Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 29 August 2014

Eurozone delusions

I have already had a number of interesting comments on my previous post which illustrate how confused the Eurozone macroeconomic debate has become. The confusion arises because talk of fiscal policy reminds people of Greece, the bailout and all that. That is not what we are talking about here. We are talking about what happens when the Eurozone’s monetary policy stops working.

If Eurozone monetary policy was working, the Eurozone would be experiencing additional (monetary) stimulus everywhere, and average inflation would be 2%. Because Germany through 2000 to 2007 had an inflation rate below that in France and Italy, it now has to have an inflation rate above these countries. Something like 3% in Germany and 1% in countries like France and Italy for a number of years. If ECB monetary policy was working, Germany would get no choice in this, because it is part of what they signed up to when joining the Euro.

Monetary policy is not working because of the liquidity trap, so we instead have average Eurozone inflation at about 0.5%, with Germany at 1% and France/Italy at nearer zero. That implies a huge waste of Eurozone resources. That waste can be avoided, in a standard textbook manner, by at least suspending the Stability and Growth Pact (SGP), and preferably by a coordinated fiscal stimulus.

Why is this not happening? There are two explanations: ignorance or greed. Ignorance is a non-scientific belief that fiscal stimulus cannot or should not substitute for monetary policy in a liquidity trap. Greed is that Germany wants to avoid having 3% inflation, because it controls fiscal policy.

Those that say that Germany would be ‘helping out’ France and Italy by agreeing to suspend the SGP and enact a stimulus therefore have it completely wrong. If things were working normally, Germany would be getting a (monetary) stimulus, whether it liked it or not. What Germany is doing is taking advantage of the fact that monetary policy is broken, at the rest of the Eurozone’s expense. Germany gains a small advantage (lower inflation), but the Eurozone as a whole suffers a much larger cost.

Often greed fosters ignorance. It is unfortunate but not surprising that many in Germany think this is all about Greece and transfers and structural reform, because that is what they keep being told. How many of its leaders and opinion makers understand what is going on but want to disguise the fact that Germany is taking advantage of other Eurozone members I cannot say. What is far more inexplicable is that the rest of the Eurozone is allowing Germany to get away with it.
       

134 comments:

  1. I would argue that there is a meta-level problem. German policy thinking stresses the idea that every institution should concentrate on doing the “right” thing and it will all work out. Monetary policy is separate from fiscal policy. Germany does the right thing and if everyone else does the right thing all will be well. It’s a macro version of the fallacy of composition.
    And the German experience seems to confirm them in this view. I would argue that this is because of factors other than macro policy, above all a corporate culture where firms have retained a strong sense of what they are about. This culture can absorb a lot of macro policy mistakes.
    As long as the German economy does well, why should this view of the world change? The euro protects against revaluation pricing German firms out of the market. German banks were protected from bad investments by the willingness of countries like Ireland to take over the debts. The ECB prevents the monetisation of bugger deficits.
    It’s only if and when we see Germany suffer from all this that we can expect change.
    I would argue that there is another force at work which explains the relatively supine attitude of other countries towards Germany. This is that in spite of a long period of falling inflation, we still have a generation of policy makers who feel that the natural tendency in the economy is for inflation to occur. In Germany this is intensified by the initial inflationary pressures which came from unification
    Until we have a really long period in which the difficulties of avoiding deflation are apparent I am pessimistic about seeing this change.

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  2. "There are two explanations: ignorance or greed. Ignorance is a non-scientific belief that fiscal stimulus cannot or should not substitute for monetary policy in a liquidity trap. Greed is that Germany wants to avoid having 3% inflation, because it controls fiscal policy."

    This is not about Monetary policy vs Fiscal policy. That is simply Dear Model dictating analysis. It is bigger than that.

    There is no guarantee that a fiscal expansion in a post-crash liquidity glut (a low interest rate environment where savings are not being channelled into loans and investment) will flow into new productive investment.That is reallocate bank lending away from preferred already well-capitalised clients and low yielding government bonds or central bank deposits.

    Now financial institution purchases of low yielding government bonds can be good. But it would depend on what that government expenditure was being used for. If it was going into useful capital expenditure (that translates into local employment) or to help heavily poor or indebted members of society, good, this will have multiplier effects with a sustainable increases in growth and employment

    But there is no guarantee. The only way is if you can ensure that the institutional safeguards are in place. Otherwise, assuming banks bought the bonds and this led to a substantial dispersal of fiscal funds, it is likely to lead to an unsustainable rise in imports in countries where an external payments problem/ unbalanced structure of production and trade problem is the actual underlying economic problem.

    The problem requires institutional change and fiscal union. Only through fiscal union can Germany be sure that money is going into the right place.

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    1. Let me paraphrase your argument. Other countries cannot be trusted to spend stimulus money wisely. (But they are trusted to cut wisely to meet SGP targets?) Therefore we have to have a fiscal union. I fiscal union would mean these same countries can have a say in how everyone's money is spent?! Or are you assuming that a fiscal union would be run by Germany?

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    2. "Other countries cannot be trusted to spend stimulus money wisely."

      Yes. What other conclusion could you make from the historical record of these countries since 1945? These countries require major structural reform. Think of Germany like a bank accountable to its depositors - it wants to give out or lend its money wisely.

      "Or are you assuming that a fiscal union would be run by Germany?"

      No. The whole point is that it will be run by the EU as a whole.

      With fiscal union, Germans as investors want some say over where that investment is directed. Spaniards, Italians and Greeks as part of the EU also now get a say over EU fiscal policy.

      "(But they are trusted to cut wisely to meet SGP targets?)"

      This one-sided result is a consequence of the periphery having no say (point made above.)

      To get K flowing from high K/L areas to high L/K areas we need a system that enables fiscal transfers to get that redistribution going. My view is that these fiscal transfers also need to be targeted (a common tax policy is not enough) and there needs to be institutional reform to ensure that fiscal funds go to where they are needed.

      All these things I think will eventually call on fiscal union.

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    3. it's indeed about lack of confidence, just look at what recently happened: all the money that did flow to countries like Spain was used for a housing boom. How effective was this for these countries?

      Why don't you ask the UK government to help out troubled countries, after all, the UK is the EU too? Because they are not part of a fiscal union. Well, eurozone surplus countries are not in a fiscal union either! If you want them to do anything, you have to assume they get some political control too, why is this so difficult to understand?

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    4. Let me paraphrase your argument.

      The bigger point here is that these countries face a terms of trade problem (low valued exports vv a high marginal propensity to import). This has to be fixed. It requires investment. This can come from Germany through fiscal union with the necessary institutional reforms.

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    5. You are talking about different issues here. If you are saying that Germany is using the fact that there is a liquidity trap to gain some political leverage on these other issues, then that comes under greed I'm afraid. Also doesn't it worry you that this all sounds very imperialistic?

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    6. "Also doesn't it worry you that this all sounds very imperialistic?"

      I think that is a great point! Now we are really talking outside the Neoclassical synthesis/neoliberal model.

      As a Post-Keynesian or Neo-Marxist would tell you one big thing missing in the neo-liberal political science and neo-classical economics model are issues of power.

      Power is absolutely central.

      Germany does not have the moral authority to start dictating what the Southern European countries do, because of its history. The US was in a very different position with its Marshall Plan in Europe and Japan, and it is one reason that large fiscal disbursement into government capital expenditure had large multiplier effects (leading to more infrastructure development and more private investment, more calls for infrastructural development.....) post WWII up to about 1970. Recovery was rapid after total devastation, growth sustained. (Granted, output during this time was well below potential obviously - still the effectiveness of the mobilisation of this capital is important.)

      EU political and fiscal union does not mean German domination. Actually they are willing to sacrifice sovereignty for Europe in a way the UK is not. I do not think domination is what they want. They really just want money to be used wisely and an end to the old boom and busts in the periphery.


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    7. I concur. Germany is willing to transfers powers to Brussels, France isn't and you can't get fiscal union (or co-ordination of fiscal stimulus) without more political union. Tell France to give up sovereignty, and you get Germany on your side.

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    8. Until the European political elite can show that they can design appropriate and successful macroeconomic institutions (i.e. better than ECB, SGP), any move to fiscal union would seem extremely unwise.

