Economics and similar, for the sleep-deprived

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Update: seemingly not

Update: Oh yeah!


Tuesday, June 19, 2012

 
Germany demands austerity! that's what they do, right?


Why would Germany demand austerity from its trading partners? Exactly? oh probably because they're all right wing conservatives, all of them, and also really Teutonic and uptight, also Weimar or something possibly.

That's the level that the European debate is being conducted at, it seems.  I have absolutely no brief for the German political class and was indeed quite early to harangue them as being parochial and smug when to do so was neither popular nor profitable, but ... I don't think much is being gained by such studied mindlessness.

And is it even true?  I wrote this to a couple of email correspondents today.

Well we need to define terms here. "Demand austerity" often just seems to mean "declines to provide free money with no say about how it's spent". This was the issue in Greece; it is actually quite correct to worry that providing more fiscal deficit financing in the absence of a functional budget apparatus would just be financing a) capital flight for the Greek rich, and b) another six months of denial and toxic labour relations in the nationalised industries.


In Spain there have been no terms imposed by the troika because it doesn't have a program yet; what it does have is a promise that the program it gets will impose no major fiscal conditionality. Spain has been cutting its budget, but this is a result of the massive liability forced onto it by the regional savings banks and its inability to borrow on the market - it's not anything to do with Germany. 


The Euroland Pact isn't an austerity program either; it's "Hard Keynesianism" of the sort advocated by Henry Farrell and John Quiggin in their "Foreign Affairs" article. It refers to the structural rather than cyclical deficit and has an explicit exception for emergencies. 


The one case where there has been genuine austerity in the sense of clearly counterproductive procyclical policy in my view is Ireland, but the Irish program was the first one to be agreed, and every party to it believed in confidence-fairy expansionary austerity reasoning. Germany didn't need to force Lenihan and Ahearn to think that the road to recovery was slashing the state and a load of supply side bullshit. If Germany had been able to force any conditionality on Ireland then they would have done something about corporate tax. 


Greece would be another case of austerity (and a lot of people, including Paul Krugman, Doug Henwood and Brad Delong, think it is and I'm wrong on this) but in my view people are looking only at the fiscal arithmetic and not at the underlying politics. If you just look at the numbers and assume that Greece is a normal economy that works like any other OECD state, then the budget package looks completely wrong. If you come at it from an emerging-market rather than a developed-market perspective and recognise that there is a limit to the amount of lending you can pour into the leaky bucket that is the Greek fiscal sector, then you get a different perspective - the governance problem is the fiscal problem is the austerity problem.


[...]


In any case, none of Germany's policy stance is based on being "righteous". It's all based on not wanting to pay an unknown and possibly unlimited amount of money with no effective control on how it's spent and no ability to prevent further debts being run up in future. In actual fact, Germany's unwillingness to act this way has disastrous effects, and their technical and ideological legacy to the ECB even more so, but you can see their reasons for believing what they believe. When Greece has riots over the suggestion of a technical assistance mission to their tax collection authorities and the biggest Sunday newspaper in Ireland talks about "jackboots" (and the French as their "collaborators", presumably in the vague hope that everyone had forgotten De Valera's neutrality), the temptation to say "well screw you guys, remember that *we* can export to China" must be overpowering. 


 [...]


And if we're going to ignore political possibility, it would help a lot if Greece would implement labour reforms and undo the crony networks, Ireland could reform the tax system and break the links between politicians and property developers, Italy could improve tax collection and Spain could bring the regional governments under the central budget. 


 Seriously, after two years of having it explained to me that a Democratic president can't pass a centrist healthcare bill through a House and Senate with Democratic supermajorities, it is now my turn to suggest that implementing a high-wage, high-inflation policy in Germany is also not quite as simple as that.


And just before taking my contrarian jester's hat off, I'll rejoind to the Paul Krugman access that there is, actually, one example of a European country carrying out an internal devaluation when faced with an overvalued exchange rate which is generally regarded as a success ... obviously, the policy mix for Germany wouldn't be appropriate for countries that don't have its particular endowment of technology and human capital.  But if you start thinking about what it might be like to see things through their eyes, you get a bit of a different perspective.
14 comments this item posted by the management 6/19/2012 12:48:00 PM


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