Spitfire List Web site and blog of anti-fascist researcher and radio personality Dave Emory.

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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

37 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
  36. Here’s a arti­cle from June of 2017 that gives a nice overview of the trans­for­ma­tion of the AfD from what was orig­i­nal­ly a par­ty about pro­mot­ing Ordolib­er­al­ism and call­ing for Ger­many to exit the euro and slow­ly trans­formed into a par­ty focused on eth­nona­tion­al­ism. It’s an arti­cle that was writ­ten at a time when the AfD’s for­tunes were seen to be falling and it’s tak­en on a new sig­nif­i­cance now that the AfD is poised to make big gains in the upcom­ing vote in Bavaria and is just gen­er­al­ly ris­ing in pop­u­lar­i­ty. Because while it’s clear that a ris­ing AfD is going to push Ger­many to the right on all sorts of pol­i­cy issues relat­ed to refugees and immi­gra­tion, a ris­ing AfD is also going to be inevitably push­ing Ger­many eco­nom­ic pol­i­cy in its direc­tion as the CDU and CSU adopt posi­tions designed to stop the elec­toral hem­or­rhag­ing. And that’s going to include move­ment towards the AfD’s eco­nom­ic plat­form. So it’s going to be impor­tant to keep in mind that the rise of the AfD — a par­ty found­ed to pro­mote Ordolib­er­al­ism and the idea that Ger­many is being sapped by the euro­zone (which is laugh­able) and should ditch the euro — is prob­a­bly going to make the Ger­man polit­i­cal estab­lish­ment even more ordolib­er­al when it comes to eco­nom­ic pol­i­cy, with an addi­tion­al will­ing­ness to threat­en leav­ing the euro if they don’t get their way. Which is ter­ri­fy­ing giv­en how dis­as­trous Europe’s ordolib­er­al-dri­ven aus­ter­i­ty poli­cies have been in recent years.

    So that’s all one more rea­son the rise of the AfD is such bad news: it does­n’t just mean more eth­nona­tion­al­ism and far right chau­vin­ism. It also means more Ordolib­er­al­ism, which is extra scary in the con­text of Ger­many’s place in the euro­zone So don’t for­get that the rise of the AfD is also ter­ri­fy­ing for eco­nom­ic rea­sons too:

    The Lon­don School of Eco­nom­ics and Polit­i­cal Sci­ence
    Blog

    The rise of Germany’s AfD: From ordolib­er­al­ism to new right nation­al­ism and into the Bun­destag?

    by Julian Göpf­far­th

    Opin­ion polls sug­gest that as many as six inde­pen­dent par­ties could cross the elec­toral thresh­old and enter the Bun­destag in Germany’s fed­er­al elec­tions in Sep­tem­ber. In advance of the elec­tions, we are run­ning a series pro­fil­ing each of these par­ties. In the sec­ond arti­cle of the series, Julian Göpf­far­th traces the rise of the Alter­na­tive für Deutsch­land (AfD), which nar­row­ly missed out on enter­ing the Bun­destag in the last fed­er­al elec­tions in 2013, but which is well placed to gain rep­re­sen­ta­tion this time around.

    The Greek debt cri­sis and Lucke’s ordolib­er­al eco­nom­ics (2013–15)

    On 14 July 2013, a skin­ny and youth­ful man jumps onto the stage of a Berlin con­ven­tion cen­tre. Against roar­ing applause, he euphor­i­cal­ly presents the recent­ly found­ed Alter­na­tive für Deutsch­land as a “new type of par­ty” that “dares to have more democ­ra­cy” in the face of “Merkel’s gov­er­nance with­out alter­na­tives”. A par­ty that is the only alter­na­tive for Ger­many, a real oppo­si­tion to an estab­lish­ment of “yea-say­ers with­out opin­ions” and which has the guts to oppose Merkel’s Euro­pean poli­cies. His speech marks the begin­ning of the first par­ty ral­ly of the AfD.

    The man is called Bernd Lucke, founder of the AfD and an ordolib­er­al econ­o­mist at the Uni­ver­si­ty of Ham­burg. He sees him­self and the par­ty in the tra­di­tion of Kohl, Schmidt and Ade­nauer who act­ed, so he says, in the inter­ests of the peo­ple and in respect of oth­er Euro­pean nations. Merkel, how­ev­er, makes the Ger­mans pay for Greek mis­takes while inter­fer­ing in oth­er coun­tries’ busi­ness. Rather than sav­ing Europe, she threat­ens it.

    The true alter­na­tive, he goes on, is one that tells the truth, name­ly that through the euro, Ger­mans are pay­ing for the dys­func­tion­al economies and states of coun­tries such as Greece. The solu­tion is to dis­man­tle the Euro­zone, and to return to the Deutschmark and a nation­al econ­o­my that trades with the world but which is based on few but strict rules. Above all, he calls for more direct democ­ra­cy and an immi­gra­tion sys­tem lim­it­ing the pos­si­bil­i­ty of “immi­gra­tion into the Ger­man wel­fare-state”. The last point shows that what the AfD was lat­er to devel­op into, name­ly an anti-immi­gra­tion par­ty, was already in its orig­i­nal DNA.

    Lucke’s sup­port­ers, some of which are promi­nent Ger­man econ­o­mists, inter­rupt his speech on sev­er­al occa­sions, enthu­si­as­ti­cal­ly cheer­ing his claims. Most of the 1,500 ini­tial mem­bers used to be in Merkel’s CDU. In terms of elec­toral sup­port, some polls sug­gest that up to 24% would be ready to sup­port a new par­ty of the pro­file of the AfD. In the 2013 fed­er­al elec­tions, the par­ty nar­row­ly miss­es the thresh­old required to enter the Bun­destag, but in 2014 it is elect­ed into three Ger­man state par­lia­ments as well as the Euro­pean Par­lia­ment. In the nation­al polls, the par­ty soars up to 10%. How­ev­er, its rise only lasts as long as the Euro­zone cri­sis dom­i­nates the Ger­man media. By July 2015, as oth­er top­ics dom­i­nate the news, the sup­port of the par­ty in the polls falls back to 3%.

    The refugee cri­sis, Petry and the rise of the nation­al­ist AfD (2015–16)

    Giv­en the enthu­si­asm of the ear­ly days, few, least of all Lucke him­self, would have expect­ed that just three years lat­er he would not only be leav­ing the AfD, but would be express­ing regret over what his for­mer par­ty had tran­si­tioned into. But in the sum­mer of 2015, the AfD duly ousts its own founder and elects Frauke Petry, until then the leader of the AfD in Sax­ony, as the new par­ty leader. Instead of call­ing for a nation­al alter­na­tive to Merkel’s Euro­zone poli­cies, the AfD now prop­a­gates an alter­na­tive way of han­dling one of the biggest refugee crises in Euro­pean his­to­ry – and with it an alto­geth­er dif­fer­ent idea of what Ger­man iden­ti­ty means.

    In light of the Paris attacks and ris­ing num­bers of refugees com­ing to Ger­many, the par­ty calls for a halt to all immi­gra­tion, if nec­es­sary by using vio­lence. Lead­ing AfD mem­bers tie the party’s cri­tique of Merkel’s migra­tion pol­i­cy to Islam­o­pho­bia, ques­tions of Ger­man iden­ti­ty and nation­al­ism. Some even open­ly sup­port PEGIDA – the Dres­den based move­ment made up of a diverse array of sup­port­ers unit­ed by Islam­o­pho­bia and a fear of the decline of the Ger­man Kul­tur­na­tion.