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    9. Unfortunately I think you may be right. In an expanded EU fiscal unification sounds even more politically unsurmountable. Some argue that the UK's push for immediate eastward expansion was really an attempt to undermine Franco-German influence and reduce the possibility of further political (ultimately leading to foreign and defence policy) unification in order to preserve the pre-eminence of NATO and the US alliance. My hope though is that Europe persists, and that a core (excluding the UK and Eastern Europe) forges ahead, with fiscal union (although I think it should drop any pretences towards common defence and foreign policies).

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    10. the us government did not do an especially good job of spending its stimulus, but i prefer being in Cambridge, Ma than being in Cambridge, England.

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  3. Very good post and comment!

    I think both explanations are valid.

    If you want a proof for the non-scientific belief argument:
    Read the following article (unfortunately in German):
    http://blog.zeit.de/herdentrieb/2014/08/28/der-wirtschaftsminister-plant-milliardengeschenk-fuer-versicherungen-und-banken_7698

    It basically explains that Gabriel, minister of economic affairs (SPD), wants to use private capital from insurance companies to fund an off-balance sheet identity which funds infrastructure investments and wants to reward them with a 1-2% premium on German bonds as payment.
    So basically he prefers to spend additional 1-2% on bunds instead of using the good credit rating of Germany to cheaply fund infrastructure investments. It is total madness.

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  4. " There are two explanations: ignorance or greed."

    Nonsense. There's a third explanation, which is political. Just because you do not understand European politics very well, does not mean you should wave your hands as if it doesn't matter. The more logical reaction is to learn more (indeed much more) about European politics before writing. This simplistic reasoning - we macroeconomists must be right, so if we aren't getting our way the explanation must be that the other side is either stupid or evil - is not helpful. In fact it's ironic, since it's only your ignorance (or bad faith) which is on display.

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    1. Fully agree. I was just going to write this. Mr. Wren Lewis, please take of your economic colored glasses and try to think of the political side for once.
      If your basic economics works, you still face the problem that the eurozone is not a federation with a government. You can only get the surplus countries on your side (with stimulus, loans, transfers), when they get some say in how the deficit economies are being run. If not, why would they do anything? No taxation without representation!

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    2. I just do not understand this. As I said, if monetary policy was working, Germany would be getting stimulus and 3% inflation whether it liked it or not. So what you are saying is that German politicians want to take advantage of the liquidity trap to get a say on how other countries are being run?

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    3. This comment has been removed by the author.

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    4. Monetary policy is made by the ECB, fiscal policy is made by Germany. Germany is not going to do fiscal policy they don't like. If you want to convince Germans of your ideas, you need to take a closer look at what they are thinking. But you already did draw your conclusions: they are either ignorant or greedy.

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    5. What you see as "taking advantage of the liquidity trap to get a say on how other countries are run" is in German eyes:
      Regardless of the reason for spending (Keynesian stimulus or fiscal spending due to beging at the ZLB) our first priority is to ensure that the spending is used in a meaningful way.

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    6. If MP was working, Germans would not be too concerned about what was happening in the periphery in the first place. They realise there is a problem. They realise it requires institutional reform. The fundamental economic problems in the periphery require a redistribution of capital across the Eurozone, which requires firstly a fiscal solution involving an injection of capital from surplus countries. This requires, for the reasons made by many commentators above, fiscal and ultimately political union.

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    7. When I read a good argument for insisting that the SGP be followed, I will revise my opinion. All I'm hearing is arguments that are about something else. For example my post is about Germany and countries like France or Italy, not the periphery.

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    8. When I read a good argument for insisting that the SGP be followed, I will revise my opinion.

      It is discipling and converging device that prepares the way for fiscal union. It helps keep things from blowing out of control during the transition. Once fiscal union is achieved it is no longer needed. Fiscal expansion can then begin under a simplified, homogenised, reformed and unified framework.

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    9. the question is not if following SGP or not is a good policy, the question is: if SGP would be suspended, what would replace it? I would say fiscal union, and you can't have fiscal union without political union. Or do you think you can run the eurzozone without any rules at all, just some ''co-ordination'' ?
      How do you think that is going to work?

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    10. Excellent comment!

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    11. Anonymous29 August 2014 10:02 refers to a 29 August 2014 04:47, which was an excellent comment.

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  5. Krugman's blog November 15, 2013 'Weaponized Keynesianism, Historical Edition' and the current oddball running Japan seems to show that it might be Russian foreign and military policy which causes politicians in the Eurozone to use a fiscal stimulus to offset some of the damage done through trade sanctions?




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  6. An important factor which also seems to enforce the misunderstandings is the different understanding of monetary policy in the Anglosaxon view and in the (traditional) German view.

    The Anglosaxon view tends to see monetary and fiscal policy as two equal tools too maintain a healthy economy. So if monetary is restricted we could use the other one. The different schools of thought tend only to differ which is when and to what circumstances efficient.

    This is not the traditional German view. According to this view monetary policy should be done totally indepently of economic output or political trends. It should only care for the price level. The central bank should be, in essence, apolitical.
    This is why it is so difficult to go from monetary policy to fiscal policy (even "just" for price stability) because according to the ideal they are and not should be connected. The situation of failing monetary was not thought of before and so there is no real idea how to deal with it.

    Personal anecdote:
    I had a long discussion during my exchange year with one of the great US professors of "new keynesianism". Up to the discussion I believed, having been educated in only midlevel macro courses at a German university, that the sole goal of monetary policy is to maintain price stability while he was of the opinion that the ecb had more or less the same mandate as the fed.
    In reality, the mandate is a typical European compromise with all goals in the treaty but with price stability given first priority. In this way it is a compromise everybody can live with but which has not really solved the different understanding.

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    1. I recognize your characterization, but that is partly why I have tried to focus on inflation. The problem with this traditional view is that it does not recognize a liquidity trap. However, surely by now it must be obvious that the Eurozone is in a liquidity trap. So why pursue the SGP which is making it worse? It would not be difficult to see that as fiscal policy preventing monetary policy doing its apolitical job.

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    2. The short answer for a large part of the public and hawks is: "Because it is in the treaty which was signed by all parties (full stop)."

      I think that everybody would agree that we are in a situation where MP does not work any longer, BUT:
      For the old generation of German economists (think Norbert Walter, etc.) which luckily has retired, the consequence is probably not we should use fiscal policy instead. They would prefer to do nothing since the outcome is uncertain and stability is a very important in this world view. They would also refuse to accept that monetary policy does not work to do fiscal policy preventing it but that it just does not work anymore (full stop) and that this will probably be again back to normal after the crisis is sorted out in the private sector.

      But I do think that the younger generation of economists is a lot more pragmatic and that also the policy of the German government is starting to change. There was an interesting article in Sueddeutsche several weeks ago which more a less argued that Merkel and Schaueble have said behind closed doors that they will not look so closely if the SGP targets are met.
      But to stand before the German public and say: "We will not pursue the SGP anylonger" would be political suicide due to several factors which have been explained in several comments today and yesterday.
      Merkel probably would be the only person to be able to survive this. But it is against her very own image. She is popular because she is seen as a "president" who is "above" the politcal day-to-day problems. She does not explain her politics and is therefore seen as apolitical which makes her popular.

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  7. "I just do not understand this." Yes you do not understand.

    "As I said, if monetary policy was working, Germany would be getting stimulus and 3% inflation whether it liked it or not." There is no divine law that the world must be one where monetary policy "works". In the world in which we live there are pre-determined rules about monetary policy, which Germany did not impose and which everyone agreed to. So your conditional has no relevance to anything.

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    1. Why is monetary policy not working? Because of austerity imposed by the SGP. That sounds like political interference with monetary policy to me.

      I'm trying as hard as I can to put my arguments in as many different ways as I can, only to be told that I'm ignorant of the politics. But the only political arguments being made are about bailouts to the periphery. What has that got to do with imposing the SGP rules on France, for example?

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    2. ''But the only political arguments being made are about bailouts to the periphery''

      Not true. As Anglo-saxon you are familiar with the phrase ''no taxation without representation''. The eurozone is facing a similar issue: if with fiscal union tax money will be transferred, the people of the euzozone countries will want more democratic control on the spending. Therefore political union.

      You might claim co ordination of fiscal stimulus is sufficient. What if there is no agreement? Shall we put you as unelected chief eurozone in charge? You think from your ivory tower, in your simple worldview there is no need for politics because it's clear what needs to be done according to your model.

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    3. "it's clear what needs to be done according to your model."

      Please we're European, do not adopt the language of American macro-economists.

