keynesians cry: throw money at the problem!

    Ordoliberals shout back that more debt will only make the problem worse. Balancing the budget will steady the economy: lower deficits require lower taxes to service the loans, something that will unleash economic growth. If everyone adopted ordoliberal ideas and kept their economic house in order, economic disturbances would not be triggered, requiring Keynesian-style interventions.

    This is the thinking behind the fiscal compact, viewed by many outside Germany as an unwelcome imposition of alien economic thinking with little practical use in the immediate situation. But wishing away ordoliberalism isn’t a realistic option. Angela Merkel needs a European nod to German ordoliberal principles to sell the pact to her own voters who feel that, from bailouts to ECB bond-buying, Germany has made one ordoliberal compromise after another.

    Analysts in Berlin suggest that, to end the stand-off in the crisis, Germany’s partners should focus on issues where movement can be expected in Berlin.

    “Instead of attacking excessive [German] austerity . . . a more promising strategy would be to demand pan-European growth and investment programmes,” write Sebastian Dullien and Ulrike Guérot of the European Council on Foreign Relations in a recent paper, The Long Shadow of Ordoliberalism. “Instead of opposing balanced budgets, asking for more time in reaching them might be met with more understanding from Berlin.”

    In finding a path forward, German willingness to compromise its ordoliberal principles should not be underestimated. Neither should Berlin’s deep-rooted belief in the economic ideas that have served it well for six decades.

    Note that the above article was written in 2012 and it was already apparent by then that Europe’s policy debates were going to be less about that actual merits of the dominant Orodoliberal orthodoxy that had suddenly become the default economic template for Europe and more about how the rest of Europe is just going to have to come to terms with the fact that opposition to anything other than Ordoliberal supply-side mandates were simply not going to politically feasible in Berlin:


    This is the thinking behind the fiscal compact, viewed by many outside Germany as an unwelcome imposition of alien economic thinking with little practical use in the immediate situation. But wishing away ordoliberalism isn’t a realistic option. Angela Merkel needs a European nod to German ordoliberal principles to sell the pact to her own voters who feel that, from bailouts to ECB bond-buying, Germany has made one ordoliberal compromise after another.

    Analysts in Berlin suggest that, to end the stand-off in the crisis, Germany’s partners should focus on issues where movement can be expected in Berlin.

    “Instead of attacking excessive [German] austerity . . . a more promising strategy would be to demand pan-European growth and investment programmes,” write Sebastian Dullien and Ulrike Guérot of the European Council on Foreign Relations in a recent paper, The Long Shadow of Ordoliberalism. “Instead of opposing balanced budgets, asking for more time in reaching them might be met with more understanding from Berlin.”

    Also note that when you read:


    Ordoliberals shout back that more debt will only make the problem worse. Balancing the budget will steady the economy: lower deficits require lower taxes to service the loans, something that will unleash economic growth. If everyone adopted ordoliberal ideas and kept their economic house in order, economic disturbances would not be triggered, requiring Keynesian-style interventions.

    that this analysis ignores the Keynesian argument that a temporary stimulus is actually what is needed to get a nation’s house “back in order” under abnormal circumstances like a major demand shortfall (assuming you don’t want to wait for “the long run” to fix things). But beyond that, the Ordoliberal argument not only ignores the fundamental issues associated with a currency union and “sharing” monetary policy, but, somewhat amazingly, Ordoliberalism actually rejects the lessons from one of the schools of economic thought most associated with the term “supply-side economics”: Milton Friedman and monetarism:

    Center for European Reform
    What explains Europe’s rejection of macroeconomic orthodoxy?

    Written by Simon Tilford, 05 February 2014

    The 1930s depression led to the birth of Keynesian economics, because the prevailing economics orthodoxy had no answers to the crisis. Keynes demonstrated that the government could, and should, intervene to correct a shortfall of demand in the economy. The rise of monetarism in the 1970s saw the challenging of the Keynesian reading of the 1930s. Monetarists argued that the 1930s depression was caused by governments failing to prevent the collapse of the money supply (the amount of money in circulation), which led to a collapse of demand rather than a collapse of demand leading to a collapse of money, as per the Keynesian analysis. Despite their differences, both camps agree that there is an indispensable role for macroeconomic policy in combating a slump.

    By contrast, the depression that started in 2008, and which Europe is still struggling to emerge from, has led to the explicit rejection of Keynesian economics across Europe, and the implicit rejection of monetarism. How has a crisis borne largely of poorly run and regulated financial institutions, combined with the creation of a currency union modelled on the gold standard been used to turn the clock back on both economic theory and history? And what does it mean for Europe?

    Keynesian critics of the direction of macroeconomic policy-making in Europe have long become accustomed to having their views caricatured. Their criticism of the pace of austerity is presented as a call to ‘artificially pump up demand’. This assertion rests on two assumptions: Keynesians ignore the supply side of the economy, and that Europe’s crisis is a result of government failure to push through supply-side reforms. This chorus of criticism has picked up further with signs of economic improvement in the eurozone and UK, despite fiscal austerity for the last three years.

    What have Keynesians actually said, as opposed to what has been attributed to them? They argue that fiscal policy is an indispensable tool to stabilise economies suffering from a drop in domestic demand. This is especially so when interest rates had fallen to close to zero (neutering the effectiveness of monetary policy). When businesses and consumers do not want to borrow and invest even when nominal interest rates are close to zero, monetary policy is unable to stimulate demand. Keynesians also argue that fiscal policy is especially important in a currency union (where interest rates are set for the currency union as a whole rather than for the needs of individual economies). Few Keynesians dismiss the importance of supply-side policies; rather they argued that supply-side reforms will not help address a crisis of demand (and that the wrong macroeconomic policies can outweigh the potentially positive impact of supply-side policies). Finally, mainstream Keynesian economists have not said that austerity would prevent economic recovery at some point. Instead, they have said that recovery would take place at a lower level of activity, with an unnecessary accumulation of debt and the risk of deflation.

    Keynesian advice was followed (up to a point) in the early stages of the crisis, and by late 2009, the European economy was recovering (see chart). However a dramatic tightening of fiscal policy in 2010 helped push the eurozone and UK economies back into a recession, which in the case of the eurozone only came to an end with an easing of fiscal austerity over the second half of 2013. Since then, European governments and the European Commission have argued that any attempt to boost demand would be at best useless and at worst damaging.

    The rejection of monetarism has been less strident, but no less striking. Monetarists are sceptical that governments can affect the amount of demand in the economy through fiscal policy, but are unequivocal that central banks should prevent a collapse in the money supply. Following the launch of the euro, the ECB initially focused on two pillars when setting interest rates – an inflation target of 2 per cent and a ‘reference value’ of 4.5 per cent annual growth in money supply (M3) – but has quietly dropped the second pillar. Annual growth in M3 slid to just 1 per cent in December 2013.

    Where has this rejection of orthodox thinking led Europe? The chart below shows the relative performance of the US, eurozone and UK economies since the beginning of 2008. The US authorities have followed a pretty much standard textbook approach to the crisis, providing some fiscal stimulus to offset the weakness of demand and injecting as much monetary stimulus as possible. The US recovery has been disappointing (by US standards) but still compares highly favourably with what has happened in Europe.

    What about growth prospects? Advocates of Europe’s current approach argue that the reforms being pushed have improved Europe’s growth potential. However, even the European Commission and the IMF – the architects of the European approach – expect a very modest recovery, averaging 1.3 per cent a year for the next three years (compared with over 3 per cent in the US). Many other forecasters are even more pessimistic about Europe’s prospects.

    The reason for this pessimism is obvious – the damage done to the supply-side of European economies by low rates of investment (both public and private) and high unemployment (the longer someone is out of work, the less likely that person is to find a job). Far from boosting the supply side of the European economy, austerity has made structural changes less, not more likely: fiscal stimulus in the US allowed the private sector to reduce debt levels, hastening the point at which investment recovered. By contrast, the process of reducing private sector debt levels has much further to go in Europe.

    [see chart]

    What has happened to public debt? The argument for fiscal austerity was that it was necessary in order to arrest the rise in debt ratios, even if the result was a hit to economic growth. The eurozone’s ratio of debt to GDP has risen by a bit less than the US’s since the beginning of 2008 (see chart), but the US ratio is now falling quite quickly as economic recovery boosts tax revenues. The eurozone’s debt ratio did drop slightly in the third quarter of 2013, but this reflected an exceptional fall in Germany rather than the start of a trend. Moreover, in a fiscally decentralised monetary union, the aggregate debt figure is pretty meaningless. What matters in the eurozone are the debt ratios of countries such as Italy and Spain. The UK has experienced a huge rise in debt partly because it suffered a very deep recession and slow recovery and partly because of the costs of clearing up its banking sector (around 10 percentage points of GDP).

    In conclusion, it is hard to be optimistic about Europe’s economy while conventional economic thinking and history are being ignored. ECB representatives from the countries facing the most acute deflation threat are becoming more assertive, but the central bank will remain politically constrained. Moreover, the fiscal stance across the eurozone will remain restrictive, not least because of the impact of weak inflation on deficits and debt levels and hence on the scope for governments to ease up on the pace of austerity. Modest steps by the ECB, a gradual clean-up of the banks and a very modest cyclical economic recovery are unlikely to be enough to head off the threat of deflation.

    “In conclusion, it is hard to be optimistic about Europe’s economy while conventional economic thinking and history are being ignored.”
    Yes, it is indeed hard to be optimistic about Europe’s economy when it’s leaders are caught in the grip of an economic death cult that makes Milton Friedman seem like a genius in comparison. And as the article pointed out, it’s also hard to be optimistic when the Ordoliberal policies focused on “structural reforms” actually make key structural reforms (like reducing private-sector debt) less likely:


    The reason for this pessimism is obvious – the damage done to the supply-side of European economies by low rates of investment (both public and private) and high unemployment (the longer someone is out of work, the less likely that person is to find a job). Far from boosting the supply side of the European economy, austerity has made structural changes less, not more likely: fiscal stimulus in the US allowed the private sector to reduce debt levels, hastening the point at which investment recovered. By contrast, the process of reducing private sector debt levels has much further to go in Europe.

    Feeling optimistic? No? Well, don’t think that complaining to the architects of Europe’s Ordoliberal regime like German finance minister Wolfgang Schaeuble will make a difference. He’s already made it clear to critics that he’s had enough of their criticism of Ordoliberalism and Berlin’s “management role” that it never wanted but has accepted (his words):

    Politico EU
    Schäuble to America: Stop lecturing me

    The German finance minister’s economic thinking explained by the master himself.

    By Florian Eder

    9/11/15, 9:05 PM CET

    Updated 9/12/15, 9:52 AM CET

    BERLIN – German finance minister Wolfgang Schäuble has been annoyed with well meant advice from U.S. politicians for years — helpful hints on fiscal and monetary policies in general and on how to end the European financial crisis and deal with Greece in particular.

    On Friday, he felt it was time to answer.

    Speaking at a conferencse of the American Council on Germany and the German Atlantik-Brücke, Schäuble told his counterparts in Washington to stop lecturing him. “We are following our own formula. And we will succeed,” he said.

    “When we call for structural reforms in return for financial assistance, this isn’t some narrow-minded mantra being repeated by people who have lost sight of the big strategic questions of the future,” Schäuble said.

    He even offered his own advice for U.S policymakers. “In fact, this may well be the most important long-term strategic question we face today,” Schäuble said. ”In the European Union, we have to act differently than in the union that makes up the United States.”

    It is more than just annoyance that drives the 72-year-old veteran of German politics. He’s also motivated by proving that he is right and critics are wrong. “The formula is working,” Schäuble said, referring to economies in Spain, Portugal and Ireland that returned to good health after adopting unpopular EU rescue programs that enforced austerity measures.

    When you read, “referring to economies in Spain, Portugal and Ireland that returned to good health after adopting unpopular EU rescue programs that enforced austerity measures,” note that the unemployment rate in Spain is the second highest in the eurozone at 22.5 percent. Also, Ireland’s recovery should probably be taken with a grain of salt. And Portugal’s overall unemployment rate in July fell from 14.1 percent in July 2014 to 12.1 percent this year. And the youth unemployment in Portugal fell from 31.6 percent to 31.0 percent, which is significantly better than Spain’s 53.2 percent youth unemployment rate but still significantly greater than the EU average youth unemployment rate of 22.2 percent.

