Merry X-Mas and a great New Year 2013

Dear readers,

forgive me for not posting as frequently as before. It's due to the usual X-Mas stress and the fact that my notebook died in my bed (fortunately, I don't have this effect on human beings).

Will get a brandnew tablet PC soon and continue my regular posts.

Until then, dear readers, may you have a jolly, merry X-Mas and a healthy, happy and successful New Year.

Desperately seeking women economists for economic and financial leadership positions

I'd like to use the relative calm on the euro front (before the next storm) as an opportunity to ponder the sparsity of women economists among leading economic and financial policymakers in Germany. That is the reason why I came up with only one woman's name for a leading policy role in my economic shadow government:  not surprisingly, as minister for labor and social policy, a traditionally female role.

The Status Quo

With the exception of chancellor Merkel and the Left (Die Linke), there are no women in leading economic or financial policymaker roles in Germany, neither in the Bundestag (the upper house of the German parliament), nor in the Bundesrat (the lower house), nor on the European level.

As the leader of the most powerful economy in the eurozone, chancellor Merkel has the last word in European economic policymaking. She is, however, no trained economist and mostly follows the advice of  her all-male economic policy team, most of them with outdated, dogmatic, or no academic training in economics and/or finance [1] which partly explains her idealization of the budgeting skills of Schwabian housewives and her insistence on the macro-economically non-sensical austerity policies in the Southern periphery.  

Merkel's main opposition parties SPD and the Greens boast a number of women economists in the Bundestag and Bundesrat, yet appointed NO women to visible economic or financial policy leadership roles. The only exception is the Left with Sarah Wagenknecht, a trained economist, as deputy party leader. She frequently writes columns on economic policy issues and is often invited to talk shows and public economic policy discussions. 

Women economists are desperately needed to improve economic and financial policymaking

Following the near collapse of the world economy due to the mis-management of a male-dominated financial sector, it ought to be in the interest of ALL to appoint more women economists and financiers to high-level economic and financial policy and management posts. 

This is particularly true for Germany, a country where several of the largest German banks suffered huge losses which had to be covered by taxpayers, and where only 2% of the top management posts are held by women. The possibility that there could be a correlation between the mis-performance of Germany's (and other country's) financial sector and the 98% male quota in banks' top management is not as far-fetched as many self-respecting male may think: a study by John Coates, former Wall Street trader turned senior research fellow in neuroscience and finance at the University of Cambridge, found that "hormones such as testosterone are responsible for driving young male traders to take increasingly ill-calculated risks that turn bull markets into bubbles and even financial crises." That alone should be a more than sufficient reason for appointing more women to high-level financial and economic posts.

But there's more: While Germany's predominantly male 'elite' constantly and very publicly complains about the low birth rates among German-born women, the fact that single mothers constitute the largest group among the poor in Germany is never addressed in the equally male-dominated mainstream media. The obvious correlation between the poverty-risk of childrearing and low birth rates in Germany has been ignored for years. Instead, Germany's policymakers spend billions of €uros of taxpayer money for child care subsidies, even child-rearing 'salaries' (the so-called Elterngeld), as well as PR on the joys of parenthood. A second important reason why Germany needs female economic policymakers in leadership positions !

The third reason:  the (lack of) quality of financial and economic policymaking in the eurozone.

Whenever a woman's quota is being discussed in Germany to force men to give up a portion of their privileged positions to women, the age-old chestnut about a lack of qualified women candidates is being trotted out. Or, if that doesn't work because young women with better university diplomas than men are overwhelming the labor market, the already aging chestnut about how it takes time for these women to move them up the career ladder (see Heiner Thorborg's CEO initiative), thus ensuring that it takes another 10-20 years before Germany's top management reaches the targeted quota of 30% women.

In view of the recent near collapse of the world economy, it is obvious that women can NOT possibly perform worse than men in financial and economc leadership positions. And so, for the benefit of us all, we might as well give ALL well-trained women economists and financiers, young and older, a chance NOW.

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[1] Her finance minister Mr. Schäuble; her economics minister Mr. Rösler (a trained  surgeon who caused a market panic when he suggested that Greece needed a debt reduction), Mr. Bruederle (economics speaker of her coalition partner FDP), and her powerful banker friends (Joe Ackermann and other chiefs of zombie banks). 

A progressive alternative to Merkel's muddle-through government

Following the Eurogroup's latest 'Greek Deal', the economic prospects for the eurozone remain bleak, if not downright depressive (see Yanis Varoufakis' excellent analysis). For fear of telling the truth to the German electorate that her Schwabian housewife policies have failed, chancellor Merkel is bound to continue her muddle-through strategy until the general election in September 2013. Meanwhile, the Southern European periphery is condemned to another year of economic and mental depression, and a growing humanitarian and political crisis.

Germany's largest opposition party SPD (social democratic party) has 'appointed' a chancellor-candidate (Peer Steinbrueck) who continues to support Agenda 2010 policies and thus is likely to pursue an economic strategy very similar to Merkel's austerity cum supply-side reforms package, albeit with an emphasis on economic growth (see my post "What do recent events mean for the EU and economic policy in the eurozone, part II").  And Germany's Greens, the only possible SPD-coalition partner to prevent another Merkel government, also voted for pro-Agenda 2010 candidates (see my post "Best-case economic scenario postponed").  Enough for Europe's non-austerians to despair !

Yet, even Germany has a small group of progressive economic policymakers and experts who could form an alternative (shadow) government ready to take the baton from Merkel's Schwabian housewife team and enact the necessary U-turn in economic policies in the eurozone, away from the explosive debt-deflationary strategy currently pursued toward a humane, job-creating growth strategy which is also the only viable strategy for a sustained and sustainable lowering of debt ratios in Greece and elsewhere. The financing of such a strategy could be provided by the receipts from a financial transactions tax, a solidarity tax imposed on financial institutions and the rich, as well as project funds from the EBRD and the EIB.

Germany's progressive (economic) shadow government could include (please take note, Mr. Soros):

- Sven Giegold (Greens), currently MdEP and member of the Committee for Economic and Monetary Affairs, as Minister for European Economic Policy working in close coordination with

- Heiner Flassbeck (SPD), currently chief economist of UNCTAD, as Minister for International Economic Policy and Cooperation, 

- Gerhard Schick (Greens), currently the Green speaker for fiscal policy, as Minister of Finance, 

- Peter Bofinger (no party affiliation), currently professor of economics and a member of Germany's Council of  Economic Advisors, as Economics Minister.

An excellent coordinator of this progressive shadow government would be Claudia Roth (Greens) in the role of chancellor or vice-chancellor/Foreign Minister.

While this shadow government exists only in my imagination, it might be a good idea for such a group of progressive policymakers to actively start a conversation about alternative economic strategies for the eurozone, so as to be ready to take charge if and when the current debt-deflationary strategy explodes in our faces, and the euro with it.