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  8. "So Germany could gain competitiveness simply by having lowish inflation — no need to actually deflate."

    Someone needs to tell Krugman that even if this issue is central to the problem (questionable) German exports do not compete with the EU periphery. They compete mainly with Japan and China, and Germany does not have a competitiveness advantage in terms of exchange rates with either. But the periphery is an important MARKET for German exports, so if it was self-serving it would not want to keep them depressed.

    More generally German policy since the nineteenth century has never advocated a low exchange rate to stimulate exports - that is a myth. Devalue the DM - never!! Rather it has generally preferred a high exchange rate to keep the cost of imports down. He needs to understand the problems of initiating an AD expansion in countries with structural trade deficits and a limited industrial base where an exogenous injection of funds will not be channelled into where they are needed.

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    1. But Germany did devalue relative to rest of Eurozone from 2000 to 2007.

      Do France and Italy have a limited industrial base? Once again, this is NOT about Greece!!!

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  9. "But Germany did devalue relative to rest of Eurozone from 2000 to 2007."

    OK, I will reconsider my position. But was this really to gain a competitiveness advantage against other Eurozone countries? I find that very, very surprising.

    France is not a peripheral country in the sense Spain, Portugal and Greece are. It also does not have the structural trade problems the periphery countries do. I think its problems lie more in secular stagnation-related problems that started @1970 long described by people like Angus Maddison.

    Italy has a terrible north/south divide (worse than the UK) and has in the past, like the periphery, got out of its problems with devaluation of the lira without really ever solving its underlying problem. It is somewhere between France and the periphery.

    Overall I do believe that for macro-policy to have multiplier effects with sustained growth in output and employment in France and Italy, which are very different economies to Germany, fiscal union is needed - across the EU. Only then can we get the redistribution of capital necessary ,through fiscal transfers -targeted and through automatic stabilisation through a common tax policy.

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  10. "Why is monetary policy not working? Because of austerity imposed by the SGP. That sounds like political interference with monetary policy to me."

    So your reasoning is: Fiscal stimulus would make monetary policy work. Since monetary policy is not working, there should be fiscal stimulus. This reasoning summarises as: "Since there is no fiscal stimulus, there should be fiscal stimulus." I hope your first-year PPE students can explain this as "begging the question."

    "I'm trying as hard as I can to put my arguments in as many different ways as I can"
    I'll try to be as gentle as possible; impression you are giving is one who is flailing. To paraphrase an unknown pundit, someone who presents too many different arguments has probably already made up his mind about the conclusion first, and and is looking for supporting arguments second.

    " But the only political arguments being made are about bailouts to the periphery. " How is the argument Germany should not be responsible for another country's economic problems without a say in that economy only about the periphery? Obviously it applies equally to France.

    "What has that got to do with imposing the SGP rules on France, for example?"
    Well, SGP rules apply to everyone, including France (and Germany). Or do you think it would have been politically possible, when the euro was formed, for there to have been one rule for France and another for everyone else?

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  11. "What is far more inexplicable is that the rest of the Eurozone is allowing Germany to get away with it."

    Writing this form Finland, I can list numerous reasons why German policy doctrine is backed by countries that are suffering from it. In the whole scheme of things Finland does not weight a lot in this, but if the discourse in other small eurozone countries is anything like ours, there is no reason to wonder why Germany gets away with it.

    a) History: Finland used to devaluate and/or slash spending when the economy sunk and wait for demand for exports to save the day. Now politicians and people seem to think that this waiting and saving policy is a wise policy to do on an European scale too. That's of course absurd. Waiting and saving at home and pushing for demand increasing policies on European level would at least have some logic to it.

    b) Despite most of the electorate seems to think that the right policy is to cut public expenses, and if that doesn't help to cut some more, those speaking for any kind of stimulus without a following litany of mambo jambo about structural reforms, are deemed as populists. Even the opposition in the parliament is not demanding more stimulus but more cuts.

    c) Political ambition: Our present and previous prime ministers have ambitions beyond Finland, i.e. they want offices from Brussels. As long as Germany decides, they will follow.

    d) Perverse ideas about what Schumpeter meant with creative destruction. Depression just cleans out the market from unhealthy businesses, never mind that in an open market economy, with more and more a subsidiary economy, we may end up with nothing here in the north.

    e) Keynesian macro economics came to Finnish universities very late, and has never been truly tried in actual economic policy. Witness the 1990s disaster. Even the present head of the Government Institute for Economic Research has written multiple publications about this, yet has sided with the supply side and austerity people in the current crisis.

    f) Momentum of what has already been said. The major political figures still in power have wholeheartedly ascribed to these austerity policies, and have been promising that growth is just around the corner year after year in an Olli Rehn like manner. It is not easy to back down now.

    I could actually come up with even more reasons, but this is somewhat dispiriting subject to ponder.

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    1. Nevertheless, thanks. Your point (c) was something I had not thought of.

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    2. Worked at least for Donald Tusk, for he has been one of these "it is possible to combine austerity and expansion in Europe" fellows. During the coming week it is interesting to see whether there is anything left for Katainen.

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  12. "But Germany did devalue relative to rest of Eurozone from 2000 to 2007."

    This point is central. You see price level movements as determined by political decisions. I see price level movements as resulting from millions of individual decisions to change prices.

    Germany has never devalued. It was simply in a difficult situation, ultimately resulting from re-unification. Therefore, prices and wages rose only slowly. This has nothing to do with political decisions.

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    1. So agenda 2010, Hartz IV etc just happened? It wasn't a political decision? Did the laws descend themselves from the heavens?

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  13. It is not tenable that so many top policy makers can be so economically illiterate as to make the reason for this economic disaster a lack of understanding of economics. Neither is it true that German policy makers are dictating events in the Euro Area, because policy elites in other countries consistently buckle down and accept austerity policies despite it being quite clear they are making matters worse even on their own terms of reducing debt / GDP ratios.

    No, the answer to the conundrum is that the policy elites do not care about the economic discomfort of the developed world masses because what they want for them is sustainability, as per Agenda 21, and from their point of view a depression is more sustainable than the Keynesian objective of full employment and steady growth.

    The current policy elites are in fact the same vested interests referred to by Keynes, and their policy has remained remarkably consistent, interrupted temporarily post war by fear of organised labour which caused them to relent and go for growth with Keynesian policies - successfully. With organised labour safely destroyed they have simply returned to form.

    We have to analyse economics on the basis of the correct objective function of the policy elites, which is sustainability and community for the masses, not maximisation of employment and wealth of the masses. As Keynes said, it would take a volume of an entirely different nature, an attack on the vested interests which even he was too coy to undertake.

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  14. Germany devalued between 2000 and 2007 because it had the highest labor costs in the world. That's why it's impossible to demand a mean reversion on the grounds of "It has to happen". Yes, the SGP should be suspended, but Germany is in a unique position because it adhered to orthodox principles in the last decade and they worked! Now it should abandon its course for the sake of other countries. You can convince the population of a country to change its prefered policy for its own good, but you can hardly convince them to change for the good of others.
    The focus on monetary policy is definitely wrong. As you say, it wouldn't be working now. Targeted fiscal policies should work well. The more depressed a country is, the more effective fiscal stimulus becomes. I don't think that german inflation necessarily needs to rise in step with the inflation of other countries. And here the question is whether the financial markets would finance fiscal stimulus. I think they probably would as long as the stimulus "makes sense", i.e. useful infrastructure projects and timely limited spending. But that's where the fear of a bailout comes from. What if the financial markets refuse to financial stimulus programs?

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    1. Germany has high labour costs because it is extremely good at producing high quality goods that other countries want. The only issue is what the sustainable real exchange rate (=level of competitiveness) is for Germany. Its large current account surplus suggests it is too competitive today, which is why additional inflation relative to the rest of the Eurozone is inevitable.

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    2. The political problem is that Germany was "the sick man of Europe" at the end of the 90s. German workers learned to live with wage stagnation and accepted it for the sake of higher competitiveness. Now you say that this was in vain because the other countries can't keep up. You also want Germany to abandon 130 years of industrial policy (the Made in Germany label that backfired on the British Empire was introduced in 1887). I'm just saying that this is politically impossible.

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    3. @Mainly Macro29 August 2014 09:58:

      "... which is why additional inflation relative to the rest of the Eurozone is inevitable."

      So everything will come out all right by itself. So why all the heat and dust and moralizing ("greed or ignorance")?