    These are the Schäublenomics success stories touted by Schaeuble and Merkel.

    Continuing…


    The core of Schäuble’s economic thinking is to reduce governmental debt in order to make money available for investment rather than debt servicing and to enable economies to grow.

    Schäublenomics explained by Schäuble, a trained lawyer, sound like this, in just a few lines: “We intend to make sure that government spending grows more slowly than tax revenue. This generally means that government spending must not grow faster than GDP does,” he said.

    That together with structural reforms and, eventually, investment will lead to new economic growth, in the view of the economic gospel according to Schäuble.

    Germany has often been criticized for imposing Schäublenomics on the rest of the eurozone. Wrongly so, its inventor said: “When it comes to making sure that Europe is successful, Germany has a special responsibility, simply because of our economic strength and our position in the heart of Europe.”

    Germans had found this role difficult to accept, Schäuble said, “and we still do. But this management role – as I would like to call it – has fallen to us, at a time when Europe is in crisis and is also surrounded by new crises. Others have high expectations of us.”

    Europe had a “special nature” with 28 sovereign countries, Schäuble stated, a structure, he helpfully noted, “that some Americans sometimes find hard to understand”.

    That “special nature” is the reason a pledge for a change of the EU treaties is part of Schäuble’s thinking. As long as there were 28 governments accountable to their 28 parliaments and electorate, nothing will ever happen that could harm politicians’ chances to be re-elected.

    “In the actual EU treaties, there is always a temptation for leaders not to do what is needed,” he said, but to settle for an easier solution. “The risk of moral hazard is much higher than elsewhere in the world.”

    Behold, Schäublenomics!


    The core of Schäuble’s economic thinking is to reduce governmental debt in order to make money available for investment rather than debt servicing and to enable economies to grow.

    Schäublenomics explained by Schäuble, a trained lawyer, sound like this, in just a few lines: “We intend to make sure that government spending grows more slowly than tax revenue. This generally means that government spending must not grow faster than GDP does,” he said.

    That together with structural reforms and, eventually, investment will lead to new economic growth, in the view of the economic gospel according to Schäuble.

    Yes, “We intend to make sure that government spending grows more slowly than tax revenue. This generally means that government spending must not grow faster than GDP does,” so let’s implement austerity policies that shrink the GDP so much by slashing government spending that the debt-to-GDP ratio is actually higher in Spain, the UK, France, Italy, Portugal, Ireland, and Greece than it was in 2012 (which were already significantly elevated from the 2010 debt-to-GDP levels, when austerity really got underway and much much higher debt-to-GDP levels than in 2008, which is quite notable when the entire narrative of pro-austerity crowd was that out-of-control public spending was the problem).

    But we shouldn’t complain about the imposition of “Schäublenomics” because Germany, as Europe’s biggest economy, has a “special relationship” with the rest of the eurozone (and EU) to do that which politicians won’t normally do because it might cost them their elected office:

    Germany has often been criticized for imposing Schäublenomics on the rest of the eurozone. Wrongly so, its inventor said: “When it comes to making sure that Europe is successful, Germany has a special responsibility, simply because of our economic strength and our position in the heart of Europe.”

    Germans had found this role difficult to accept, Schäuble said, “and we still do. But this management role – as I would like to call it – has fallen to us, at a time when Europe is in crisis and is also surrounded by new crises. Others have high expectations of us.”

    Europe had a “special nature” with 28 sovereign countries, Schäuble stated, a structure, he helpfully noted, “that some Americans sometimes find hard to understand”.

    That “special nature” is the reason a pledge for a change of the EU treaties is part of Schäuble’s thinking. As long as there were 28 governments accountable to their 28 parliaments and electorate, nothing will ever happen that could harm politicians’ chances to be re-elected.

    “As long as there were 28 governments accountable to their 28 parliaments and electorate, nothing will ever happen that could harm politicians’ chances to be re-elected.”
    And therefore the eurozone should just let Wolfgang Schaeuble assert his rightful “management role” as the finance minister of the eurozone’s largest economy and impose “Schäublenomics” on the rest of the the European Union despite the fact that it’s an economic theory that’s basically failed supply-side economics combined with the false hope of a decent public sector (because only the wealthiest nations get that under “Schäublenomics”) and some sort of mercantilistic exports-at-all-costs viewpoint that can’t possibly work at a continental or global level. Europe has a “special nature” with 28 sovereign countries and therefore a grand EU experiment with an unprecedented monetary union and “Schäublenomics” should just be uncritically imposed and given enough time to prove its critics right. Americans should just think of him as Europe’s version of Grover Norquist, except taking the pledge isn’t really an option. Why can’t people accept all that and stop complaining? It will all work out in the long run.

    In other news…

    Posted by Pterrafractyl | September 12, 2015, 8:24 pm
  29. The Economist had a piece on Ordoliberalism that makes some key points about the economic philosophy that really can’t be stressed enough these days: First, it’s important to keep in mind that Ordoliberalism is school of thought that, like the Austrian School, is basically a liquidationist school that declares government stimulus spending a pointless waste and mandates that we just wait for “the market” to work itself out regardless of the consequences. It’s not particularly surprising considering that Walter Eucken, the father of Ordoliberalism, frequently shared ideas with his close friend Friedrich von Hayek.

    A second key is closely related to the first, but still worth explicitly pointing out. It’s also a rather shocking point considering that this is the economic school of thought that dominates the eurozone’s policy-making, but it is what it is: Ordoliberalism “is at heart a microeconomic model that disavows macroeconomic policy because it treats countries, or even an entire currency zone, as if they were individual households”:

    The Economist
    Of rules and order

    German ordoliberalism has had a big influence on policy during the euro crisis
    May 9th 2015 | BERLIN |

    “NO MATTER what the topic, it’s four to one against me,” laments Peter Bofinger, one of the five members of Germany’s Council of Economic Experts, which advises the government. The other four, he says, consider deficits and debt bad, oppose the European Central Bank’s quantitative easing as “monetary meddling” and believe austerity is the answer to the euro crisis. In Germany, says Mr Bofinger, “I’m the last Keynesian—and I feel like the last Mohican.”

    The relationship between Mr Bofinger and his colleagues mirrors the gap that exists between German and Anglo-Saxon (or Latin) views of economics. German thinking on economics has long differed from the mainstream in other countries, including other euro-zone members. In the past six years of euro crisis, the gap has become larger, more visible and more controversial. Sebastian Dullien of the European Council on Foreign Relations, a think-tank, says that this amounts to a “decoupling” of Germany from the rest of the world.

    Such a stance leaves economists outside Germany bewildered. Why are Germans sceptical of attempts by the ECB to pep up Europe’s economies? Why do they insist on fiscal austerity in countries where demand is collapsing? And why are they obsessed with rules for their own sake, as opposed to their practical effects?

    The answers are rooted in German intellectual history, especially in ordoliberalism. This is an offshoot of classical liberalism that sprouted during the Nazi period, when dissidents around Walter Eucken, an economist in Freiburg, dreamed of a better economic system. They reacted against the planned economies of Nazi Germany and the Soviet Union. But they also rejected both pure laissez-faire and Keynesian demand management.

    The result was a school that was close both in personal contacts and in its content to the Austrian school associated with Friedrich Hayek. The two shared a view that deficit spending for demand management was foolish. Ordoliberalism differed, however, in believing that capitalism requires a strong government to create a framework of rules which provide the order (ordo in Latin) that free markets need to function most efficiently.

    From the original ordoliberals sprang one big idea for state intervention when cartels dominated the economy: a muscular antitrust policy. A second was a strict monetary policy that focused rigidly and exclusively on price stability. A third was the enforcement of Haftung, which means not just liability but also responsibility. Germany has tougher insolvency laws than America or Britain, for instance.

    Through Ludwig Erhard, West Germany’s first economics minister and second chancellor, ordoliberalism strongly influenced post-war economic policy. There was a brief flirtation with Keynesianism in the 1960s. But Germany passed its philosophy of antitrust vigour and monetary hawkishness on to the European Union and the ECB. There are ordoliberal fingerprints on the euro zone’s stability and growth pact, agreed on in the 1990s as a rules-based way of curbing budget deficits, even if it was a German centre-left government that first breached the pact.

    The financial crisis of 2008 exposed the gap between Germany and the rest of the world even more starkly. In America it brought Keynesianism back into fashion. Both George Bush and Barack Obama responded with fiscal stimulus. Germany also adopted fiscal expansion, but many German economists cried foul.

    Then, as the euro crisis unfolded, says Mr Bofinger, he was “permanently confronted with ordoliberal positions”. Economists outside Germany agree that microeconomic reforms were necessary. But the Germans almost uniquely argued for the anti-Keynesian concept of spending cuts amid declining demand. In Germany itself, a “debt brake” has been written into the constitution, requiring states to balance their budgets by 2020 and limiting federal borrowing (Germany’s budget is now balanced at what is touted as the “black zero”). Germany has foisted similar rules on other EU countries through the 2012 fiscal-compact treaty, partly to limit its own liability to them.

    Even more characteristic is the German attitude to rules. To some extent, this reflects the country’s culture. But it also has an ordoliberal origin. Jens Weidmann, president of the German Bundesbank, often quotes Walter Eucken, especially in passages where Haftung “must go hand in hand with” control. This gives German economists an argument for opposing Eurobonds and other forms of debt mutualisation and stressing the euro zone’s no-bail-out rule. Similarly, calls for “solidarity” (or fiscal transfers) run straight into concerns over moral hazard. Mario Monti, a former Italian prime minister, likes to claim that in Germany economics is seen as a branch of moral philosophy.

    A moral tone certainly creeps into discussions of Germany’s current-account surplus, now the world’s largest. To non-German economists, huge surpluses represent an imbalance of saving over investment that has counterparts in other countries’ deficits and, as the EU’s own macroeconomic-imbalances procedure suggests, requires corrective action. To Germans surpluses are signs of economic virtue that merely reflect competitiveness and do not merit any policy response.

    Critics find the ordoliberal tradition outdated or misguided. “Ordoliberalism is not very practical, it’s religion,” says Michael Burda, an American economist at Berlin’s Humboldt University. Most German economists simply assume, for example, that the minimum wage introduced in Germany will lead to job losses, even though empirical evidence in America and Britain suggests this need not be so.

    Ordoliberalism’s biggest flaw, says Mr Burda, lies in “failing to do the aggregation step”. It is at heart a microeconomic model that disavows macroeconomic policy because it treats countries, or even an entire currency zone, as if they were individual households. It makes sense for individuals to save when they are in debt, as the proverbial Swabian housewife does in Germany. But if all individuals cut spending at the same time, the result can be a shortfall in demand that negates the benefits of microeconomic reforms. Once in a while it is better to break rules than all go under in law-abiding misery. Yet that is not how things are seen in Berlin or Frankfurt.

    “Ordoliberalism’s biggest flaw, says Mr Burda, lies in “failing to do the aggregation step”. It is at heart a microeconomic model that disavows macroeconomic policy because it treats countries, or even an entire currency zone, as if they were individual households. It makes sense for individuals to save when they are in debt, as the proverbial Swabian housewife does in Germany. But if all individuals cut spending at the same time, the result can be a shortfall in demand that negates the benefits of microeconomic reforms. Once in a while it is better to break rules than all go under in law-abiding misery. Yet that is not how things are seen in Berlin or Frankfurt.”
    That’s a pretty good summary of a pretty massive flaw: economic models that are to be applied to entire nations (or continents) probably should disavow macroeconomic policy and treat countries as if they were an individual household. And yet here we are:


    Such a stance leaves economists outside Germany bewildered. Why are Germans sceptical of attempts by the ECB to pep up Europe’s economies? Why do they insist on fiscal austerity in countries where demand is collapsing? And why are they obsessed with rules for their own sake, as opposed to their practical effects?