Why do European taxpayers continue to bail out eurozone banks ?

Watching IMF representatives and European policy makers bicker about whether Greece will attain some randomly determined benchmark or another by 2020 is akin to watching a scenario in a nuthouse. What makes me furious is the fact that the attainment of arbitrary benchmarks thought up by some non-elected bureaucrats determines the release of desperately needed financial assistance for Greece, and thus the fate of millions of suffering Greeks. 

Which brings me to my initial question: why are eurozone banks still being bailed out while the people in the Southern European periphery have to suffer under the troika's inhumane and economically non-sensical austerity policies ? Before attempting an answer to this question, let me provide some evidence for the dirty secret that, four years after the onset of the Great Financial Crisis, eurozone banks still need taxpayer support in the trillions (compare Yanis Varoufakis, "Europe after the Global Minotaur"):

• The ECB's long-term refinancing operation (LTRO) in late 2011 and early 2012 lent 1 trillion Euro to eurozone banks at 1% interest in exchange for questionable collateral in the form of sovereign bonds.  This highly lucrative operation for eurozone banks was designed to motivate banks to purchase Spanish and Italian sovereign bonds paying anywhere from 5% to 7% interest. It worked.  Between the end of 2011 and July 2012, european lenders increased their assets from $42 trillion to $45 trillion (see graph below).

• The March 2012 partial write-off of Greece's debt held by banks and private investors (the so-called PSI or private sector involvement) represents a huge subsidy for banks and a transfer of private investment risk to the public sector, i.e. the European taxpayer. Even though the market value of Greek bonds was discounted by 70-80% before the write-off, banks had to take a haircut of only 20%-30%, implying a taxpayer subsidy of between 50%-60%.
  
• To add insult to taxpayer injury, the new sovereign bonds issued in exchange for retiring the old, nearly worthless ones are guaranteed by the EFSF, i.e. European taxpayers. Thus, 65% of Greek credit risk (€194 bln out of €300 total) has been smoothly transferred to the European taxpayer. And Greece, by the way, ended up with a higher debt burden than before due to new loans it had to take on to repay the troika creditors.
  
• In August 2012, the ECB announced that it would buy an unlimited amount of sovereign eurozone bonds on the secondary market to keep interest rates and, thus, financing costs low for the countries concerned (mainly Spain and Italy). The dirty secret behind this operation lies in the fact that the ECB purchases raise the market value of these bonds held by banks and private investors, thus providing another taxpayer-financed subsidy. 

All in all, the corporate welfare payments to eurozone banks may cost European taxpayers hundreds of billions of euros, if not more, and the money does not even benefit the people who, by contrast, have to suffer dramatic cuts in wages and public pensions to free up money for their country's debt service and to improve competitiveness. 

So what explains this crazyness and why is it that the eurozone's financial sector has not been forced to deleverage and close down zombie banks instead of keeping them alive with taxpayer money ? 

Enter the Institute of International Finance

The answer to the question posed above might be found at the doors of an institution created 30 years ago, just two blocks from IMF headquarters in Washington DC, to represent the interests of the world's largest commercial and investment banks in debt restructuring negotiations with highly-indebted Latin American countries: the Institute of International Finance (IIF).

The IIF's membership in 1982 encompassed the eight largest US money center banks at the heart of the Latin American debt crisis: Citigroup, JP Morgan, Chase Manhattan, a.o. Today, celebrating its 30th anniversary, the IIF counts more than 450 members from over 70 countries, including a growing number of large insurance companies and investment management firms (regular IIF members) in addition to multinational corporations, trading companies, and multilateral agencies (associate IIF members). 

Until recently, the IIF was chaired by Josef Ackermann, ex-CEO of Deutsche Bank Group, who no doubt advised Charles Dallara, IIF Managing Director, the IIF representative during the Greek debt restructuring negotiations in early 2012. ....This might explain the very favorable terms banks got in the March 2012 PSI (see above). It might also be no accident that the IIF recently moved its headquarters close to the US Treasury, the most important player in the resolution of the 2008 Great Financial Crisis.

Despite its inconspicious name suggesting a research institute, the IIF's website until recently didn't hide its true mission: “being the most influential global association of financial institutions”, striving to fulfill this mission through the following activities (the mission statements below were taken from the website in 2011, they have since been toned down):

• “Systematically identify, analyze, and shape regulatory, financial and economic policy issues of relevance to our members globally or regionally.”

• “Develop and advance representative views and contructive proposals that influence the public debate on particular policy proposals, including those of multilateral agencies….”

• “Work with policymakers, regulators, and multilateral organizations to strengthen the efficiency, transparency, stability and competitiveness of the global financial system, with an emphasis on voluntary market-based approaches to crisis prevention and management.”

• “Provide a network for members to exchange views and offer opportunities for effective dialogue among policymakers, regulators, and private sector financial institutions."
  
  
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The fiscal multiplier and austerity in the eurozone

As I had mentioned in my post "What do recent events mean for the EU and economic policy in the eurozone?", part II and III, the IMF's World Economic Outlook of October 2012 presented new evidence of a larger than assumed fiscal multiplier, now found to be in the order of between 0.9 and 1.7, instead of 0.5 as previously estimated (see WEO 2012. chapter 1, box 1.1).

Before thís momentous concession that IMF economists had underestimated the fiscal multiplier, there were three different 'camps' regarding the impact of austerity on economic growth:

1.) The 'expansionary austerity' camp [fiscal multiplier = 0]

Proponents of the expansionary austerity view argue that fiscal contraction would not only NOT reduce economic growth, but might even enhance growth through exchange rate and confidence effects. The supply-side research papers of Alberto Alesina have been particularly influential in certain economic policy circles and were quickly picked up by European policymakers as a justification for the austerity programs imposed on Greece and other Southern European countries in return for EU financial assistance. While German finance minister Schäuble is a staunch supporter of the expansionary austerity school, Larry Summers thinks "that the idea of expansionary austerity is oxymoronic"...."you can drop the prefix." (see my post "Austerity chickens are coming home to roost in Germany").

2.) The mainstream camp [fiscal multiplier = 0.5]

This camp, which included the IMF and the Bank of England, held that the impact of austerity on economic growth would be significant, but only moderately so. Examining data from the last three decades, the IMF concluded in October 2010 that "fiscal consolidation typically lowers growth in the short term."...."we find that after two years, a budget deficit cut of 1 percent of GDP tends to lower output by about 1/2 percent and raise the unemployment rate by 1/3 percentage point." (see press points for chapter 3, World Economic Outlook 2010)

3.) The 'recessionary austerity' camp [fiscal multiplier > 1]

Economists in the third camp, including Paul Krugman, Brad Delong, Martin Wulf (Financial Times) and Simon Wren Lewis, argue that the experience of the last three decades is not relevant to today's liquidity trap environment. In a liquidity trap environment, central banks' injections of cash into the banking system fail to stimulate economic growth because banks and people hoard cash. As people expect insufficient aggregate demand and/or deflation, they prefer to hoard their money instead of investing or consuming it, so that the impact of monetary policy is either zero or very moderate due to its limitation by the zero lower bound of interest rates. In such a situation, only fiscal policy will have an impact on economic growth, with the fiscal multiplier most likely larger than 1. For the eurozone, this means that each €uro of fiscal austerity will reduce economic activities by >1 €uro, specifically by between €0.9 and €1.7.