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    4. I'm afraid the rest of the Eurozone does not agree:

      http://www.telegraph.co.uk/finance/economics/10758577/Germany-risks-EU-fines-with-record-current-account-surplus.html

      In any case, its basic macroeconomics that competitiveness will revert to a sustainable level, whatever politicians say. If German workers were sold wage stagnation in order to gain competitiveness, they were duped.

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    5. To 09:58: Because Germany is helping make sure that the adjustment takes place at an inflation rate that is convenient to them, and ruinous to the rest of the Eurozone.

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    6. Yeah, but you apparently need to convince Germany, not the rest of the Eurozone. If there really was the political will across the whole Eurozone to enact different policies without Germany's influence, then we shouldn't have a problem now.
      Also, why does it have to be a zero-sum game within the Eurozone? You would have to convince Germany that a loss of its competitiveness directly benefits other depressed european countries. Yet, the quality of german export goods isn't easily replicable by other countries.
      Yes, the current situation is full of imbalances that insult the neoclassically trained eye. But the return to equilibrium will always be second to the political world. That's why others immediately jump to the topic of transfers, because it eliminates a couple of these imbalances.
      The crux of the matter from Germany's point of view is: To counteract these imbalances, should our economy start to perform worse or should other economies start to perform better?

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    7. I still want to point out though that I also don't exactly support Germany's policies, but from a political point of view, the case against the current course is very hard.
      @ 10:25:
      Paul Krugman makes the same point and I already argued against that, even supporting your inclusion of fiscal policy measures. Germany's devaluation happened through wage stagnation. This created low inflation. A focused spending program on national programs could revitalize the labor markets of depressed countries, thereby raising wages there and create national inflation. Yes, some of that increase in inflation might swap over to Germany, but not all of it. European labor markets are not as frictionless as, for example, american markets. There are many cultural, legal and language borders.
      Also, the equation of inflation and competitiveness is dangerous. I mean, if we want Germany's competitiveness to decrease, we want higher wages, to make exports more costly (other options, such as intentionally destroying productivity are senseless.). I am actually not sure that wages would rise just like that - remember, Germans learned how to live with wage stagnation. And finally, monetary policy alone, the idea that we generally inflate the Eurozone, thus devalue the Euro would again increase German competitiveness.

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    8. "The only issue is what the sustainable real exchange rate (=level of competitiveness) is for Germany. Its large current account surplus suggests it is too competitive today, which is why additional inflation relative to the rest of the Eurozone is inevitable."

      Would that not suggest the Euro has to rise further? The only way out, surely, is fiscal union.

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    9. @Mainly Macro29 August 2014 10:25

      How is Germany helping make sure that the adjustment takes place at an inflation rate that is convenient to them, and ruinous to the rest of the Eurozone?

      In fact, how can one bring about the inflation that you want? Your friend Paul Krugman says that he proved by IS/LM that raising the quantity of money would not produce inflation at the zero lower bound - which is where we are.

      So: What technique do you propose?

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    10. That is what my post is about. The 'technique' is described in paragraph 3. What is not clear?

      Delete
    11. Mainly Macro29 August 2014 14:09

      My question was: How do you raise inflation at the zero lower bound if Paul Krugman says it won't happen? How much stimulus would Germany need to spend?

      Delete
  15. A little OT maybe, but not that much.I have yet to understand why good inflation is close to 2% and deficit at 3%. Magic numbers or sound economic background?

    ReplyDelete
  16. Anonymous: wages and prices are sticky on the downside so some inflaition makes adjustment easier; they exact level does not matter, but the higher the inflation rate the quicker and easier the adjustment though inflation has some cost though whether 3 or 4 or 5%, that cost is probably not high.

    ReplyDelete
    Replies
    1. The exact level does matter, Trichet docet.

      Delete
  17. "What is far more inexplicable is that the rest of the Eurozone is allowing Germany to get away with it".
    Corruption is the answer, my friend. Not in the sense of taking bribes. But in the sense of getting high level, highly paid, guaranteed careers at the EU commission, at the ECB, in big multinational and financial institutions intertwined with the Bruxelles - Berlin economic power system.

    ReplyDelete
    Replies
    1. Nonsense ? Try to explain it differently...

      Delete
    2. Marco Cattaneo29 August 2014 19:58

      You do believe in conspiration theories, don't you?

      Delete
    3. Marco Cattaneo29 August 2014 19:58

      Sorry - conspiracy theories. To sharpen your awareness on what is afoot, let me refer you to Le Monde Diplomatique, the official organ of the Conspirationist International. You then will be fully abreast.

      Delete
    4. Still waiting for your alternative explanation...

      Delete
    5. 'Still waiting for your alternative explanation...'
      I'm a different anonymous - but I take it you are Italian - and as I (partly) grew up in Italy I'm familiar with the concept: 'Corruption is the answer,'

      But when I moved to different places I also learned about different possibilties - and that's probably all the other anonymous is sayen?

      Delete
    6. I'm Italian, but I don't explain everything with corruption. I learned about different possibilities and took benefit of them (competent, hard working) while staying in Italy, by the way.
      Still, Mr Wren-Lewis said "What is far more inexplicable is that the rest of the Eurozone is allowing Germany to get away with it". I do believe that (high-level, well-disguised) corruption is the most likely answer. Repeat: Not in the sense of taking bribes, but of getting highly paid, guaranteed careers at the EU commission, at the ECB, in big multinational and financial institutions closely related / dependent from Bruxelles and Berlin.
      If you can explain differently how the Italian, the Spanish, the French (not to mention smaller countries') governments keep on following economic policies which are clearly producing catastrophic results, I'm willing to listen.

      Delete
    7. As far as I know, there are much more South Europeans in authority than Germans. Look at the ECB! (Draghi, Constancio,Coeuré are from Southern Europe). There is only Lautenschlaeger from Germany. In Brussels it's not different. Being in Brussels at the EU you hear a lot more people speeking Italian or Spanish than German. My impression - wthout haveing any data - is: It's just the other way round as you purported!

      Delete
    8. Of course you both have Northern and Southern Europeans. The point is: is the whole show run in the interest of Germany, or in the interest of Italy, Spain and France ? Wren-Lewis and myself believe the answer is: of Germany. Which brings back to his question: why are the Latin Countries accepting that ?

      Delete
    9. "Which brings back to his question: why are the Latin Countries accepting that ?"

      Mario Draghi knows exactly what is wrong with Italy and he also talked to Hollande in the same way about France. Spain and Portugal are on the way to recovery. Italy and France have problems with their competitiveness. Devaluating their currency, which was the instrument used during the time of the European Snake, is all over now. Real devaluation is "bullsh**" , yes I believe it, and increasing government expenditure by increasing the debt ... yes find somebody who will buy the bonds without doing moral hazard to your neighbours.
      http://www.reuters.com/article/2014/08/13/us-italy-economy-idUSKBN0GD19N20140813
      Is Mario Draghi acting in favour of Germany? Or in favour of Goldman Sachs? Which actually means he is acting in favour of the financial sector and not in favour of industry and trade - in the whole Euro-zone!

      Delete
    10. Spain on the the way to recovery ? Unemployment is 25%, the country is in deflation, GDP trend looks very marginally better than Italy just because they were allowed to run 9% average deficit / GDP (2011-13) vs 3% in Italy, public debt / GDP went from 40% to 100% (2008 to 2014).
      Draghi knows what is wrong ? what's wrong is that you need the Eurozone being thouroughly reformed under keynesian principles. You don't come out a deflation / depression environment via "reforms to restore competitiveness". Improving competitivity via non-monetary actions takes years and it's better left to entrepreneurs.
      Three years ago Monti was dispatched to "save Italy". The EU told us the guy knew perfectly how to reform the country. Result: an unmitigated disaster...
      Meanwhile, UK recovered (in 2011 was in a situation very similar to Italy as concerns post 2008 GDP performance) taking benefit from a flexible exchange rate and 10%+ public deficits entirely financed by the BOE at zero cost...

      Delete
    11. "Improving competitivity via non-monetary actions takes years and it's better left to entrepreneurs."

      Yes, Italy should have launched out 10 years ago! Just do it!

      "UK recovered (in 2011 was in a situation very similar to Italy as concerns post 2008 GDP performance) taking benefit from a flexible exchange rate and 10%+ public deficits entirely financed by the BOE at zero cost..."

      a) Reintro the Lira and you'll have a flexible exchange rate.

      b) Britain recovered although there were austerity measures.... it could have been faster. The price to pay would have been a higher debt.