    Dur­ing this time, the influ­ence of the New Right as well as rad­i­cal and extrem­ist nation­al­ism ris­es. While Lucke oppos­es this devel­op­ment, Petry and Alexan­der Gauland, leader of the AfD in Bran­den­burg, sup­port the shift from ordolib­er­al­ism to nation­al­ist con­ser­vatism. Through­out 2016, as the refugee cri­sis dom­i­nates the media, the par­ty surges yet again in the polls. Stop­ping only a few per­cent­age points short of the SPD, it reach­es its pre­lim­i­nary cli­max in Sep­tem­ber 2016 at 16%. At the state lev­el, the par­ty enters into five more par­lia­ments, becom­ing the sec­ond strongest par­ty in Meck­len­burg-Vor­pom­mern (20.8%) and Sach­sen-Anhalt (24.3%).

    Stud­ies have shown that the major­i­ty of AfD-vot­ers are eco­nom­i­cal­ly suc­cess­ful mem­bers of the mid­dle class. Thus some argue that the basis for the AfD’s rise is nei­ther a fear of eco­nom­ic glob­al­i­sa­tion, nor eco­nom­ic need, but a per­ceived lack of pos­i­tive nation­al self-con­scious­ness and a per­ceived decline of Ger­man cul­tur­al iden­ti­ty. This per­cep­tion seems to unite a diverse mem­ber­ship, with 47% of mem­bers hav­ing pri­or polit­i­cal expe­ri­ence. As polit­i­cal sci­en­tists from the Wis­senschaft­szen­trum Berlin have shown, 46% of AfD mem­bers used to be in the CDU, 12% in the lib­er­al FDP, and 10% in the SPD. These num­bers sup­port the the­sis that the AfD is not mere­ly made up of rad­i­cals. How­ev­er, the same study also shows that 21% of AfD mem­bers have a back­ground in oth­er rad­i­cal or far right pop­ulist par­ties.

    Gauland and Wei­del – fight­ing decline and chaos to enter the Bun­destag (2017)

    In 2017, the AfD’s star is no longer ris­ing, but is falling yet again. Since Sep­tem­ber 2016, the par­ty has been in steady decline in the polls. There are sev­er­al pos­si­ble rea­sons for this devel­op­ment. First, the refugee issue is far less present in the media than it has been in pri­or months. Sec­ond, the elec­tion of Trump and Brex­it might have deterred some vot­ers and giv­en Merkel the chance to reap­pear on the nation­al scene as a strong leader. Third, some of the estab­lished par­ties have man­aged to regain the sup­port of lost vot­ers by either focus­ing on ques­tions of social jus­tice (SPD), estab­lish­ing stricter asy­lum and refugee leg­is­la­tion (CDU and SPD), or by incor­po­rat­ing some of the AfD’s ideas on nation­al iden­ti­ty (CDU). Last but not least, the par­ty has done much to harm its own image.

    The increas­ing influ­ence of rad­i­cal and extreme right cur­rents has result­ed in Petry becom­ing the tar­get of inner par­ty attacks. Para­dox­i­cal­ly, she is now the one call­ing for mod­er­a­tion and it is her lead­er­ship that is now being ques­tioned by rad­i­cal nation­al­ist cur­rents in the par­ty. An increas­ing num­ber of influ­en­tial par­ty mem­bers see her as a threat to the core of the AfD, name­ly its anti-estab­lish­ment char­ac­ter. The main sources of rad­i­cal­i­sa­tion are mem­bers with a rad­i­cal and extreme right past as well as those from the party’s youth organ­i­sa­tion, Junge Alter­na­tive, which main­tains strong links to the extrem­ist iden­ti­tar­i­an move­ment.

    The dis­pute between mod­er­ate and rad­i­cal cur­rents took on yet anoth­er dimen­sion ear­li­er this year. Björn Höcke, leader of the Thuringia-AfD, who has strong links to the intel­lec­tu­al cir­cles of Ger­man New Right nation­al­ism, open­ly called for end­ing the “cult of guilt” around the holo­caust. Instead, in Höcke’s view, Ger­many needs to take a more “pos­i­tive” atti­tude toward its his­to­ry. Even if the par­ty lead­er­ship react­ed by insti­tut­ing pro­ce­dures to remove Höcke, his com­ments have made the AfD appear to be too extreme for many vot­ers. The image of the par­ty has fur­ther suf­fered from a series of scan­dals. The most recent one involves Petry her­self, which might lead to her los­ing par­lia­men­tary immu­ni­ty, but will more than like­ly see the end of her lead­er­ship of the AfD. Final­ly, stud­ies have unveiled the party’s poor per­for­mance in state par­lia­ments, as well as a gen­er­al lack of pro­fes­sion­al­ism and will­ing­ness to debate con­struc­tive­ly.

    The AfD has tried to fight this chaot­ic appear­ance by the nom­i­na­tion of Alice Wei­del and Alexan­der Gauland as its lead­ing can­di­dates for September’s fed­er­al elec­tions. For now, Petry remains the offi­cial par­ty leader. At first sight, one may read this as an attempt to rec­on­cile Lucke’s orig­i­nal ordolib­er­al AfD with the nation­al con­ser­v­a­tive and pop­ulist far right par­ty the AfD became under Petry. Wei­del, who has been called the pro­to­type of a cos­mopoli­tan young pro­fes­sion­al, lived in Chi­na for six years, is flu­ent in man­darin and worked for Gold­man Sachs. Hold­ing a PhD in eco­nom­ics, where she was super­vised by one of Lucke’s ear­ly sup­port­ers, the 38-year-old is por­trayed as sym­bol­is­ing the con­tin­u­ing impor­tance of ordolib­er­al­ism in the par­ty. How­ev­er, in the past she has open­ly denounced immi­grants and Islam as being incom­pat­i­ble with Ger­man cul­ture, just as her com­pan­ion Gauland has done. The 76-year-old for­mer CDU state sec­re­tary has been a fer­vent sup­port­er of Höcke and his New Right nation­al­ism.

    ...

    ———-

    “The rise of Germany’s AfD: From ordolib­er­al­ism to new right nation­al­ism and into the Bun­destag?” by Julian Göpf­far­th; The Lon­don School of Eco­nom­ics and Polit­i­cal Sci­ence Blog; 06/27/2017

    The man is called Bernd Lucke, founder of the AfD and an ordolib­er­al econ­o­mist at the Uni­ver­si­ty of Ham­burg. He sees him­self and the par­ty in the tra­di­tion of Kohl, Schmidt and Ade­nauer who act­ed, so he says, in the inter­ests of the peo­ple and in respect of oth­er Euro­pean nations. Merkel, how­ev­er, makes the Ger­mans pay for Greek mis­takes while inter­fer­ing in oth­er coun­tries’ busi­ness. Rather than sav­ing Europe, she threat­ens it.”

    It’s easy to for­get these days that it was ordolib­er­al econ­o­mist Bernd Lucke who found­ed the AfD on a plat­form of pri­mar­i­ly eco­nom­ic griev­ances relat­ed to the euro­zone crises and the var­i­ous ‘bailouts’.

    Lucke had the view that the euro­zone was unsus­tain­able, which was and is a valid crit­i­cism of the euro­zone. But because of his ordolib­er­al ide­ol­o­gy, Lucke is adamant­ly opposed to the kinds of things that would make the euro­zone work, like the expec­ta­tion of reg­u­lar finan­cial assis­tance from the rich to the poor mem­ber states. And for some rea­son the ordolib­er­als don’t acknowl­edge that the wealthy export pow­er­hous­es like Ger­many are helped eco­nom­i­cal­ly by pool­ing their cur­ren­cy with a bas­ket of weak­er cur­ren­cies at the cost of the poor­er states have more expen­sive exports and that’s part of the rea­son there should be an expec­ta­tion of reg­u­lar rich-to-poor fis­cal trans­fers. But in the ordolib­er­al nar­ra­tive the best and only way to deal with sit­u­a­tions like the Greek cri­sis was mass ongo­ing aus­ter­i­ty and the demands that coun­tries adopt a strict ordolib­er­al pol­i­cy ortho­doxy.

