The European Austerity Experiment…
Hello, dear reader! I’m currently still working on matters to do with piracy, but I thought I might touch briefly on new economic information coming out of Europe. Eurostat, the directorate responsible for European level statistical gathering (think the Bureau of Economic Statistics for the EU) has released the latest statistical findings on European economic growth for 2011. (You may access the statistical report here if you are so inclined)
To say that things are not so great across the Atlantic is a bit of an understatement. Some of it is from the Mediterranean illness: Greece has contracted 7% over the last year, Italy has a foot in the recession coffin with a 0.7% contraction on a quarterly basis. Yet this isn’t confined merely to the PIIGS. We see that Britain is facing a dip back into technical recession (which we will all recall is 2 quarters of contraction), and the Netherlands are already there. Slovenia, a typically stalwart member of the Eurozone has seen zero growth or contraction over the last year. Things on the whole look quite grim.
With budget deficits on the rise and the inability for central banks to resort to quantitative easing for stimulus measures, the EU has served as an interesting natural experiment in austerity economics. So far the result seems to be coming up negative. Not only has economic growth ground to a stand-still, the actual budget deficits haven’t closed and the entire monetary union stands on a knife’s edge.
The tenuous nature of this stability is visible in the election climate in France. There the Parti socialiste candidate Francois Hollande is leading the incumbent Monsieur Sarkozy by a whopping 15 point margin. Next to Newt Gingrich, Sarkozy appears to be the least popular conservative candidate running for a major presidency in the world.
The silver lining is that perhaps the fall of Sarkozy might force Ms. Merkel’s government in Germany to take seriously the possibility of monetary dissolution and take out their checkbook. Afterall, the major beneficiary of the Euro has been Germany. Before the advent of the single currency, German economic growth was sluggish, its competitiveness within Europe hampered by a strong Deutsche-Mark and made even worse abroad due to its quasi-reserve currency status and hard value. Since 2000 Germany has been one of the strongest performers in Europe, helped by a leveling of the monetary playing field within the Eurozone and a cheaper currency abroad.
They’ve profited nicely from 12 years of monetary union, the question is are they willing to actually pay the cost of supporting weaker economies and living off their backs? The future of the global economy might very well depend on their answer to this question.
And yeah, a pro-loose money policy, I figured would be a good way to change the topic from the firestorm brewing in the contraception topic from Erik.
Lemme dig in while the Austrians and Neoclassicalists come to assault my Keynesian walls…Report
Why is this thread brown?Report
When the OP makes a high comment it’s highlighted with this color.Report
The opposite of austerity is loose fiscal policy, not loose monetary policy.Report
I meant “loose money” in a general sense, with an emphasis on loose monetary and fiscal policy as a general counter to austerity.
But you’re correct and point taken.Report
Sorry if this seems like nit-picking but loose monetary policy is not a counter to austerity. You can run austere fiscal policy and loose monetary policy at the same time. In fact, that combo would probably have been endorsed by the majority of academic macroeconomists prior to the current crisis inexplicably summoned the ghost of old Keynesian macro back from the dead.Report
You’re right.
Then let me say that I’m making the case for a loose fiscal policy combined with an expansive monetary policy in order to deal with the short-term shocks created by an economic recession, followed by expansive monetary policy and gradual tightening of fiscal policy to bring down structural deficits.
Either way, the Austrians and neoclassicals would have a fit.Report
http://www.businessinsider.com/this-is-just-getting-ugly-as-a-verbal-war-is-breaking-out-between-germany-and-greece-2012-2
mp’s giving them till March 20 — at the latest.Report
Germans really need to understand that they’ve been profiting off the Euro as much as anyone…until they do, they’re going to keep up their holier than thou bullshit toward the rest of Europe and refuse to cut the check.Report
Yeah, it gets really tiring listening to people with 6 weeks of paid vacation a year call workers in other countries “lazy”Report
I remember when the German ambassador was at the Strauss Center telling us how the US should adopt more German measures like kurzarbeit to help lower unemployment and not worry about austerity….Report
Its the normal sanctimonious story lenders who made unwise loans tell about the people who took them – debtors who don’t pay are immoral, lazy and unproductive. The lenders who made the loans are innocent dupes. You see the same thing being played our between mortgage lenders and borrowers facing foreclosure in the US, but fortunately the borrowers there at least have the protection of domestic law, which is quite borrower friendly. In international situations, it comes down to politics and force.
The Germans have to face up to the question of whether they spend their incoming subsidising the Greeks (in particular) so they can artificially maintain the face value of their savings, or whether they want to accept the fact their savings are not worth what they thought they were. Or they could drop their post-traumatic obsession with inflation and let the ECB bail out Greece. The last option is by far the least painful, and if you insist that’s not an option, the right answer is always to choose income over (financial) savings, especially when the people with the income and the people with the savings are often not the same people. But guess what they chose?
