And now the Euro­pean unem­ploy­ment rate is at a record high and the dread­ed infla­tion-mon­ster is the weak­est it’s been in three years. The obvi­ous ques­tion pol­i­cy-mak­ers are ask­ing: does this awful data mean the euro­zone has turned a cor­ner? The pol­i­cy-mak­ers that made the poli­cies that brought us this awful data seem to think so:

Mon­day, April 29, 2013 by
John O’Donnell, Reuters
Could the euro­zone have turned a cor­ner?

There are no calls for cel­e­bra­tion, no desire to relax in the cor­ri­dors of Brus­sels, but some offi­cials believe the euro­zone has turned a cor­ner, sharp­en­ing the focus on longer-term reforms and struc­tures.

Despite a messy bailout of Cyprus, mar­kets are calm, Ireland’s res­cue pro­gramme is on track and Greece and Por­tu­gal, while still in reces­sion, hope for a slow recov­ery next year.

Slovenia’s banks are a con­cern, but one that pol­i­cy­mak­ers are con­fi­dent they can deal with. And although Malta’s bank­ing sys­tem is vast com­pared with its econ­o­my, it is not struc­tured in the same way as in Cyprus. The same goes for Lux­em­bourg.

Spain’s bank restruc­tur­ing appears to be work­ing.

“All the skele­tons are out of the clos­et,” said one senior offi­cial who has spent much of the past three years work­ing on the cri­sis. “There are no more major issues in the pipeline.”

It is a line of think­ing shared by Euro­pean Cen­tral Bank pol­i­cy­mak­er Yves Mer­sch, who said last week he did not expect anoth­er coun­try to “slump fur­ther”.

The rel­a­tive calm has giv­en offi­cials in Brus­sels breath­ing space, and the signs are that sev­er­al coun­tries, includ­ing France and Spain, could be giv­en an extra year or two to meet their bud­get deficit goals. The pol­i­cy of aus­ter­i­ty remains, but the pace of fis­cal con­sol­i­da­tion will ease.

Yet none of that means the big­ger issues under­pin­ning the cri­sis are resolved. While the exis­ten­tial threat may have passed, the need to imple­ment tough and unpop­u­lar struc­tur­al reforms remains, and plans for tighter over­sight and con­trol of banks via a ‘bank­ing union’ are not even halfway there.

“With Cyprus, we have hit the low­est trough of the cri­sis,” said Peterson’s Jacob Kirkegaard of the Peter­son Insti­tute for Inter­na­tion­al Eco­nom­ics, a think-tank in Wash­ing­ton.

...

Many dan­gers lie ahead. First off, most mem­ber states still have to ful­ly imple­ment tough reforms to reha­bil­i­tate their economies by rais­ing pro­duc­tiv­i­ty, cut­ting labour costs and over­haul­ing their pen­sion sys­tems, even as they are drop­ping deep­er into reces­sion.

That painful process of reform is going to take years to com­plete, with the risk that it will be reject­ed by vot­ers.

Sec­ond­ly, the botched ini­tial attempt to impose loss­es on small savers in Cyprus could grad­u­al­ly erode con­fi­dence, prompt­ing depos­i­tors to with­draw mon­ey if they fear a sim­i­lar “bail-in” else­where.

“There is clear­ly a risk that when you make a pro­pos­al that insured deposits can be bailed in, you have let the genie out of the bot­tle,” said Stringer. “It is then dif­fi­cult to con­vince peo­ple that this option will nev­er be con­sid­ered.”

Third­ly, the con­trols on cap­i­tal move­ment in Cyprus have cast a cloud of uncer­tain­ty over Europe.

“If you can­not access or trans­fer euros in Cyprus, it will call into ques­tion whether there is a frag­men­ta­tion of the cur­ren­cy,” said Stringer. “It’s dif­fi­cult to argue that a euro in Cyprus is the same as a euro in Ger­many.”

But per­haps the biggest risk, as in the past, is that Europe‘s polit­i­cal will to change could fal­ter. That is espe­cial­ly true when it comes to estab­lish a bank­ing union, includ­ing ECB super­vi­sion as well as an agency and fund to close bad banks. It is a con­cern at the fore­front of offi­cials’ minds.