    And that’s part of what’s absurd about the AfD’s ordolib­er­al com­plaints: the aus­ter­i­ty poli­cies imposed on coun­tries like Greece and Ire­land were ordolib­er­al poli­cies. The only thing Lucke was real­ly oppos­ing about the aus­ter­i­ty poli­cies get­ting imposed on Greece back in 2015 was the bil­lions in ‘bailouts’ that were paid out as part of the deal and a per­cep­tion that that there was­n’t enough aus­ter­i­ty imposed on Greece.

    And we can’t for­get that the ‘bailouts’ were actu­al­ly large­ly loans to the P.I.I.G.S.. An those ‘bailout’ loans were used to actu­al­ly bailouts pri­vate lenders. And the repay­ment of those ‘bailout’ loans became the pre­text to imple­ment the ordolib­er­al aus­ter­i­ty poli­cies. So the AfD was found­ed on oppo­si­tion to the ‘bailouts’ that were actu­al­ly usury agree­ments used to impose the ordolib­er­al aus­ter­i­ty demands. The ori­gins of the AfD is root­ed in a hor­ri­ble unre­solved eco­nom­ic psy­chodra­ma:

    ...
    The true alter­na­tive, he goes on, is one that tells the truth, name­ly that through the euro, Ger­mans are pay­ing for the dys­func­tion­al economies and states of coun­tries such as Greece. The solu­tion is to dis­man­tle the Euro­zone, and to return to the Deutschmark and a nation­al econ­o­my that trades with the world but which is based on few but strict rules. Above all, he calls for more direct democ­ra­cy and an immi­gra­tion sys­tem lim­it­ing the pos­si­bil­i­ty of “immi­gra­tion into the Ger­man wel­fare-state”. The last point shows that what the AfD was lat­er to devel­op into, name­ly an anti-immi­gra­tion par­ty, was already in its orig­i­nal DNA.
    ...

    High­light­ing how the rise of the AfD is going to par­tic­u­lar­ly impact the poli­cies of the CDU and CSU, we can’t for­get the AfD was large­ly start­ed with CDU mem­bers:

    ...
    Lucke’s sup­port­ers, some of which are promi­nent Ger­man econ­o­mists, inter­rupt his speech on sev­er­al occa­sions, enthu­si­as­ti­cal­ly cheer­ing his claims. most of the 1,500 ini­tial mem­bers used to be in Merkel’s CDU. In terms of elec­toral sup­port, some polls sug­gest that up to 24% would be ready to sup­port a new par­ty of the pro­file of the AfD. In the 2013 fed­er­al elec­tions, the par­ty nar­row­ly miss­es the thresh­old required to enter the Bun­destag, but in 2014 it is elect­ed into three Ger­man state par­lia­ments as well as the Euro­pean Par­lia­ment. In the nation­al polls, the par­ty soars up to 10%. How­ev­er, its rise only lasts as long as the Euro­zone cri­sis dom­i­nates the Ger­man media. By July 2015, as oth­er top­ics dom­i­nate the news, the sup­port of the par­ty in the polls falls back to 3%.

    ...

    Stud­ies have shown that the major­i­ty of AfD-vot­ers are eco­nom­i­cal­ly suc­cess­ful mem­bers of the mid­dle class. Thus some argue that the basis for the AfD’s rise is nei­ther a fear of eco­nom­ic glob­al­i­sa­tion, nor eco­nom­ic need, but a per­ceived lack of pos­i­tive nation­al self-con­scious­ness and a per­ceived decline of Ger­man cul­tur­al iden­ti­ty. This per­cep­tion seems to unite a diverse mem­ber­ship, with 47% of mem­bers hav­ing pri­or polit­i­cal expe­ri­ence. As polit­i­cal sci­en­tists from the Wis­senschaft­szen­trum Berlin have shown, 46% of AfD mem­bers used to be in the CDU, 12% in the lib­er­al FDP, and 10% in the SPD. These num­bers sup­port the the­sis that the AfD is not mere­ly made up of rad­i­cals. How­ev­er, the same study also shows that 21% of AfD mem­bers have a back­ground in oth­er rad­i­cal or far right pop­ulist par­ties.
    ...

    But then, in 2015–2015, the far right eth­nona­tion­al­ists like Frauk Petry took over and Lucke was out, caus­ing him to leave the par­ty. The focus on ordolib­er­al eco­nom­ics was also replaced with xeno­pho­bia over refugees:

    ...
    The refugee cri­sis, Petry and the rise of the nation­al­ist AfD (2015–16)

    Giv­en the enthu­si­asm of the ear­ly days, few, least of all Lucke him­self, would have expect­ed that just three years lat­er he would not only be leav­ing the AfD, but would be express­ing regret over what his for­mer par­ty had tran­si­tioned into. But in the sum­mer of 2015, the AfD duly ousts its own founder and elects Frauke Petry, until then the leader of the AfD in Sax­ony, as the new par­ty leader. Instead of call­ing for a nation­al alter­na­tive to Merkel’s Euro­zone poli­cies, the AfD now prop­a­gates an alter­na­tive way of han­dling one of the biggest refugee crises in Euro­pean his­to­ry – and with it an alto­geth­er dif­fer­ent idea of what Ger­man iden­ti­ty means.

    In light of the Paris attacks and ris­ing num­bers of refugees com­ing to Ger­many, the par­ty calls for a halt to all immi­gra­tion, if nec­es­sary by using vio­lence. Lead­ing AfD mem­bers tie the party’s cri­tique of Merkel’s migra­tion pol­i­cy to Islam­o­pho­bia, ques­tions of Ger­man iden­ti­ty and nation­al­ism. Some even open­ly sup­port PEGIDA – the Dres­den based move­ment made up of a diverse array of sup­port­ers unit­ed by Islam­o­pho­bia and a fear of the decline of the Ger­man Kul­tur­na­tion.

    Dur­ing this time, the influ­ence of the New Right as well as rad­i­cal and extrem­ist nation­al­ism ris­es. While Lucke oppos­es this devel­op­ment, Petry and Alexan­der Gauland, leader of the AfD in Bran­den­burg, sup­port the shift from ordolib­er­al­ism to nation­al­ist con­ser­vatism. Through­out 2016, as the refugee cri­sis dom­i­nates the media, the par­ty surges yet again in the polls. Stop­ping only a few per­cent­age points short of the SPD, it reach­es its pre­lim­i­nary cli­max in Sep­tem­ber 2016 at 16%. At the state lev­el, the par­ty enters into five more par­lia­ments, becom­ing the sec­ond strongest par­ty in Meck­len­burg-Vor­pom­mern (20.8%) and Sach­sen-Anhalt (24.3%).
    ...

    But with the rise of Alice Wei­del as one of the AfD’s key lead­ers we’re see­ing the endur­ing influ­ence of the AfD’s ordolib­er­al roots. So it’s going to be inter­est­ing to see if that’s an endur­ing trend:

    ...
    Gauland and Wei­del – fight­ing decline and chaos to enter the Bun­destag (2017)

    In 2017, the AfD’s star is no longer ris­ing, but is falling yet again. Since Sep­tem­ber 2016, the par­ty has been in steady decline in the polls. There are sev­er­al pos­si­ble rea­sons for this devel­op­ment. First, the refugee issue is far less present in the media than it has been in pri­or months. Sec­ond, the elec­tion of Trump and Brex­it might have deterred some vot­ers and giv­en Merkel the chance to reap­pear on the nation­al scene as a strong leader. Third, some of the estab­lished par­ties have man­aged to regain the sup­port of lost vot­ers by either focus­ing on ques­tions of social jus­tice (SPD), estab­lish­ing stricter asy­lum and refugee leg­is­la­tion (CDU and SPD), or by incor­po­rat­ing some of the AfD’s ideas on nation­al iden­ti­ty (CDU). Last but not least, the par­ty has done much to harm its own image.

