As my regular readers know, the NYT coverage of the EU financial crisis has been shameful, economically illiterate, and harmful. In the last two weeks, however, that coverage has finally begun to mention the concept of inadequate demand, the fact that governmental spending can provide demand, and that austerity is not the only available choice. In the last 10 days the coverage even began to quote economists who made the point that austerity is the problem rather than the solution. This modest improvement has taken six years, two gratuitous Great Recessions, and Great Depressions for about one-third the eurozone’s population.
In the last two days, however, the NYT has given space to an outsider and a newly hired journalist not from the EU beat to write about EU austerity. Each column contain more blunt truths than six years of the NYT’s regular coverage of EU austerity – combined. The columns have considerable common elements in their emphasis on the struggle between Germany and the eurozone officials trying to limit the damage inflicted by Germany’s austerity diktats.
Yesterday’s column was by Anatole Kaletsky. Kaletsky does not mince words.
“The [EU’s] fiscal compact rules, if applied literally, would make economic recovery in France a mathematical impossibility.”
Kaletsky’s conclusion is correct. The explanation is a bit subtle. “Austerity” has no exact definition. With the exception of Germany, the Eurozone nations that are inflicting even the severest austerity have overwhelmingly also run (seriously inadequate) budget deficits. A few nations can maintain significant growth even while slowing their growth through austerity if they are very large net exporters. There are three critical limits on this strategy. First, we can’t all be net exporters, and only a small number of nations can be very large net exporters. Second, it is very hard to maintain being a very large net exporter continuously. Third, being a very large net exporter strongly tends to suppress workers’ wages while making the wealthy far wealthier. In most countries this causes severe social and political strife.
One implication of what I have written is that most eurozone nations forced gratuitously back into a second Great Recession by austerity (and now, in the case of Italy, a third Great Recession that actually has Great Depression levels of unemployment) still have modest (though sharply inadequate) levels of fiscal stimulus through their deficits. This has reduced the self-destructive impact of austerity. As the EU’s oxymoronic “Stability and Growth Pact” (which causes instability and destroys growth) goes forward, however, it will require substantial budget surpluses in many of the EU nations of the periphery already suffering the most from austerity (in order to meet the Pact’s debt-to-GDP requirements) at a time when growth in these nations will already be grossly inadequate. At this juncture, when even the deeply inadequate demand provided now by the far too small excess of government spending over government revenue is eliminated and the surplus drains demand from the already battered economies the destruction inflicted by austerity will be ruinous. Kaletsky is correct that the economies of nations like France would be crushed if they actually inflicted the full economic self-destructiveness of the Stability and Growth Pact’s austerity demands in coming years.
Kaletsky also gets the importance of these issues for Europe and global economy correct.
“Why are the stakes suddenly so high? With most of Europe sliding back into recession over the summer as a result of the war in Ukraine and the failure to implement the kind of monetary and fiscal stimulus that revived the United States, Japanese and British economies, Europe now has an obvious choice: stick to failed policies that are almost certain to perpetuate economic stagnation, or change course.”
Kaletsky correctly identifies the critical question – can German politicians find a way to climb down from the disastrous policies they have inflicted on the peoples of the eurozone? Can they give up their ideology and accommodate reality – and can they admit error?
“When faced with this choice, the German guardians of the euro’s monetary and fiscal rule book defend the status quo, no matter how dismal. Germany’s central bank and constitutional court are steeped in a tradition in which rules must be obeyed at all costs and following the letter of the law is more important than observing its spirit or achieving a desired outcome. But this legalistic philosophy is now running run up against the even more inexorable laws of mathematics, democracy and geopolitics.
What if it is mathematically impossible for the governments in France and Italy to abide by European Union budget rules, because raising taxes and cutting public spending would crush economic activity and thus widen budget deficits instead of reducing them? What if electorates refuse to accept a decade of austerity and stagnation simply for the sake of preserving the Union’s monetary and fiscal rules?”
Today’s NYT column is by Neil Irwin. Irwin is the former Washington Post journalist and author of The Alchemists: Inside the Secret World of the Central Bankers. His focus is on the conflict between Mario Draghi, the head of the ECB and Germany’s political leaders, including the ultra-ideological head of the German Central Bank.
“It’s not an overstatement to say that the future of Europe depends on how this conflict is resolved.
Mario Draghi, the E.C.B. president, is barely on speaking terms with Jens Weidmann, the president of the German Bundesbank (and a member of the E.C.B.’s policy-setting governing council), Reuters reported Thursday. When Mr. Draghi dispatched a deputy to Berlin to visit aides to Chancellor Angela Merkel, the message received was that vocal German attacks on the central bank were unlikely to end anytime soon.”