As the sense of cri­sis has eased, Berlin has cooled to the idea for fear that it could be left on the hook for reck­less lend­ing in oth­er coun­tries. With­out Ger­man sup­port, the whole scheme will fal­ter.

Finance Min­is­ter Wolf­gang Schaeu­ble put a brake on plans in mid-April when he said bank­ing union need­ed a change to the EU Treaty, a cum­ber­some process most mem­ber states want to avoid.

...

Over the longer term, as Europe wal­lows in reces­sion and vot­er resent­ment hard­ens, the mood could dark­en.

“Fore­casts for eco­nom­ic recov­ery, includ­ing our own, keep on get­ting pushed back,” said Fitch’s Stringer. “First it was 2011, now 2012 and then 2013. The big wor­ry is that Europe will suf­fer a lost decade, as Japan has done.”

Francesco Papa­dia, the for­mer head of the Euro­pean Cen­tral Bank’s finan­cial mar­ket oper­a­tions and one of the inner cir­cle around for­mer ECB Pres­i­dent Jean-Claude Trichet, under­stands the risks in the del­i­cate bal­anc­ing act to sus­tain con­fi­dence.

“The mess in Cyprus was hor­ri­ble,” he said. “I’m sur­prised that the mar­ket has tak­en ... events so much in its stride. But if Italy says we’ll run our own finances not Brus­sels, or Merkel says for­get about bank­ing union, for exam­ple, then ten­sions could come back with a vengeance.”

Huh, so Europe risks fac­ing a lost decade if the economies don’t recov­er, but pol­i­cy-mak­ers are still feel­ing opti­mistic while main­tain­ing their com­mit­ment to “struc­tur­al reforms”. The opti­mism appears to be root­ed in:
1. An eas­ing of the imme­di­ate cri­sis sen­ti­ment fol­low­ing the Cyprus bail-in deba­cle.
2. The Cyprus bailout appeared to but­tress sup­port for the planned “bank­ing union”
3. Grow­ing agree­ment amongst pol­i­cy-mak­ers to extend the by a year or two the time allowed to coun­tries like Spain and Italy to meet var­i­ous “struc­tur­al reforms”.

In oth­er words, they’re feel­ing opti­mistic over an agree­ment to leave “eased up” aus­ter­i­ty poli­cies in place for years longer than ini­tial­ly planned. They’re also feel­ing con­fi­dent due to the fact that the Cyprus-relat­ed euro­zone-implo­sion threat appears to have lit a fire under every­one’s ass regard­ing the imple­men­ta­tion of the “bank­ing union” by high­light­ing how ten­u­ous the cur­rent sit­u­a­tion remains. Feel­ing opti­mistic yet?

As for­mer ECB-offi­cial Francesco Papa­dia warned at the end, though, if the mar­kets get spooked again and/or Merkel say “for­get about the bank­ing union” (which she’s sort of doing by demand­ing a treaty change). Papa­dia also warned of the risk of coun­tries like Italy get­ting the strange idea that run­ning their own finances instead of let­ting Brus­sels han­dle it would be a good idea. And for the bank­ing union to work Papa­di­a’s warn­ing about Italy decid­ing to run its own finances will have to be avoid­ed. The planned bank­ing union adds a new lay­er of over­sight to EU-wide (and not just euro­zone-wide) nation­al fis­cal pol­i­cy (i.e. poten­tial­ly ALL nation­al expen­di­tures depend­ing on how things evolve). In addi­tion, there is also the fis­cal com­pact com­ing into force that man­dates EU-wide deficit ceil­ings of 0.5%. Those two pol­i­cy regimes that are posi­tioned to be the enforcers of per­ma­nent aus­ter­i­ty have yet to come into exis­tence. So the notion that the bank­ing union will some­how solve Europe’s con­ti­nen­tal identity/sovereignty crises is sort of a sick joke. But it’s a joke for the future.

In the mean time, let the beat­ings must con­tin­ue!

The New York Times
The Beat­ings Must Con­tin­ue
Paul Krug­man
April 30, 2013, 6:25 am

Some­times econ­o­mists in offi­cial posi­tions give bad advice; some­times they give very, very bad advice; and some­times they work at the OECD.