    The increas­ing influ­ence of rad­i­cal and extreme right cur­rents has result­ed in Petry becom­ing the tar­get of inner par­ty attacks. Para­dox­i­cal­ly, she is now the one call­ing for mod­er­a­tion and it is her lead­er­ship that is now being ques­tioned by rad­i­cal nation­al­ist cur­rents in the par­ty. An increas­ing num­ber of influ­en­tial par­ty mem­bers see her as a threat to the core of the AfD, name­ly its anti-estab­lish­ment char­ac­ter. The main sources of rad­i­cal­i­sa­tion are mem­bers with a rad­i­cal and extreme right past as well as those from the party’s youth organ­i­sa­tion, Junge Alter­na­tive, which main­tains strong links to the extrem­ist iden­ti­tar­i­an move­ment.

    The dis­pute between mod­er­ate and rad­i­cal cur­rents took on yet anoth­er dimen­sion ear­li­er this year. Björn Höcke, leader of the Thuringia-AfD, who has strong links to the intel­lec­tu­al cir­cles of Ger­man New Right nation­al­ism, open­ly called for end­ing the “cult of guilt” around the holo­caust. Instead, in Höcke’s view, Ger­many needs to take a more “pos­i­tive” atti­tude toward its his­to­ry. Even if the par­ty lead­er­ship react­ed by insti­tut­ing pro­ce­dures to remove Höcke, his com­ments have made the AfD appear to be too extreme for many vot­ers. The image of the par­ty has fur­ther suf­fered from a series of scan­dals. The most recent one involves Petry her­self, which might lead to her los­ing par­lia­men­tary immu­ni­ty, but will more than like­ly see the end of her lead­er­ship of the AfD. Final­ly, stud­ies have unveiled the party’s poor per­for­mance in state par­lia­ments, as well as a gen­er­al lack of pro­fes­sion­al­ism and will­ing­ness to debate con­struc­tive­ly.

    The AfD has tried to fight this chaot­ic appear­ance by the nom­i­na­tion of Alice Wei­del and Alexan­der Gauland as its lead­ing can­di­dates for September’s fed­er­al elec­tions. For now, Petry remains the offi­cial par­ty leader. At first sight, one may read this as an attempt to rec­on­cile Lucke’s orig­i­nal ordolib­er­al AfD with the nation­al con­ser­v­a­tive and pop­ulist far right par­ty the AfD became under Petry. Wei­del, who has been called the pro­to­type of a cos­mopoli­tan young pro­fes­sion­al, lived in Chi­na for six years, is flu­ent in man­darin and worked for Gold­man Sachs. Hold­ing a PhD in eco­nom­ics, where she was super­vised by one of Lucke’s ear­ly sup­port­ers, the 38-year-old is por­trayed as sym­bol­is­ing the con­tin­u­ing impor­tance of ordolib­er­al­ism in the par­ty. How­ev­er, in the past she has open­ly denounced immi­grants and Islam as being incom­pat­i­ble with Ger­man cul­ture, just as her com­pan­ion Gauland has done. The 76-year-old for­mer CDU state sec­re­tary has been a fer­vent sup­port­er of Höcke and his New Right nation­al­ism.
    ...

    Yep, Wei­del is both an ordolib­er­al and com­fort­able work­ing with the New Right nation­al­ist (neo-Nazi) wing. That’s how the ordolib­er­al wing of the AfD dealt with the rise of the neo-Nazi wing. They put for­ward a far right agen­da that includes strict Ordolib­er­al­ism. And that’s prob­a­bly going to remain a fea­ture of the AfD because Ordolib­er­al­ism is very amend­able to the far right’s var­i­ous eco­nom­ic pol­i­cy agen­das and is going to have an obvi­ous appeal to Ger­man chau­vin­ists. So there’s no rea­son to belive that the ordolib­er­al ide­ol­o­gy is going to get pushed out by the rise of the eth­nona­tion­al­ist wing of the AfD. They can co-exist just fine. As Alice Wei­del and Alexan­der Gauland man­i­fest­ly makes clear.

    We’ll see. But a par­ty that thinks Greece has it too easy is on the rise in Ger­many and it’s doing that by large­ly steal­ing the CDU’s and CSU’s vot­ers. So Ger­many’s right-wing is about to get extra crazy for the fore­see­able future. That’s just a giv­en at this point. And since it’s the AfD that’s dri­ving the CDU and CSU extra crazy, and since Ordolib­er­al­ism is a key aspect of the AfD’s ide­ol­o­gy and pop­u­lar appeal (Ger­man vot­ers that hat­ed the bailouts will find the ordolib­er­al posi­tions appeal­ing), it’s almost cer­tain that the CDU and CSU are going to get more ordolib­er­al going for­ward. Which is amaz­ing and ter­ri­fy­ing. But that’s where we are. So let’s hope we don’t see any new nation­al finan­cial crises pop up in the euro­zone over the next decade or so. Because that cri­sis prob­a­bly going to get a super extra hard­core ordolib­er­al response if cur­rent Ger­man polit­i­cal trends con­tin­ue.

    Posted by Pterrafractyl | October 3, 2018, 11:14 pm
  37. Inter­na­tion­al finan­cial mar­kets have been swoon­ing again in the wake of anoth­er day of Pres­i­dent Trump’s rage tweet­ing on Fri­day. And while that sounds like just anoth­er day dur­ing the Trump pres­i­den­cy, part of what made Fri­day’s tweets so unset­tling was both the scope and inten­si­ty of the rage tweets.

    For starters, fol­low­ing the announce­ment by Chi­na that it was con­sid­er­ing new retal­ia­to­ry tar­iffs on US goods and a speech by Fed­er­al Reserve Chair Jerome Pow­ell at Jack­son Hole where Pow­ell accu­rate­ly not­ed that, while future Fed rate cuts are on the table, there are lim­its to the eco­nom­ic stim­u­lus a cen­tral bank can pro­vide in the face of a pres­i­dent deter­mined to wage one trade war after anoth­er, Trump asked him­self on Twit­ter whether or not Pow­ell or Chi­nese Pres­i­dent Xi Jin­ping is a big­ger ene­my of the Unit­ed States. It was a desta­bi­liza­tion-by-tweet twofer:

    The New York Times

    Pow­ell High­lights Fed’s Lim­its. Trump Labels Him an ‘Ene­my’

    By Jean­na Smi­alek

    Aug. 23, 2019

    JACKSON, Wyo. — Jerome H. Pow­ell, the Fed­er­al Reserve chair, kept future inter­est rate cuts square­ly on the table on Fri­day but sug­gest­ed that the cen­tral bank was lim­it­ed in its abil­i­ty to coun­ter­act Pres­i­dent Trump’s trade poli­cies, which are stok­ing uncer­tain­ty and pos­ing risks to the eco­nom­ic out­look.

    Mr. Powell’s remarks drew a swift and angry reac­tion from Mr. Trump, who equat­ed the Fed leader with the president’s adver­sary in the trade war, Pres­i­dent Xi Jin­ping of Chi­na.

    “My only ques­tion is, who is our big­ger ene­my, Jay Pow­ell or Chair­man Xi?,” Mr. Trump wrote in one of a series of Twit­ter posts.

    ....My only ques­tion is, who is our big­ger ene­my, Jay Pow­ell or Chair­man Xi?
    — Don­ald J. Trump (@realDonaldTrump) August 23, 2019

    The president’s harsh response to Mr. Pow­ell, a fre­quent tar­get of Mr. Trump’s ire, came after the Fed chair sug­gest­ed that the cen­tral bank may be unable to over­come eco­nom­ic uncer­tain­ty stem­ming from the president’s trade war.

