By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives
As things go from bad to worse in the eurozone the putative adults have begun to fight openly in front of the kids. The putative adults, of course, have refused to act like adults for six years and instead have lived in a fantasy world in which austerity – bleeding the patient – is the optimal response to a recession. As many of us have been warning for six years, this is a great way to create gratuitous recessions and even the Great Depression levels of unemployment in three nations of the periphery with 100 million citizens.
Italy has been forced by German demands for austerity into a third recession in six years, with France likely to experience the same fate. Even Germany has stagnated and could fall into recession. Instead of the four horsemen of the apocalypse, the three horses that make up a troika consist of the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission (EC). The troika combined to force the entire eurozone to inflict austerity in response to the Great Recession.
The IMF was the first member of the troika to publish research demonstrating that austerity was harmful and fiscal stimulus in response to the crisis proved even more successful than economists anticipated. The IMF has recently lowered the eurozone’s growth forecast substantially, urged Germany to increase its spending, and warned of a serious risk of deflation.
The New York Times recently wrote an article noting (but not explaining the significance of) Olli Rehn calling on Germany to increase government spending. Germany has a budget surplus, severe unmet infrastructure needs, and a stagnating economy so its continuing austerity has become so irrational that even the crazies are starting to jump off the crazy train. Rehn was the troika’s hit man on austerity, so his call for Germany to increase government spending is significant even though it does not indicate that Rehn is no longer an austerian.
Similarly, the ultra-austerian Dutch conservatives that have dominated key EU functions have added their voices to the call for Germany to cease its insanity. As with Rehn, the Dutch conservatives remain fierce believers in austerity and claim that it leads, promptly, to growth.
Contemporaneously, the rider of the third horse of the troika, Mario Draghi, the head of the ECB, has pushed for Germany to increase its government spending on infrastructure and for the ECB to engage in quantitative easing. German conservatives have responded by launching vicious attacks on Draghi.
Again, none of this indicates that Draghi has reconsidered his faith in austerity. Indeed, Draghi, the IMF, and the Dutch conservatives are trying to broker a grand deal in which Germany would agree to increase governmental spending on much needed infrastructure in return for Italy and France capitulating more abjectly to German demands that they engage in a war on their workers’ wages. From Angel Merkel’s perspective this later demand is not only ideologically pleasing, but also an “elegant” solution that will cause the (supposedly leftish) leaders of France and Italy to self-destruct by betraying their voters and their principles and discrediting their parties (as was done with great success in Portugal and Greece).
The fact that the German conservatives are demonizing Draghi for pushing for the grand bargain that would simultaneously aid German growth, safety, and convenience while discrediting Merkel’s political opponents is a telling indication of how ideological they are in their commitment to austerity and how fully they believe they have the right to rule by German diktat. Given their (economically illiterate) attribution of virtue to budgetary surpluses by sovereign nations and moral failure to deficits it “must” follow that the larger the budgetary surplus that Germany runs the more uniquely virtuous Germans are because of their “self-sacrifice.” The German rage at anyone who points out that for a nation state the entire concept of budgetary surpluses and deficits being defined as “moral” and “immoral” is nonsensical. Ditto for anyone who points out that the claim that because surpluses are (supposedly) “good” large surpluses must be “great” is contrary to economic experience and theory and logic. Specifically, the claim commits the logical fallacy of “composition.”
German conservatives consider it illegitimate for their eurozone allies to criticize Germany’s hegemony over the EU. If Germans are uniquely virtuous (by running large budgetary surpluses) then Germany’s hegemony is morally sound. “There is no alternative” (TINA) not only to austerity, but also to German domination of the Continent. European “unity” has taken on a sinister cast
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Once again, Mr Black nails it. Almost no else has come close to spelling out the nuts and bolts on what plagues this continent.
In short, in spite of what we’ve learned about austerity we continue to be pilloried with calls for more austerity. Local politicians in many parliaments are hidebound to push cruel more austerity.
We had Mr Stiglitz speak at the Italian parliament last week giving the senators some cold hard talk on the problems with the European framework. We need someone of his stature as an outsider with a Nobel prize to continue to give blunt talk to other parliaments on the problems with austerity.
This commentary probably needs to be published in Germany, in German. I wonder if Prof. Black has a German colleague who could see to it.
Great Article
Stop giving Witch Doctors a bad name.
Which doctors? {ducks}
Is German nationalism even really a factor? It seems like this austerity thing is more a product of fundamentalist, ascetic strands of Christianity. All this stress on the necessity of privation and the elevation of toil and work as the highest ends of existence is at the heart of this madness.
It seems like this austerity thing is more a product of fundamentalist, ascetic strands of Christianity. Generalfeldmarschall von Hindenburg
My comment in moderation deals specifically with this. And, I’ll add, Biblical Christianity is not ascetic either.
Comment is now visible, see below.
It’s not so much German nationalism or Christian “asceticism” as it is the German paranoia about hyper-inflation as experienced in the Wiemar era. It is a national psychosis that permeates their entire political economy. Anything that has the slightest whiff of promoting any inflation at all, whether based on valid or false economic theory, is to be avoided, no matter what the cost.