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The chart above shows the liquidity trap as visualized in a IS-LM diagram. A monetary expansion (the shift from LM to LM') has no effect on equilibrium interest rates or output. However, fiscal expansion (the shift from IS to IS") leads to a higher level of output with no change in interest rates.
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Since October 2012 I believe it is fair to say that at least the IMF's Chief economist and his team of economists have moved from the mainstream camp to the recessionary austerity camp. Here is the key paragraph of their research findings on fiscal multipliers: "Our results indicate that multipliers have actually been in the 0.9 to 1.7 range since the Great Recession. This finding is consistent with research suggesting that in today's environment of substantial economic slack, monetary policy constrained by the zero lower bound and synchronized fiscal adjustment across numerous economies, multipliers may be well above 1."  (see WEO of October 2012)

What does all this mean for the eurozone ?

In view of economic developments in the eurozone since the Great Financial Crisis in 2008, one doesn't have to be an economist to conclude that ECB monetary policy has been ineffective in terms of its impact on economic growth: while interest rates reached historically low levels, economic activity has slumped in the periphery and slowed down in the core, with banks withholding credit and corporations postponing investments; with consumers foregoing consumption, prefering to put their money under the mattress or depositing it in other countries perceived as safe havens (predominently Germany, Luxemburg, or Switzerland).

Anybody with common sense can also observe that fiscal policy has had a severe impact on the economies of the eurozone's Southern periphery: In Greece, the fiscal contraction imposed by the troika to lower the country's debt in relation to its GDP caused a dramatic slump in GDP, from €249 bln in 2009 to €194 bln in 2012. Instead of lowering the debt ratio, the economic contraction increased the burden of Greek debt in relation to its dramatically lower GDP from 120% in 2009 to 176.7% of Greek GDP in 2012 (Eurostat data). This suggests that the fiscal multiplier has indeed been much larger than 0.5 as initially estimated by the IMF in 2010. Applying the IMF's revised multiplier estimate of 1.7, the new fiscal cuts of €13.5 bln just approved by the Greek parliament would lower Greek GDP by €23 bln to €171 bln, increasing the debt ratio to 203% of GDP ! At that point, Greece would need another €100 bln from the European taxpayer just to keep it going.

Similar fiscal multiplier effects can be observed in Spain and Portugal. Instead of putting the Southern periphery on a path toward sustainable growth, the austerity polices imposed by the troika have dramatically lowered the countries' GDP, thus increasing public debt ratios and creating a humanitarian crisis so dramatic that it provokes regular massive demonstrations against the inhumane spending cuts focused on the weakest members of society: the old, the young, and the poor. 

The conclusion is obvious to anybody but the Very Serious People in power: A continuation of the austerity policies in the eurozone worsen the debt burden and the humanitarian crisis in the countries of the eurozone's periphery, reinforce the trend toward violent opposition and foster the growth of militant, nationalist movements. These trends already threaten "Europe's cohesion and the ideals behind the European Union" (George Soros) and seriously endanger the 60-year peace period in Europe, mocking the recently awarded Nobel Peace prize.

Hence, it is urgent and indispensable to immediately STOP the austerity measures, take up Mr. Soros' offer to "commit serious financial resources", and design a more appropriate, sustainable, and humane economic adjustment strategy for the entire eurozone. 

Best-case economic scenario postponed

In my post "What do recent events mean for economic policy in the eurozone ? Part III" I defined the best-case scenario as a "new approach in economic policy", away from the current deflationary austerity toward a more humane, job-creating growth strategy, "with a completely different political coalition in Germany" and argued that the feasibility of such a scenario depended on the outcome of the primary of Germany's Green party.

Well, the Green party's primary results are in and suggest, unfortunately, that a U-turn in economic policy making in the eurozone is highly unlikely. Let me explain why:

Germany's Green party members have elected Jürgen Trittin and Katrin Göring-Eckhardt as their leaders for the 2013 parliamentary elections, two veteran politicians who during the last red-green government from 1998-2005 supported the economic policies of Agenda 2010: an employer-friendly, supply-side economic program of labor market reforms prepared by the global media conglomerate Bertelsmann Group and broadly supported by Germany's corporate interest groups (see my post: "Blueprint of labor reforms in Greece: Germany's Agenda 2010").

Katrin Göring-Eckhardt, a trained evangelical theologian without academic degree, career politician and Agenda 2010 supporter apparently does not see a conflict between the humanitarian values of the evangelical gospel and her support for the inhumane policies of Agenda 2010 which have thrown millions of German citizens into poverty and forced them into accepting menial jobs paying €1 an hour. Everybody can be excused for making mistakes, but the fact that she has not distanced herself from the inhumane Agenda 2010 policies, in my eyes, makes her untrustworthy and unelectable.

Trittin (a trained sociologist, career politician, and one of this year's invitees at the Bilderberg conference) is making some politically correct noises designed to attract progressive voters. Nevertheless, when push comes to shove, he would not shrink from making compromises with Germany's powerful corporate and financial 'elite' to gain and remain in power. While compromises are per se not objectionable, they are at a minimum questionable, if not criminal, with a German 'elite' that insists upon imposing its Schwabian housewife policies of deflationary austerity in the eurozone's Southern periphery, against all evidence that such policies throw the economies into a depression, worsen the debt ratios, and create a humanitarian crisis so severe that criminal charges have been filed against Ms. Merkel and the leaders of the troika for crimes against humanity.

Given that the only feasible alternative to a Merkel government in Germany is a red-green coalition led by a social (!) democratic chancellor candidate Steinbrueck who is currently engulfed in a controversy about his €1.5 million earnings from speaking engagements while many of his fellow party members barely make ends meet with yearly salaries of €25.000 (an amount that Steinbrueck received for just one speech), doesn't make me very optimistic for a positive change in economic policies in the eurozone.

Sadly,I guess the only viable alternative is to keep up the democratic pressure to force real change. As President Roosevelt said to the union leaders when they proposed plans to include in the New Deal: "I agree with you, I want to do it, now make me do it !" (FDR, 1932)

Germanic Economic Mythology - update Jan 2013

Since the 2012 release of Quentin Tarantino's Django Unchained the global movie audience is familiar with the story of Brunhilde and Siegfried (i.e. the German Nibelungen saga) as told by Dr. Schultz. It is my personal pleasure today to present to you the economic sequel of this saga:

The economic sequel features the current German approach to economic policy making based on what can best be described as Germanic Economic Mythology:

It serves four gods and goddesses, namely

1.) the Swabian housewife [most revered for her budgeting skills]

2.) financial markets [the evil twin of the Schwabian housewife]

3.) competitiveness [the mother of exports]

4.) free and flexible markets [esp. as applied to labor markets]

Assisting the gods and goddesses are the invisible fairies, namely

• the confidence fairy which helps motivate financial markets to invest
  and
• the invisible hand which guides market participants toward the equilibrium between supply and demand, even if it means poverty-level wages.