      Delete
    12. 'Meanwhile, UK recovered (in 2011 was in a situation very similar to Italy as concerns post 2008 GDP performance) taking benefit from a flexible exchange rate

      Really?
      - and I thought the UK recovered by selling the Crown Jewel -(aka London) - to some Russians?

      Delete
    13. Anonymous 31 August 2014 01:46

      Just do it ? you don't do it in the middle of a depression triggered by a world financial crisis. You don't do it while a lot of your neighbours try to do the same. Germany tried, 1929-1933. You know the outcome.

      Delete
    14. @anonymous: UK is a very good example of AUSTERITY = RECESSION and STIMULUS = RECOVERY. UK were the first to double-dip in 2010 one year before the rest of Europe because they were the first to go for austerity. They recovered in 2013 only after stopping austerity measures i.e. when they started to run a primary budget deficit.

      Delete
    15. @ Bertrand Groslambert
      read the article of S W-L
      Saturday, 27 October 2012
      "The UK and Austerity: some facts"
      in this blog.

      Delete
  18. What a great conversation - which reminded me on the ongoing battle in my family -(with members from nearly every continent) - Should the Anglo-American fraction change its general outlook on money matters - and do the Germans have to take over -(as they supposedly did already in Europe?)
    As a German-American I always vote Italian - or in other words: 'We will solve this problem Mr.Wren-Lewis sees - by improvising and after a while the problem is forgotten anyway -(like alle these funny predictions Anglo-American economists made about the future of the Euro)

    ReplyDelete
    Replies
    1. Well said - certainly better than what Mr.Wren-Lewis says.

      Delete
  19. BUT let me - last not least - say something about 'greed' -(as I'm kind of an expert with the very extensive family I have)

    And so these Germans in the first years of the Euro always had this impression that everybody else in Europe was a lot greedier then they were -(and everybody got rich mast faster than they did) - AND now we have the absurd situation that exactly these lesser greedy people - should help their much 'greedier' neighbors by inflating the little they have.

    And I just try to give you kind of an idea how a 'poorer' person thinks - and that 'poorer person' probably would think exactly the same way if it would NOT be a German.

    (and just a nice and decent British person, who has a problem with some Russians who buys the London neigborhood and after being 'overextented' the Russian asks the the decent British person for a loan)

    ReplyDelete
  20. Simon,

    SWL: "What is far more inexplicable is that the rest of the Eurozone is allowing Germany to get away with it."

    As David Goldsby has pointed out above the passivity only looks strange if you conceive of French/ Italian/ Spanish political leaders to have objectives distinct from that of the governing orthodoxy (the Berlin view). But this is not the case. It was Hollande – a French socialist who shamelessly invoked Says law. He has now sacked his government for daring to give even token rhetorical support for the most conventional of socialist beliefs. We are therefore no longer dealing with a national leadership whose overriding priority (independent of party affiliation) is the national interest. We are instead dealing with a euro leadership whose overriding priority (independent of party affiliation) is the dogged maintenance of the euro. This much vaunted “political will” is also responsible for overruling the public verdict in referenda and the serial violation of manifesto pledges Europe wide. At election time the personnel may change but the policy set remains serenely unaltered – an Oligarchy in being.

    Since at a euro level public opinion doesn't matter the policy set there has long since been captured by a narrow, self serving but blinkered corporate interest. The leadership are captives of the euro and have therefore, by default, become the active enablers of a policy set that is welfare positive for corporates and rentiers and welfare negative for the population at large. Those old school communists who warned us that the EEC was a bankers ramp are entirely vindicated in this forecast if no other.

    Of course the progressive devastation wreaked on millions of Europeans by this policy set is building a constituency for radical political parties. Public opinion can now only influence policy by breaking the cross party lockout that has excluded them. That means they are not going to vote Gaullist when the time comes to remove Hollande – they are going to vote National Front.

    That the eurozone policy has been economically perverse has been well described by Simon & others for many years now. But the economic perversity is the consequence of political perversity. We have made the journey from an open governance model to a closed governance model. Oligarchies are not welfare positive and to expect a rational and constructive policy to emerge from an oligarchical power structure is a triumph of hope over experience.

    We have witnessed the deliberate overturning of the post war democratic settlement in favour of establishing a trans national oligarchy. Our leaders have seen the future - and it is Versailles! This has left the political field wide open to extremist politics - after all the natural popular response to Versailles is the Place de la Revolution.

    This is the entirely self inflicted perversity that will really astound & appal our descendants …..

    ReplyDelete
    Replies
    1. 'This is the entirely self inflicted perversity that will really astound & appal our descendants …..'

      Now your comment makes me really angry - because you confuse the existence of a 'trans national oligarchy' with something as admirable, peaceful and visionary as the European Dream.

      And a contraire to your silly Anglo-American rant there are Millions of Europeans who work in a very constructive way on this Dream - and most of them have realized that a common currency was just the first step to their Dream.

      And the fact - that a very weird coalation of reactionairies, right wingers and (Anglo-American) - monetary economist try to sabotage - will NOT destroy this dream for our descendants!

      Delete
    2. No, but bad macroeconomics might. If you want to make the Euro a success and move on, you need to make it work, which means listening to proposals about how to make it work better instead of dismissing them!

      Delete
    3. 'If you want to make the Euro a success and move on, you need to make it work, which means listening to proposals about how to make it work better instead of dismissing them!'

      I -(We) are open to any proposal how to make it better - but with having an extensive multinational family a lot of 'proposals' are getting sorted out - because
      some Cousin or her husband -(from Japan?) tells you; 'The Inflation Number'?
      Been there! -
      Done that! -
      Didn't work very well!

      Let's try a different proposal?

      Delete
  21. If you want to understand how the economic debate in the German public has been you should read the comments by "Dieter" on this blog
    http://crookedtimber.org/2010/07/22/keynes-and-germany/

    It is 4 years old and the public German debate has only improved slightly

    ReplyDelete
    Replies
    1. I looked it up. Dieter doesn't know a thing. He claims Germans are mercantilists. Nothing could be farther from the truth.

      Delete
    2. Ok, the correct term is Neo-mercantilist

      Delete
    3. Neo-Mercantilist is equally far from the truth.

      Delete
  22. Dear Sir,

    I am sorry to say that you are far removed from the German debate and thinking. Please bear with me and allow me to revisit recent history from a German perspective briefly.

    When the Euro was created, there was huge resentiment in the German public. The Euro was always a project by the elites, not the people. There was always the sense that we were allying with unreliable partners who wanted to have a currency as strong as the DM but not do what is necessary to make it such. People with these concerns feel vindicated now. We Germans were promised a Euro as rock solid as the DM. A Euro-DM. And now we are fearing that the policies you are promoting lead down a slippery slope down to a Euro-Lira. If that was to happen, support in Germany for the common currency would crumble. The whole of the austerity policies are designed to stay away such an eroding course for domestic trust in the Euro.

    In short: We Germans insist that if we have to have a common currency, then the rest of the EZ must become more like Germany and not Germany become more like the rest of the EZ. That was promised to us Germans back then. And that was also (and here I cannot let you revise history) the understanding between our politicians and those of the other countries. That is why the ECB has been designed with the BuBa in mind. This is what Germany and the other EZ nations IN TRUTH signed up to as we created the Euro. The Euro was designed to be based on the principles of the BuBa's Ordoliberalism, not on Keynesianism. Everything else would be revising history.

    In conclusion, though, this isn't just about what may or may not be the best economic policy. It is also about trust. And the trust of the German public in the reliability of mainly southern governments is very limited. EZ policies have to address this issue.

    ReplyDelete
    Replies
    1. "And now we are fearing that the policies you are promoting lead down a slippery slope down to a Euro-Lira."

      With its present settings Euro is on a slippery slope down to nonexistence.

      "When the Euro was created, there was huge resentiment in the German public."

      There was huge resentment in every country of the EU. In some countries so huge that they didn't even join the currency. This is not about that. This is about how can we live on with this from today's perspective humongously stupid decision to join.

      How stabile and of what use is a currency facing an existential threat caused by its silly foundations and stupid central bank rules? What do we do with a central bank setting its policies for the service of only one country of the currency union? What is that trust you are talking about? How do you create such trust with help that saves the banks of the creditor countries and leaves the debtor countries so full of debt that they will never be afloat again?