    The answers are rooted in German intellectual history, especially in ordoliberalism. This is an offshoot of classical liberalism that sprouted during the Nazi period, when dissidents around Walter Eucken, an economist in Freiburg, dreamed of a better economic system. They reacted against the planned economies of Nazi Germany and the Soviet Union. But they also rejected both pure laissez-faire and Keynesian demand management.

    The result was a school that was close both in personal contacts and in its content to the Austrian school associated with Friedrich Hayek. The two shared a view that deficit spending for demand management was foolish. Ordoliberalism differed, however, in believing that capitalism requires a strong government to create a framework of rules which provide the order (ordo in Latin) that free markets need to function most efficiently.

    Yep, the EU is now run according to an economic philosophy that is a somewhat less insane version of the Austrian school, in that it actually allows for the involvement of the government in managing the economy. So the government is highly limited in what its allowed to do to help during a crisis under ordoliberal doctrine, but still empowered to do what it takes to maintain the integrity of the marketplace (that’s stuck in the crisis). Just sit back and wait for the market to work it’s magic, and eventually the crisis will work itself out. The most important thing is that the market be allowed to work its magic. Also, nations can be treated like households when crafting economic policy. In other words, contemporary ordoliberalism somewhat less insane version of the Austrian school and, therefore, a less insane (but not nearly less insane enough to avoid self-reinforcing depressions) version of the the Ron Paul school of economics. So it could be worse for Europe in terms of the quality of the dominant economic philosophy. But not much worse than if the Austrian school was running the place. Bravo!

    And in unfortunately related news, Neel Kashkari, a former top U.S. Treasury official who managed the government’s $700 billion Troubled Asset Relief Program during the financial crisis and then ran as the Republican nominee for Governor in California, and who also happens to be a strong proponent of seeing the Fed raise interest rates over unfounded fears of runaway inflations, just got chosen to head the Minneapolis Federal Reserve Bank, replacing one of the biggest supporters for the current policy of low interest rates and Quantitative Easing:

    Reuters
    UPDATE 4-Kashkari, critic of easy money policy, to run Minneapolis Fed

    By Ann Saphir
    Tue Nov 10, 2015 4:20pm EST

    Nov 10 (Reuters) – Neel Kashkari, who as a top U.S. Treasury official managed a key part of the banking and auto industry bailouts during the financial crisis, was picked on Tuesday to be the next president of the Minneapolis Federal Reserve Bank.

    A former executive at Goldman Sachs and global investment firm Pimco who ran as a Republican for California governor last year, Kashkari will take over from Narayana Kocherlakota on Jan. 1.

    Kashakari, 42, has been a critic of the U.S. central bank’s accommodative monetary policies, warning that its easing policies are less effective as underlying U.S. economic growth slows, and could spark inflation.

    He may also be the first Fed policymaker featured in People magazine’s “sexiest men alive” edition and the first to tweet prolifically about everything from bears to football to his first bite of a cheese-covered hotdog inside a piece of fried chicken (“Tastes better than it looks!”).

    He will join the central bank just as Fed Chair Janet Yellen plans to begin weaning the U.S. economy from seven years of near-zero interest rates.

    The choice of Kashkari, 42, marks a departure for the Fed’s smallest regional bank, whose current chief is an enthusiastic supporter of monetary policy easing..

    Kashkari’s varied experience in politics, banking and government make him an unusual addition to the Fed policy-setting table. He also has a theatrical flair: in 2014 in what he said was both a publicity stunt and an effort to draw attention to poverty in the California gubernatorial race, he lived as a homeless man for a week. He posted a Facebook video about it afterwards.

    Kashkari ran the government’s $700 billion Troubled Asset Relief Program, which some credit for saving Detroit’s auto industry and for playing an important role in keeping the financial industry from collapsing.

    In 2009, he went to work for Pimco to build an equities business, leaving in 2013 and becoming the Republican candidate for California governor the following year. He lost handily to incumbent Democratic Governor Jerry Brown.

    SON OF INDIAN IMMIGRANTS

    Kashkari will not get to vote on Fed policy until 2017, according to the schedule of rotating votes on the central bank’s policy committee.

    In 2012, as the Fed launched its third round of bond-buying to spur the U.S. economic recovery, Kashkari was dismissive.

    “At the end of the day, this is not going to lead to real economic growth,” he told CNBC at the time. “Unfortunately, it likely leads to an inflationary outcome.”

    He becomes the third former Goldman executive to be appointed to head a Fed regional bank this year. These moves have angered the Fed Up coalition of labor groups and community activists, which says the bank represents the problems that led to the 2007-2009 financial crisis.

    To Richard Fisher, who ran the Dallas Fed until March, that’s a plus: “If you don’t understand financial markets today, you can’t really understand how the economy operates,” he told Reuters. “As long as they remember, and they do, that they work for the American people.”

    “At the end of the day, this is not going to lead to real economic growth…Unfortunately, it likely leads to an inflationary outcome.”
    That was Kashkari’s predicted result of Fed’s decision in 2012 to extend the Quantitative Easing program. Fortunately, the inflation permahawks like Kashkari and Richard Fisher have had a habit of being perma-wrong over the past six years. Unfortunately, that perma-wrongness also means inflation is probably still too low for the Fed to start the inevitable rate rise without risking the recovery. And now, with the Fed set to end its Quantitative Easing program and raise rates sooner or later, one of the biggest supporter of the low rate policies that helped the US avoid a eurozone-style deflationary death spiral is getting replaced with a permahawk. As Paul Krugman recently put it, in the words of Charlie Brown, AAUGH!:

    The New York Times
    The Conscience of a Liberal

    Supply, Demand, and Neel Kashkari

    Paul Krugman
    Nov 11 7:14 am

    So, if the Minneapolis Fed felt the need to maintain conservation of NK, they could have chosen to replace Narayana Kocherlakota with a New Keynesian. Instead, they chose Neel Kashkari. Brad DeLong isn’t happy, and this Twitter exchange suggests that he has good reason to worry.

    I’ve written before about the all-too-common fallacy of confusing demand with supply, of arguing that because we had a bubble — so that some component of aggregate demand was unsustainable — the economy as a whole was somehow producing more than its potential. Let me just repeat what I said then:

    Just a brief note: one thing that keeps appearing in comments is the notion that because we had a bubble, in which some people were borrowing too much, the economic growth of 2000-2007 wasn’t “real” — that it was all a figment of our imagination.

    This is confusing demand with supply.

    We really did produce all the goods and services counted in GDP; we were able to do that because we had willing workers, a sufficient capital stock, the right technology, and so on.

    What is true is that some of the spending that created demand for those goods and services was debt-financed, and those debtors can’t continue to spend the way they did. But that doesn’t say that the capacity has somehow ceased to exist; it only says that if we want to keep the capacity in use, someone else has to spend instead. In other words, past growth wasn’t an illusion, or a fraud; but we need policies to sustain aggregate demand.

    But now we are about to have a Fed president who says:

    How’s this? Growth was artificially fast due to leveraging of econ. Trying to return to that rate thru def spend is futile.

    In the words of Charlie Brown, AAUGH!

    That word “artificially” is the real telltale, as is Kashkari’s description of Japanese monetary stimulus as “morphine.” It’s straight out of the liquidationist playbook, e.g. Hayek denouncing the use of “artificial stimulants” to fight the Great Depression.

    So, great: we now have a liquidationist in a senior position in the Fed system.

    “That word “artificially” is the real telltale, as is Kashkari’s description of Japanese monetary stimulus as “morphine.” It’s straight out of the liquidationist playbook, e.g. Hayek denouncing the use of “artificial stimulants” to fight the Great Depression.”

    Yes, the newest Federal Reserve governor sure does sound a lot like Friedrich von Hayek. Of course, Hayek was also an opponent of having central banks at all, which is presumably something Kashkari doesn’t quite agree with. Of course, he also managed the US bailouts, which presumably wouldn’t have been approved under an Ordoliberal regime either. And back in 2001, he even advocated that the European Central Bank start its own QE program and buy bonds (while he was working for the bond giant Pimco).

    So while Kashkari’s views share a number of disturbing similarities to the Ordoliberal school, he would appear to be a bit of a fair-weather Ordoliberal at best (And he’s not the only one)

    Posted by Pterrafractyl | November 12, 2015, 10:14 pm
  30. Germany appears to have a surplus of record surpluses on its hands. First it reported a record budget surplus for 2015 back in February. Recently it was placed on a new US watchlist for nations potentially engaged in unfair foreign-exchange practices due to its massive current-account surpluses, which was the second-highest in the world. And how it has another record current-account surplus:

    Bloomberg Markets

    Germany Posts Record Current-Account Surplus Amid U.S. Concern

    Paul Gordon
    May 10, 2016 — 2:19 AM CDT

    * Surplus rises to EU30.4 billion, trade gap also at a record
    * U.S. has placed Germany on watchlist along with China, Japan

    Germany posted a record current-account surplus just days after being placed on a U.S. watchlist for countries that may have an unfair foreign-exchange advantage.

    The current-account gap climbed to 30.4 billion euros ($34.6 billion) in March, up from 21.1 billion euros the previous month, data from the Federal Statistics Office showed on Tuesday. The nation’s trade surplus, a narrower measure that only counts imports and exports of goods and services, widened to 26 billion euros, also a record.

    The U.S. put Germany, China, Japan, South Korea and Taiwan on a new currency watchlist on April 29, saying their foreign-exchange practices bear close monitoring to gauge whether they provide an unfair trade advantage over America. The economies met two of the three criteria used to judge unfair practices under a February law that seeks to enforce U.S. trade interests. Meeting all three would trigger action by the president to enter discussions and seek potential penalties, including being cut off from some U.S. development financing and exclusion from U.S. government contracts.

    While Germany has no direct influence over the value of its currency, being just one member of the 19-nation euro area, it was cited because of its current-account and trade surpluses. Taiwan made the list because of its current-account surplus and persistent intervention to weaken the currency, according to the Treasury.

    Germany’s excess savings could be used to boost growth in the euro area, the Treasury said at the time. A report by the International Monetary Fund on Monday said the current-account surplus will probably stay near record levels this year.

    While Germany has no direct influence over the value of its currency, being just one member of the 19-nation euro area, it was cited because of its current-account and trade surpluses. Taiwan made the list because of its current-account surplus and persistent intervention to weaken the currency, according to the Treasury.”
    The fact that Germany has no direct influence over the value of its currency, since it’s part of the eurozone, is important to keep in mind. Because it is true that the economic woes across the eurozone call for a much lower currency valuation than Germany would normally have, and you can’t blame Germany for a cheap currency. The rest of the eurozone really does need it.

    Granted, this is ignoring the critical role Berlin has played in maintaining the depressed eurozone economies via its insane and ongoing demands for austerity. But in a general sense, the way the eurozone is structured it’s entirely predictable that situations where Germany has a much cheaper currency than it probably should have, due to weaknesses elsewhere in the eurozone, are going to pop up over and over. And that’s why it makes sense for US criticism to focus on the massive current-account/trade surpluses. Because, while a cheap currency that leads to a big surge in exports might sort of be beyond German control at this point (again, this ignores the profound and outsized role Berlin plays in shaping eurozone and EU policies), whether or not this results in record surpluses or record budgets is still entirely totally within Germany’s control. We can’t have a functioning global economy when major exporters keep running chronic trade and budget surpluses and the eventual plan is to have those major exporters just own larger and larger chunks of the global economy. Germany just needs to spend and import more. It’s not like it can’t afford it.

    Although, if you listen to Bundesbank chief Jens Weidmann, Germany basically can’t afford it. Why? Because it has a long-term demographic issue of a shrinking population and so, according to Weidmann, the appropriate thing to do is run structural surpluses now. And when you factor in that Germany’s population is probably going to be falling for decades to come, it’s basically an argument for structural surpluses indefinitly:

    Reuters

    ECB must not keep policy ultra-loose for too long, Weidmann says

    FRANKFURT | By Francesco Canepa
    Markets | Wed May 11, 2016 3:50pm EDT

    The European Central Bank must not keep an ultra-loose monetary policy for too long or it may struggle then to wind it down, ECB governing council member and German central bank governor Jens Weidmann said on Wednesday.

    The head of the Bundesbank reaffirmed his support for the ECB’s present stance and defended the bank’s independence.