    “While mon­e­tary pol­i­cy is a pow­er­ful tool that works to sup­port con­sumer spend­ing, busi­ness invest­ment and pub­lic con­fi­dence, it can­not pro­vide a set­tled rule book for inter­na­tion­al trade,” said Mr. Pow­ell, who spoke in Jack­son, Wyo., at the Fed­er­al Reserve Bank of Kansas City’s annu­al sym­po­sium.

    “Our chal­lenge now is to do what mon­e­tary pol­i­cy can do to sus­tain the expan­sion” to achieve the Fed’s goals of low unem­ploy­ment and sta­ble infla­tion, he had said ear­li­er in the speech.

    Mr. Powell’s remarks indi­cat­ed that the Fed, which cut inter­est rates in July for the first time in more than a decade, remained will­ing to cut them again in order to keep the econ­o­my grow­ing.

    But his reluc­tance to clar­i­fy the tim­ing or size of any such move high­light­ed the cen­tral bank’s predica­ment: Unem­ploy­ment is low and con­sumer spend­ing is strong, but Mr. Trump’s trade con­flict is fuel­ing uncer­tain­ty, weigh­ing on man­u­fac­tur­ing and roil­ing mar­kets. And the Fed is lim­it­ed in its abil­i­ty to resolve unpre­dictabil­i­ty.

    “Trade pol­i­cy uncer­tain­ty seems to be play­ing a role in the glob­al slow­down and in weak man­u­fac­tur­ing and cap­i­tal spend­ing in the Unit­ed States,” Mr. Pow­ell said, adding that there were “no recent prece­dents to guide any pol­i­cy response to the cur­rent sit­u­a­tion.”

    His com­ments fol­lowed Beijing’s announce­ment on Fri­day that Chi­na would retal­i­ate against the Trump administration’s next round of tar­iffs by increas­ing tax­es on $75 bil­lion of Amer­i­can imports, includ­ing agri­cul­tur­al prod­ucts, crude oil and cars. Both coun­tries plan to increase their levies in Sep­tem­ber and Decem­ber, which could exac­er­bate the eco­nom­ic harm from a trade war that is already caus­ing finan­cial pain across the globe.

    They also come as trade ten­sions, and not just those cre­at­ed by Mr. Trump, threat­en growth abroad. Mark Car­ney, who heads the Bank of Eng­land, said in a Jack­son Hole speech that the threat of an unruly Brex­it looms large for his domes­tic econ­o­my.

    ...

    In the Unit­ed States, Mr. Pow­ell not­ed that the weeks since the Fed’s last meet­ing, on July 31, “have been event­ful.” The day after that meet­ing, Mr. Trump announced that the coun­try would tax anoth­er $300 bil­lion in Chi­nese prod­ucts. Since then, fur­ther evi­dence of a glob­al slow­down has emerged and finan­cial mar­kets have react­ed to the “com­plex, tur­bu­lent pic­ture,” Mr. Pow­ell not­ed.

    He said that pol­i­cy­mak­ers were “care­ful­ly watch­ing devel­op­ments” as they assessed the impli­ca­tions for the eco­nom­ic out­look and mon­e­tary pol­i­cy, and main­tained an ear­li­er pledge to “act as appro­pri­ate to sus­tain the expan­sion.”

    Against that back­drop, some mem­bers of the pol­i­cy-set­ting Fed­er­al Open Mar­ket Com­mit­tee sup­port cut­ting rates to shore up eco­nom­ic growth, while oth­ers want to wait to mon­i­tor how the trade dis­pute plays out.

    “Risk man­age­ment enters our deci­sion mak­ing because of both the uncer­tain­ty about the effects of recent devel­op­ments, and the uncer­tain­ty we face regard­ing struc­tur­al aspects of the econ­o­my,” Mr. Pow­ell said.

    Mr. Trump, who appoint­ed Mr. Pow­ell to a four-year term, has said that the Fed should use mon­e­tary pol­i­cy to even the play­ing field with trad­ing part­ners like Chi­na and Ger­many, which he believes are weak­en­ing their cur­ren­cies and low­er­ing rates to gain an eco­nom­ic advan­tage over the Unit­ed States.

    “Our Fed­er­al Reserve does not allow us to do what we must do,” the pres­i­dent said in a tweet on Thurs­day, adding that Fed offi­cials “move like quick­sand. Fight or go home!”

    Investors ful­ly expect a rate cut in Sep­tem­ber and antic­i­pate anoth­er before the end of the year, based on mar­ket pric­ing mea­sured by the CME Group.

    Fed offi­cials often point to two mid-1990s rate-cut­ting cycles as rough tem­plates for how the cen­tral bank is approach­ing pol­i­cy now. In both instances, the Fed cut rates by 75 basis points to help get the econ­o­my through rough patch­es.

    Mr. Pow­ell referred those episodes in his remarks on Fri­day, not­ing that “the Fed was cut­ting, not rais­ing, rates in the months pri­or to the end of the first two expan­sions in this era, and the ensu­ing reces­sions were mild by his­tor­i­cal stan­dards.”

    Speak­ing on Bloomberg Tele­vi­sion on Fri­day, James Bullard, the pres­i­dent of the Fed­er­al Reserve Bank of St. Louis, called those instances a “great base­line” to ref­er­ence for pol­i­cy now, although he did not com­mit to match­ing their size.

    “That’s what they did in the ’90s,” Mr. Bullard said. “I don’t know where we’ll end up.”

    The Fed is also con­tend­ing with infla­tion that has run stub­born­ly below the 2 per­cent goal lev­el that the cen­tral bank views as con­sis­tent with a healthy econ­o­my. The need to return infla­tion to its goal quick­ly was one rea­son that the cen­tral bank cut rates in July.

    While pol­i­cy­mak­ers his­tor­i­cal­ly have set inter­est rates to keep very-low unem­ploy­ment from spurring faster infla­tion, Mr. Powell’s remarks show how that the cal­cu­lus is chang­ing.

    Mr. Pow­ell not­ed that in the 1990s, the Fed was able to cut rates to sup­port employ­ment “with­out desta­bi­liz­ing infla­tion.” At anoth­er point in the speech, he said that “low infla­tion seems to be the prob­lem of this era, not high infla­tion.”

    ———-

    “Pow­ell High­lights Fed’s Lim­its. Trump Labels Him an ‘Ene­my’” by Jean­na Smi­alek; The New York Times; 08/23/2019

    ““While mon­e­tary pol­i­cy is a pow­er­ful tool that works to sup­port con­sumer spend­ing, busi­ness invest­ment and pub­lic con­fi­dence, it can­not pro­vide a set­tled rule book for inter­na­tion­al trade,” said Mr. Pow­ell, who spoke in Jack­son, Wyo., at the Fed­er­al Reserve Bank of Kansas City’s annu­al sym­po­sium.”

    Stim­u­la­tive mon­e­tary pol­i­cy an do a lot and the Fed is ready to do more, but it can’t sim­ply negate the effects of an ongo­ing and deep­en­ing trade war where tit-for-tat retal­ia­to­ry mea­sures have become the norm. That’s the mes­sage Jerome Pow­ell had for the mar­kets on Fri­day and it was mes­sage Trump did­n’t take well:

    ...
    His com­ments fol­lowed Beijing’s announce­ment on Fri­day that Chi­na would retal­i­ate against the Trump administration’s next round of tar­iffs by increas­ing tax­es on $75 bil­lion of Amer­i­can imports, includ­ing agri­cul­tur­al prod­ucts, crude oil and cars. Both coun­tries plan to increase their levies in Sep­tem­ber and Decem­ber, which could exac­er­bate the eco­nom­ic harm from a trade war that is already caus­ing finan­cial pain across the globe.