It’s almost exact­ly three years since the Paris-based OECD gave what may have been the worst advice of any major inter­na­tion­al orga­ni­za­tion — worse than the Euro­pean Com­mis­sion, worse than the ECB. Not only did it join in the demand for fis­cal aus­ter­i­ty, it also demand­ed that the US start rais­ing inter­est rates rapid­ly, so as to head off the threat of infla­tion — even though its own mod­els showed no such threat.

So here we are three years lat­er. No infla­tion take­off in Amer­i­ca (and the Fed try­ing to find ways to boost demand at a zero rate); aus­ter­i­ty eco­nom­ics has crashed and burned; the lat­est num­bers from Euro­stat look like this:
[see img]

And what is the OECD’s chief econ­o­mist (still the same per­son) say­ing?

The euro zone is at risk of snatch­ing defeat from the jaws of vic­to­ry by aban­don­ing efforts to cut bud­get deficits and fix long-stand­ing eco­nom­ic prob­lems, the Orga­ni­za­tion for Eco­nom­ic Coop­er­a­tion and Development‘s chief econ­o­mist warned Mon­day.

…

Mr. Padoan said the grow­ing per­cep­tion that aus­ter­i­ty has been futile is incor­rect.

“Fis­cal con­sol­i­da­tion is pro­duc­ing results, the pain is pro­duc­ing results,” he said.

He added that euro-zone pol­i­cy mak­ers need to do a bet­ter job of com­mu­ni­cat­ing their suc­cess­es to a weary pop­u­la­tion.

I believe that’s eurospeak for “the beat­ings will con­tin­ue until morale improves.”

Yes, the pain is pro­duc­ing results.

For folks fear­ing a US gov­ern­ment shut­down, fear not! Europe has been engaged in the wide­spread slash­ing gov­ern­ment spend­ing for years and just look how awe­some it’s going:

The Tele­graph
My grov­el­ling apol­o­gy to Herr Schäu­ble

By Ambrose Evans-Pritchard Eco­nom­ics Last updat­ed: Sep­tem­ber 17th, 2013

Ger­man Finance Min­is­ter Wolf­gang Schäu­ble has been vin­di­cat­ed.

For my part, I have been wrong about every­thing. Ger­man dis­ci­pline poli­cies for the euro­zone have been a tremen­dous suc­cess. I am ashamed for sug­gest­ing oth­er­wise.

As the wise, patient, and always self-effac­ing Mr Schäu­ble writes today in The Finan­cial Times, the Euro-scep­tics talk and write relent­less dri­v­el.

“Ignore the doom­say­ers: Europe is being fixed” is the head­line:

The euro­zone is clear­ly on the mend both struc­tural­ly and cycli­cal­ly.

What is hap­pen­ing turns out to be pret­ty much what the pro­po­nents of Europe’s cool-head­ed cri­sis man­age­ment pre­dict­ed. The fis­cal and struc­tur­al repair work is pay­ing off, lay­ing the foun­da­tions for sus­tain­able growth. This has tak­en crit­i­cal observers aback. It should not have, because, in truth, we have seen it all before, many times and in many places.

Despite what the crit­ics of the Euro­pean cri­sis man­age­ment would have us believe, we live in the real world, not in a par­al­lel uni­verse where well-estab­lished eco­nom­ic prin­ci­ples no longer apply.

Mr Schäu­ble says Ger­many pulled it off the old-fash­ioned way ear­li­er this decade, with root-and-branch reform. The UK did it in the 1980s, Swe­den and Fin­land in the ear­ly 1990s, Asia in the late 1990s:

The recipe worked then and it is work­ing now, some­what to the cha­grin and bemuse­ment of its numer­ous crit­ics in the media, acad­e­mia, inter­na­tion­al organ­i­sa­tions and pol­i­tics.

In just three years, pub­lic deficits in Europe have halved, unit labour costs and com­pet­i­tive­ness are rapid­ly adjust­ing, bank bal­ance sheets are on the mend and cur­rent account deficits are dis­ap­pear­ing. In the sec­ond quar­ter the reces­sion in the euro­zone came to an end.