      Delete
    2. Just as reminder - the Euro is now 12 years old - and soon the people will completely forget that there EVER was any other currency in the Euro-Countries than the Euro - so how does this song go: 'Let it go let it go....

      Delete
    3. @Anonymous30 August 2014 10:59

      "This is about how can we live on with this from today's perspective humongously stupid decision to join."

      Simon Wren-Lewis's answer is inflation. But inflation is, as Thomas Piketty pointed out, a tax on the poor

      http://www.theguardian.com/books/2014/apr/13/occupy-right-capitalism-failed-world-french-economist-thomas-piketty/print

      Why should the poor pay for people who received real money and were able to buy real goods and then found they had overspent? Why is it "ignorance or greed" to refuse that?

      Is that is the best macroeconomics has to offer?

      Delete
    4. The poor are paying very high price of this madness through record unemployment, lower wages and disappearing social safety net. Millions of young people have lost their change to proper career because of this. Comparing 2-3 percent inflation with this is wicked.

      Delete
    5. Anonymous 30 august 2015 07:33

      "The Euro was designed to be based on the principles of the BuBa's Ordoliberalism, not on Keynesianism"

      translation:

      "The rocket to be sent to Mars was designed to be based on Ptolemaic theory, not Copernicus'..."

      Delete
    6. @Marco Cattaneo31 August 2014 01:46

      Futher nonsense. Read Simon Wren-Lewis's post of today.

      Delete
    7. @Anonymous31 August 2014 01:11

      So - let the poor pay for the other poor. That's solidarity, and everything else is wicked.

      I repeat my question, which was of course directed to Simon Wren-Lewis:

      Is inflation really the best macroeconomics has to offer?

      Delete
    8. @31 August 2014 02:43

      One of Simon's main points in the above post was that if the adjustment between Germany and the south happens so that Germany has low inflation and the south is in deflation, it will be ruinous to the south (and to some in the north too). So what he suggests is that the ECB would even try to match its inflation target or to go a bit over it so that the less competitive countries would not enter deflationary spiral.

      I think that in a world where the best that macroeconomics has to offer would matter, the Euro would not exist as it is today. Nevertheless, Wren-Lewis at least tries to come up with solutions that might be politically possible instead of living in a fantasyland of " let's be more vicious and brutal so they will understand and trust will emerge."

      "I repeat my question, which was of course directed to Simon Wren-Lewis:"

      Of course it was, I just failed to use my telepathic powers to notice it. How clumsy of me to answer.

      Delete
    9. @Anonymous31 August 2014 03:40

      So the German poor should pay for the Southern poor.

      As for my question, I wanted a competent answer, in other words not from you.

      Simon Wren-Lewis is of course, the most competent economist on this blog, and we know the answer he has given. So my question is a request to the most competent economist to think it over. If he cannot give any other answer, some people might think that macroeconomics is no great help. That leaves politicians and voters to follow their preferences - so who can blame the Northern EU countries for preferring stable prices? The fact is that there is no proof that 3% inflation in Germany would help the Southerners in any measurable degree. High inflation in one part does not necessarily mean sufficiently better rates and better economic conditions in other parts of the EU. The North cannot import enough produce from the South to have measurable impact - even if the German government ordered all soldiers and civil servants to eat a pound of olives per day.

      So I am looking for a better solution and hoping it exists. If not, I am willing to close the discussion,

      Delete
    10. Anonymous31 August 2014 03:40 makes the key point. You seem to be missing the most basic macroeconomics. Higher output and higher inflation go together. So of course higher inflation in the Eurozone would mean higher output and lower unemployment, which would greatly benefit pretty much every other country in the Eurozone except Germany. Germany would 'suffer' inflation a bit above the Eurozone's target. So is Germany going to act in the Eurozone's interest and stop this deflation, or is it just looking after itself?

      Delete
    11. @Mainly Macro31 August 2014 08:27
      Three questions:
      1.
      If higher inflation "of course" means higher output and lower unemployment (which I doubt, remembering the seventies), why would that not benefit Germany? In that case, the southern countries could buy more German goods.

      2.
      By what means is Germany preventing monetary pölicy from working in the EZ? The ECB is independent and has outvoted the Bundesbank several times.

      3.
      ou want to raise inflation by fiscal means.
      How much would the German state have to spend more to produce 3% inflation in Germany? In 2013, GDP was 2.735 Milliards €, total expenditure by the Federal government, the Länder and local communities was 787 milliards €.

      http://de.statista.com/statistik/daten/studie/38223/umfrage/oeffentlicher-gesamthaushalt/

      The devil is in the details, and I am eager to learn.

      Delete
    12. Mainly Macro31 August 2014 08:27

      "So of course higher inflation ... would mean higher output and lower unemployment."

      Clearly, Robert Mugabe is on to something.

      Kindly explain.

      Delete
    13. @31 August 2014 10:07

      1. Of course that would benefit Germany too. People would get higher wages and more of those employed with subsidies would find real jobs. For inflation to be higher in Germany than in the south would require German wages and prices to go up _more_ than in the south reflecting the German competitiveness and trade surplus. So higher inflation in Germany would be caused by higher demand (e.g. public) which would lead to higher wages and therefore higher prices, which would make the German products little more expensive, which would help the other Eurozone countries to compete by making their products a little more attractive and by giving the German money to buy them (or fly more often to the sun).

      2. It is not just Bundesbank. See for example this:
      http://www.telegraph.co.uk/finance/financialcrisis/10629658/ECB-paralysed-by-German-court-decision-as-deflation-threatens.html

      Or this:
      http://www.spiegel.de/international/spiegel/breaking-taboos-concerns-mount-in-germany-over-ecb-bond-buys-a-780258.html

      The latter is funny, since in it the ECB was purchasing large volumes of Italian government bonds, which German central bankers and politicians in Chancellor Merkel's government opposed, because they saw it as a threat to the ECB's _independence_.

      3. While waiting for an answer from Wren-Lewis, you could go to Google Scholar and search for "fiscal multipliers" and have fun.

      Delete
    14. @Anonymous31 August 2014 14:45

      1.
      Your first point amounts to saying that Prof. Wren-Lewis was wrong when he said that higher inflation would only benefit other countries than Germany.

      2.
      The constitutional Court is the Supreme Court in Germany, and the German constitution is what they say it is (just as in the US). The government (and the voters) is bound by their decisions, but not the independent ECB. Where do you detect its influence on European monetary policy?

      3.
      The question is what amount of government spending will - with the help of the fiscal multiplier - translate into 3% inflation for the whole of German GDP. That will also depend on the current output gap.

      Unfortunately, it is extremely hard to correctly estimate both the fiscal multiplier and the output gap.

      The devil is in the details, so I request a competent economist to explain how to reach the desired result. If you think you can do it, let us compare your results with his. So far, there are none.

      Delete
    15. Correction to Anonymous31 August 2014 15:34

      @Anonymous31 August 2014 14:45:

      Point 2:

      Where do you detect the Court's influence on European monetary policy?

      Delete
    16. Anonymous 31 August 2014 02:12

      I did. What you are not getting is that pretending a rigid monetary union of 18 dishomogeneous countries to work is the macroeconomic equivalent of the Ptolemaic theory. Please feel free to board your rocket to Mars. I'm not coming...

      Delete
    17. Marco Cattaneo31 August 2014 22:36

      Anonymous 31 August 2014 02:12

      Of course the Euro was a bad idea. That is why the Germans were against it - even that good European chancellor Kohl. As you can read in Timothy Garton Ash, he complained to Secretary of State Baker of the pressure of Mitterrand - and, curiously, Andreotti - to agree to it, which he finally did as the price of reunification. So the Ptolemaic astronomers were Frenchmen and Italians. Once it was there, Germans adapted to it, the French and Italians did not.

      You should criticise them, not - for the reasons explained by Simon Wren-Lewis - the Bundesbank.

      Can we agree to that?

      Delete
    18. @Anonymous31 August 2014 15:34

      "1. Your first point amounts to saying that Prof. Wren-Lewis was wrong when he said that higher inflation would only benefit other countries than Germany."

      Where did he say anything like this? I am sorry to say but I think you fail to understand what Wren-Lewis's proposal entails. And the funny thing is that the core of what it entails is what the EBC should be doing anyways simply based on its present mandate, i.e. take care that Eurozone does not end up in deflation (price stability).