    They also come as trade ten­sions, and not just those cre­at­ed by Mr. Trump, threat­en growth abroad. Mark Car­ney, who heads the Bank of Eng­land, said in a Jack­son Hole speech that the threat of an unruly Brex­it looms large for his domes­tic econ­o­my.

    ...

    In the Unit­ed States, Mr. Pow­ell not­ed that the weeks since the Fed’s last meet­ing, on July 31, “have been event­ful.” The day after that meet­ing, Mr. Trump announced that the coun­try would tax anoth­er $300 bil­lion in Chi­nese prod­ucts. Since then, fur­ther evi­dence of a glob­al slow­down has emerged and finan­cial mar­kets have react­ed to the “com­plex, tur­bu­lent pic­ture,” Mr. Pow­ell not­ed.

    ...

    Mr. Trump, who appoint­ed Mr. Pow­ell to a four-year term, has said that the Fed should use mon­e­tary pol­i­cy to even the play­ing field with trad­ing part­ners like Chi­na and Ger­many, which he believes are weak­en­ing their cur­ren­cies and low­er­ing rates to gain an eco­nom­ic advan­tage over the Unit­ed States.

    “Our Fed­er­al Reserve does not allow us to do what we must do,” the pres­i­dent said in a tweet on Thurs­day, adding that Fed offi­cials “move like quick­sand. Fight or go home!”
    ...

    So Trump declared both the pres­i­dent of Chi­na and the head of the Fed to be “ene­mies” of the Unit­ed States. And that just the first part of Trump’s Fri­day rage-tweet­ing. He went on to tweet out that we had the author­i­ty to order US com­pa­nies to leave Chi­na. This is why mar­kets are swoon­ing.

    At least it’s part of why mar­kets are swoon­ing. As pre­car­i­ous as Trump’s open-end­ed ad hoc approach to trade nego­ti­a­tions may be, we can’t pre­tend that he’s the only source of eco­nom­ic insta­bil­i­ty around the globe. And that points towards one of the cur­rent oppor­tu­ni­ties avail­able at the moment for cool­ing things off between the US and Chi­na. As we’ve learned over and over, the one sure fire way to dif­fuse a Trumper­tantrum is to dis­tract Trump with a dif­fer­ent fight. And with the G7 meet­ing tak­ing place this week­end there is a won­der­ful poten­tial dis­trac­tion right there: Ger­many.

    Because if we had to look for a coun­try with lead­er­ship more intent on dam­ag­ing the glob­al econ­o­my than Trump, it’s Ger­many. After all, it’s Ger­man lead­er­ship that helped send the euro­zone into a depres­sion, result­ing in a weak euro that’s boost­ed Ger­man exports. And it’s Ger­many that has long played the role of the top deci­sion-mak­er in EU, and espe­cial­ly euro­zone, eco­nom­ic affairs and guid­ed poli­cies from an Ordolib­er­al eco­nom­ic ortho­doxy that is math­e­mat­i­cal­ly unwork­able on a glob­al stage. Run­ning mas­sive trade sur­plus­es as the path to nation­al wealth might work for indi­vid­ual nations but the entire Euro­pean con­ti­nent, let alone the world, obvi­ous­ly can’t run a trade sur­plus with itself, and yet that’s more or less the eco­nom­ic mod­el Ger­many has imposed on Europe.

    Beyond that, Ger­many has led the way in oppos­ing the very idea that fis­cal stim­u­lus mea­sures can be effec­tive and appro­pri­ate. Instead, as Ger­many’s Euro­pean neigh­bors have seen their economies sput­ter, we’ve seen Ger­many run­ning steady bud­get sur­plus­es since 2014. Part of the jus­ti­fi­ca­tion for these sur­plus­es is the absurd EU debt rules stat­ing that a debt-to-GDP ratio below 60% and deficits below 3% needs to be main­tained under the threat of fines. Rules that con­ve­nient­ly weren’t enforced back in the ear­ly 2000’s when Ger­many and France were sys­tem­at­i­cal­ly vio­lat­ing them. In oth­er words, the deci­sion to run bud­get sur­plus­es under the guise of adher­ing to the 60% debt-ceil­ing rule was real­ly a polit­i­cal and ide­o­log­i­cal choice.

    Yes, instead of doing its part to stim­u­late both the Ger­many econ­o­my and the economies of his euro­zone part­ners and cor­rect its obscene trade sur­plus­es, Ger­many has been low­er­ing its debt-to-GDP ratio for the past five years. But as the fol­low­ing arti­cle describes, those sur­plus­es have result­ed in Ger­many’s debt-to-GDP ratio drop­ping so fast that it’s sched­ule to fall below the 60% ceil­ing next year. And that means that debt-ceil­ing rule is no longer going to be a valid excuse for Berlin to avoid doing the respon­si­ble thing and run fis­cal stim­u­lus poli­cies. As a result, even politi­cians in Berlin are begin­ning to warm to the idea of run­ning some sur­plus­es next year. But at this point it’s still just talk, talk that’s pred­i­cat­ed on Ger­many not falling into reces­sion before then and not hit­ting that 60% ceil­ing in time. And as is abun­dant­ly clear at this point, if Berlin can find an excuse not to engage in fis­cal stim­u­lus, it’s going to do so.

    Also keep in mind that when Jerome Pow­ell lament­ed how there are lim­its to what cen­tral banks can achieve with mon­e­tary stim­u­lus alone, one of the major eco­nom­ic tools cen­tral banks have no con­trol over is fis­cal pol­i­cy.

    So if Pres­i­dent Trump wants to pick a use­ful fight in glob­al trade rela­tions he could hard­ly find a bet­ter fight to pick than the fight to get Ger­many to actu­al­ly spend its wealth for every­one’s ben­e­fits. Espe­cial­ly now that Ger­many is about to lose the debt-ceil­ing excuse:

    Reuters

    Ger­many has fis­cal mus­cle to counter next cri­sis: Scholz

    Michael Nien­aber
    August 18, 2019 / 8:41 AM / Updat­ed

    BERLIN (Reuters) — Ger­many has the fis­cal strength to counter any future eco­nom­ic cri­sis “with full force”, Finance Min­is­ter Olaf Scholz said on Sun­day, sug­gest­ing Berlin could make avail­able up to 50 bil­lion euros ($55 bil­lion) of extra spend­ing.

    With its econ­o­my on the brink of reces­sion and bor­row­ing costs at record lows, Ger­many is fac­ing pres­sure at home and abroad to ditch its pledge to tar­get bal­anced bud­gets and instead boost invest­ment by tak­ing on new debt.

    A gov­ern­ment offi­cial told Reuters ear­li­er this month that the finance min­istry was toy­ing with the idea of issu­ing debt in line with the more for­mal debt-brake rules to help finance a cli­mate pro­tec­tion pro­gram.

    Speak­ing at a gov­ern­ment “open day” news con­fer­ence, Scholz acknowl­edged the debate about debt-financed spend­ing but said a state should live with­in its means in eco­nom­ic good times, not least because this meant it would be bet­ter placed to act when things go wrong.

    Germany’s debt lev­el is expect­ed to fall to rough­ly 58% of eco­nom­ic out­put this year from 60.9% the pre­vi­ous year, putting it below the Euro­pean Union’s debt ceil­ing of 60% and giv­ing it more flex­i­bil­i­ty on future spend­ing.

    “So if we have a debt lev­el in Ger­many in rela­tion to eco­nom­ic out­put that is below 60 per­cent, then this is the strength we have to counter a cri­sis with full force,” Scholz said.

    Scholz said the glob­al finan­cial cri­sis in 2008/2009 had cost Ger­many rough­ly 50 bil­lion euros, adding: “And we have to be able to muster that (sum of mon­ey). And we can muster that. That’s the good news.”

    ...