    But he warned about the risk associated with keeping the ECB’s ultra-low rates and money-printing program going for too long and defended Germany’s conservative fiscal policy against accusations that it was slowing down the European economy

    The head of the Bundesbank reiterated that defense on Wednesday, saying central banks should avoid being taken hostage by financial markets or fiscal policies.

    German Chancellor Angela Merkel also took some pressure off the central bank on Wednesday, saying it was up to euro zone governments to foster the growth necessary to lift inflation and allow the ECB to raise rates.

    But in a nod to his domestic audience, Weidmann dismissed an argument that excessive savings and insufficient investment in Germany were slowing down the ECB’s recovery.

    “Should more funds be invested in Germany? That’s something I would wholeheartedly welcome, but the disclaimer remains the same: The funds should only be invested in sensible projects,” Weidmann said.

    He also defended the German government against criticism that it was spending too little and focusing too narrowly on maintaining a surplus.

    “While I would not deny that there is scope for some more public investment in infrastructure or education, it is worth noting that fiscal policy in Germany is already in expansionary mode due to the cost of accommodating the refugees,” Weidmann said.

    “The long-term sustainability of public finances calls instead for Germany, with its demographic burden, to run a structural surplus.”

    “The long-term sustainability of public finances calls instead for Germany, with its demographic burden, to run a structural surplus.”
    Now, keep in mind that, to some extent, this is sort of a valid argument…if only consider one nation and ignore the rest of the world and the fact that large swathes of the world (primarily the developed world) are also already facing shrinking populations and the countries that are still growing are generally a lot poorer and had better start leveling off sooner rather than later if we’re going to avoid an eco-collapse. Because the global population can’t grow forever. Leveling off, or shrinking, the global population humanely is simply one of he major challenges of the 21st century. So if shrinking populations are going to be an excuse for running permanent trade and budget surpluses, we’re basically setting ourselves up to systematically strangle the global economy. Because, as the eurozone crisis needlessly reminds us, we can’t all run surpluses at once! In other words, like much of the economic ordoliberal orthodoxy we’ve seen emerge from the Berlin (which is basically updated crypto-mercantilism), if that orthodoxy gets applied everywhere, the global economy breaks.

    So we’ll see if the “we’re shrinking and therefore we need to run record trade budget and surpluses indefinitely”-argument catches on outside of Germany. Japan and China probably wouldn’t mind the argument for permanent surpluses although the developing nations still struggling with high growth rates presumably won’t be super enthusiastic about the wealthiest nations in the world systematically hoarding wealth and expecting the poorer nations to basically finance those surpluses indefinitely. But, for now, it’s one of the justifications getting used by very influential people for why Germany’s surplus of surpluses is not only not a problem, but is actually a needed long-term strategic goal. Let’s hope it’s an idea that doesn’t get overly exported.

    Posted by Pterrafractyl | May 12, 2016, 2:09 pm
  31. Nobel prize-winning economist Joseph Stiglitz wrote a book about the eurozone. Based on the excerpt below, it sounds like a must-read book. Especially for the eurozone’s policy-makers. Although one of the key points of the following excerpt is that the eurozone’s policy-makers have an ideological commitment to discredited theories driving the eurozone’s dysfunction, so a lot of other people should probably read this book too:

    The Guardian

    The problem with Europe is the euro

    In this extract from his new book, the Nobel prize-winning economist argues that if the euro is not radically rethought, Europe could be condemned to decades of broken dreams

    by Joseph Stiglitz

    Wednesday 10 August 2016 04.00 EDT

    Europe, the source of the Enlightenment, the birthplace of modern science, is in crisis. This part of the world, which hosted the Industrial Revolution that led to unprecedented changes in standards of living in the past two centuries, has been experiencing a long period of near-stagnation. GDP per capita (adjusted for inflation) for the eurozone – the countries of Europe that share the euro as their currency – was estimated to be barely higher in 2015 than it was in 2007. Some countries have been in depression for years.

    When the US unemployment rate hit 10% in October 2009, most Americans thought that was intolerable. It has since declined to less than 5%. Yet the unemployment rate in the eurozone reached 10% in 2009 as well, and has been stuck in double digits ever since. On average, more than one out of five young people in the labour force are unemployed, but in the worst-hit crisis countries, almost one out of two looking for work can’t find jobs. Dry statistics about youth unemployment carry in them the dashed dreams and aspirations of millions of young Europeans, many of whom have worked and studied hard. They tell us about families split apart, as those who can leave emigrate from their country in search of work. They presage a European future with lower growth and living standards, perhaps for decades to come.

    These economic facts have, in turn, deep political ramifications. The foundations of post-cold war Europe are being shaken. Parties of the extreme right and left and others advocating the breakup of their nation-states, especially in Spain but even in Italy, are ascendant, and in June Britain voted to leave Europe altogether. What had seemed inevitable in the arc of history – the formation of nation-states in the 19th century – is now being questioned. Questions are arising, too, about the great achievement of post-second world war Europe – the creation of the European Union.

    While there are many factors contributing to Europe’s travails, there is one underlying mistake: the creation of the single currency, the euro. Or, more precisely, the creation of a single currency without establishing a set of institutions that enabled a region of Europe’s diversity to function effectively.

    The common currency was an outgrowth of efforts that began in the mid-20th century, as Europe reeled from the carnage and disruption of two world wars. Europe’s leaders recognised that a more peaceful future would necessitate a complete reorganisation of the politics, economics and even the national identities of the continent. In 1957, this vision came closer to being a reality with the signing of the Rome treaty, which established the European Economic Community (EEC), comprising Belgium, France, Italy, Luxembourg, the Netherlands and West Germany. In the following decades, dominated by the cold war, various other western European countries joined the EEC. Step by step, restrictions were eased on work, travel and trade between the expanding list of EEC countries.

    But it was not until the end of the cold war that European integration really gained steam. The fall of the Berlin Wall in 1989 showed that the time for much closer, stronger European bonds had grown near. Hopes for a peaceful and prosperous future were higher than ever, among both leaders and citizens. This led to the signing of the Maastricht treaty, which formally established the European Union in 1993 and created much of its economic structure and institutions – including setting in motion the process of adopting a common currency, the euro.

    Advocates of the euro rightly argue that it was not just an economic project that sought to improve standards of living by increasing the efficiency of resource allocations, pursuing the principles of comparative advantage, enhancing competition, taking advantage of economies of scale and strengthening economic stability. More importantly, it was a political project; it was supposed to enhance the political integration of Europe, bringing the people and countries closer together and ensuring peaceful coexistence.

    The euro has failed to achieve either of its two principal goals of prosperity and political integration: these goals are now more distant than they were before the creation of the eurozone. Instead of peace and harmony, European countries now view each other with distrust and anger. Old stereotypes are being revived as northern Europe decries the south as lazy and unreliable, and memories of Germany’s behaviour in the world wars are invoked.

    The eurozone was flawed at birth. The structure of the eurozone – the rules, regulations and institutions that govern it – is to blame for the poor performance of the region, including its multiple crises. The diversity of Europe had been its strength. But for a single currency to work over a region with enormous economic and political diversity is not easy. A single currency entails a fixed exchange rate among the countries, and a single interest rate. Even if these are set to reflect the circumstances in the majority of member countries, given the economic diversity, there needs to be an array of institutions that can help those nations for which the policies are not well suited. Europe failed to create these institutions.

    Worse still, the structure of the eurozone built in certain ideas about what was required for economic success – for instance, that the central bank should focus on inflation, as opposed to the mandate of the Federal Reserve in the US, which incorporates unemployment, growth and stability. It was not simply that the eurozone was not structured to accommodate Europe’s economic diversity; it was that the structure of the eurozone, its rules and regulations, were not designed to promote growth, employment and stability.

    Why would well-intentioned statesmen and women, attempting to forge a stronger, more united Europe, create something that has had the opposite effect? The founders of the euro were guided by a set of ideas and notions about how economies function that were fashionable at the time, but that were simply wrong. They had faith in markets, but lacked an understanding of the limitations of markets and what was required to make them work. The unwavering faith in markets is sometimes referred to as market fundamentalism, sometimes as neoliberalism. Market fundamentalists believed, for instance, that if only the government would ensure that inflation was low and stable, markets would ensure growth and prosperity for all. While in most of the world market fundamentalism has been discredited, especially in the aftermath of the 2008 global financial crisis, those beliefs survive and flourish within the eurozone’s dominant power, Germany. These beliefs are held with such conviction and certainty, immune to new contrary evidence, that they are rightly described as an ideology. Similar ideas, pushed by the IMF and the World Bank around the globe, led to a lost quarter-century in Africa, a lost decade in Latin America, and a transition from communism to the market economy in the former Soviet Union and eastern Europe that was, to say the least, a disappointment.

    Germany, however, holds itself out as a success, providing an example of what other countries should do. Its economy has grown by 6.8% since 2007, but at an average growth rate of just 0.8% a year – a number that, under normal circumstances, would be considered close to failing. (By comparison, the US growth rate in the same period averaged 1.2%.) It’s also worth noting that developments in Germany before the crisis, in the early 2000s – when the country adopted reforms that aggressively cut into the social safety net – came at the expense of ordinary workers, especially those at the bottom. While real wages stagnated (by some accounts decreased), the gap between those at the bottom and the middle increased – by 9% in less than a decade. And through the early years of the century, poverty and inequality increased as well. Germany is talked about as a “success” only by comparison with the other countries of the eurozone.

    It is perhaps natural that the eurozone’s leaders want to blame the victim – to blame the countries in recession or depression or reeling from a referendum result – for bringing about this state of affairs. They do not want to blame themselves and the great institutions that they have helped create, and which they now head. But blaming the victim will not solve the euro problem – and it is in large measure unfair.

    It should have surprised no one that Europe’s response to the UK’s referendum was dominated by the same harsh response that greeted Greece’s June 2015 ballot-box rejection of its bailout package. Herman Van Rompuy, a former European council president, expressed a widespread feeling when he said that David Cameron’s decision to hold a referendum “was the worst policy decision in decades”. In so saying, he revealed a deep antipathy towards democratic accountability. Understandably so: in most of the cases in which voters have been directly turned to, they have rejected the euro, the European Union and the European constitution. Moreover, polls at the time of Brexit showed that a majority of those in many European countries besides the UK had an unfavourable view of the EU (including Greece, France, and Spain).

    The economic and political consequences of Brexit will, of course, depend a great deal on Europe’s response. Most assume that Europe will not cut off its nose to spite its face. It seems in the interests of everyone to work out the best economic relationship consistent with the democratic wishes and concerns of those on both sides of the Channel. The benefits of trade and economic integration are mutual, and if the EU takes seriously its belief that the closer the economic integration the better, that implies an attempt to make the closest ties possible under the circumstances. Anything the EU does to the UK to try to punish it would have an equal and opposite effect, hurting itself at least as much in the process. The fact that European stock markets were down markedly and European banks were particularly hard hit at least suggests that Brexit was bad for Europe as well.

    But Jean-Claude Juncker, the proud architect of Luxembourg’s massive corporate tax-avoidance schemes and now the head of the EU commission, has taken a hard line – perhaps understandably, given that he may go down in history as the person on whose watch the dissolution of the EU began. His line is that Europe must be unrelenting in its punishment, and should offer little more than what the UK is guaranteed under normal global agreements, such as the World Trade Organisation, lest others join the rush to the exit. What a response! According to Juncker, Europe is not to be held together because of the benefits that accrue – benefits that far exceed the costs, the economic prosperity, the sense of solidarity, the pride in being a European. No, Europe is to be held together by threats and fear – of what would happen if a country leaves.

    The euro is often described as a bad marriage. A bad marriage involves two people who never should have been joined together making vows that are supposedly indissoluble. The euro is more complicated: it is a union of 19 markedly different countries tying themselves together. When a couple in trouble goes for marriage counselling, old-style counsellors would try to figure out how to make the marriage work, but a modern one begins by asking: Should this marriage be saved? The costs of dissolution – both financial and emotional – may be very high. But the costs of staying together may be even higher.