Sys­tems adapt, down­turns bot­tom out, trends turn. In oth­er words, what is bro­ken can be repaired. Europe today is the proof.

So there we have it. The prob­lem is solved. How can I not have seen it? How can any of us on this blog thread have missed it?

I apol­o­gise for men­tion­ing that unem­ploy­ment is 27.8pc in Greece, 26.3pc in Spain, 17.3pc in Cyprus, and 16.5pc in Por­tu­gal, or for point­ing that it would be far worse had it not been for a mass exo­dus of EMU refugees. Nor was is prop­er to men­tion that Greek youth unem­ploy­ment in 62.9pc. These are triv­ial details.

I apol­o­gise for point­ing out that the EU-IMF Troi­ka orig­i­nal­ly said the Greek econ­o­my would con­tract by 2.6pc in 2010 and then recov­er briskly, when in fact it con­tract­ed by rough­ly 23pc from peak-to-trough, and will shrink anoth­er 5pc this year accord­ing to the think-tank IOBE. This slip­page is well with­in the nor­mal mar­gin of error.

I apol­o­gise for men­tion­ing that the debt tra­jec­to­ries of Spain, Greece, Italy, and Ire­land have accel­er­at­ed upwards under the aus­ter­i­ty plans, and there­fore that the pol­i­cy has been self-defeat­ing.

It was quite uncalled for to point out that Italy’s debt ratio has jumped to 130pc of GDP, or to so sug­gest that debt can­not keep ris­ing on a con­tract­ing nom­i­nal GDP bas, and I will wash my mouth soap if I ever utter the words “denom­i­na­tor effect” again. It is shab­by to use such cheap lan­guage.

I apol­o­gise for men­tion­ing IMF stud­ies show­ing that the fis­cal mul­ti­pli­er is three times high­er than first thought by EU offi­cials in EMU cri­sis states, and there­fore that the con­trac­tionary effects of belt-tight­en­ing are far greater than first cal­cu­lat­ed.

As for using that pious and pre­ten­tious Greek word “hys­tere­sis” to sug­gest that mass unem­ploy­ment and the col­lapse of invest­ment in south­ern Europe has low­ered the eco­nom­ic growth tra­jec­to­ry of these coun­tries for years to come, out­weigh­ing any of the alleged gains from the EU-imposed reforms: this is just try­ing to blind good folk with posh talk.

I apol­o­gise for sug­gest­ing that Ger­man reforms under Schröder have been vast­ly overblown, and that Ger­man com­pet­i­tive­ness gains have been chiefly the result of a beg­gar-thy-neigh­bour wage squeeze at the cost of EMU trade part­ners. Nor should I have said that a small open econ­o­my like Swe­den in the 1990s may well be able to tight­en its way back to vital­i­ty in a the mid­dle of a glob­al boom, but if half Europe does so in uni­son in a slump, it will inflict car­nage.

It was uncon­scionable of me to say that Ger­many has locked in a semi-per­ma­nent trade advan­tage over Club Med, or for say­ing that the try­ing to close this gap by impos­ing defla­tion on the South is impos­si­ble because this will play hav­oc with debt dynam­ics.

How could any of in the euroscep­tic camp have stooped to the his­tor­i­cal pornog­ra­phy of the 1930s, sug­gest­ing for one moment that EMU repli­cates the worst errors of the inter­war Gold Stan­dard, or that the Ger­man-led cred­i­tor bloc is doing to Spain exact­ly what the US-led cred­i­tor bloc did to Ger­many from 1928–1933? Just sheer smut.

I apol­o­gise per­son­al­ly to Mr Schäu­ble for call­ing him a dan­ger­ous medi­oc­rity: arro­gant, shal­low, nar­row-mind­ed, provin­cial, and unsci­en­tif­ic in equal degree. This was shock­ing­ly rude. It brings shame to Fleet Street.

I should not have ques­tioned his wis­dom in think­ing it is pos­si­ble to harm­less­ly enforce con­trac­tionary poli­cies on the South of a sin­gle cur­ren­cy zone with­out off­set­ting expan­sion in the North. Events have shown that he has the finest mind in Europe, and a superb grasp of Euro­pean pol­i­tics. More­over, peo­ple have seen the light even in Greece, where he is now adored.