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If someone promises to do something for you (especially when you did something for them on the basis of the promise) and then doesn’t do it, don’t you have a right to be at least a little peeved?Report
Sure you do, but in lawful environments we have bounds on what you’re allowed to do about it. You can’t imprison them, or enslave them, or demand that their children’s children retain the obligation, all of which were done in times past. You have at best some recourse on their assets. The Germans appear to want to hold the Greeks to some incredibly stringent standard instead of letting them simply default or allowing the ECB to inflate.
When it comes to these systemic issues, the limit on the permissible extent of peevedness goes double. While Greece was going to hit trouble some day, Spain, Portugal and Ireland probably did not have fundamental problems of the type that would cause a recession of the currentl severity if it hadn’t been for events completely outside of their control.
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Greece has a primary deficit, they can’t default without also engaging in austerity. The Germans aren’t adding these demands as some kind of status play, the demands exists because without them an effective bailout is impossible.Report
The Euro was a dumb idea to begin with. How the hell do you have a continental unified currency without unified fiscal policy?Report
I’m not so sure a unified fiscal policy would have solved most of the issues we’re seeing now. It might have made them somewhat better, but not solved them.
A stabilization mechanism would certainly have helped, though I honestly think maybe the Euro should’ve been a reserve currency for trade use rather than a single actual currency. (Something akin to SDRs but only for the Eurozone) That would’ve given better time for the unified market to pan out and adjust.Report
I think honestly, Brussels knew this could happen if the economy totally went pear-shaped, but thought, “hey, we’ve gone eighty years without a complete and total economic meltdown. What’s the chance of it happening anytime soon?”Report
I’m not sure its really fiscal policy, but its a key and underappreciated feature of the Euro that the ECB does not lend to governments. While most central banks control the money supply by buying and selling government debt, the ECB buys and sells AAA rated private bank assets instead. So while the US government can control the real value of its liabilities by simply creating more of them and having te Fed soak them up, European governments cannot.Report
There really isn’t any such thing as “austerity economics.” Austerity is what you’re left with when you’ve run out of money and options, and Europe is running out of both. I wouldn’t consider it a competitive economic theory. If they could afford it, there wouldn’t be any austerity.Report
While you might not consider it an economic theory, there seem to be plenty of people (particularly in the GOP) who think it actually is an economic theory.
I’m also skeptical on the notion that “Europe” is out of options and money. They have plenty of both, but the countries with money aren’t willing to put up the costs of actually doing it.
In the process of course, places like Greece wind up going all to hell and creating a terrible recession.Report
Europe is only out of money because the ECB won’t print enough of it. While its not very precise, the term “Austerity economics” does seem to accurately describe the view that its right not to.Report
Printing more money won’t help Greece. Bond markets aren’t stupid, if inflation increases, they’ll just jack up their interest rates to match.Report
Sure, Greece was in for trouble some day anyway. The same is not true for Spain or Ireland or probably for Portugal. Ireland is the most obvious case – they need much looser monetary policy to recover given the straits their government is in, and locally it would not cause inflation to speak of.Report
The old saying goes that Americans will do the right thing after exhausting every other alternative. We are witnessing a test as to whether that saying will apply to the Germans. For quite a while now they’ve enjoyed a symbiotic relationship with the rest of Europe where the non-Germans get to borrow like Germans and the Germans get to trade like non-Germans. The effects of the former is quite blatantly obvious, the latter more subtle. It remains to be seen whether the German politicians and the German polity come to realize that, like their compatriots in Greece, they face an unpalatable choice: accept either higher inflation and/or higher transfer payments from Germany to the periphary or lose their convenient neighboring markets and the jobs that it gave Germany.Report
I think at some point Ms. Merkel will find herself without any backers in Europe as centre-right governments fall either to centre-left politicians like Monsieur Hollande, or to far right crazies. And when that happens things are going to get really chilly in Europe unless the Germans can talk quickly.Report
We’re very much on the same page here Nob ol’ boy. If it weren’t so terribly important I’d find it quite fascinating. Instead I find it rather nervewracking.Report
Perhaps it’s the simple fact that I’m already unemployed at the moment, but the possibility of imminent economic calamity doesn’t trouble me as much as it should.Report
Guns and cigarettes, baby!
(are you prepared?)
In all reality, this isn’t nearly as dangerous as the last crash. Set money to undetermined, and you’ve got REAL problems.Report
I don’t think we can call Europe a natural experiment in austerity, for shoemaking to be a natural the change in policy has to be exogenous. Engaging in austerity bcause your finances are about to enter meltdown is very much an endogenous reaction. Governments only choose austerity when the alternative is oblivion, and that makes it very hard to study its effects.
