Michael Burda from Berlin’s Humboldt University has an interesting
article
in the Royal Economic Society newsletter, which is critical of
views that I and others have expressed about the ‘problem with
German (macro)economics.’ The key argument Michael Burda wants to
make is that there is nothing peculiar or unusual about German
economics, and what many of the critics interpret as either economic
ignorance or distinctiveness is actually self-interest. To quote from
his final paragraph: “It is not ordoliberal religion, but a mixture
of national self-interest and healthy mistrust informed by experience
that guides German economic policy today.”
Often trying to decide whether policies are the result of
self-interest or particular ideas is difficult because both
explanations fit the facts. What we really need are examples of
German economic policy which follow self-interest but not dominant
ideas, or vice versa. Now some might suggest ‘bailing out’ Greece
and other periphery countries was a clear example, where the idea of
European solidarity triumphed over self-interest. Unfortunately that
will not work: the fact that Greece in particular did not default in
2010 and had only limited default in 2012 was in part to protect the
interest of other EU banks. You could plausibly argue that Greece has
suffered precisely because of German and other EU countries'
self-interest.
In fact in many ways Germany has done rather well out of the EZ
crisis. Henning Meyer points
us
to a study which suggests that, as a result of the crisis and
Germany’s ‘safe haven’ status, the German government has saved
more than E100 billion from 2010 to 2015 in debt interest. As Henning
notes, this has helped Germany ‘set an example’ on deficits
without having to do anything too painful. That is slightly more than
its total loss if Greece completely defaults. It has also not done
badly as a result of the profits the ECB has
made
on its lending.
Perhaps the largest benefit Germany has received from the Eurozone
has been as a result of undercutting its fellow members around ten
years ago. Everyone knows about the ‘excess inflation’ in the
periphery during those years, but the story
of insufficient wage inflation in Germany at the same time is not
often told. This policy - which if it had occurred via exchange rates
rather than domestic inflation would be called beggar my neighbour -
may well have been accidental, but it is a key reason why Germany is
the only Eurozone economy that has not suffered since 2010. Indeed,
one interesting explanation of the general lack of interest in using
fiscal policy for demand management in Germany is that for some time
the country has been part of a fixed exchange rate system in which,
with its particular wage bargaining system, it can fairly easily
boost demand by changing domestic inflation.
What about the pressure from Germany on the ECB: first not to
undertake the OMT programme in September 2012 which ended the
non-Greek crisis, and then not to undertake QE? That is generally put
down to extreme fears of inflation and fiscal dominance of monetary
policy in Germany. Unfortunately it is also been in Germany’s
self-interest. For example, if the ECB had been able to keep to its
2% inflation target, the earlier undercutting of its neighbours would
have had to result in a subsequent period of German inflation above
2%. However Germany may well avoid this outcome as a result of
Eurozone deflation, so that countries outside Germany will bear the
cost of correcting the German competitiveness problem.
That self-interest is key to German policy gets important support
from 2009 when alongside other counties Germany enacted a form of
countercyclical Keynesian policy. Here we have a clear case where
self-interest appeared to win out over a prevalent distrust of
countercyclical fiscal policy.
In some senses I’m attracted to Michael Burda’s hypothesis. I
once believed
that the “problem with German macroeconomic policy is not that it is acting in the national interest, or otherwise, but that it is based on a discredited and harmful set of ideas”.
But in my recent discussion
on why these discredited ideas persisted, while I threw doubt on some
popular accounts, I still failed to come up with a convincing story.
There may also be an element of false optimism in focusing on belief
in poor economic ideas rather than self-interest, if you also think
(hope?) that these beliefs can be more easily changed.
For much the same reason I also think it is futile to try and
convince Germany that it should embark on fiscal expansion ‘for the
sake of the rest of the Eurozone’, partly because it contradicts
self-interest, but also because Eurozone deflation means that we need
fiscal expansion not just in Germany, but the whole of the Eurozone,
so that ECB interest rates can be lifted above their lower bound. The
problem over the last few years has not just been austerity in
Germany, but austerity in the Eurozone as a whole.
So perhaps it is all just self-interest. But if that means there is
nothing unusual about German economics, it does not let German
economists off the hook. Germany was central to creating the second
Eurozone recession through its insistence on fiscal austerity
everywhere, together with unhelpful pressure on the ECB. Germany was
also central in imposing harmful debt levels and austerity on Greece.
Mainstream economics tells us this, but few German economists have
been prepared to say so in public. German Keynesians who are involved
in the policy debate that I have talked to tell me the prevailing
climate is definitely anti-Keynesian. It is not the job of German
academics to stay quiet about what mainstream macroeconomics tells us
just because doing so suits the national interest.