      "2. The constitutional Court is the Supreme Court in Germany, and the German constitution is what they say it is (just as in the US). The government (and the voters) is bound by their decisions, but not the independent ECB. Where do you detect its influence on European monetary policy?"

      Because the treaties give the ECB so limited mandate, the bank has been very careful and slow with any unconventional measures required in a liquidity trap. Politics, monetary politics included, is much more than the formal rules of the institutions.

      "3. The question is what amount of government spending will - with the help of the fiscal multiplier - translate into 3% inflation for the whole of German GDP. [snip] so I request a competent economist to explain how to reach the desired result. If you think you can do it, let us compare your results with his."

      While you are waiting for the competent answer, you could stop to for a minute to ponder how well the forecasts and estimates of those behind the present policies have worked. Instead of growth expansionary austerity has produced so far only ruin, and that is what is going to follow from letting the Eurozone fall in deflation. So if you think that there were some well thought easy to follow plans that managed also to forecast what has been going on, you imply that the comission and the ECB have brought us a recession on purpose. However, there where macro economists who knew from the get go where this is going to lead. This is not exact stuff, but at least the theories behind decisions should be logical in terms of their own premises and have some congruence with data. With the present policy, neither of these are true.

      Delete
  23. "What is far more inexplicable is that the rest of the Eurozone is allowing Germany to get away with it."

    Well, people are sick of war. Very bad currency policies engineered by Germany in the 1920s and 1930s played an important role in the German engineered disaster that struck Europe in the 1930s. Instead of reminding Germans of this, it's considered wiser to forget it.

    That, of course, is a mistake. Germany profited from the enormously lower Euro more than a decade ago. It's time to advocate not just higher inflation, but a much lower Euro. Or is it that the Euro ought to be only a German tool? Very low when it's good for Germany, all too high when it advantages Germany?

    ReplyDelete
    Replies
    1. "It is 4 years old and the public German debate has only improved slightly".

      A lower exchange rate may temporarily help those countries that are not competitive though it reduces their endeavour to make reforms of their legislation and institutions to become more competitive. Moreover, a lower Euro aggravates the balance of payment problem of the eurozone, because then Germany's exports will cap it all.

      Delete
  24. "It's time to advocate not just higher inflation, but a much lower Euro"

    Funny argument; that will boost German exports aggravating the trade balance problems of the EUROZONE.

    ReplyDelete
  25. Strange but true: a German is carrying out Keynesian monetary policy in Folkestone, and it appears to be highly successful at stimulating the economy. From the Guardian newspaper:

    "Three friends have struck gold after a German artist buried thousands of pounds worth of bullion on a Folkestone beach.

    Berlin-based Michael Sailstorfer has hidden 30 bars of 24-carat gold, worth £10,000, under the sand of the Outer Harbour beach in Folkestone as part of the town's triennial arts festival.

    Kevin Wood, Kirsty Henderson and her sister Megan unearthed a £500 piece on Friday after digging for an hour at low tide.

    The friends had travelled from Canterbury after hearing about the gold rush on Twitter.

    Describing the moment he got lucky, Wood, 28, said: "My legs went from under me and I started shaking. I put it quietly in my pocket. We left the beach, and halfway home we pulled over for a drink."

    On Thursday the Guardian prompted hundreds of gold diggers to head for the town by breaking the news that the conceptual artist had buried 30 bars of the precious metal, together worth £10,000."

    ReplyDelete
  26. 'Strange but true: a German is carrying out Keynesian monetary policy in Folkestone, and it appears to be highly successful at stimulating the economy.'

    You mean he is exposing the 'stimulus' of an Anglo-American Gold Rush?

    ReplyDelete
  27. AND actually guys -
    Why can't you just accept it?
    That the Euro is here to stay - I mean it is 12 -(in words:TWELVE) years now.

    How long are you intending to fight its existence?
    Another 12 years? Or wouldn#t it be much better to deal with it as we ALL -(sorryly) have to deal with the Dollar?

    I mean - how pathetic and what kind of a stupid contruct is the US Dollar?


    ReplyDelete
    Replies
    1. The Latin Monetary Union lasted 62 years, the Scandinavian Monetary Union lasted 41 years. Both failed. 12 years of a lunatic system is nothing...

      Delete
  28. '12 years of a lunatic system is nothing.'.

    Not in the 21th century!

    If in just one week the lunatic system of the Worlds Economy can be saved by just a few American dudes - 12 years are now like eternity!

    ReplyDelete
  29. Simon, the Anonymous comments have gotten out of control. You might consider disabling that kind of comment. How do you tell which Anonymous wrote what?

    Suggestion for people who don't want to put down any more than a name: Select Name/URL from the list, and put a common URL like www.google.com. That's what I often do. Your browser should remember and fill out the form for you once you type the first letter in the name box and the "w" in the URL box.

    ReplyDelete
    Replies
    1. Excellet proposal!

      Delete
    2. Lol... well OK then, here's another thought: just "sign" comment at the bottom. I don't get why someone would want to be confused to other commentators.

      -Tom Brown

      Delete
  30. @Tom

    You're right -- this is a great, informative blog being ruined by ridiculous numbers of anonymous comments.

    One anonymous commenter on a previous post even claimed: "I'm a different anonymous". Different to who?

    ReplyDelete
  31. "What is far more inexplicable is that the rest of the Eurozone is allowing Germany to get away with it"

    Think about the bribes German companies have paid to European politicians and you will understand how they control them. Does the name Siemens ring a bell to start with?

    ReplyDelete
    Replies
    1. Anonymous31 August 2014 14:17

      Nonsense!

      Delete
    2. Bribing politicians europe-wide would be far too expensive for Germany's top companies. In fact, I don't know about the other European countries and I thus don't want to voice any opinion about what is going on there. However, in Germany, the mechanism is quite simple: First, the media are full of journalists with microeconomic education ... but no macroeconomic understanding. Second, the same applies to politicians. Most politicians in Germany - at least the influential ones - have second jobs in boards of management in large companies (such as Siemens). There, the politicians learn the microeconomic view from the company's perspective. There is no equivalent way of macroeconomic training. Thus the crucial problem is that journalists and politicians - the major actors of public opinion/debate - have no educational basis to tackle the problem they are facing. (This is a theory that explains most of the observed facts in Germany. While that is promising, it does by no means guarantee that my theory is correct. I am open for better explanations ...)

      As I said, I have no idea how other European countries work and how public debate and public opinion are shaped in those other countries. Nonetheless, I suspect (correct me if I am wrong) that very similar mechanisms are at work as in Germany.

      Delete
  32. Part 1.

    I am German myself and I have been following this whole Euro crisis and the debates around it very closely. Based on my inside experience, I fully agree with the author's conclusion that ignorance and/or greed are at work in German policy.

    There are countless statements of leading German officials (Merkel, Schäuble, Weidmann, etc.) that manifestly document their total ignorance when it comes down to macroeconomic questions - or so it would seem. In Germany, the whole debate rests on purely micro- instead of macroeconomic arguments. Possibly the most infamous example is Merkel's "Swabian housewife": She said countries should manage their budgets like a Swabian housewife. To explain this phrase: Swabia is a wealthy region in southern Germany and Swabians families are famous for saving a lot of money ... even at the cost of food consumption ... which was usually managed by the wife (which did not need to work because her husband had a well-paid job).

    Whether this truly reflects lack of understanding or is just a disguise for greed, I don't know. In fact, I don't think that it matters because the consequences are all the same in both cases and neither case offers any particularly obvious way to overcome the problem.

    The worst, however, is the intellectual level on which the public debate in Germany takes place. German media are dominated by fully neoliberal journalists which have been hammering their doctrines into their reader's minds for more than a decade now. The public debate is not based on any facts but only on prejudice and morality. Germans are taught by their media and their politicians that they are "morally superior" to their fellow Europeans. It is striking how that simple propagandistic trick can work so effectively. It's the same old story with the Germans ... tell them they are "superior" (on whatever subject, let it be football/soccer, economics, etc.) and they will rally behind your banner - no matter what your agenda is. Germans often proudly boast that they learned something out of their history ... don't believe a word of it. They didn't! (You can probably read my own frustration about that fact between the lines?)

    ReplyDelete
    Replies
    1. By the way, if anyone is interested in having a laugh, I can easily provide many more funny misguided statements of German officials that relate to the Euro crisis. Also, if anyone has any questions about actions of German officials, I can try to explain them from my perspective.