Irwin explains his view of the stakes.
“The central issue is that Mr. Draghi and the E.C.B. see Europe as being on the cusp of a triple-dip recession. Europe is also at risk of getting stuck in a cycle of very low inflation and stagnant growth. Inasmuch as it has already cut short-term interest rates to zero (below zero, even), the bank is considering doing an American-style program of quantitative easing, or buying vast sums of bonds with newly created euros, to try to avert this fate. It is also encouraging Germany and other European nations to loosen the purse strings a bit and pursue fiscal policy that is more supportive of growth.”
A little context here: from my perspective Draghi has been a big part of the problem as a member of the troika. I also have no faith in QE as an answer to a Great Recession. But it is true that in the valley of macroeconomically blind that the troika have been trampling under their hooves, Draghi has begun to emerge as the one-eyed king. (In fairness to Christine Lagarde, the head of the IMF, she emerged years ago as the troika’s one-eyed queen.)
Irwin makes the key point that Paul Krugman, we, and many others have been emphasizing for years. There is an overwhelming consensus among economists that Germany’s policies represent economic malpractice. Most political scientists also see Germany’s insistence on inflicting austerity on the eurozone and its war against workers’ wages as the gravest threat to EU stability.
“It’s worth adding that most everybody on this side of the Atlantic, the International Monetary Fund and the United States government, for example, is on Team Draghi in this dispute. Indeed, the widespread view among economists in the United States and Britain is that the risks facing Europe are grave and that the need for easing both monetary and fiscal policy is urgent.”
The IMF is the third member of the troika that has led the twin policies of austerity and the war on workers’ wages. As Irwin implicitly notes, the ECB and the IMF now agree that austerity is the problem rather than the solution. It is a testament to Germany’s hegemony over the EU that the realization of two of the three members of the troika (the ECB and the IMF) that the third member – the EU parliament controlled by deeply conservative parties that worship austerity as if it were a moral matter and that take their direction from German diktats – that Germany is leading Europe over a cliff has not been enough for them to dig in their heels and choose survival rather than economic and political suicide.
Irwin describes the problem in these terms.
“If Mr. Draghi and the E.C.B. take insufficient action and the eurozone economy indeed stagnates or falls into a long recession, it could mean a lost generation of Europeans living with high unemployment and declining living standards. We can’t know for sure whether Europeans would react to this outcome by being content to muddle through, or if they would elect radical politicians who might endanger the era of a Europe united around liberal democratic ideals. So far Europeans have been O.K. with muddling along amid high unemployment, but it’s a really bad result either way.”
I understand what Irwin means by the sentence “so far Europeans have been O.K. with muddling along amid high unemployment,” but it is worth adding two cautions. First, what he is describing is German and Dutch conservatives being “O.K.” with the Italian, Spanish, and Greek workers that they despise suffering “high unemployment” levels that exceed the Great Depression in length and severity. That is not “muddling along” – that is “revealed preferences.” The conservatives and their ultra-right parties that dominate the European Commission are simply the most open about revealing their preferences, i.e., their contempt for the over 100 million Europeans who are citizens of nations suffering from Great Depression levels of unemployment as a result of the Commission’s demands for austerity and the war on workers’ wages. It is now inescapable that the great bulk of Europeans do not believe in any pan-European unity in which the citizens of other nations are even remotely akin to fellow-citizens.
Second, to date it has been overwhelmingly ruling parties of the left (e.g., Spain, Portugal, Greece, and (now) France) that Germany has forced to inflict austerity in circumstances where it is likely to promptly cause a severe recession. The resultant betrayal of the parties’ principles and base has discredited these parties and led to them being crushed at the polls. The replacement governments of the right have given slavish support to austerity. The Socialist Party has not yet lost power in France due to the timing of elections. President Hollande was elected primarily because his right wing opponents embraced austerity and forced France into recession. Hollande was elected on a platform promising to lead the resistance to austerity. Instead, Hollande purged his leading anti-austerity stalwarts and is spectacularly unpopular. Hollande is so feckless that his policies and statements on austerity are bewilderingly incoherent.
Angela’s Albtraum
The limited popular resistance to austerity will grow if Germany’s diktats continue to dominate. Soon, it will be overwhelmingly conservative parties inflicting Germany’s twin demands of austerity and the war on workers’ wages. When those policies produce the results that Kaletsky and Irwin warn about, the conservatives will sow the seeds of resistance similar to those sown by the Washington Consensus’ austerity demands. Latin America’s election of over a dozen progressive heads of state who ran for office on the basis of their opposition to the Washington Consensus is not the inevitable result in the EU, but it is a serious possibility, Europe’s best hope for reform, and Angela’s Albtraum.
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