I apol­o­gise for scream­ing for two years that the EMU would blow apart unless Ger­many allowed the ECB to step up to its respon­si­bil­i­ties as a lender of last resort for sov­er­eign states, as it final­ly did at one minute to mid­night in July 2012. It was the Fis­cal Com­pact that saved EMU, and the Six Pack, and the Two Pack, and all those rule books from Berlin.

It was carp­ing for me to sug­gest that recent charts show­ing a dra­mat­ic nar­row­ing of unit labour costs in Spain et al are large­ly bogus, the mir­ror of mass unem­ploy­ment that caus­es an auto­mat­ic rise in appar­ent pro­duc­tiv­i­ty; and nor should I have quib­bled about the low trade gear­ing of Spain, Italy, Por­tu­gal, and Greece, or sug­gest­ed that exports are too small a share of GDP to lift these coun­tries out of the morass quick­ly. This is just pointy-head­ed, clever-clever, anorak stuff, and frankly laugh­able.

So no, Mr Schäu­ble has pulled it off. The Ger­man Con­sti­tu­tion­al Court is in the pock­et of the Ger­man finance min­istry and will thank­ful­ly run a coach and hors­es through the Grundge­setz when it rules next month, or soon after. The court will not stop the ECB keep­ing Italy and Spain afloat. The law has been stitched up, so no prob­lems there.

...

Ger­many got anoth­er reminder last week from Bun­des­bank Chief Jens Wei­d­mann that it would be fool­ish to assume that the aus­ter­i­ty treat­ment won’t be return­ing to Ger­many’s work force soon­er or lat­er. The vir­tu­ous cycle of greater tech­nol­o­gy lead­ing to greater pros­per­i­ty can be turned into a vicious cycle of fis­cal aus­ter­i­ty and scarci­ty pret­ty eas­i­ly. It just requires that a soci­ety mind­less­ly ele­vates prof­it-max­i­miza­tion and eco­nom­ic “com­pet­i­tive­ness” (which is also basi­cal­ly a mea­sure­ment of prof­itabil­i­ty) over ALL of the soci­ety’s oth­er inter­ests. Do that long enough and ANY econ­o­my will break. Send­ing one’s trade part­ners into an eco­nom­ic death-spi­ral while posi­tion­ing one’s own soci­ety to com­pete in the same “com­pet­i­tive­ness” race with these neigh­bors also helps the vir­tu­ous cycle of greater tech­nol­o­gy and and net pros­per­i­ty turn vicious:

Sep­tem­ber 25, 2013, 12:15 PM
The Wall Street Jour­nal
ECB’s Wei­d­mann Warns Ger­many on Need to Reform
By Christo­pher Law­ton

Germany’s top cen­tral banker issued a stark warn­ing to Germany’s gov­ern­ment Wednes­day: either reform or risk falling behind.

Speak­ing at a Deutsche Bun­des­bank event in Dues­sel­dorf just days after nation­al elec­tions in Europe’s largest econ­o­my, Jens Wei­d­mann, pres­i­dent of the Ger­man cen­tral bank, paint­ed a sober­ing pic­ture of the chal­lenges Ger­many faces.

No one sees Ger­many as “the sick man of Europe” any­more, Mr. Wei­d­mann said, ref­er­enc­ing a com­mon phrased used to describe Ger­many in the late 1990s when its econ­o­my was weak.

“But an eco­nom­ic head start can quick­ly be lost,” he added.

...

As a result, Ms. Merkel may now need to spend months nego­ti­at­ing with par­ties with con­flict­ing views on tax­es and social issues in order to form a gov­ern­ment. The Social Democ­rats, one like­ly part­ner, wants to raise tax­es on the wealthy to pay for more invest­ment and social pro­grams, and imple­ment a nation­wide min­i­mum wage.

In a wide rang­ing speech, Mr. Wei­d­mann said Ger­many would be chal­lenged by glob­al­iza­tion, ener­gy pol­i­cy shifts, and an aging soci­ety. In par­tic­u­lar, Mr. Wei­d­mann, who also sits on the Euro­pean Cen­tral Bank‘s Gov­ern­ing Coun­cil, sin­gled out Germany’s debt, which at 80% of nom­i­nal gross domes­tic prod­uct, is “very high.”

