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.
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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.
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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.
I get the impression that at this point, when some commentators are complaining about German demands for austerity, their ire is really focused on the ECB more than anything.
ReplyDeleteNot that conflating them and the Germans is productive of course.
http://blogs.reuters.com/anatole-kaletsky/2012/06/20/can-the-rest-of-europe-stand-up-to-germany/
ReplyDeleteI'm coming round to the view that Greece's problems are all built around competitiveness and the current-account deficit; if Euros are flowing *out* of the country (long term current account deficit), and more Euros are not available in credit, then there must by simple arithmetic be fewer Euros in circulation in Greece, resulting in fewer or lower-value transactions.
ReplyDeleteSince Greece needs to import fuel and medicine, its ability to do that decreases in proportion to the export gap, those things become less affordable, and it starts looking more like an "undeveloping" country.
OK, I'll bite. Not sure about your chronology or interpretation of the bailouts. The Irish was the second, not the first (Nov '11, six months after Greece) & I think enough has come out about the negotiations to be clear that some important things were up for grabs, notably the question of protecting the Irish banks' senior bondholders. The ECB, the eurogroup and the Commission were all resolutely hard-line on this, far more so than the IMF, for reasons surely not unconnected with the exposure of German and French banks.
ReplyDeleteIndeed, Spain's & Ireland's banking crises weren't nothing to do with Germany: IIRC German banks were heavily involved in financing private sector booms across the periphery.
For me the most irritating aspects of the German official attitude are casually to ignore 1. the role their own banks had in the crisis and 2. the effect on the credibility of eurozone fiscal policy of the widespread disregard for Father of Fiskalpakt aka the SGP, which they and France were the first to break. (I agree with you, btw, that the Fiskalpakt has more holes than the England back four.) During the euro's first decade, Germany's ability to lecture other eurozone countries effectively on fiscal policy was fatally undermined by its own violation of the SGP.
Finally, that Greece has serious governance problems affecting its fiscal situation should have come as news to no-one at all. Germany could easily have blocked Greece joining the euro in the first place, and chose not to do so.
Duh: Irish bailout in Nov '10, not '11.
ReplyDeleteIIRC German banks were heavily involved in financing private sector booms across the periphery.
ReplyDeletethis is a much weaker point than anyone wants it to be. Germany has banks, so what. Might as well say "German automobile manufacturers were heavily involved in providing goods for the Greek overconsumption".
I think enough has come out about the negotiations to be clear that some important things were up for grabs, notably the question of protecting the Irish banks' senior bondholders. The ECB, the eurogroup and the Commission were all resolutely hard-line on this, far more so than the IMF, for reasons surely not unconnected with the exposure of German and French banks.
The reasons for this were a little bit more involved and related to a really badly generally understood point about Irish bankruptcy law. Deep down in comments on a protected blog, I can probably reproduce something else I wrote for the same mailing list ...
----
My understanding of what
went on in those strange two weeks in October 2010 (btw, this is
strictement confidential; all my sources will deny ever having talked
to me) are that:
1) Lenihan and Cowen started off by denying that there was a problem
2) It became increasingly obvious that there was a problem with
respect to BoI and AIB's liquidity
---> at this stage there was a sensible exit-ramp, which was for the
ECB to do its damn job already, and to take over providing last resort
lending to AIB and BoI. But this was the road, stupidly, not taken.
3) because the ECB started claiming that this was a solvency problem
that had to be handled by the fiscal authorities
4) and so the EFSF was created, and the Irish joint EFSF/IMF program
was agreed A large part of this was the guarantee of AIB and BoI
---> at this point, things had been more or less settled, and we might
have got on with our lives. In particular, the majority of the EFSF
money was meant to be a "contingency fund" that wasn't meant to be
drawn down, hence the 2% premium over EFSF cost of funds
5) but, possibly encouraged by the IMF, who really did not understand
what they were playing at, Lenihan and Cowen then tried to open up the
possibility of renegotiating the terms of the program, based on
"burden sharing" (ie, defaulting on BoI and AIB bonds).
