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 !!!