He also called for tar­get­ed invest­ments in infra­struc­ture and edu­ca­tion to help boost eco­nom­ic growth, but warned that any new invest­ment shouldn’t boost Germany’s nation­al debt. He also warned that imple­ment­ing a min­i­mum wage could have neg­a­tive con­se­quences for employ­ment.

Ulti­mate­ly as oth­er economies imple­ment reforms and slash pub­lic bud­gets to bet­ter com­pete on the glob­al stage, Ger­many can­not afford to sit still, espe­cial­ly as its soci­ety ages. But he added that these chal­lenges can be over­come through reforms. In par­tic­u­lar, he urged Ger­many to make more use of its old­er and female work­ers, and called for a sys­tem­at­ic approach for attract­ing skilled work­ers to Ger­many.

...

Oh well, increas­ing glob­al trade will no doubt turn around all these euro­zone economies once they’ve suf­fi­cient­ly increased their “com­pet­i­tive­ness”. Or maybe not.

Ger­many got anoth­er reminder last week from Bun­des­bank Chief Jens Wei­d­mann that it would be fool­ish to assume that the aus­ter­i­ty treat­ment won’t be return­ing to Ger­many’s work force soon­er or lat­er. The vir­tu­ous cycle of greater tech­nol­o­gy lead­ing to greater pros­per­i­ty can be turned into a vicious cycle of fis­cal aus­ter­i­ty and scarci­ty pret­ty eas­i­ly. It just requires that a soci­ety mind­less­ly ele­vates prof­it-max­i­miza­tion and eco­nom­ic “com­pet­i­tive­ness” (which is also basi­cal­ly a mea­sure­ment of prof­itabil­i­ty) over ALL of the soci­ety’s oth­er inter­ests. Do that long enough and ANY econ­o­my will break. Send­ing one’s trade part­ners into an eco­nom­ic death-spi­ral while posi­tion­ing one’s own soci­ety to com­pete in the same “com­pet­i­tive­ness” race with these neigh­bors also helps the vir­tu­ous cycle of greater tech­nol­o­gy and net pros­per­i­ty turn vicious:

Sep­tem­ber 25, 2013, 12:15 PM
The Wall Street Jour­nal
ECB’s Wei­d­mann Warns Ger­many on Need to Reform
By Christo­pher Law­ton

Germany’s top cen­tral banker issued a stark warn­ing to Germany’s gov­ern­ment Wednes­day: either reform or risk falling behind.

Speak­ing at a Deutsche Bun­des­bank event in Dues­sel­dorf just days after nation­al elec­tions in Europe’s largest econ­o­my, Jens Wei­d­mann, pres­i­dent of the Ger­man cen­tral bank, paint­ed a sober­ing pic­ture of the chal­lenges Ger­many faces.

No one sees Ger­many as “the sick man of Europe” any­more, Mr. Wei­d­mann said, ref­er­enc­ing a com­mon phrased used to describe Ger­many in the late 1990s when its econ­o­my was weak.

“But an eco­nom­ic head start can quick­ly be lost,” he added.

...

As a result, Ms. Merkel may now need to spend months nego­ti­at­ing with par­ties with con­flict­ing views on tax­es and social issues in order to form a gov­ern­ment. The Social Democ­rats, one like­ly part­ner, wants to raise tax­es on the wealthy to pay for more invest­ment and social pro­grams, and imple­ment a nation­wide min­i­mum wage.

In a wide rang­ing speech, Mr. Wei­d­mann said Ger­many would be chal­lenged by glob­al­iza­tion, ener­gy pol­i­cy shifts, and an aging soci­ety. In par­tic­u­lar, Mr. Wei­d­mann, who also sits on the Euro­pean Cen­tral Bank‘s Gov­ern­ing Coun­cil, sin­gled out Germany’s debt, which at 80% of nom­i­nal gross domes­tic prod­uct, is “very high.”