6) this was very badly handled; everyone else had thought they had a
done deal. On initial inquiries, it turned out very quickly that the
IMF advisors in favour of this deal had simply suggested it based on
general "private sector creditors should suffer" principles, and had
given basically no thought at all to the legal and technical
implications. A charitable interpretation would be that they had not
realised that the BoI/Financial Regulator do not have the same powers
as the FDIC, and it was not possible to carry out a "partial default"
on the bonds, without also defaulting on the deposits, interbank
credits, etc etc.
---> note that at this stage, Lenihan and Cowen were in the position
of holding a gun at their own head and threatening to pull the
trigger. In the event of a default of AIB and BoI, the people who
would suffer vastly the most would be Ireland. It would also be very
inconvenient for the ECB, which would have to lend a lot more to stop
the systemic collapse, and for the USA and world markets generally.
But it was basically a non-credible threat in the game theory sense,
which was only given credibility by the fact that Lenihan and Cowen
were so politically dead anyway that nobody could rule out the
possibility that they'd do something crazy out of desperation.
7) tempers were pretty high at this stage. Cowen in particular did a
lot of damage to his reputation by pointless grandstanding, and at
least some people present thought that he was literally threatening to
pull down the whole European banking system unless he got his way.
8) this was the point at which Geithner got involved.
>Might as well say "German automobile manufacturers were heavily involved in providing goods for the Greek overconsumption".
ReplyDeleteCome on - banks are fundamentally different from carmarkers, which is why they have far more extensive regulation, and why the arguments in favour of capital account liberalisation are theoretically and empirically different from those for trade liberalisation. Banks create, or at least facilitate, bubbles, which is what the German banks did in Spain and elsewhere, and their regulators failed to haul them in.
The context for this criticism is that the official German attitude to the periphery is generally that everyone needs to act like Germany. As far as breaking fiscal rules and allowing reckless lending against a housing bubble (in this case someone else's housing bubble, but within the eurozone that ended up being their problem as well), I'd say that's already been achieved. The internal devaluation bit considerably less so: it's hard to invent overnight the kind of labour market institutions Germany has developed over decades, another thing that the German government might have thought of before letting Greece into the euro.
Ireland: I'm supremely underqualified relative to you to comment on the internal negotiations over the banks, but I would agree that it was clearly a job for the ECB. That the ECB has not been playing its proper role in this crisis owes a fair amount to the intellectual and organisational influence of the Bundesbank, which I would include in the general critique of German officialdom. (I realise I'm shifting the argument while retaining the conclusion here, but I think the critique is legitimate.)
Banks create, or at least facilitate, bubbles, which is what the German banks did in Spain and elsewhere, and their regulators failed to haul them in
ReplyDeleteSrsly, Germany could have had literally no banks at all and nothing would have been at all different. The two big bank-caused crises of Europe were Spain and Italy, and they were caused by domestic banks, not foreign ones. In Greece, the banks really were a sideshow (an entertaining and utterly culpable one in the case of the GS swaps transaction, but nothing really turned on this).
That the ECB has not been playing its proper role in this crisis owes a fair amount to the intellectual and organisational influence of the Bundesbank
I would not totally disagree with that, but would attribute a lot to the personal agency of Jean-Claude Trichet, who I always bring up when people are trying to give Alan Greenspan any kind of "Worst Central Banker Of The Decade" award.
German banks lent heavily to Spanish banks (and didn't Commerz actually wind up with a stake in a Barcelona property company through a debt-for-equity deal?) Would the Spanish bubble have happened without them? Difficult counterfactual, but German officialdom did little to spot the actual crisis happening and warn or do anything about it, either in fiscal policy or bank regulation.
ReplyDeleteTrue of course about Greece's banking system, but German banks did also lend a lot to the Greek sovereign. (And bought all sorts of crap from the US.)
BTW the loose monetary policy that helped fuel the bubble in the mid-2000s was wildly inappropriate for the periphery & largely driven by Germany's needs. Not Germany's fault they are the biggest economy in the eurozone, but characteristically annoying not to acknowledge the effect of their economic weight on the rest of it.