The tragic thing is that all of this could have been averted. If Greece had started a measured austerity programme 5 years ago when times were good the country would have borne the short-term costs well, and the fiscal improvement would have been sufficient to make the current recession survivable.
But as it stands I now believe Greece is doomed. The Greek public will never wear austerity of sufficient magnitude to stabilise their government, and without that all the bailouts in the world will only delay the inevitable. Greece has a primary deficit, not even total default will save them.Report
I’m of the opinion that Greece probably never should have been allowed into the monetary union and that Brussels screwed up in not actually checking if the claims the Greek government made on their finances was accurate…
That said…
At this point, the best way to deal with Greece is to probably take them off the Euro with their own pegged currency, a new Drachma of some sort, and let them repay their debts with a heavily inflated domestic currency while they sort out their problems. Their tourism economy would do much better if they had a weak currency that Europeans could go wild spending in…
In the mean time ECB should be printing more money to help governments like the Netherlands and Italy borrow a bit more to stabilize so they can work on a 10-15 year plan to bring deficits and public spending back under control.Report
But as soon as you do that the flow of international credit will stop, or at the very least become so expensive Greece won’t be able sustain it’s spending. In either case austerity will be necessary.
As for the ECB’s monetary policy, I agree that in a recession loose monetary policy makes good sense.Report
Nob blame German efficiency. Clearly the Germans are at fault for playing the game better than their neighbors.Report
I’d read Blinder’s piece. Nonsensical claptrap.
“Teutonic efficiency” didn’t save Germany pre-Eurozone. And it won’t save them if they go back to having only the Deutsche-Mark or some sort of narrowed northern European currency.Report
You didn’t read carefully then. The fixed exchange rate gave the more efficient economy a huge advantageReport
Right. So moving off a fixed exchange single currency means that Germany would have to compete again without that artificial monetary leveler.
It’s not rocket science, it’s a basic part of economic theory.
If China and the US were in a monetary union for example, there’d be far more manufacturing jobs leaving China for the US than vice versa.Report
Heh. But we /are/ in a monetary union. No sooner does the dollar move than the Chinese jigger their exchange rate to their benefit. The Chinese are now saying they’d like to go to a basket of currencies but they won’t.Report
Well, a currency peg isn’t quite the same thing. If they had to use dollars, or if the US used yuans, the competitive advantage of Chinese firms would vanish, and US firms with their remarkable efficiency would come out ahead.Report
“Since 2000 Germany has been one of the strongest performers in Europe, helped by a leveling of the monetary playing field within the Eurozone and a cheaper currency abroad.”
Wasn’t the Euro pretty strong throughout the 00’s? Or was that just against the US $? (or alternatively, is this just speaking relatively of the Mark vs Euro?)Report
It’s the latter.
The DM vs EURO was a peg of 1.99:1 when introduced.Report
Stealing the Keynesian refrain: Without austerity it would have been much worse!Report
Austerity never fixes anything.Report
It fixed my credit card debt.Report
… okay, if you’ve got positive growth, austerity is a good idea. I think everyone’s in favor of austerity in good economic times.Report
Ecch, austerity does fix some things. It’s always a question of how it’s imposed. Countries, like people, must live within their means. I’ve got one credit card. I use it to rent cars and travel. I pay it off immediately, my credit card company hates me.
The larger picture of Europe’s problems resolves to the cost of borrowing. The EU’s banks loved the idea of extending credit to countries: sovereign debt is usually viewed as a rock-solid investment. But not always: Greece and Italy are both drowning in debt, a self-imposed punishment for reckless borrowing. We can spread the blame around as far as you’d like, blaming the banks for loaning all that money, it doesn’t matter. Keynes is often pilloried for saying countries ought to borrow in hard time but nobody seems to remember he advocated saving in good times.
You simply can’t be serious. Nobody is well-served to borrow against an uncertain future. Prudence is a seldom-used word in these evil times.Report
Nobody is well-served to borrow against an uncertain future.
Unless your shorting it? 😉Report
Uh, no. Can you say “AIG” ?Report
Point taken, and an illustration of why I don’t play the market.Report
Never “play” the market. That said, you’ll never get rich working for a living. You’ll have to invest somewhere, be those investments ever so small. It’s sorta like psychological analysis: take the Talking Cure with an investment advisor and take the measure of your own goals. Better yet, take a few courses on investing.