The gods and their fairies live in dark forests filled with dragons and zombies (zombie banks, the inflation zombie, cockroach zombies). While zombie banks are regularly fed with corporate welfare payments in the hope that they can be reanimated, Germans desperately fear that the inflation zombie comes back to life because it might turn into a fire-spewing dragon. That is why they prefer to beat it down even when it shows no signs of life at all.

Germans also fear another, even more horrible dragon with three ghastly heads: the public debt. Its largest head is the federal government's debt, including the obligations of the national pension fund. The other two heads include the regional debt and the debt of the communes.  

To slay the three-headed monster dragon public debt and prevent the inflation zombie from turning into a fire-spewing dragon, draconic sacrifices are made on the altar of the most powerful gods, the financial markets and competitiveness.The sacrifices preferred by the most powerful gods are wages and social welfare benefits such as unemployment benefits, health care benefits, public pensions and the like. If the three-headed monster dragon public debt is really large and endangers the lifestyle of the gods, the ultimate sacrifice may be required:  human dignity and human life.  

Statue of Siegfried slaying the dragon, Bremen.

What do recent events mean for the EU and economic policy in the eurozone ? (part III)

Part I of this series provided an interpretation of the meaning of the Nobel Peace Prize award to the European Union, part II assessed the likelihood of a U-turn in economic policy in the eurozone under a new German government headed by the social democratic chancellor candidate Steinbrueck. 

Part III: German finance minister Schaeuble's recent pronouncements about Greece

Finance minister Schaeuble has always been steadfast (if not to say boneheaded) in his insistence that Greece would have to meet all the economic conditions and fiscal targets agreed upon in the March 2012 Memorandum of Understanding before the next tranche of financial assistance could be released. He said this in complete knowledge of the fact that without this next tranche of financing Greece would be bankrupt. Then, during a visit to Singapore in mid-October, to much of the world's surprise Schaeuble suddenly pronounced in broken english: "I think, there will no, it will not happen that there will be a Staatsbankrott in Greece." 

What explains Mr. Schaeuble's sudden change of heart, together with the apparent change in chancellor Merkel's stance toward Greece who suddenly decided to visit the country to declare her support for the country to remain in the eurozone ? Well, unfortunately, it was not the sudden enlightenment and realization that the inhumane austerity policies imposed on Greece are economically counterproductive (if not to say moronic) and extremely damaging to the social cohesion and peace in the country. Far from it ! Merkel's and Schaeuble's change of heart can be entirely traced back to intense pressure by China and the United States not to let Greece fall, or else ! 

It just so happens that Mr. Schaeuble's surprising pronouncement occurred a day after the close of the IMF/World Bank meeting in Tokyo from October 12-14 where IMF Managing Director Christine Lagarde urged that countries not sacrifice growth for the sake of austerity. Backed by new research of IMF Chief economist Olivier Blanchard and his team who found that the fiscal multiplier had been underestimated at 0.5 and is probably more in the order of 0.9-1.7 [*], Madame Lagarde said that "the pace of government debt reduction must be tempered by spending to help get the unemployed back to work." She further said that "without growth, the future of the global economy is in jeopardy." 

Madame Lagarde as well as high-level US and Chinese finance officials must have impressed on Mr. Schaeuble that a collapse of Greece triggered by a German refusal to release the next tranche of financing would seriously damage the world economy and would probably mean the end of the euro project. The latter point was underlined by a discrete diplomatic indication from Chinese officials that, in the event of a Greek bankrupty and exit from the eurozone, the Chinese government would sell €500 bln of their eurozone bond holdings. That, in fact, would mean the collapse of the euro project.

So, as in 2008/2009, it was international pressure rather than their own reassessment of economic policies that brought German politicians to reason. Thank you France, the US, China, and others for your intelligent intervention. I admire your capability to talk reason into German boneheads. Chapeau !

* * *

What does all this mean for economic policymaking in the eurozone ? Unfortunately, not much. We will probably remain stuck with Merkel, Schaeuble & Co, or Merkel & Steinbrueck, a combination that may improve economic policies only moderately, if at all. This is the base case scenario.

The Merkel/Steinbrueck combination may also worsen economic policies as Steinbrueck, a staunch Agenda politician and a model cost- and deficit-cutter, may introduce Agenda 2020 with more cuts in wages and pensions in Germany and elsewhere in the eurozone, thus reinforcing the deflationary austerity and leading the eurozone into a depression. This, obviously, is the worst-case scenario.

Whether a best-case scenario with a completely different political coalition in Germany and a new approach in economic policy is feasible depends on the outcome of the Urwahl (a sort of primary) of the German Greens at the beginning of November. More on this issue in one of my next posts.

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* This means that a 1%age point cut in public spending results in a 1.7%age point reduction in GDP.

   (See chapter 1 and esp. box 1.1 of the IMF World Economic Outlook of October 2012)

What do recent events mean for the EU and economic policy in the eurozone ? (part II)

Part II: Mr. Steinbrueck's candidacy for German chancellor and economic policy in the eurozone

In my last post I argued that the alternative to a dissolution of the euro project is a 180° turn in economic policy for the eurozone by a new German government without Merkel. Today, I shall try to assess the likeliness of such an alternative with Mr. Steinbrueck (SPD) as the next German chancellor.

Merkel's October 18th Regierungserklärung (government policy statement) in the German Bundestag and the verbal blows that followed by chancellor candidate Steinbrueck provided the first indication of Steinbrueck's views and visions for the euro project as well as an idea of his economic policy approach toward Greece and the eurozone.

Steinbrueck started with a scathing critique of chancellor Merkel's mishandling of "the special German responsibility for Europe" and in particular of her failure to reprimand the "mobbing" of Greece and the brazenly chauvinist comments about the Greek people and other Southern Europeans by some of her coalition members, namely Mr. Rösler (economics minister), Mr. Söder (leading member of the Christian Social Union), Messrs. Dobrindt and Döring (leading members of Germany's liberal party FDP). Steinbrueck's stinging remark "You want to ride on the wave of public opinion that feeds on the ressentiments about Germany as the paymaster of Europe, but at the same time you want to avoid to dive into this wave...." further twisted the knife in the body of Merkel's damaged political standing, and his final statement served the knock-out blow: "Neither Mr. Kohl nor one of his predecessors would have allowed to use a European partner for political aims." 