    While there are many reasons for pessimism, more important are those for hope: that so many throughout Europe have held on to their faith in the European project, that even in countries where there is every reason for despair, there is still hope – hope that the EU can and will be reformed. There are political leaders throughout Europe who have become politicians because they still believe that democratic politics can bring about changes that will deliver shared prosperity to ordinary citizens. And throughout Europe, there are people, many of them young, who have marched, in the tens of thousands, for a different Europe; one, for instance, in which new trade agreements serve not just corporate interests but broader societal interests.

    There are alternatives to the current arrangements that can create a true shared prosperity: the challenge is to learn from the past to create this new economics and politics of the future. The Brexit referendum was a shock. My hope is that the shock will set off waves on both sides of the Channel that will lead to this new, reformed European Union.

    “Why would well-intentioned statesmen and women, attempting to forge a stronger, more united Europe, create something that has had the opposite effect? .The founders of the euro were guided by a set of ideas and notions about how economies function that were fashionable at the time, but that were simply wrong. They had faith in markets, but lacked an understanding of the limitations of markets and what was required to make them work. The unwavering faith in markets is sometimes referred to as market fundamentalism, sometimes as neoliberalism. Market fundamentalists believed, for instance, that if only the government would ensure that inflation was low and stable, markets would ensure growth and prosperity for all. While in most of the world market fundamentalism has been discredited, especially in the aftermath of the 2008 global financial crisis, those beliefs survive and flourish within the eurozone’s dominant power, Germany. These beliefs are held with such conviction and certainty, immune to new contrary evidence, that they are rightly described as an ideology. Similar ideas, pushed by the IMF and the World Bank around the globe, led to a lost quarter-century in Africa, a lost decade in Latin America, and a transition from communism to the market economy in the former Soviet Union and eastern Europe that was, to say the least, a disappointment.”

    That’s right, the ideological economic foundations of the eurozone were fashionable in the 90’s, subsequently and thoroughly discredited through neoliberal policy failures across the globe, and yet still they remain fashionable. Or, if not entirely fashionable, still the rules. With no end in sight.

    And the same is largely true from the rest of the European Union too. Well, except for Britain, although even in that case it’s very unclear just how long the long arm of the austerity fetishists will reach because there’s a new EU policy fashion emerging regarding the best type of glue to use to hold the remaining EU together, and Britain needs to be squashed in order to get that glue:


    But Jean-Claude Juncker, the proud architect of Luxembourg’s massive corporate tax-avoidance schemes and now the head of the EU commission, has taken a hard line – perhaps understandably, given that he may go down in history as the person on whose watch the dissolution of the EU began. His line is that Europe must be unrelenting in its punishment, and should offer little more than what the UK is guaranteed under normal global agreements, such as the World Trade Organisation, lest others join the rush to the exit. What a response! According to Juncker, Europe is not to be held together because of the benefits that accrue – benefits that far exceed the costs, the economic prosperity, the sense of solidarity, the pride in being a European. No, Europe is to be held together by threats and fear – of what would happen if a country leaves.

    Fear. Fear is the fashionable new euro-glue.

    If that scares you it’s apparently supposed to. For the benefit of everyone. Or at least someone.

    Posted by Pterrafractyl | August 18, 2016, 10:17 pm
  32. The ECB just issued a report calling for greater fiscal spending in the eurozone “core” economies as a means of mitigating the effects of austerity on the austerity-riddled periphery economies and pulling the zone out of near deflation and weakening growth. Not that this paper is going to make any difference, but it’s still worth noting the ECB wrote it since it’s going to be completely ignored:

    Reuters

    Fiscal spend in richer euro countries would help periphery: ECB paper

    Thu Aug 25, 2016 8:47am EDT

    Fiscal spending in “core” euro zone countries, such as Germany, would help weaker economies in the region’s periphery at a time when European Central Bank rates are stuck at zero, an ECB research paper showed on Thursday.

    The authors argue for fiscal stimulus in the euro zone’s core to counter the effects of “structural reforms”, which temporarily reduce prices and wages, in peripheral countries, such as Greece, Portugal and Spain.

    The paper provides further ammunition to ECB President Mario Draghi, who has long been calling for countries to use the “fiscal space” they have under European rules and raise the pace of reform.

    His plea has fallen on deaf ears so far, with Germany, which is sitting on its biggest budget surplus since records began with reunification in 1990, reluctant to loosen the purse strings.

    The study found that spending in core countries, which include Germany, France and the Netherlands, would boost euro zone inflation, thereby lowering the cost of borrowing for firms and households in real terms.

    If ECB interest rates remained at zero despite the inflation rise, this would then stimulate domestic demand in peripheral economies as well as their exports to core countries, according to the three authors.

    “His plea has fallen on deaf ears so far, with Germany, which is sitting on its biggest budget surplus since records began with reunification in 1990, reluctant to loosen the purse strings.”

    Of course it fell on deaf ears. That’s just how the eurozone rolls. Even after a Brexit, persistent near-deflation, and a socioeconomic “lost generation” on the periphery, and basic economic theory, the eurozone “core” just can’t bring itself to engage in a fiscal stimulus.

    Maybe this could change if, for instance, Germany started running a really, really big fiscal surplus and the eurozone as a whole started generating a massive current account surplus with the rest of the world. But since that’s already happening, maybe not:

    Council on Foreign Relations Blogs
    Follow the Money

    Germany is Running a Fiscal Surplus in 2016 After All

    by Brad Setser
    August 25, 2016

    It turns out Germany has fiscal space even by German standards!

    Germany’s federal government posted a 1.2 percent of GDP fiscal surplus in the first half of 2016. The IMF was forecasting a federal surplus of 0.3 percent (and a general government deficit of 0.1 percent of GDP—see table 2, p. 41); the Germans over-performed.*

    Germany’s ongoing fiscal surplus contributes to Germany’s massive current account surplus, and the large and growing external surplus of the eurozone (the eurozone’s surplus reached €350 billion in the last four quarters of data, which now includes q2). The external surplus effectively exports Europe’s demand shortfall to the rest of the world, and puts downward pressure on global interest rates. Cue my usual links to papers warning about the risk of exporting secular stagnation.

    Martin Sandbu of the Financial Times put its well.

    “The government’s surplus adds to the larger private sector surplus which means the nation as a whole consumes much less than it produces, sending the excess abroad in return for increasing financial claims on the rest of the world. German policymakers like to say that the country’s enormous trade surplus is a result of economic fundamentals, not policy—but as far as the budget goes, that claim is untenable. Even if much of the external surplus were beyond the ability of policy to influence, that would be a case to use the government budget to counteract it, not reinforce it.”

    The Germans tend to see it differently. Rather than viewing budget surpluses as a beggar-thy-neighbor restraint on demand, they believe their fiscal prudence sets a good example for their neighbors.

    But its neighbors need German demand for their goods and services far more than they need Germany to set an example of fiscal prudence. It is clear—given the risk of a debt-deflation trap in Germany’s eurozone partners—that successful adjustment in the eurozone can only come if German prices and wages rise faster than prices and wages in the rest of the eurozone. The alternative mechanism of adjustment—falling wages and prices in the rest of the eurozone—won’t work.

    German fiscal expansion, especially if channeled to public investment that spurs private investment and spills over the rest of the eurozone, thus would help others achieve their fiscal goals. Stronger demand in Germany would raise exports, pulling up output and tax revenues. See this 2014 IMF working paper.

    If nothing else, Germany’s 2016 surplus allows the IMF to easily recalibrate its 2017 fiscal recommendation for the eurozone. It looks like the German fiscal expansion that the IMF initially projected for 2016 didn’t happen (the IMF projected a half point increase in government spending relative to GDP and a 20 basis points fall in revenue relative to GDP in 2016). Which makes it easy for the IMF to call for an expansion that brings the surplus down to zero in 2017, and in the process helps to offset the negative fiscal impulse likely to come from Spain and others. The IMF is still reluctant to call for external surplus countries to run (modest) budget deficits. But it has been willing to call for countries with external surpluses and budget surpluses to bring their budgets back to balance.

    “The Germans tend to see it differently. Rather than viewing budget surpluses as a beggar-thy-neighbor restraint on demand, they believe their fiscal prudence sets a good example for their neighbors.”

    And once again we learn that Berlin’s economists either have no idea how economies works or are just playing dumb. Might they be playing dumb? Hmmmm…

    “The government’s surplus adds to the larger private sector surplus which means the nation as a whole consumes much less than it produces, sending the excess abroad in return for increasing financial claims on the rest of the world. German policymakers like to say that the country’s enormous trade surplus is a result of economic fundamentals, not policy—but as far as the budget goes, that claim is untenable. Even if much of the external surplus were beyond the ability of policy to influence, that would be a case to use the government budget to counteract it, not reinforce it.”

    Wow, so by refusing to acknowledge basic macroeconomic realities and accumulating a giant pile of excess cash, Germany is “sending the excess abroad in return for increasing financial claims on the rest of the world.” How helpful.

    But at least it sounds like the IMF will be able to more easily call for Germany to increase its fiscal stimulus next, which should be helpful assuming Germany doesn’t just decided to ignore those IMF calls like it did this year. But even if the IMF does make that useless call, it’s worth noting that it’s basically the only call for fiscal stimulus the IMF is going to make:

    The New York Times
    The Conscience of a Liberal

    The Folly of Prudence, IMF Edition

    Paul Krugman
    Aug 23 1:45 pm

    This, from Brad Setser, is infuriating. He notes that even now the IMF is advocating fiscal contraction almost everywhere — the euro area, Japan, China — and fiscal expansion almost nowhere.

    Setser puts this in terms of the IMF violating its own dictum that current-account surplus countries should be expanding, which is true. But I’d put it in a broader context: we’re in a world where secular stagnation looks like a very real risk, where inflation is below-target everywhere despite unprecedented monetary expansion. Everything about recent experience suggests that the world desperately needs fiscal expansion to boost demand and expand the supply of safe assets, that our sole reliance on central banks isn’t working.

    Even if the ultimate solution may involve higher inflation targets and the always-invoked structural reform, nothing is likely to work without a major helping push from fiscal policy. This diagnosis has, finally, been making some headway in the wider discourse; it’s not just what a few of us Keynesians have been saying. Yet the IMF, in the name of prudence, is still — still! — pushing for fiscal austerity.

    We’ve been living with low-rate, depression economics for 8 years now — and key players are still acting as if they’ve learned nothing.

    “We’ve been living with low-rate, depression economics for 8 years now — and key players are still acting as if they’ve learned nothing.”

    Yes, the key players are still acting as if they’ve learned nothing. Either that or, you know, maybe the key players have learned that they actually kind of like depression economics and would like to see it continue. Seems possible.

    Posted by Pterrafractyl | August 25, 2016, 10:06 pm
  33. Here’s a great example of why the eurozone is basically doomed to dysfunction and despair: Germany’s export numbers for July just came in, along with fears that the sharpest drop in exports in over a year point towards a “crash landing” in global demand. This is all to be expected since a global demand shortfall has been one of hte hallmarks of the post-2008 crisis global economy and, thanks to the GOP in the US and the Berlin-led austerity faction in Europe, there’s basically nothing other than central bank monetary easing left to avoid a crash. In addition, ECB chief Mario Draghi just issued a rebuke to Berlin for refusing to use its fiscal surplus to shore or domestic demand and hopefully rebalance the wildly unbalanced eurozone current accounts. And despite this bad news for Germany’s exports and the ECB’s calls for a stimulus package, Germany’s imports dropped too and the its current account surplus (exports minus imports) is set to make another record this year after breaking records in 2015. Plus, Finance Minister Wolfgang Schaeuble declared that there will be no additional government stimulus and nothing should be done to decrease the record surplus.

    So we now have an answer to the question of whether or not Berlin would be willing to shift gears and back pro-growth policies even in the face of falling exports: Nope, it will just cut imports instead and keep the record surpluses:

    Reuters

    UPDATE 2-German exports add to growth concerns with “crash landing”

    * Seasonally adjusted exports fall by 2.6 pct in July

    * Imports also down, narrowing German trade surplus

    * Weak data points to cooling of Europe’s biggest economy

    * Debate about more investment to support growth (Adds details on trade surplus, Schaeuble, BGA trade body)

    By Michael Nienaber
    Fri Sep 9, 2016 7:45am EDT

    BERLIN, Sept 9 German exports plunged unexpectedly in July, posting their steepest drop in nearly a year, while imports also edged down, suggesting Europe’s biggest economy started the third quarter on a weak footing.