    The Ger­man econ­o­my con­tract­ed 0.1% quar­ter-on-quar­ter from April to June, push­ing Europe’s biggest econ­o­my close to a reces­sion as sen­ti­ment sur­veys and indus­tri­al orders data sug­gest hard­ly any improve­ment in the third quar­ter.

    Most econ­o­mists define a reces­sion as a peri­od of at least two con­sec­u­tive quar­ters of con­trac­tion.

    Scholz said the Ger­many econ­o­my was suf­fer­ing main­ly from weak­er for­eign demand and busi­ness uncer­tain­ty linked to fac­tors such as the esca­lat­ing trade dis­pute between the Unit­ed States and Chi­na.

    “The biggest prob­lem is uncer­tain­ty, includ­ing that caused by the Chinese‑U.S. trade war,” Scholz said.

    ...

    ———-

    “Ger­many has fis­cal mus­cle to counter next cri­sis: Scholz” by Michael Nien­aber; Reuters; 09/18/2019

    “Germany’s debt lev­el is expect­ed to fall to rough­ly 58% of eco­nom­ic out­put this year from 60.9% the pre­vi­ous year, putting it below the Euro­pean Union’s debt ceil­ing of 60% and giv­ing it more flex­i­bil­i­ty on future spend­ing.”

    No more excus­es. At least next year there won’t be any more debt-ceil­ing excus­es for Berlin’s reck­less bud­get sur­plus­es, assum­ing there isn’t a reces­sion before then that caus­es the GDP to shrink. and right now it’s look­ing like that reces­sion just might arrive. Or might already be here:

    ...
    The Ger­man econ­o­my con­tract­ed 0.1% quar­ter-on-quar­ter from April to June, push­ing Europe’s biggest econ­o­my close to a reces­sion as sen­ti­ment sur­veys and indus­tri­al orders data sug­gest hard­ly any improve­ment in the third quar­ter.

    Most econ­o­mists define a reces­sion as a peri­od of at least two con­sec­u­tive quar­ters of con­trac­tion.

    Scholz said the Ger­many econ­o­my was suf­fer­ing main­ly from weak­er for­eign demand and busi­ness uncer­tain­ty linked to fac­tors such as the esca­lat­ing trade dis­pute between the Unit­ed States and Chi­na.
    ...

    And that’s part of why pres­sur­ing Berlin it to start run­ning sur­plus­es now would be an actu­al­ly use­ful trade fight for Trump to pick. At least in the­o­ry. He’d prob­a­bly still screw it up. Still, giv­en the ide­o­log­i­cal aver­sion to fis­cal stim­u­lus that dom­i­nates in Berlin, per­haps threats from Trump are exact­ly the kind of polit­i­cal excuse Merkel’s gov­ern­ment needs jus­ti­fy the imme­di­ate stim­u­lus that the sit­u­a­tion calls for.

    Although Trump’s threats might also be the excuse Berlin uses to resist a stim­u­lus. Who knows at this point. All we know is that Berlin real­ly does­n’t want to devi­ate from the cur­rent path of mas­sive bud­get and trade sur­plus­es, regard­less of the costs to the rest of the Euro­pean or glob­al econ­o­my. For exam­ple, as the fol­low­ing arti­cle lays out, at the same time we’re get­ting chat­ter from Ger­man media that Berlin is start­ing to think about fis­cal stim­u­lus mea­sures to counter the fear loom­ing reces­sion, we’re also told by Merkel her­self that she does­n’t see the need for any new stim­u­lus to counter the slow­ing econ­o­my:

    Reuters

    Ger­many ready to ditch bal­anced bud­get in case of reces­sion: Spiegel

    August 16, 2019 / 9:37 AM

    BERLIN (Reuters) — Germany’s right-left coali­tion gov­ern­ment would be pre­pared to ditch its bal­anced bud­get rule and take on new debt to counter a pos­si­ble reces­sion, Der Spiegel mag­a­zine report­ed on Fri­day.

    Fears are mount­ing that Europe’s largest econ­o­my could slide into a reces­sion after slump­ing exports due to a glob­al slow­down, tar­iff con­flicts and Brex­it fears trans­lat­ed into a con­trac­tion of 0.1% in the sec­ond quar­ter.

    Ger­many has had a bal­anced bud­get since 2014, a fis­cal rule intro­duced by for­mer con­ser­v­a­tive finance min­is­ter Wolf­gang Schaeu­ble and stuck to by his Social Demo­c­rat suc­ces­sor Olaf Scholz.

    ...

    Chan­cel­lor Angela Merkel said on Tues­day she did not see any need for a fis­cal stim­u­lus pack­age to counter the effects of a slow­ing econ­o­my. She added that her gov­ern­ment remained com­mit­ted to a high lev­el of pub­lic invest­ment.

    Ger­many has for years faced calls from its euro zone part­ners and the Inter­na­tion­al Mon­e­tary Fund to increase pub­lic spend­ing, which would stim­u­late the econ­o­my of the whole mon­e­tary union.

    ———–

    “Ger­many ready to ditch bal­anced bud­get in case of reces­sion: Spiegel”; Reuters; 08/16/2019

    “Chan­cel­lor Angela Merkel said on Tues­day she did not see any need for a fis­cal stim­u­lus pack­age to counter the effects of a slow­ing econ­o­my. She added that her gov­ern­ment remained com­mit­ted to a high lev­el of pub­lic invest­ment.”

    And that’s why we should­n’t be tak­ing this talk of Berlin’s will­ing­ness to engage in fis­cal stim­u­lus seri­ous­ly. Merkel her­self sees no need and this is with the Ger­man econ­o­my shrink­ing in the last quar­ter. Of course, she might change he mind, espe­cial­ly if there’s a sharp con­trac­tion over the next year. But let’s not for­get that the 2014–2019 peri­od was filled with far worse eco­nom­ic tur­moil for the euro­zone than the cur­rent sit­u­a­tion and Berlin was adamant­ly opposed to fis­cal stim­u­lus back then. So if recent his­to­ry is a guide, we prob­a­bly should­n’t be count­ing on any mean­ing­ful stim­u­lus from Berlin regard­less of how bad it gets.

    Sure, there might be a few sym­bol­ic fis­cal stim­u­lus mea­sures if it gets real­ly bad, but we can’t for­get that let­ting the eco­nom­ic sit­u­a­tion get real­ly bad and forc­ing mass aus­ter­i­ty is a core ele­ment of Ordolib­er­al ortho­doxy. It’s a ver­sion of sup­ply-side eco­nom­ics that pri­or­i­tizes bud­get and trade sur­plus­es over use­ful pub­lic invest­ments which is one of the rea­sons it’s such a bad eco­nom­ic ide­ol­o­gy to adopt on a con­ti­nen­tal or glob­al scale and why Merkel’s pledges of sus­tain­ing Ger­many’s cur­rent lev­els of pub­lic invest­ment ring hol­low. It has been wide­ly rec­og­nized for years now that Ger­many has a huge back­log of pub­lic infra­struc­ture needs that aren’t be addressed and now would be the per­fect time to do it with inter­est rates at record lows. But bud­get sur­plus­es were pri­or­i­tized instead because that’s all part of Ordolib­er­al ortho­doxy. Apply­ing this phi­los­o­phy to a union of mem­ber states or the globe is a recipe for end­less dis­as­ter and that’s why Trump real­ly would be actu­al­ly help­ing for once if he man­aged to give Ger­many the excuse it needs to adopt a mean­ing­ful fis­cal stim­u­lus pol­i­cy that addressed its egre­gious desta­bi­liz­ing trade sur­plus.