Wow ! Hallelujah, Mr. Steinbrueck !

So far, so good. Yet, while Steinbrueck's attack of chancellor Merkel's coalition's treatment of Germany's eurozone partners was nothing less than brilliant, his recipes for economic policymaking in Europe were disappointingly unspectacular: banks shall fund future bail-outs out of their own bank-financed rescue fund; the need for a growth and employment pact and "a new social balance" in Europe; a desire to "export the successful mechanisms of the German social market economy" are all ideas that chancellor Merkel would approve of as well. 

Is this well-behaved economic policy approach an indication of Steinbrueck's secret wish to keep open the option of a second 'grand coalition' with Merkel, despite his rhetoric otherwise ? Most likely. As likely as the possibility that his economic views are really not very different from Merkel's. Let's not forget that it was Mr. Steinbrueck who supported (and still vehemently defends) the employer-friendly austerity measures of Agenda 2010 which now serve as the blueprint for labor market reforms in Greece (see my post on this issue). Let's neither forget that he supported the liberalization of Germany's financial markets during his time as finance minister of the first grand coalition with Merkel from 2005-2009. In a recent interview, when Mr. Steinbrueck was asked why he had supported finanical liberalization in Germany, he responded that his actions had been part of the Zeitgeist then. The question for me is: "Would I want a chancellor who follows the Zeitgeist or one who will question the Zeitgeist and make a decision based on what's best for the German people?" I think, the answer is obvious. 

During that same grand coalition with chancellor Merkel, Mr. Steinbrueck initially refused any economic stimulus to overcome the Great Financial Crisis of 2007/2008, provoking economic Nobel Prize winner Paul Krugmann to call him a bonehead. In 2009, Steinbrueck finally succumbed to international demands for stimulus policies in the largest European economy, but only grudgingly. Three years later, while the whole world attempts to deleverage Steinbrueck calls for prosperous Germany to serve as the debt- and cost-busting competitiveness model, thus greatly endangering a recovery from the euro crisis and increasing the risk of global deflation and, in the worst-case, a global depression.

In the only European economy that has the funds to balance out the deleveraging in other eurozone countries,   Steinbrueck calls for more fiscal austerity, just as the IMF presents new evidence of a larger than assumed multiplier of fiscal contraction. (see WEO 2012, chapter 1, box 1.1).

Not very promising, Herr Steinbrueck ! Makes me seriously doubt that he has what it takes to perform a U-turn in German economic policy and to competently lead the eurozone out of the crisis.

What do recent events mean for the EU and economic policy in the eurozone ? (part I)

In the last two weeks, three key events occurred that could significantly alter the course of developments in the European Union as a whole and in the eurozone in particular:

I.   The Nobel Peace Prize 2012 awarded to the EU;
II.  Mr. Steinbrueck's candidacy for chancellor in Germany; and
III. Mr. Schäuble's recent pronouncements about Greece.

I. The Nobel Peace Prize 2012 awarded to the European Union - a brilliant move !

Much can be read into the Nobel Peace Prize for the EU, awarded "for over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe": Some view the prize as a symbol of wishful thinking for a peaceful future, just like the Nobel Peace Prize bestowed on President Obama less than a year after he took office. Others interpret the award as a last ditch plea and admonition to EU policymakers not to destroy the hard-won peace in Europe over conflicts about the financial rescue of Greece, the austerity policies imposed in the eurozone, and the distribution of the costs of the euro crisis. Conflicts that have the potential to destroy the euro project and tear apart the European Union.

The evidence supports the latter interpretation. As reported by the New New York Times, the chairman of the Nobel Prize panel commented after the announcement of the award: "We see already now an increase of extremism and nationalistic attitudes" (see my post "Bravo, Mr. Andor). He continued, "There is a real danger that Europe will start disintegrating. Therefore, we should focus again on the fundamental aims of the organization." As noted in my posts "Don't Shock the Countries, Shock the Banks/ters", Part I and II, the economic austerity policies demanded by the eurozone's creditor countries (mainly Germany) unfairly put the burden on the weakest members of the debtor countries (mainly Greece, Portugal, Ireland, and Spain) and have caused immeasurable human pain and suffering, leading to social unrest not seen in Europe for a generation. It is no wonder that such harsh treatment of fellow-Europeans in the rich eurozone not only causes ill will but hatred toward those who seem to ignore the agony they cause, bringing back to mind the horrors of World War II.

Viewed in this context, the award of the Nobel Peace Prize to the European Union is a brilliant move, using positive reinforcement to shame the eurozone's creditor countries into a more fruitful cooperation with their less-than-perfect eurozone partners by rewarding them for the EU's historic achievement of 60 years of peace in Europe. It remains to be seen whether the positive reinforcement approach will be more effective  than the reverse psychology approach by Heiner Flassbeck who argues that eurozone members should separate and dissolve the euro project now to prevent the destruction of the political integration attained over the last 60 years. 

While Ms. Merkel says that she views the award of the Nobel Peace Prize as an inducement and an obligation, her government is not planning to halt the inhumane austerity policies imposed on Southern Europeans, increasing the risk of political and economic disintegration in the eurozone. In this situation, Flassbeck views the attempt to move toward more integration in the form of a banking union or even a fiscal union as an illusion. In contrast to Flassbeck, however, I do see an alternative to the dissolution of the euro project:  a 180° turn in economic policy for the eurozone, initiated by a new German government without Merkel !

In my next post, I will discuss the likeliness of such an alternative, either with Steinbrueck as the next German chancellor or a completely different option.

It was about time you visited Greece, Ms. Merkel

Finally, after years of suffering from your moronic Schwabian housewife policies of saving, scraping, and saving some more on the back of the poor to pay back the debt accumulated by a corrupt elite, finally you condescend to visiting Greece. Of course, not to meet the regular folks to learn how your policies affect them or to see for yourself the economic pain you caused them. No, you prefer to meet with the elite, safely cordoned off from the rif-raf.  And then, in safe distance from the people whose lives you wrecked, you have the nerve to say that more efforts are needed to attain success in Greece. Not one word of apology, empathy or true compassion !

Ms. Merkel, as a German citizen, I really feel ashamed that you represent my country and would like to apologize to the Greek people on your behalf:

"Please forgive Ms. Merkel and the current German government for imposing such heartless and needless austerity measures that cause you to lose your jobs or your homes so that some of you even have to go hungry or choose between a warm meal or life-saving medication - all this, in the middle of wealthy Europe ! After the horrors and economic hardships the Nazis brought to you during the second world war, I and many of my German compatriots understand the hatred you feel toward Ms. Merkel and Germany. Let me assure you that we will do everything to stop the austerity measures imposed on the weakest members of your society and make sure that this heartless woman who calls herself chancellor of Germany will be fired from her job."