He also called for tar­get­ed invest­ments in infra­struc­ture and edu­ca­tion to help boost eco­nom­ic growth, but warned that any new invest­ment shouldn’t boost Germany’s nation­al debt. He also warned that imple­ment­ing a min­i­mum wage could have neg­a­tive con­se­quences for employ­ment.

Ulti­mate­ly as oth­er economies imple­ment reforms and slash pub­lic bud­gets to bet­ter com­pete on the glob­al stage, Ger­many can­not afford to sit still, espe­cial­ly as its soci­ety ages. But he added that these chal­lenges can be over­come through reforms. In par­tic­u­lar, he urged Ger­many to make more use of its old­er and female work­ers, and called for a sys­tem­at­ic approach for attract­ing skilled work­ers to Ger­many.

...

Oh well, increas­ing glob­al trade will no doubt turn around all these euro­zone economies once they’ve suf­fi­cient­ly increased their “com­pet­i­tive­ness”. Or maybe not.

Krug­man has a nice post on some of the moti­va­tions behind the Ger­man oppo­si­tion to last week’s sur­prise inter­est rate cut by the ECB designed to ward off Europe’s grow­ing prob­lem with defla­tion. It appears
that intense fears over the pos­si­bil­i­ty that some lazy South­ern Euro­peans might be get­ting a ‘free-ride’ by low inter­est rates super­sedes fears of defla­tion. And it appears that those fears of lazy South­ern­ers are par­tial­ly based on an appar­ent inabil­i­ty to recall that high­er lev­els of infla­tion in South­ern Europe was exact­ly what Ger­many used to achieve its own aus­ter­i­ty suc­cess:

The Con­science of a Lib­er­al

Germany’s Lack of Reci­procity
Paul Krug­man
Novem­ber 12, 2013, 1:26 am

Huge ten­sions over the ECB rate cut, with a split on the board and many Ger­man econ­o­mists protest­ing. As usu­al, a lot of it is about the per­cep­tion that those lazy south­ern Euro­peans are get­ting a free ride:

A com­men­tary by the chief econ­o­mist of the finan­cial week­ly Wirtschaftswoche called the deci­sion a “dik­tat from a new Ban­ca d’Italia, based in Frank­furt”.

Why can’t those Ital­ians etc. pull up their socks the way we did?

What Ger­mans — econ­o­mists as well as the gen­er­al pub­lic — still don’t seem to get is how much Germany’s suc­cess at emerg­ing from its late-90s dol­drums depend­ed on a some­what infla­tion­ary boom in south­ern Europe. And they there­fore also don’t real­ize how much dam­age Ger­many is impos­ing by refus­ing to allow high­er euro­zone infla­tion.

...

Ger­many was able to achieve large gains in com­pet­i­tive­ness with­out defla­tion, because Spain and oth­ers were will­ing to accept infla­tion well above 2 per­cent. But now the euro­zone has over­all core infla­tion below 1 per­cent, which means that Spain can only achieve inter­nal deval­u­a­tion through crip­pling defla­tion:

...

The Ger­mans, in oth­er words, aren’t ask­ing the south­ern Euro­peans to emu­late them; they’re demand­ing that they accom­plish a feat Ger­many nev­er had to man­age, and which hard­ly any­one has ever man­aged.

One of the inter­est­ing long-term impli­ca­tions about struc­tur­ing an econ­o­my based around the moral par­a­digm of “if you (or your nation) did­n’t earn it, you (or your nation) don’t deserve it!” is that we’re rapid­ly tran­si­tion to an econ­o­my were a grow­ing amount of what’s pro­duced is pro­duced using sci­ence and tech­nol­o­gy that none of us earned because we will have inher­it­ed enor­mous tech­ni­cal exper­tise from past gen­er­a­tions. So are the engi­neers that man­age the robot-run fac­to­ries of the future real­ly going to look at all that robot-cre­at­ed pro­duc­tion (using sci­en­tif­ic knowl­edge and tech­nol­o­gy that took cen­turies to devel­op) and say “Yes We Did Build That! All of that! And all you lazy moochers had bet­ter not even think about shar­ing in the spoils of our grand socioe­co­nom­ic con­quest that we achieved all on our own!” Is this real­ly going to be our future? Prob­a­bly, since it’s already our present.