    “The second half of the year begins with a crash landing of foreign trade,” BGA trade association head Anton Boerner said, adding that an unusual high number of risks and crises around the globe was increasing uncertainty and hampering investments.

    The poor performance narrowed the seasonally adjusted trade surplus to 19.4 billion euros ($21.9 billion), data from the Federal Statistics Office showed, with a particularly large decline in exports to countries outside the EU like China.

    This marked the fourth month in a row of a shrinking surplus, something not seen since 1992, and indicated that Germany’s shift towards a more domestically driven economy could lead to smaller trade surpluses in the medium term.

    Still, Finance Minister Wolfgang Schaeuble rejected a recent suggestion by European Central Bank President Mario Draghi that Germany should do more to boost domestic demand, increase imports and reduce its trade surplus.

    The feeble trade figures followed economic data this week that painted a gloomy picture for German manufacturing, with industrial orders barely rising and output falling the most in nearly two years.

    “The month of July was clearly not a good month for Germany,” ING economist Carsten Brzeski said, adding that the surprisingly weak trade figures exacerbated growth concerns.

    “A further cooling of the economy in the months ahead should give more support to just-started discussions about fiscal stimulus,” Brzeski said.

    Seasonally adjusted exports fell 2.6 percent on the month, the data showed. This undershot the Reuters consensus forecast of a 0.25 percent increase. Imports edged down 0.7 percent which was also weaker than the predicted 0.8 percent rise.

    Commerzbank economist Ralph Solveen said the steep drop in exports partly reflected special factors such as more holidays falling in July.

    “However, exports certainly won’t be the driver of the German economy in the coming months,” Solveen said. “There is the sluggish global economy and the effects from the weaker euro are also fading.”

    LOW DEMAND

    A breakdown of unadjusted trade figures showed that demand for German goods from countries outside the EU dropped the most, with exports to so-called third countries, which includes the United States, Japan and China, plunging by 13.8 percent.

    German exports to EU countries outside the euro zone, which includes Britain, dropped by 8.8 percent.

    The government expects domestic demand to be the sole driver of economic growth this year, with an estimated expansion rate of 1.7 percent. For 2017, it predicts a slowdown to 1.5 percent.

    The DIW institute gave a more pessimistic outlook on Thursday, predicting German economic growth to nearly halve in 2017 as Brexit and other risks hit exporters.

    Despite the possibility of a longer-term decline in surpluses, in the first seven months of 2016, Germany’s unadjusted trade surplus rose to 149.9 billion euros, slightly above last year’s level of 148.2 billion euros. In 2015 as a whole, Germany posted a record surplus of 247.9 billion euros.

    The Munich-based Ifo economic institute has said the wider measure of Germany’s current account would probably hit a new record surplus this year, overtaking that of China again to become the world’s largest.

    Speaking in Bratislava, Schaeuble blamed the ECB for Germany’s trade surplus, saying the central bank’s loose monetary policy has led to a weaker euro which in turn boosts German exports.

    The veteran conservative, an ally of Chancellor Angela Merkel, also dismissed Draghi’s suggestion that Germany should use fiscal room to decrease its export surplus.

    The Social Democrats, coalition partners of Merkel’s ruling conservatives, have made increasing investment a centrepiece of their election campaign a year before the federal vote.

    “The Munich-based Ifo economic institute has said the wider measure of Germany’s current account would probably hit a new record surplus this year, overtaking that of China again to become the world’s largest.”

    Yeah, despite the medium-term drop in Germany’s current account surplus, somehow it doesn’t seem like Berlin’s policy-makers are going to be a hurry to change anything after once again overtaking China to hold the world’s largest current account surplus.

    So is there anything that’s going to make Berlin change its mind? Well, it sounds like it’s maybe possible if the SPD somehow gains control although who knows what they could accomplish in a political environment where the AfD is on the rise.

    But as the article below hints, there is actually one very real possible scenario that would almost inevitably entail a pretty massive stimulus commitment from not just Berlin but the entire EU and that scenario became a lot more likely in the wake of the Brexit: Replacing NATO with an EU army. That’s not going to be cheap:

    BBC

    Brexit vote revives dream of EU army

    By Jonathan Marcus Defence and diplomatic correspondent

    9 September 2016
    From the section Europe

    The British decision to leave the European Union in the wake of the Brexit referendum has given renewed impetus to the idea that the EU should have its own army.

    The UK – by far the most capable European military player, along with France – has always been a brake on such an idea, fearing unnecessary duplication with Nato.

    The UK went along with EU plans up to a point. A British army light mechanised infantry unit (2nd Battalion the Yorkshire regiment) currently forms the core of one of the EU’s 1,500-strong battle groups: a rapid-reaction force capable of being deployed to a crisis zone at short notice.

    In fact over recent years the UK has also stepped up defence co-operation with France – a natural partner, given the scale of their military ambitions.

    Indeed, defence was the sector in which the UK was perhaps the strongest EU player, in part to compensate for Britain’s absence from other core issues of European business – the common currency, the project for ever greater political union and so on.

    But Britain’s view was that EU defence co-operation should only go so far. Nothing should be done to reduce the primacy of Nato and money should not be wasted on duplicating things that the transatlantic alliance was already doing.

    This – broadly speaking – is the US view too.

    What matters in Washington is European defence spending and capability. The willingness (or as he would see it unwillingness) of America’s European partners to pay more for defence is a key element in the Republican candidate Donald Trump’s critique of Nato.

    But now, with the UK in the departure lounge for EU exit, a number of European leaders are reviving the idea of a stronger EU defence identity – summed up in the phrase, “a European army”.

    This has long been the ambition of the most ardent eurocrats. Back in March 2015, European Commission President Jean-Claude Juncker declared that a common European army was needed to address the problem that the EU, as an international player, was not “taken entirely seriously” in the world – not least in Moscow.

    The Brexit vote has opened the floodgates to the idea. The prime ministers of Hungary and the Czech Republic have urged the EU to build its own army. Only this week, German Defence Minister Ursula von der Leyen, who was visiting Lithuania, declared that “it’s time to move forward to a European defence union which is basically a ‘Schengen of defence’.”

    This reference to “Schengen”, the EU’s open borders agreement, prompted one defence expert I know to comment wryly that it was pretty rich to talk about a “Schengen of defence” when Schengen had effectively allowed thousands of refugees to “invade” EU territory.

    But an EU army is back on the agenda and it is unlikely to go away.

    EU setbacks

    The UK’s Brexit vote was a blow to the EU’s sense of itself.

    The EU has already been battered by its failures to deal adequately with a series of crises: from the Greek bailout to the wave of refugees heading for Europe’s shores. It is perhaps understandable that the EU’s advocates are looking to bolster its standing by moving ahead in other areas.

    But it is crucial to realise that there is more politics here than strategic thought. What exactly does “a European army” mean? Sending soldiers into harm’s way is perhaps the ultimate sovereign decision a government can take.

    Countries enter into alliances like Nato (or indeed the EU itself) because pooling resources provides greater capability and thus security.

    But there is no Nato army as such, just national forces integrated into a common command structure. They only become Nato forces in the event of a conflict.

    Sections of the British press that hyperventilate whenever the idea of an EU army comes up miss this essential point: that the term “EU army” is largely meaningless.

    But more European defence there will be. There is already a patchwork of defence arrangements – some bilateral, some multilateral, some in the EU and many involving Nato as a whole.

    If this leads to more defence and better defence it is probably a good thing. If it leads to political posturing and duplication then the sceptics may be right – and the only person who may be happy is Russian President Vladimir Putin, watching it all from the Kremlin.

    “The Brexit vote has opened the floodgates to the idea. The prime ministers of Hungary and the Czech Republic have urged the EU to build its own army. Only this week, German Defence Minister Ursula von der Leyen, who was visiting Lithuania, declared that “it’s time to move forward to a European defence union which is basically a ‘Schengen of defence’.”

    Note that when Germany’s Defense Minister Ursula von der Leyen called for a “Schengen of Defense”, she told the audience in Vilnius that “That is what the Americans expect us to do.”. So there appears to be a big push for a big new EU Army.

    Also keep in mind that when you read the above opinion that the prospects of an EU Army run by the EU, as opposed to a NATO model of a coalition of sovereign militaries, that assumes there aren’t serious plans for an EU military:

    But it is crucial to realise that there is more politics here than strategic thought. What exactly does “a European army” mean? Sending soldiers into harm’s way is perhaps the ultimate sovereign decision a government can take.

    Countries enter into alliances like Nato (or indeed the EU itself) because pooling resources provides greater capability and thus security.

    But there is no Nato army as such, just national forces integrated into a common command structure. They only become Nato forces in the event of a conflict.

    Sections of the British press that hyperventilate whenever the idea of an EU army comes up miss this essential point: that the term “EU army” is largely meaningless.

    Well, we’ll see if the term “EU army” remains largely meaningless and just a coalition of militaries without the creation of a single EU Army command structure. But if EU Commissioner Jean-Claude Juncker’s vision for an EU Army that he laid out in 2015 comes to fruition, there’s going to be a Brussels-run army. And be part of a large European-wide military modernization investment program. The EU Army gets built with a bunch of new weapons and a new mega-MIC to boot. And German Defense Minister Ursula von der Leyen endorsed the idea at the time, saying an EU Army is in the future, but not yet:

    The Guardian

    Jean-Claude Juncker calls for EU army

    European commission president says this military development would persuade Russia the bloc is serious about defending its values

    Andrew Sparrow
    @AndrewSparrow

    Sunday 8 March 2015 19.44 EDT

    The European Union needs its own army to help address the problem that it is not “taken entirely seriously” as an international force, the president of the European commission has said.

    Jean-Claude Juncker said such a move would help the EU to persuade Russia that it was serious about defending its values in the face of the threat posed by Moscow.

    However, his proposal was immediately rejected by the British government, which said that there was “no prospect” of the UK agreeing to the creation of an EU army.

    “You would not create a European army to use it immediately,” Juncker told the Welt am Sonntag newspaper in Germany in an interview published on Sunday.

    “But a common army among the Europeans would convey to Russia that we are serious about defending the values of the European Union.”

    Juncker, who has been a longstanding advocate of an EU army, said getting member states to combine militarily would make spending more efficient and would encourage further European integration.

    “Such an army would help us design a common foreign and security policy,” the former prime minister of Luxembourg said.

    “Europe’s image has suffered dramatically and also in terms of foreign policy, we don’t seem to be taken entirely seriously.”

    Juncker also said he did not want a new force to challenge the role of Nato. In Germany some political figures expressed support for Juncker’s idea, but in Britain the government insisted that the idea was unacceptable.

    A UK government spokesman said: “Our position is crystal clear that defence is a national – not an EU – responsibility and that there is no prospect of that position changing and no prospect of a European army.”

    In the past David Cameron, the British prime minister, has blocked moves to create EU-controlled military forces saying that, although defence cooperation between member states is desirable, “it isn’t right for the European Union to have capabilities, armies, air forces and all the rest of it”.

    Labour said that it did not support a standing European army, navy or air force and that Nato was and should remain the cornerstone of Europe’s collective defence.

    A Lib Dem spokesman said: “Having an EU army is not our position. We have never called for one.”

    But in Germany, Ursula von der Leyen, the defence minister, said in a statement that “our future as Europeans will one day be a European army”, although she added “not in the short term”. She said such a move would “strengthen Europe’s security” and “strengthen a European pillar in the transatlantic alliance”.

    Norbert Röttgen, head of the German parliament’s foreign policy committee, said having an EU army was “a European vision whose time has come”.

    A report by the Royal United Services Institute (Rusi), published on Monday, has warned that thousands more soldiers, sailors and airmen will face the axe in the next parliament regardless of which party wins the general election.

    Rusi said it was inevitable that Britain’s defence spending would drop below the Nato target of 2% of GDP in the face of continuing austerity cuts and warned that up to 30,000 service personnel could go – with the army likely to bear the heaviest cuts – leaving the armed forces with a combined strength of just 115,000 by the end of the decade.