Only in uber-Keynesian la-la land is spending dramatically more than you raise in taxes “austerity”. Going broke slightly more slowly than your previous pace of going broke is not a sustainable solution, no matter how many rants against draconian cuts the “spend other peoples’ money til you drop” crowd can muster.
Gather ten of your Keynesian friends around a dinner table and ask them to raise their hand if they are willing to spend more than they currently do if you give $1 million dollars of newly printed money to each participant . All 10 hands would be raised, as most humans have a propensity to consume far in excess of that which their effort in life permits. Then ask all ten how many are willing to produce more … you know, work longer hours, learn how to work more productively, perhaps by gaining access to better capital goods. Likely no hands will be raised, as most people believe they already work too hard and have too little leisure time.
Production of goods or services, which improves standard of living, is difficult; consumption of goods and services using “money” or debt conjured out of nothing is effortless.
However this way of thinking also reduces all human endeavour to being defined according to its financial/monetary aspect. This tendency is part of what creates great suffering at all levels of one’s being.
If any of the friends were entrepreneurs they might realize that this increased demand creates a great opportunity for profit. And it works even better if rather than being given this money poeple earned it by providing goods and services.
But your point is well taken that most people work too hard for not enough and would be much better served if they were relieved from medical and education debts and were less burdened by high asset prices, in particular the cost of housing/renting.
Work more productively? Stiglitz himself explains how productivity is the achilles heel of capitalism. Human productivity and technology are both very high. Jobs and wages are down. And in an irrational effort to keep the sacred euro from devaluing, the commission insists on austerity. Nice the French are finally getting fed up and claiming sovereign priorities. It is so hypocritical of Rehn to suggest that only Germany stimulate its economy simply to keep the surplus going. It won’t accomplish anything. And Germany’s flagship exports (cars) are heading into a new era of public transportation. If Germany stimulates its economy it better be in a new direction from the old exports.
Gather 10 of your supply side friends around the dinner table and offer each of the a Death Star Planet and see how many of them will kill each other in order to rule the known universe. You’d be surprise what the market can do for you with the proper incentive.
Exactly none of them would kill each other … perhaps your friends are a little angrier than mine, in that they expect others to hand them a certain lifestyle to which they aspire. The fact that exactly none of the “something for nothing crowd” which responded to my comment disagreed with me regarding the results of the proposed experiment is the WHOLE POINT of the comment.
“Something for nothing crowd” ?
Now you’re talking about bankers since they lend what they don’t have in exchange for interest that does not necessarily even exist in aggregate and seize real assets from those who can’t pay.
Except you neglect the boom-bust cycle. The government-subsidized banking cartel drives people into debt during the boom and that debt proves unpayable during the inevitable bust so of course additional money creation is necessary – as a matter of justice.
Likely no hands will be raised, as most people believe they already work too hard and have too little leisure time. DCR
I smell blame the victims. People are often willing to work very hard – but not at meaningless jobs under someone else. And if they need leisure to recuperate, you begrudge them that?
As for budget surpluses being moral, the Bible condemns money hoarding in Matthew 25:14-30 (Parable of the Talents) and Luke 19:12-26.
“Wicked”, “lazy” and “worthless” are the expressions used, not “moral”. But that’s what comes from following godless Austrian economists instead of the foundational document of Western Civilization.
I believe that the primary objective is not and has not been euro zone economic growth. Instead, the People of the euro zone have been thrown under the bus for this:
http://sdw.ecb.europa.eu/reports.do?node=1000003351
http://sdw.ecb.europa.eu/reports.do?node=1000003381
Until the People of the euro zone can again influence, control, and replace fiscal and monetary policy makers, I expect this state of affairs will continue indefinitely.
I respect Bill Black but, WTF?? What austerity are you talking about? Governments in Eurozone, where i live, have always spent waaaay over what they took in. VAT, which you don’t have in the US, has creeped from 19,5 to 21,5 percent on average since the crisis started. Other taxes were increased and we got tons of new or increased stealth taxes. Yet public finances are still in the red every year. The only difference is that the governments that overspent by 7-10 percent of GDP in 2009 and 2010, now overspend by merely 3-5 percent of GDP annually. End result is a rapidly increasing public debt across the eurozone. A debt that will eventually crush us and probably cause wars or at least violent revolutions. Cuts in public spending have been few and far between and mostly on paper only.
There has been no real austerity in eurozone to date. Mostly there are attempts to revive the debt fueled craziness of 2007, but private sector will have none of that, which can be seen in the fact that private sector indebtedness in eurozone is on a downward trajectory.
The real problem is the gap between productivity and wages, which was caused by the inability of peripheral governments to inflate away their debts and keep workers happy with ever-increasing nominal wages, while real wages grew at the pace of productivity growth = slower. You guessed it. It’s the euro. The productivity gap, which means in countries like Spain wages would need to be decreased by 25 percent and even in France by about ten percent to be on the same footing with German productivity, cannot be closed without causing an instant revolution and the end of eurozone.