It’s always perplexed me why more people don’t think through their own financial goals. I think lots of people are just like you, or more precisely, living at your level of fear and distrust of financial markets. The not-so-secret secret of investing is to understand what you’re buying and why. Me, I capitalize on panic. There’s an endless supply of fear and stupidity in the universe and I don’t let it go to waste.Report
I’ll end up about as rich as TIAA-CREF is smart. It works out reasonably well for most people. And I’ve been increasing my contribution as my pay increases. I won’t be rich (I started too late for that), but then my standards for what wealth it takes to be content aren’t that high, either.Report
Tiaacref is still dumb money.Report
Though nothing is less-wanted than unwanted advice, here’s some anyway. As the Boomers moved through the pipeline, pretty much everyone who invested in fulfilling their needs made a killing.
They need health care now. Nursing homes. There’s recently been a big panic selloff because of the changes to Medicare. A dumb move by the sellers, the demand is not going down and those stocks are currently going for bargain basement prices.
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a self-imposed punishment for reckless borrowing
Well here is the problem the people who pay for austerity through job losses and service cuts are by and large not the people who set national budgets so it isn’t as if they individually could have avoided this.
Here’s an attempted analogy. Imagine you are a teenager living at home, one day your dad offers you a car bought on credit. Maybe you take it maybe you object to credit on principle and refuse to drive the fishing thing, either way the money is spent and the debt incurred. Next it turns out your dad misjudged the household disposable income so to make payments on that car he decides not to buy you any new clothes for two years.
Now you can argue that dad was stupid, you can point out that debts should be paid but I’d like to see the argument that for this hypothetical teenager the clothing austerity is self imposed.
Most people in Europe are like that teenager we are paying for things someone else ordered and we are paying whether we drove the car or not.
Not a solution just an observation.Report
Let’s get back to the problem of the debts of nations. Greece and Italy borrowed beyond their means. They don’t collect enough taxes to repay those loans. Yes, it’s the man in the street who inevitably pays the price for the stupidity of the ministers. It doesn’t change the facts: tax avoidance in both Greece and Italy has been raised to an art form.Report
the people who pay for austerity through job losses and service cuts are by and large not the people who set national budgets so it isn’t as if they individually could have avoided this.
Exactly, and that’s why these debt problems are so likely to happen. There’s a real diffusion of responsibility, not just among the politicians but among the people who have supported them. Each of us benefits, in the short term, from immediate benefits and deferred costs, so it’s easy to sell us politically on budgets that work that way. And there is no “one” who is responsible.
So what is needed is an institutional structure that stops us from collectively behaving that way. That’s the idea behind a balanced-budget amendment–the purpose is not to prevent all borrowing at all times, or even to prevent any deficit from ever happening, but to prevent persistent deficit financing of operational costs all the time.
There’s absolutely no value in blaming any people, even politicians, for deficit financing. That’s what the incentives demand whenever the direct linkage between benefits and costs is severed (e.g., it’s why people so quickly rack up credit card debt). So a change in the institutions–the rules–is necessary.Report
Of course the problem is more enforcement than rules.
The EU and Eurozone specifically have a mechanism/rule very similar to a BBA.
Greece’s government cheated and lied through the whole thing.Report
Indeed, if governments were held to the same standard as corporations a number of Greek politicians would be facing jail time for fraud right now.
In truth, I think the public sentiment is pretty much the only check on this kind of behaviour, which is why it takes a country getting burned before the polity takes fiscal probity seriously.Report
What’s drowning in debt today? Is it any more leveraged than what we give homebuyers in a mortgage?
Iceland, now there was drowning in debt, 50 to1. That’s more than a bit much.Report
Austerity certainly does fix some things. I personally feel that the benefits of austerity are long term, while the short-term benefits of stimulus spending (with the exception of extension of unemployment benefits) are very marginal due to the complexity and inefficiency of the expenditure channels.
My statement was sarcasm directed at the line of thinking that lead Nob to treat Europe as an “austerity experiment”, and allows many economic arguments from all sides to resist falsifiability.Report
Hello!
I am a stupid man! I am busy and cannot check on my investments. Accordingly, I lend out money so that other people might make more money for me!
Then, I blame it on them, if they don’t pay it back. Regardless of mine own ability to forsee the Calamity of them being unable to pay back their bills.
It is HIS FAULT if I go broke, never mine!
Thus the savers try to win the war against borrowers.
Are you carrying my cross of gold?Report
It’s true that it was unwise to treat Greece like a western-European country. But I would point out that the Greek government was fraudulently overstating it’s fiscal position. That’s a pretty clear-cut case of malfeasance, it’s hard to do due diligence when the borrower lies to you.Report
How much encouragement for lying was there? are we into ninja loan territory, where it was publically encouraged to lie?Report
Loads of encouragement. It was a one-two fraud: the Greek government said it needed infrastructure, a reasonable enough rationale for a loan, but then stuffed all the money into a few politically-connected banks.Report
Interesting Choose Your Adventure-style plan over at Crooked Timber about Greece.Report
I got the “Evita” ending.Report