    Even if defence spending is given the same level of protection being promised to health and schools, it said the forces are still likely to shed 15,000 personnel during the next parliament.

    “But in Germany, Ursula von der Leyen, the defence minister, said in a statement that “our future as Europeans will one day be a European army”, although she added “not in the short term”. She said such a move would “strengthen Europe’s security” and “strengthen a European pillar in the transatlantic alliance”.”

    That was German Finance Minister Ursula von der Leyen’s opinion last year: Jean-Claude Juncker’s vision for an EU Army is the future, just not in the short term, which means the short term is only about a year since she thinks it’s time for an EU Army now.

    Also note that in 2013, there were reports of existing EU plans for and EU air force of air-to-air refueling planes, heavy transport, and a military drone program and purchased and managed at an EU level. So there really probably is going to be an “EU Army” that’s a command structure fully operated by Brussels.

    And, again, all that’s going to be mighty expensive. There’s no way an EU army isn’t going to end up being a major fiscal stimulus. A misdirected one, perhaps, but the bigger this gets, the bigger that stimulus is going to be. And we know Germany wants to make this thing happen so that’s a huge signal that it could happen in the short term. And assuming this new army is acquired in such a way that acts as a real stimulus, where there aren’t automatic budget cuts elsewhere but this become real EU-level stimulus spending, it’s going be a real stimulus and probably at least kind of popular everywhere because of that. It’s a reminder that one thing austerity policies could end up doing is catalyzing acceptance of spending money on an EU army in a big way: building an EU Army, run by a Brussels command structure and assumed fiscal and/or direct military contributions by the the entire EU, could end up being the only allowable EU-wide stimulus that even austerity-stricken countries get to participate in. Because so far there’s nothing. Even Germany, with with world’s largest current account surplus and budget surplus, won’t allow itself to fiscally stimulate its own domestic demand. That’s how crazy the EU’s fiscal stimulus are now and for the foreseeable future. Imagine how tantalizing EU army spending is in that kind of policy environment.

    If it’s hard to imagine the EU nations all agreeing to start pooling military spending and personnel under a common Brussels-run command-structure without further political and fiscal integration (i.e. creating a “United States of Europe” first), keep in mind that the eurozone was a giant real-world experiment in skipping politics. It happened. And as long as tensions with Russia continue to simmer, the odds of a “we have to build an EU army to stop Russia from invading” argument is going to gain momentum. So this could happen sooner than we think The EU knows how to build put politics in the backseat.

    Don’t forget how much creating the euro – unifying currencies without a much deeper political unification, the kind that would have prevented Berlin from basically running the continent in in the even of a fiscal crisis – was basically an insane idea that involved creating a shared sovereign framework without the required fiscal burden sharing and political fusion or general solidarity that’s required to make shared currencies for something on the scale of the eurozone to work. The eurozone was supposed to help create political fusion and general solidarity. That’s how the EU operates. It happened. So when you read that Juncker sees the EU army as helping to integrate the foreign policies of EU nations, he’s describing a eurozone “Field of Dreams” template of political integration: if you build the EU-wide institution that requires political integration, the political integration will come. Last time it was monetary policy, this time it’s going to be the procurement and direction of military forces and foreign policy:


    “You would not create a European army to use it immediately,” Juncker told the Welt am Sonntag newspaper in Germany in an interview published on Sunday.

    “But a common army among the Europeans would convey to Russia that we are serious about defending the values of the European Union.”

    Juncker, who has been a longstanding advocate of an EU army, said getting member states to combine militarily would make spending more efficient and would encourage further European integration.

    “Such an army would help us design a common foreign and security policy,” the former prime minister of Luxembourg said.

    “Europe’s image has suffered dramatically and also in terms of foreign policy, we don’t seem to be taken entirely seriously.”

    ““Such an army would help us design a common foreign and security policy,” the former prime minister of Luxembourg said.”

    An EU army that leads to integrated foreign and security policies (so everyone falls in line when Brussels declares war) is pretty much what we should expect. This is how the EU operates and all signs are things like an EU army are how it’s going to integrate further. The eurozone was just the first “zone”. It is now time for the “Schengen of Defense”. As Juncker said last year “A joint EU army would show the world that there would never again be a war between EU countries”. An EU army is intended to be part of what creates an EU identity.

    So, given the looming EU army reality, it’s going to be absolutely fascinating to see how this new army gets financed. And where this new army gets built. Military procurement in the US has been, if anything, a political bonding experience. It’s been a big trough, and a lot of people shared it. That’s not now the EU has operated so far, but it could. If there was an EU institution that could most easily be arranged to facilitate the widespread of EU-wide pork spending and make everyone kind of happy, it’s the procurement of a brand new EU army. Especially because no other form of stimulus is allowed.

    This all assumes that there is any meaningful short or medium-term investments in an EU army. Maybe austerity will win the day even on that. But even if that military build up stimulus only happens in the long run in a big way it’s a notable development in the evolution of the EU that we’re seeing a big push from key players to create an EU army in the wake of the Brexit. If that happens soon it’s going to be exactly the kind of fiscal stimulus the EU economy desperately needs. And if that stimulus happens later rather than sooner, it’s still probably also going to be exactly the kind of fiscal stimulus the EU economy will need because nothing else is allowed. That’s how the EU is set up now after all the treaties like the Fiscal Compact and all indications are that further “integration” is going to involving more built-in austerity is junk economics. Whatever stimulus is allowed, military or otherwise, is exactly the stimulus the economies need because they are starved for demand due to the insane Ordoliberalism that dominates the EU’s fiscal policy now.

    So, assuming spending on an EU army gets budget prioritization and becomes a mechanism whereby the EU can “redistribute the wealth” and a mechanism for fiscal transfers from rich member states to poor, and remains basically the only EU policy that allows for stimulus spending, we could be looking at the emergence of a new framework that super-charges the creation of a big new military force. Spending on schools and the poor is highly controversial, especially if it involves fiscal transfers from rich countries to poor countries to pay for the poor countries’ poor. But fiscal transfers from rich to poor for a new army? That’s probably going to be much more politically palatable. Because people are messed up like that.

    try not to be super shocked if the next big push in EU solidarity is an EU army that’s sort of a military version of the eurozone’s “if you build the politically complicated institution, the politics will come”-experience. An EU army is the one potentially allowable kind of investment everyone might get behind where it’s conceivable that we could see a big EU spending push and Germany is already behind it. This could happen.

    If you’re wondering how an EU army under a central command is going to happen without adequate political integration, just think of the eurozone and the whole Ordoliberalism experience. *gulp*

    Posted by Pterrafractyl | September 10, 2016, 11:19 pm
  34. With the proposed purchase of Time Warner by AT&T once again bringing attention to stunning level of concentration of ownership in the US media landscape, it’s worth noting that discussions of corporate ownership are about to heat up for a different, although overlapping, set of reasons: German politicians are pushing for EU rules against foreign corporate acquisitions of high-tech companies, in particular acquisitions by state-owned or partially state-owned firms. Fears of Chinese investors buying up German companies is creating a backlash and it’s getting taken to the EU level. So this could happen as an EU thing. Sooner than you might think since it’s getting a good reception. At least from the EU’s competition minister Gunther Oettinger, who also happens to be Germany’s former energy minister and a CDU party member. How this evolves is going to be something to watch.

    Also keep in mind that one of the signature characteristics of the EU and the austerity/exports at all costs strategy that Berlin has demanded of the EU. Especially in the eurozone and especially to the benefit of Germany exporters. And that means growing levels of foreign acquisitions by EU firms, especially German firms, is a given. That’s part of the plan. The whole Ordoliberal-ish theory behind austerity is that nations cut their costs and imports so much that they can export their way back to prosperity. And that means generating current account surpluses and foreign acquisitions. That’s the EU plan. And now new barriers on foreign acquisitions of high-tech companies are part of the plan too:

    Reuters

    Germany considers protecting firms from foreign takeovers: newspaper

    Sun Oct 16, 2016 | 4:28am EDT

    The German Economy Ministry wants to protect high tech companies in Germany from unwanted takeovers, especially from state-owned and partly state-owned companies in non-European countries, a German newspaper reported on Sunday.

    Welt am Sonntag (WamS) said Deputy Economy Minister Matthias Machnig had in the past week sent to members of the German government a paper containing six key points for reviewing investment at the European Union level.

    The paper foresees wide-reaching rights for the EU and national governments to prohibit company acquisitions by investors in non-EU countries, the newspaper said.

    The issue of foreign takeovers has come to the fore in Germany with Chinese home appliance maker Midea (000333.SZ) buying German robot maker Kuka (KU2G.DE) and Chinese chipmaker Sanan Optoelectronics (600703.SS) saying on Monday it had been in contact with German lighting group Osram (OSRn.DE) about a potential acquisition or cooperation deal.

    “Minister (Sigmar) Gabriel has, however, repeatedly made clear that he would like to sound out options – also at the European level – to make fair competition possible, especially in international competition with state-subsidized foreign companies, and at the same time to remain open for investment,” the spokesman said.

    “”Minister (Sigmar) Gabriel has, however, repeatedly made clear that he would like to sound out options – also at the European level – to make fair competition possible, especially in international competition with state-subsidized foreign companies, and at the same time to remain open for investment,” the spokesman said.”

    That’s Sigmar Gabriel – the Minister of Economic Affairs and head of the Social Democrats – who is repeatedly making it clear he would like to “sound out options – also at the European level”. So we should probably listen when they get around to sounding this out. Because based on the article below, it sounds like they’re specifically trying to target Chinese corporate takeovers in Germany and countries with their own barriers to foreign acquisitions more generally, but the proposals are also vague enough that it might create a general EU right to block all non-EU investments greater than 25 percent of ownership of a company. So that’s pretty big. It’s not quite clear if that’s really what’s being proposed. So when they start sounding this out, listen:

    Bloomberg Markets

    German Momentum Grows for Curbs on Chinese Overseas Investment

    Birgit Jennen
    Weixin Zha
    Aoife White
    October 23, 2016 — 5:00 PM CDT

    * Merkel’s vice chancellor said to seek voting-rights trigger
    * Kuka, Osram part of record year for China’s German engagement

    Germany is seeking tighter control over foreign investment in European companies, in a sign of a growing protectionist reaction to China’s appetite for overseas acquisitions.

    Spurred by the purchase of German robot maker Kuka AG by China’s Midea Group Co., Chancellor Angela Merkel’s deputy, Sigmar Gabriel, is calling for European Union measures to give national governments expanded powers to block or impose conditions on shareholdings of non-EU companies. He’s found an ally in EU Digital Economy Commissioner Guenther Oettinger, a German who’s a member of Merkel’s party.

    “It’s absolutely right to initiate this debate at the European level,” Oettinger said in an interview last week. “Everybody has to play by the same rules. Clearly, there are many countries, including big ones such as China, that make market access or corporate takeovers difficult or effectively impossible.”

    While Merkel hasn’t publicly backed her vice chancellor’s push, Gabriel’s proposal reflects growing resistance within her government to unfettered Chinese investment in Europe’s biggest economy. In the latest potential Chinese bid, lighting maker Sanan Optoelectronics Co. Ltd. said it had held talks with Osram Licht AG on a possible acquisition of the almost century-old German company.

    The initiative by Gabriel, who also is Germany’s economy minister, calls for allowing EU member states to step in if a non-EU investor seeks to acquire more than 25 percent of the voting rights in a company, according to a government document obtained by Bloomberg. Restrictions would potentially kick in if the home country restricts foreign investment or its government orders or funds the acquisition.

    ‘Shy Away’

    Gabriel heads Germany’s Social Democrats, the junior partner in Merkel’s governing coalition. With his party trailing her Christian Democrats in polls ahead of elections next year, he’s sounding warnings about Chinese encroachment on German industry and the risk of job losses. EU commissioner Oettinger’s support suggests cross-party backing.

    “The EU has to take a clear position toward China,” Gabriel told a meeting of the Federation of German Industries lobby in Berlin this month. “We shouldn’t shy away.”

    In another sign of European headwinds, opposition by the Belgian region of Wallonia halted a trade pact between the EU and Canada on Friday. Failure of the deal, which has been in the works for five years, would complicate separate negotiations with the U.S., Japan and other countries as a populist surge around the world challenges the benefits of free trade.