    And if Trump does decide to pick a trade fight with Ger­many over its twin bud­get and trade sur­plus­es, let’s hope he picks a fight with the Bun­des­bank too. Or maybe we should­n’t hope that. It depends on whether or not Trump’s rage-tweet­ing makes the Bun­des­bank more or less hawk­ish and Trump usu­al­ly screws these things up so we prob­a­bly should­n’t hope he rage-tweets at the Bun­des­bank. But as the fol­low­ing arti­cle about the Bun­des­bank’s stance on fis­cal stim­u­lus makes clear, the Bun­des­bank deserves a Trump rage-tweet. The Ger­man cen­tral bank expects anoth­er round of eco­nom­ic con­trac­tion in the cur­rent quar­ter, which would tech­ni­cal­ly be a reces­sion giv­en the con­trac­tion last quar­ter, and yet it still does­n’t see any util­i­ty in fis­cal stim­u­lus. Like Merkel:

    Bloomberg

    Bun­des­bank Sees No Need for Fis­cal Stim­u­lus in Ger­many Right Now

    By Jana Randow and Kristie Plad­son
    August 22, 2019, 9:28 AM CDT

    * Insti­tu­tion pre­dicts out­put will shrink 0.1% in third quar­ter
    * Econ­o­my not in reces­sion but in a long peri­od of stag­na­tion

    Germany’s cen­tral bank doesn’t see a need for fis­cal stim­u­lus at this time, even though it expects the econ­o­my to shrink again this quar­ter, accord­ing to two peo­ple famil­iar with the Bundesbank’s stance.

    While it’s pru­dent for Finance Min­is­ter Olaf Scholz to pre­pare mea­sures that could be imple­ment­ed if the out­look wors­ens, the econ­o­my cur­rent­ly doesn’t require addi­tion­al sup­port, the peo­ple said, ask­ing not to be iden­ti­fied reveal­ing inter­nal delib­er­a­tions.

    Econ­o­mists at the Bun­des­bank pre­dict out­put might fall 0.1% in the three months through Sep­tem­ber, the same pace as in the pre­vi­ous quar­ter, accord­ing to the peo­ple. Con­ven­tion­al­ly, two con­sec­u­tive quar­ters of eco­nom­ic con­trac­tion would be con­sid­ered a tech­ni­cal reces­sion.

    ...

    Germany’s dete­ri­o­rat­ing econ­o­my, high­light­ed in a sur­vey on Thurs­day show­ing man­u­fac­tur­ing still shrink­ing and orders falling, has prompt­ed a wave of calls for the gov­ern­ment to pro­vide a fis­cal boost.

    Even with long-term bor­row­ing costs below zero, the gov­ern­ment has been reluc­tant to aban­don its bal­anced-bud­get pol­i­cy and jump into action. How­ev­er, Bloomberg report­ed this week that it’s is prepar­ing mea­sures that could be trig­gered by a deep reces­sion.

    At the cen­tral bank how­ev­er, experts describe the state of the econ­o­my as one of pro­tract­ed stag­na­tion, with the per­for­mance over the past year skewed by a range of tem­po­rary fac­tors. Mild win­ter weath­er, for exam­ple, bol­stered out­put in the first quar­ter, with pay­back in the spring.

    That doesn’t mean there’s no risk of a deep­er slump. In its month­ly report pub­lished Mon­day, the Bun­des­bank high­light­ed the dif­fi­cul­ty pre­dict­ing the cur­rent course of the econ­o­my, with man­u­fac­tur­ing in a deep down­turn and pri­vate con­sump­tion still sol­id.

    “As things cur­rent­ly stand, it is unclear whether exports and, by exten­sion, indus­try will regain their foot­ing before the domes­tic econ­o­my becomes more severe­ly affect­ed,” the Bun­des­bank wrote.

    ———-

    “Bun­des­bank Sees No Need for Fis­cal Stim­u­lus in Ger­many Right Now” by Jana Randow and Kristie Plad­son; Bloomberg; 08/22/2019

    Even with long-term bor­row­ing costs below zero, the gov­ern­ment has been reluc­tant to aban­don its bal­anced-bud­get pol­i­cy and jump into action. How­ev­er, Bloomberg report­ed this week that it’s is prepar­ing mea­sures that could be trig­gered by a deep reces­sion.”

    Yep, only a deep reces­sion will trig­ger the talked about fis­cal stim­u­lus mea­sures. That’s the real­i­ty of Berlin’s appar­ent change of heart on fis­cal stim­u­lus. It’s not actu­al­ly a change of heart.

    But even more omi­nous is that the Bun­des­bank takes a sim­i­lar view and also sug­gests that a deep reces­sion is very pos­si­ble. We’re also told the Bun­des­bank is expect­ing pro­tract­ed stag­na­tion. Which, again, is con­sis­tent with Ordolib­er­al ortho­doxy. Fis­cal stim­u­lus, maybe, dur­ing a deep reces­sion will be con­sid­ered but pro­tract­ed stag­na­tion does­n’t call for fis­cal stim­u­lus. That’s why there’s mere talk of fis­cal stim­u­lus only if there’s a deep reces­sion at the same time a reces­sion is look­ing like­ly and a deep reces­sion looks very pos­si­ble. That’s how Ordolib­er­al­ism works. With planned aus­ter­i­ty and a focus on main­tain­ing sur­plus­es at all cost:

    ...
    Econ­o­mists at the Bun­des­bank pre­dict out­put might fall 0.1% in the three months through Sep­tem­ber, the same pace as in the pre­vi­ous quar­ter, accord­ing to the peo­ple. Con­ven­tion­al­ly, two con­sec­u­tive quar­ters of eco­nom­ic con­trac­tion would be con­sid­ered a tech­ni­cal reces­sion.

    ...

    Germany’s dete­ri­o­rat­ing econ­o­my, high­light­ed in a sur­vey on Thurs­day show­ing man­u­fac­tur­ing still shrink­ing and orders falling, has prompt­ed a wave of calls for the gov­ern­ment to pro­vide a fis­cal boost.

    ...

    At the cen­tral bank how­ev­er, experts describe the state of the econ­o­my as one of pro­tract­ed stag­na­tion, with the per­for­mance over the past year skewed by a range of tem­po­rary fac­tors. Mild win­ter weath­er, for exam­ple, bol­stered out­put in the first quar­ter, with pay­back in the spring.

    That doesn’t mean there’s no risk of a deep­er slump. In its month­ly report pub­lished Mon­day, the Bun­des­bank high­light­ed the dif­fi­cul­ty pre­dict­ing the cur­rent course of the econ­o­my, with man­u­fac­tur­ing in a deep down­turn and pri­vate con­sump­tion still sol­id.

    “As things cur­rent­ly stand, it is unclear whether exports and, by exten­sion, indus­try will regain their foot­ing before the domes­tic econ­o­my becomes more severe­ly affect­ed,” the Bun­des­bank wrote.
    ...

    So while all eyes are going to be on Trump’s ham-fist­ed rage-tweet­ing thumbs dur­ing the G7 sum­mit as he con­tin­ues to hap­haz­ard­ly shake the foun­da­tions of the glob­al econ­o­my, let’s hope he he man­ages to make some sort of real progress on Ger­many trou­bling addic­tion to the twin bud­gets and trade sur­plus­es. It would be nice if Trump brought up the insan­i­ty of the Ordolib­er­al demands for aus­ter­i­ty, but the Trump admin­is­tra­tion is all about aus­ter­i­ty for social pro­grams too so he’s unlike­ly to bring that up. But he might bring up those twin sur­plus­es and he should. Or maybe not. He’ll prob­a­bly screw it up. But he should in the­o­ry. And it might dis­tract him from acci­den­tal­ly break­ing the US eco­nom­ic sup­ply-chain in his fight with Chi­na. So maybe it’s worth it for him to bring it up despite the risks he’ll screw it up. A the­o­ret­i­cal non-insane Trump should def­i­nite­ly bring this up dur­ing the G7 meet­ing because it’s actu­al­ly pret­ty impor­tant.

    Posted by Pterrafractyl | August 24, 2019, 4:58 pm

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