For you, Ms. Merkel, your heartless treatment of the Greek people and other Southern Europeans is likely to be the watershed moment for your chancellorship, just like hurricane Katrina was for your friend George W. Bush. Until this summer I had given you a break, thinking you were just badly advized by the boneheads surrounding you. But you must have seen the disturbing images and reports coming out of Greece, e.g. of increasing suicides of retired people, young people, even kids. Unless you lived on another planet, it was impossible to escape the reports of a 73-year old man who shot himself in the middle of Athens because he was unable to pay his debt. Or the heartbreaking photo of an elderly woman lining up for donations of food !

Still, you continued to publicly insist that Greece had to implement all the agreed austerity measures, or else there would be no more assistance ! These austerity measures (as reported in my post "Don't Shock the Countries, Shock the Banksters", - case study Greece) include further cuts in pensions and wages as well as cut-backs in desperately needed public services. That was the moment you lost my support. I wonder: what did you learn about christianity when you grew up as the daugther of an evangelical priest ?  Did you learn that, when a man is down on the ground, it's best to kick him again to make sure he gets the message ?

This is no way to act as the leader of the eurozone, especially if this leader happens to be German. Never again do I want Germans to be known for their inhumanity and brutality toward anybody who is not as perfect as Germans think they are. Therefore, Ms. Merkel, YOU HAVE TO GO !!! 

Bravo, Mr.Andor. Show the German 'elite' where the hammer hangs !

On September 21, an outrageous report appeared in the Frankfurter Allgemeine Zeitung (FAZ), Germany's equivalent of the Wall Street Journal (except that it doesn't come close to the WSJ quality of journalism). FAZ reported that, during an interview with the EU commissioner for social policy, Mr. Laszlo Andor had the audacity to state publicly that Germany carries part of the blame for the euro crisis ! 

Mr. Andor added that Germany needs to make a contribution to correct the imbalances in the eurozone by introducing minimum wages in all sectors of its economy and by ensuring that German wages are adjusted according to the increases in German productivity (which has not been done during the last decade --> see my post on Germany's Agenda 2010). He even had the nerve to suggest that Germany needs a quota for women on the executive boards of companies so as to open up opportunities for all the highly qualified women on the labor market ! When the interviewer pointed out that these demands would not receive standing ovations in Germany, Mr. Andor explained that the measures are necessary from a European perspective and that the EU commission has the means to take action against countries that refuse to cooperate. 

Holy macro, that took the biscuit ! The Schei.... hit the fan among the readers of the FAZ, the self-appointed 'elite' of Germany composed of bankers, entrepreneurs, management consultants, wannabe millionaires and the like: Three hundred and twenty-five ! commentators heaped nasty insults on Mr. Andor and his native Hungary, including the suggestion that he is still a communist and that Hungary only wants to get access to German money. 

I haven't read all the comments as I was already getting sick to my stomach after reading 10 of those arrogant, chauvinist, jingoistic invectives. What happened to the tolerant, open-minded, solidary, committedly European Germans I grew up with ? This sounds more like the Germany of the 1930s, just before the Nazis took over the Reichstag with a 44% relative majority of the popular vote. As a German citizen I say: stop this chauvinist smear campaign against other Europeans right now !!!!! We (committed European Germans and our European friends) will not allow you to take Europe into the abyss this time ! The recent demonstrations in Greece and Spain may seem like a walk in the parc compared to the social upheaval the eurozone will experience if the political and economic aggression from Germany does not stop. 

I congratulate Mr. Andor for having the courage to stand up against the German ‘elite’and openly call on them to cooperate in the European spirit. It is high time for Germany’s ‘Merkelantists’ [1] to stop dragging their feet on a number of issues that would help Europe’s economy while at the same time improving the lives of regular German folks:

1.) Support of Germany's internal market and reduction of implicit export subsidies through various measures:

• The reduction of value added taxes which are only imposed on domestic consumption, implying a relative subsidization of non-domestic consumption, i.e. exports. 

• The introduction of minimum wages and the adjustment of German wages according to productivity increases to (a) reduce the growing gap between rich and poor in Germany; (b) improve the incomes and living standards of Germany’s working population, and (c) last but not least, to reduce eurozone imbalances in unit labor costs and trade. 

• The implementation of restrictions on the use of lower-paid temporary workers (Leiharbeit) and precarious labor contracts to improve workers’negotiation power in salary negotiations and thus raise incomes and domestic consumption. 

2.) Improve the work/life balance for parents; raise women’s employment ratio, living standards, and participation in high-level decision-making by:

• introducing flexible working hours and/or home office work for everyone;
• investments in more childcare facilities instead of punishing people for not having enough children, making innocent citizens pay for politicians’ failed family policies of the last 30 years; 

• implementing quotas for women on Boards of Directors and other high-level posts. 

3.) Support of a European banking union, incl. a clean-up of the German banking sector

For reasons explained by Prof. Yanis Varoufakis “It’sthe German banks, stupid !”German finance minister Schäuble refuses to support a true European banking union with supervizory powers over ALL European banks, including credit unions and Landesbanks. 

4.) Elimination of austerity policies & implementation of pro-investment and pro-growth policies in the eurozone, with a focus on Southern Europe.

• see the Manifesto for Economic Sense
  
• see my posts “Non-Sense Economics and the deepening Greek crisis”, “Austerity causes capital flight and discourages investors”, “Austerity chickens are coming home to roost“, “Message to Mme La Chancelière: STOP this austerity non-sense, you are destroying the euro zone !”
  
• see Prof. Mazzucato’s Bloomberg interviews of September 2012 (see video).
  
  
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[1] Merkelantism, lat. furiosa Teutonicorum insania. A contemporary German doctrine which holds that states, just like Schwabian households, should not spend more than they earn. An economic crisis will ensue if states continuously ‘live above their means’ by increasing their debt, because markets will begin to doubt their ability to service the debt. Therefore, to maintain or regain market confidence, states have to ‘save’ and implement reforms to cut public spending. [In this context, ‘reform’ is a code word for welfare cuts and the reduction of workers’ rights.] The aim is to improve competitiveness and increase export revenues so as to allow states to reduce their debt. This is the German guideline for economy policy in the eurozone and the economic conditionality for bail-outs or other financial assistance from eurozone institution. 

Speaking of benevolent leaders....

Obama: “I would say that your first and principal task is to think about the hopes and dreams the American people invested in you. Everything you are doing has to be viewed through this prism." (Obama's Way by Michael Lewis, Vanity Fair, October 2012)

I just wish Obama had thought more about the hopes and dreams of ordinary Americans, rather than the hopes and dreams of American banks/ters.

...in contrast to Jörg Asmussen, ECB Board member and one of the key German officials determining the economic conditionality for financial assistance from eurozone institutions:

"They have not sufficiently implemented the measures they have promised to implement,” he says simply. “And they have a massive problem still with revenue collection. Not with the tax law itself. It’s the collection which needs to be overhauled.” ... “They are also having a problem with the structural reform. Their labor market is changing—but not as fast as it needs to.” (Asmussen about the Greeks, in "It's the Economy, Dummkopf!" by Michael Lewis, Vanity Fair Sept. 2011).