Trichet from my experience of him I take mainly to be a politically astute technocrat in the classic enarque mould, operating within the bounds of a system that he inherited, rather than a Greenspan-type ideologue. The continual pressure of Buba orthodoxy (see Stark and Weber resignations at what now appears a relatively moderate development) was the main factor on the ECB's actions I think.
German banks lent heavily to Spanish banks (and didn't Commerz actually wind up with a stake in a Barcelona property company through a debt-for-equity deal?) Would the Spanish bubble have happened without them? Difficult counterfactual, but German officialdom did little to spot the actual crisis happening and warn or do anything about it, either in fiscal policy or bank regulation.
ReplyDeleteThis paragraph works just as well, modulo the specific ref to Commedybank, if you take out the word "German" both times it occurs (and even better if you then insert the word "American"). Nobody would have said these things specifically about the German banks unless they had looked at the answers in the back of the book and knew that they needed a German solution.
BTW the loose monetary policy that helped fuel the bubble in the mid-2000s was wildly inappropriate for the periphery & largely driven by Germany's needs. Not Germany's fault they are the biggest economy in the eurozone, but characteristically annoying not to acknowledge the effect of their economic weight on the rest of it.
Germany's and France's but yes. OTOH it is equally characteristically annoying when this point is made by Irish and Spanish (in fairness, usually not Italian or Greek) commentators who really were not saying anything of the sort at the time and were in general handing out economics lectures to "Old Europe".
Trichet from my experience of him I take mainly to be a politically astute technocrat in the classic enarque mould [...] The continual pressure of Buba orthodoxy
oooh nonono I really disagree here. I see him as a hard-money nut in the classic interwar mould; one of my main fears in 1997-8 when this was a live discussion was that people were considering Jean-Claude effing Trichet as not "credible" enough to be the first ECB governor (on the basis, it has to be said, of some pretty stupid xenophobia). He was the man behind the franc fort policy; more than anyone else in Europe, he had spent the 90s building up a track record of being someone with an amazing degree of indifference to the unemployment of other people.
Also I would have agreed with this a couple of weeks ago ...
ReplyDelete(see Stark and Weber resignations at what now appears a relatively moderate development)
but I'm now beginning to think that Stark and Weber were a few steps ahead of the rest of us. The issue they resigned over was the changes in the ECB collateral arrangements; ie the build-up of unsecured or under-secured exposures within the Eurosystem. Although Hans-Werner Sinn is wrong as hell on his actual analysis, he's in many ways more right than the people who are right when it comes to the big picture.
Basically, the way in which the Eurosystem has developed has brought the Bundesbank members face to face with the fact that a commitment to maintaining the euro is a commitment to extending intra-Eurosystem balances without limit.
These balances are debts, and debts have to be dealt with in one of four ways:
1) pay them
2) default on them
3) monetise them
4) get someone else to pay them.
Since 1) is clearly notgonnahappen and 2) in context would be breakup of the euro, Weber and Stark must have been brought to a point where they realised that either monetary financing or mutualisation of debts on the "Germany pays" model were the inevitable conclusions. The solution that they had anticipated in 1999, which was
5) never run up any such balances because Stability & Growth Pact! Also convergence! Look, there's Halley's Comet!
didn't work, and so they resigned rather than have themselves at the helm when something very unpalatable was done.
I don't think it affects your point about Bundesbank orthodoxy which I think is still also part of the story, but I'm beginning to see those resignations as much more important and less petulant than they seemed at the time.
> Nobody would have said these things specifically about the German banks unless they had looked at the answers in the back of the book and knew that they needed a German solution.
ReplyDeleteOr, which is where we came in, in response to a contention that the German response to the eurozone crisis has no element of being "righteous". The German attitude to the problems of the periphery wilfully ignores the role of their own banks in helping to create the problem and their own pioneering work in destroying the credibility of fiscal discipline in the eurozone. You want a morality play, Chancellor? Sure, as long as hypocrisy as well as hubris gets a substantial part.
that's a fair enough point
ReplyDeleteAnd thus, improbably, a comments discussion on a blog ends civilly and even hints at a degree of synthesis and of opposing ideas taken on board (esp I take your point about Ireland).
ReplyDeleteI hope someone's taking notes on this.