    Merkel’s Message

    Chinese companies have announced or completed acquisitions of German companies worth a record 11.3 billion euros ($12.3 billion) this year, almost eight times the level of 2015, according to data compiled by Bloomberg. That includes the purchase of Kuka by Midea, China’s biggest appliance maker, after Gabriel led a failed effort to find an alternative bid by a European suitor. Merkel herself has repeatedly pressed Chinese leaders to ease access for foreign investors.

    Gabriel, who also is leading opposition within Merkel’s government to the proposed EU-U.S. trade pact, will need allies among EU governments to build momentum for tightening safeguards against foreign investors. While the European Commission, the EU’s regulatory arm, is seeking to modernize its trade defenses, it isn’t working on such a proposal for now, according to a European official who asked not to be identified discussing private deliberations.

    Existing rules generally allow governments to stop takeovers only if they threaten energy security, defense, media concentration or financial stability. Still, the EU has signaled a tougher stance toward Chinese government-owned companies, ruling this year in a nuclear-power deal that China General Nuclear Power Corp. couldn’t be viewed as independent from the Chinese state and other state-owned firms.

    “Germany has always been an open market for business investment, including for Chinese companies,” Merkel told reporters alongside Chinese Prime Minister Li Keqiang in Beijing in June. “Of course we expect that reciprocity on the Chinese side.”

    “The initiative by Gabriel, who also is Germany’s economy minister, calls for allowing EU member states to step in if a non-EU investor seeks to acquire more than 25 percent of the voting rights in a company, according to a government document obtained by Bloomberg. Restrictions would potentially kick in if the home country restricts foreign investment or its government orders or funds the acquisition.”

    Well, we’ll just have to wait and see how this plays out, but an EU-wide frameworks that makes it easy to block partial foreign corporate takeovers is going to be a quite a development for how both the EU and the global community evolve going forward. Or at least might be a big development. If EU “core” creditor nations end up having less competition when it comes to gobbling of corporations on the periphery that’s the kind of dynamic that could create new strains on the social cohesion of the EU which would be ironic given the ostensibly ‘EU patriotic’ nature of the whole proposal. And it could have all sorts of fascinating impacts on global trade rules. It all depends on what the actual proposals are. But with the EU and Canada’s trade deal stalling and the TTIP potentially dead too, we’re at one of those points were new protectionist foreign ownership laws could become a global trend.

    In other news, Germany’s current account surplus is scheduled to hit another record this year and German corporations are investing heavily abroad. It’s a reminder that unbalanced capital flows are going to make the upcoming protectionist foreign ownership phase of the breakdown of globalization extra awkward.

    Posted by Pterrafractyl | October 23, 2016, 11:30 pm
  35. Now that a Trump presidency is slated to destabilize the world with incredibly ill-advised policies, foreign and domestic, one of the few positive things we can expect to emerge from the US federal government for at least the next four years is an endless stream of unfortunate lessons about what not to do. They might be unfortunate lessons, but if they’re the kinds of unfortunate lessons that help future generations avoid obvious blunders, hey, that’s could be a real positive legacy of a Trump administration. This is of course assuming there actually are future generations.

    But a Trump administration isn’t going to have a monopoly on bad ideas and some of the unfortunate lessons the Trump administration bequeaths to future generations could be collectively learned lessons via global screw ups that a Trump administration enables but doesn’t solely create. For instance, now that the EU has adopted a de facto Ordoliberal economic paradigm and basically dedicated itself to running net trade surpluses indefinitely, and China and Japan are similarly running significant annual surpluses, who on earth is supposed to by all these net global export surpluses if the US ends its historic role as the demand-sponge for the rest of the world? What type of impact is that going to have not just on the current global economy but also prevailing economic thought if the US suddenly prioritized running its own trade surpluses indefinitely too, and implemented policies intended to slash imports rapidly? We might find out. And we might not like that answer.

    Also recall that this issue of the impossibility of collective trade surpluses came up elsewhere recently The impossibility of every eurozone country running trade surpluses simultaneously was a major underlying issue raised by the eurozone crisis, due in large part to austerity and trade surpluses being the only allowable path out or the many eurozone members’ array of crises. That’s the Ordoliberal paradigm for economic recovery, and it wasn’t resolved in any meaningful way. Or even meaningfully acknowledged by European’s leaders. But it was a real issue. And with China and Japan also running major trade surpluses, it’s pretty clear that the only thing keeping this ‘balance of trade global surplus impossibility’ from blowing up globally is the fact that the US was willing to be the global export sponge indefinitely. That’s one of the major advantages to holding the global reserve currency: the US could be a massive demand sponge and just keep the global economy sort of chugging along. So what’s going to happen when the prevailing doctrine of ‘trade surpluses lead to national wealth’ gets auto-debunked after the Trump administration tries the same scheme:

    The Wall Street Journal

    Inside Donald Trump’s Economic Team, Two Very Different Views
    ‘It is the supply-siders versus the zero-sum crowd’; trade policy seen as a particularly divisive issue

    By Nick Timiraos
    Updated Nov. 20, 2016 7:17 p.m. ET

    Donald Trump’s economic team splits neatly into two major groups over a fundamental question: Would the economy benefit most from more carrots or more sticks?

    Mr. Trump captured the presidency with a small coterie of advisers whose public views diverge sharply on several fronts, most vividly on trade policy, which the president-elect made a centerpiece of his campaign. Personnel decisions over coming weeks will reveal which side prevails.

    One group, which appeared ascendant in the closing weeks of the campaign, largely rejects mainstream economic thinking on trade and believes eliminating trade deficits should be an overarching goal of U.S. policy. That camp views sticks—tariffs on U.S. trading partners and taxes on companies that move jobs abroad—as critical tools to reverse a 15-year slide in incomes for middle-class Americans.

    The opposing camp is closer to the traditional GOP center of gravity on taxes and regulation and includes many policy veterans staffing the transition team and advising Vice President-elect Mike Pence.

    Those advisers have long championed supply-side economics and reject the hard-line position on trade that one side’s gain must come at the other’s expense. By offering more carrots—slashing red tape and taxes to make the U.S. the top destination for businesses—they say stronger growth would obviate any need for trade protectionism.

    “It is the supply-siders versus the zero-sum crowd,” said Andy Laperriere, political strategist at research firm Cornerstone Macro LP who closely watches such policy developments.

    A third group of advisers are mostly business associates of Mr. Trump’s who aren’t particularly ideological.

    The question is in which direction Mr. Trump will go. The coming weeks of White House staffing and policy briefs have taken on even greater importance to markets and industry because Mr. Trump hasn’t held elective office, honed a consistent political ideology or cultivated a bench of trusted advisers. His campaign didn’t issue the types of detailed policy papers typical of past presidential runs.

    Mr. Trump has blamed bad trade deals for the loss of U.S. jobs and promised to renegotiate and potentially quit and potentially quit the 1994 North American Free Trade Agreement with Canada and Mexico, calling it the worst trade deal “maybe ever signed anywhere.” He called the 12-nation Trans-Pacific Partnership, completed last year but not yet approved by the U.S., a “continuing rape of our country.”

    As Indiana governor, Mr. Pence had supported the TPP but reversed his support for the pact and earlier free-trade agreements after Mr. Trump tapped him to join the ticket.

    Key appointments extend not only to cabinet-level positions at the Treasury and Commerce departments but also to possibly more influential roles such as director of the National Economic Council and chairman of the Council of Economic Advisers.

    Those picks could shape the extent to which Mr. Trump governs as a more traditional Republican focused on cutting taxes and regulation or as an antiestablishment populist who pushes ahead with more tariffs and taxes on companies that outsource jobs.

    So far, broad agreement between the two camps of advisers over the necessity of reducing taxes and regulations have allowed them—and the broader GOP—to paper over the bigger disagreements on trade. “There will be a balancing act,” said Stephen Moore, a top economic adviser during the campaign on taxes who disagrees with Mr. Trump on trade. “There’s going to be some disagreements even within the administration about what should be the priority…I don’t know how that will all come down.”

    Advisers in both camps say Sen. Jeff Sessions (R., Ala.)—a longtime proponent of tighter trade and immigration rules—has emerged as the most influential adviser to Mr. Trump on the economy. Mr. Trump said Friday he would nominate Mr. Sessions as attorney general. The Republican senator’s former senior aide, Stephen Miller, became Mr. Trump’s national policy director.

    In the final weeks of the campaign, Mr. Trump’s speeches reflected the view of advisers who share a deep skepticism of trade deals, including economist Peter Navarro, financier Wilbur Ross and steel executive Dan DiMicco, all of whom are being considered for top posts in the new administration.

    Mr. Navarro, a professor at the University of California, Irvine, has written several books sharply critical of China’s trade and labor practices, including his 2008 publication, “The Coming China Wars,” and his 2015 book, “Crouching Tiger; What China’s Militarism Means for the World.”.

    Mr. Navarro learned from a television interview that Mr. Trump was a fan of his writing, and the two struck up a correspondence several years ago. Mr. Navarro became an adviser to the campaign earlier this year, though he and Mr. Trump hadn’t met in person until September.

    Mr. Laperriere said markets aren’t taking seriously enough Mr. Trump’s tough talk on trade, in which he equates trade deficits with theft. While the White House needs Congress to approve tax cuts, Mr. Trump has wide authority to change trade policy unilaterally.

    On a range of other policy issues, Mr. Trump sounds as if his position “could easily evolve,” Mr. Laperriere said. “By contrast, his convictions on trade appear strong.”

    Lawrence Kudlow, the CNBC commentator who advised Mr. Trump earlier this year on taxes, criticized using the trade deficit as a scorecard for whether the U.S. is winning or losing from trade. “Peter Navarro, a friend, is just wrong,” he wrote on Twitter before the election. Trade deficits, he added, simply reflect capital inflows and not forgone economic gains.

    Mr. Kudlow also implored the campaign to tamp down the tariff talk. By following through with tax relief for large and small businesses, “these companies won’t leave in the first place,” Mr. Kudlow told Mr. Pence in a radio interview before the election.

    “My response,” replied Mr. Pence, “is you’re exactly right.”

    Mr. Laperriere said markets aren’t taking seriously enough Mr. Trump’s tough talk on trade, in which he equates trade deficits with theft. While the White House needs Congress to approve tax cuts, Mr. Trump has wide authority to change trade policy unilaterally.”

    Ok, so if trade deficits are going to be equated with theft, it sounds like Trump is going to be prioritizing both decreasing imports and increasing exports. Of course, all the major export partners he’s going to try to be increasing exports to are, themselves, running net-surplus trading strategies and general adopt the “trade surpluses are the path to prosperity” paradigm. This is going to end well.

    Now, it’s important to point out that the “trade surpluses for prosperity” paradigm isn’t a false paradigm. It really will make a nation wealthier if it’s just running trade surpluses year after year indefinitely. The problem is that it’s a paradigm that, by definition, can’t work for everyone. It really is a “zero-sum” approach to increasing prosperity if the same nations are running surpluses year and year and it’s an impossibility for everyone to do it year after year. So it’s not a very neighborly national paradigm and an insane global paradigm. And that’s the problem. Trade surpluses for everyone isn’t a functional global paradigm, whether or not that globe is embracing economic globalism or protectionism. The math simply does not work either way.

    Also keep in mind that running trade surpluses could end up being the rhetorical trick a Trump administration uses to back out of its pledge to pull the US out of major trading agreements while still appearing to stick to the spirit of that pledge. So, assuming Trump really does make running US trade surpluses a priority, there could an economic ideological reckoning of sorts on the way for the global community. Considering that we’re talking about a reckoning of basic math and out inability to face up to it, it could be quite a reckoning.
    .
    It’s all a reminder that Trump’s promises to blow up ‘the system’ really is going to present some significant opportunities to rethink long-held assumptions because while Trump can blow things up easily, there’s very little indication his team will have the competence to put things back together. So we just be be on the verge of one long reckoning filled with lots of new lessons we should already know. Enjoy everyone!

    Posted by Pterrafractyl | November 21, 2016, 12:16 am

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