I wouldn't want to be under his tutelage. Already his bald head and the way he's said to laugh scares the sh... out of me: "Instead of opening his mouth to allow the air to pass he purses his lips and snorts the sound out through his nose. He may need laughter as much as other men, but he needs less air to laugh with."

Yes, Europe needs a benevolent Germany to lead the eurozone - progressive men and women are working on it and need your support !

At the beginning of September, I began to draft a post entitled: "Europe needs a benevolent leader.... The unchristian, heartless Merkel government does NOT fit the bill ! "  I wrote the first three paragraphs while watching the US National Democratic Convention, then interrupted the post due to a leaked letter from the Troika to the Greek government and the return of the Troika inspection team to Greece, events that provoked my last three posts: "Non-Sense Economics and the Deepening Greek Crisis", "A Manifesto for Economic Sense", and "The Blueprint for Labor Reforms in Greece: Germany's Agenda 2010" on September 12.

Only then did I discover Mr. Soros' article of Sept. 7, "The Tragedy of the European Union and How to Resolve It" in which he argues that, to save the euro, Germany would either have to decide to become a benevolent leader or leave the eurozone. While I don't agree with the latter part of Mr. Soros' argument (Germany cannot be forced to leave the eurozone and will never do so voluntarily), I fully share his view that Europe needs a benevolent leader to end the unnecessary human suffering in the Southern periphery. I think that,  in addition to the ability to feel compassion toward fellow Europeans, this leader would have to be a competent and undogmatic economic policy maker so as to avoid  the non-sensical  economic policies based on ideology and the interests of a small elite. If Germany isn't up to this task, Europe may have to look for other alternatives.

Where can Europe find a benevolent and competent leader ?

While watching the party convention of the US Democrats I could not help but feel envious that, despite all the nutcases in US politics (mostly found among the Republicans), in US finance, and among the general populace, the country still produces some of the most charismatic, engaging politicians who combine a sharp mind with a good heart, genuinely caring for the fate of their compatriots. And to top it off, they look great in a suit ! Obviously, I'm talking about Bill Clinton and Barack Obama. I can hear the doubters say, "that's all show but no substance." Excuse me, but wasn't it Bill Clinton's policies that produced the longest economic expansion in US history, created a record number of jobs, stabilized the finances of the US social security system, and eliminated the budget deficit of the US government ? (see my post "How to raise public revenues, reduce public debt, and stimulate job-creating growth.")

Germany, on the other hand, seems to produce mostly politicians who combine all the worst character traits: incompetence and/or ignorance, arrogance and elitism, dullness and rudeness. And on top of this, many German politicians (especially some of the so-called christian democrats and christian 'socialists' - CDU and CSU) display a condescending and heartless attitude toward the peoples of Southern Europe.... Is it the fundamentally undemocratic nature of our party system that produces these types of politicians ? Career-driven, loyal party bureaucrats who don't truly care about the.people they serve ? Who are neither tested for their competence (as in US debates) nor for their empathy for the lifes of ordinary citizens, yet are appointed to important leadership posts mainly on the basis of their connections ? In their arrogance, they ignore the fact that Germany's political and economic power in Europe and the world rests on the hard work, creativity and ingenuity of its people and that it is these very people who can take the power away from politicians in a heartbeat, if and when they realize and put into action these simple words: "Wir sind das Volk" - "We are the People".

Germans are not quite there yet, as the majority does not (yet) feel the economic pain of the Southern European periphery. Also, the German corporate and banks/ter 'elite', in cahoots with the Bertelsmann & Springer media empires, has been very successful in indoctrinating citizens with their market-fundamentalist, supply-side ideology of austerity. Even German academics and intellectuels in this land of Dichter und Denker (poets and thinkers) have succumbed to the neo-liberal dogma which is still being propagated every day in the popular tabloid BILD, read by many high-level employees (as can be observed every morning in first-class ICE seating sections).

So successful has been this indoctrination that the majority of the German citizenry continues to assume (as reflected in the Maastricht Treaty) that only the public sector can produce chronic deficits and that the euro crisis was caused by public overspending and overborrowing.  And so, they follow the Schwabian housewife model of hard work, modesty and thriftiness, sacrificing wage increases and improvements in living standards for the well-being of a small 'elite', while blaming the suffering Southern Europeans for the euro crisis. It will take many years to repair the social and political damage this conservative German 'elite' has imposed on the eurozone, seriously endangering peace and security in Western Europe.

There are, however, progressive individuals and groups in Germany who vehemently oppose the unfair and economically idiotic austerity policies imposed on our Southern European friends and are actively working on alternative economic strategies. Also, thanks in part to articles and blogs by nobel prize winning US economists Paul Krugmann and Joseph Stiglitz, German economists Albrecht Müller, Heiner Flassbeck and Sven Giegold, financier George Soros and others, more and more people in Germany (yet, by far not enough) are beginning to comprehend the nexus of interests dominating economic policy making in Europe. Yet, from comprehension to active opposition, whether on the streets or at the ballot box in next year's parliamentary election, is a difficult and slow process in Germany. Still, now that Mario Draghi and his Big Bazooka have achieved a (temporary ?) monetary salvation of the eurozone, the time gained should be used for a U-turn in macroeconomic policies, away from the debt-deflationary austerity toward a more benevolent, growth- and employment-enhancing recovery path in the eurozone.

However, the hundert thousand dollar question is:

Does Germany have a benevolent leader with the courage and audacity to implement demand-side policies against the interests of the corporate and banks/ter elite?
Looking at current opinion polls for the next parliamentary election in Germany (Sept 2013), the situation seems less than hopeful for anti-austerians: chandellor Merkel's CDU continues to ride high in the polls and the opposition social democrats (with the second highest poll ratings) so far have not come forward with a chancellor candidate who is immune to the neo-liberal Zeitgeist [1], or who has the ability to free himself completely from this doctrine and think outside of the box. The same is true for the old guard of the Greens, the party with the third highest poll ratings. The remaining smaller parties, garnering between 4% and 8% in the polls, include the Linke (the only party that has continuously proposed policies to reinstate the deconstructed public pension and unemployment insurance system and protect the weakest in German society), the new and unpredictable German man's party (better known as the pirate party), and the free democrats who might not make it into parliament at all. So, knowing the Angst-ridden Germans, they will probably support a party combination that seems safe: either Merkel's CDU + the conservative wing of the social democrats, or Merkel's CDU + the conservative wing of the Greens. Both combinations would mean a continuation of the current austerity policies for Europe, albeit with a stronger focus on investments and growth.