      Delete
    2. I am German myself and have to agree wholeheartedly (e.q. my comments to the other post about keynesians in Germany), especially concerning the public debate in Germany.

      Delete
    3. Sorry, what did you smoke? The public debate that includes the newspapers and newspapers i.e. Sueddeutsche Zeitung, ZEIT and even Handelsblatt and FAZ publish quite different views on the subject. They publish contributions from Blanchard and Eichengreen as well as those as those by Fratzscher. There was a debate between Fratzscher and Sinn and many other contribution by Keynesian oriented economists. The responsible politicians, particularly the minister of finance, are resistent against macroeconomic arguments. They are lawyers - and Merkel is a physicist. That's just the way it is.

      Delete
    4. @Arminius
      Sorry, just because you can name 4 individual counter-examples it does not make up for the other hundreds of articles. In particular, I have been following the Sueddeutsche Zeitung very closely since 2008 and in fact I don't remember a single article of significant length that questioned the German policy.

      Apart from that, both of us obviously agree on the general inaptitude of lawyers and physicists to steer a country through an economic crisis of this magnitude.

      Delete
    5. @Anonymous2 September 2014 11:19
      In a democracy every person being legitimised by a ballot has to steer a country whatever the problems may be. The chancelor and all ministers have to chose appropriate advisors. That's essential. Do you think Hollande or Renzi (both are lawyers) have more competence in economics. Cameron has a BA in PPP (Oxford). Or would you recommend that because of Putins dangerous military strategy, European countries should elect colonels and generals as prime ministers.

      Delete
    6. @Arminius:
      In most cases when different views are published they are part of what is adequately described (with Krugman as an example) in the following article as
      "Krugman is part of the ritual of self-criticism in Germany. There is a tendency in the culture of self-flagellation."
      From
      http://www.newrepublic.com/article/110439/paul-krugman-germany-audience-loves-hate-him

      Delete
  33. Part 2.

    This propaganda works so well, that the vast majority of Germans does not even grasp the possibility of the idea that the German actions might actually be disadvantageous to their own personal situations. This train of thought has been successfully stygmatised and anyone voicing such an opinion is immediately declassified as "left-wing never-learning idiot". No matter what kind of arguments or facts you put forward! This is a moral debate and facts don't matter at all. Do you think any media or politician in Germany actually ever mentioned details of how the people in Greecy really suffer? Do you think that the striking rise in unemployment, the growing debts despite austerity, or any other factual numbers are ever used or allowed in German public debate? This goes so far that in TV talk shows, participants who try to use such facts are silenced/interrupted by the moderators.

    Try to explain to Germans that their policy is wrong, you will probably get some elevated pointing fingers in combination with a moral lesson that "nobody can spend more money than they earn". If adverse facts are noticed at all, they are (right now) ascribed to completely unrelated events. For instance, Germany's export surplus dropped by ca. 5% in the first half of 2014. German media blamed the current Ukraine crisis for that - most notably the economic sanctions against Russia - failing to mention the detailed numbers that exports to Russia account for less than 2% of total German exports while exports to the Euro zone partners dropped by a whopping 7%. Facts don't matter or are distorted. "Too bad for reality if it does not match our ideology."

    No question, there will be no solution of the Euro crisis without Germany changing its course. However, I don't have the slightest hope that this will be possible within the next decade. Even if the consequences of Germany's short-sighted policy will eventually strike back, Germans will still blame others who "did not try hard enough". The idea of moral superiority is simply too powerful.

    ReplyDelete
  34. 'I am German myself and I have been following this whole Euro crisis and the debates around it very closely. Based on my inside experience, I fully agree with the author's conclusion that ignorance and/or greed are at work in German policy.'

    I'm only half German but I also agree that ignorance and/or greed are at work in German policy.' - As in nearly every countries policy.

    But as there seems to be an intense international competition in ignorance and/or greed - we need to see that in perspective.

    And as I always had the change to compare the German effort - to the much more 'succesful' Anglo-American version of ignorance and greed - I would say- the Germans are more or less handicaped by their cultural 'moralinsauer housewive attitude' - and the have no chance to win that competition!

    ReplyDelete
    Replies
    1. Anonymous1 September 2014 23:20
      Anonymous2 September 2014 09:30

      Nice cases of self-flagellation. Continue!

      Delete
    2. 'Nice cases of self-flagellation. Continue!'

      I once saw a movie - where one of the actors said: 'Greed is good' - and then I saw more movies - where some very greedy dudes had a lot of fun... So - no 'self flagellation' - just 'pondering'?

      Delete
    3. I am a German. I am firmly against inflation. Am I greedy or ignorant?

      I have waited until the end of the discussions of Simon Wren-Lewis's post to see if I had to change my mind. I remain unconvinced and await new and more forceful arguments.

      A) Greed is a moral judgement. I am against inflation on moral grounds. Inflation is equivalent to a tax and falls most heavily on those whose largest expenditure is for consumption. That includes poor people and pensioners living on transfer payments and non-rich employees with fixed salaries. The reason is that transfer payments and salaries are only adjusted, if at all, with a time-lag (usually one year).

      Why should these people be required to pay for others who

      either borrowed more than they could afford (Spaniards for instance)
      or for people who voted for crooked governments both of the right and left (Greece; Italy – even that nice Prof. Prodi's left-of-centre government was not above falsifying statistics to enter the Euro zone), so voters of the full political spectrum are involved.

      Of course, one cannot let them starve as in the great Irish famine. But there is no danger of that because all European countries have welfare states to take care of the indigent, and in extreme cases, there would be humanitarian help from European governments (including the German one).

      So my conclusion remains that there is no moral reason to accept inflation.


      B) Ignorance.

      The vast majority of the German population (and, for that matter, of Americans) refuses inflation since moral reasons to accept it are not in evidence. Ignorance would mean that they are deluding themselves and fail to realise that it would be in their own interest.

      But that would mean that not only popular feeling, but also the vast majority of German economists, politicians, journalists,and other real or purported experts are wrong. Now, mass delusions do occur (although German economic successes since WWII do not seem to indicate that German leaders are very delusional). But it is perfectly rational to be against higher taxes=inflation if no good reason is given. And Germans have at least one well-known international economist on their side - Thomas Piketty, who is not usually criticised by left-leaning Keynesian economists

      He says, as I and many others do, that inflation is a tax on the poor. Is Piketty ignorant?

      At least. Simon Wren-Lewis usually does not seem to think so.

      Now it would be good for Germans in general if the PIIGS, France etc were better off so Germany could export more to them and earn money that way, which would lead to higher government revenues from taxes and possibly higher transfer payments.

      So the question boils down to weighing the pros and cons: Is a tax on the German poor and lower middle classes, otherwise known as inflation, an adequate price to pay for higher nominal government revenues and possibly higher nominal transfer payments and salary rises? What proof is there that those rises would outweigh the disadvantages of inflation?

      I am not aware of macroeconomists – certainly not Simon Wren-Lewis - that have given reasoned calculations. That is understandable: As Aristotle and Keynes knew ( not to mention Mark Twain or Niels Bohr): Predictions are difficult, especially when they concern the future.

      That being so, there appears a complete lack of evidence to support inflation in Germany at the present moment.

      So I think Germany has the full right to plead not guilty to the charge of ignorance.

      However, one must be wiiling to learn. Perhaps there is a proof somewhere. But just now, macroeconomics simply has to try harder.

      Delete
    4. Thanks for having proven Simon's point about ignorance. You as well as all the other follks who don't understand the very basics of macro sould not post on a macro blog but instead read a textbook ( as the mariginal benefit for yourself as well as the readers of this blog would actually be positive and not negative :D).

      Delete
    5. Anonymous8 September 2014 11:50

      I am willing to learn.

      SWL theory is:

      "Because Germany through 2000 to 2007 had an inflation rate below that in France and Italy, it now has to have an inflation rate above these countries. Something like 3% in Germany and 1% in countries like France and Italy for a number of years."

      I am aware that a number of macroeconomists, e.g. Greg Mankiw, consider that there is short term (!) tradeoff between inflation and unemployment. As I understand it, short term amounts to one or two years.

      SWL thinks that events in a past of 7 to 14 years ago require inflation for "a number of years" in the future.

      Could you indicate to me a textbook that makes that clear? Or at least explain why that convinces you?

      .

      Delete

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