The progressive groups mentioned above include people from the left wing of the social democrats and the Greens who, unfortunately, do not (yet) have the popular or financial support to push through a U-turn in economic policies this time around. However, Mr. Soros' and others' support could help educate the German populace about the true interests behind the policies of Germany's 'elite', the corporate welfare payments to European banks financed by taxpayers, and other 'ongoings' the corporate elite doesn't want the German citizenry to know about. Such support for regular public education is absolutely necessary as there are efforts underway to prepare the terrain for the next round of the neo-liberal policy agenda, including cuts in pensions, cuts in transfer payments for families and the unemployed, labor market liberalization, privatizations, and new restrictions on public expenses which would completely eliminate any discretionary spending by democratically elected representatives and further impoverish the public sector: Agenda 2020.

Is there an alternative to German leadership in the eurozone ?

I believe there is ! Mario Draghi has shown that, with the confidence that comes from economic competence and many years of experience in leadership positions on a national and international level, the Very Serious People of Germany can be cornered and their policies exposed as selfish, backward, and in some cases even psychotic. However, this is possible only with the backing of a large enough group of other eurozone nations and the courage to stand up against powerful German officials. The aim is not to 'gang up' against Germany, but to protect Europe (including the majority of the German population) from unnecessarily austere and destructive economic policies that serve only a small elite, but are unworthy of a rich continent with sufficient financial resources to provide a comfortable standard of living for every one of its citizens.

Europeans do not want a German Europe, but a European Germany !

(written by a committed European born and raised in West-Germany)

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[1] Mr. Steinbrueck, one of the possible social democratic candidates for chancelor, was asked in a recent interview why he had supported the liberalization of the German finance sector during his time as finance minister and responded that his actions were part of the Zeitgeist then. The question for me is: "Would I, as a German citizen, want a chancelor who follows the Zeitgeist or one who will question the Zeitgeist and make a decision based on what's best for the German people?" I think, the answer is obvious.

The Blueprint for Labor Reforms in Greece: Germany's Agenda 2010

As noted in my post of August 24 (see the lower part: “case study Greece”), the focus on nominal wage reductions to lower unit labor costs [1] and thus enhance the competitiveness of Greek products is a ‘structural’ measure close to the heart of the Schwabian housewives and -men in Berlin. Based on the simplistic assumption that the cost of labor is the only determinant of competitiveness (which is non-sense [2] and without any scientific foundation), this approach reflects the same supply-side bias as the German blueprint: the Agenda 2010, implemented in Germany between 2003 and 2005.

Just as Germany’s Agenda 2010, the labor reforms imposed on Greece encompass a number of employer-friendly measures, such as  

• the lowering of wage and non-wage costs (social security contributions);
• the reduction of unemployment payments;
• the shortening of the eligibility period for unemployment payments;
• the combination of social transfer programs with a requirement to work or attend training to increase the pressure on the unemployed;
• the downward adjustment of public pensions;
• the reduction or elimination of labor market regulations.

It is interesting to examine the political economy of Germany's Agenda 2010 in the context of my post "The role of crises for Troika shock therapy:  Twelve years after Germany’s 1990 reunification at an estimated cost of over EUR 1000 bln and a substantial increase in public debt levels from 38% of GDP to 62% of GDP (see chart below), Germany’s mainstream media, financed by powerful corporate interest groups, proclaimed the reunified country as “the sick man of Europe” due to an alleged lack of competitiveness, even though Germany’s trade surplus nearly tripled from EUR 55 bln in 1990 to EUR 133 bln in 2002. Apparently, despite Germany’s obvious export performance, an articifial crisis needed to be constructed to push through cut-backs in Germany's social security system so as to reduce the public debt, effectively passing on the reunification costs to lower and middle income groups.

At about the same time in 2002, Bertelsmann Trust, owner of 80.7% of the global media conglomerate Bertelsmann S.E.[3] headquartered in Gütersloh/Germany, published a catalogue of economic demands which magically found its way into the economic reform program for the second Schröder government, called Agenda 2010:

- measures to reduce wage and non-wage labor costs;
- cuts in unemployment benefits and social welfare payments;
- the relaxation of employee protection against dismissals;
- drastic cuts in public pensions;
- and other employer-friendly reforms.

Today, corporate interest groups and the mainstream German media claim that Agenda 2010 has been successful in reducing the rate of unemployment and laying the foundation for more dynamic growth in Germany. Don’t you believe it ! German economic growth increased and unemployment declined thanks to a booming global economy from 2005 until the 2008 Global Financial Crisis and, after a crisis-induced slump in 2009, from 2010-2011. During the crisis, German unemployment rates held steady as a result of a brilliant policy measure proposed by Olaf Scholz, the social democratic mayor of the Hanse-City of Hamburg: namely, the introduction of reduced working hours (Kurzarbeit) at reduced pay. This ingenious policy move not only held unemployment rates steady thanks to an immediate reduction in nominal labor costs, but also saved employers the turnover costs associated with the firing and re-hiring of workers, and ensured the immediate availability of trained, competent, and motivated employees when economic activity picked up again in 2010 and 2011. In 2012, however, as the global economy slowed down and the demand for German products declined due to the austerity policies in Europe, German economic growth has also been affected (see my post of August 2: "Austerity chickens are coming home to Germany") and German unemployment rates are creeping upwards.

Fact is, the supply-side measures of Agenda 2010 did attain an improvement in the cost competitiveness of German products, but at a steep price:

First, at the expense of a massive worsening of living standards for the German population, with broadbased declines in real wages, a transfer of non-labor costs and risks from the employer to the employee, the creation of a low-wage sector and the widespread use of precarious employment contracts formerly unknown in Germany, as well as the near destruction of the public pension system.

Second, at the expense of other eurozone exporters. The effective competitive real devaluation of German tradables resulted in mounting trade surpluses vis-à-vis other eurozone countries and is largely responsible for the huge economic imbalances that are at the root of the euro crisis.

Third, at the expense of financial stability: As German exports boomed, export revenues and corporate profits exploded, German banks invested the incoming tsunami of capital in US mortgage-backed securities, seemingly risk-free sovereign bonds, CDS, CDOs, and other toxic assets….and the rest is history….

Conclusion
For those who argue that Germany’s Agenda 2010 should be a blueprint for an improvement in competitiveness in other eurozone countries, allow me to cite Albert Einstein:

                    “The definition of insanity is doing the same thing over and over again
                                                         and expecting different results.”

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[1] Unit labor cost = average cost of labor per unit of output.
[2] Unit labor cost (the standard measure of competitiveness) can also be reduced by an increase in output (the denominator). While holding labor costs constant, output can be increased through productivity enhancements which in turn can be achieved by investing in human resources (education, work training) and the tools they work with (investment in research and development). Such investments would have the added benefit to increase aggregate demand, employment, and economic growth, exactly what Greece needs right now !
[3] Bertelsmann S.E. includes Bertelsmann Music Group, RTL, Random House, and other media companies, including part ownership of Gruner & Jahr and Time Inc.