Thanks for visiting this blog, created in July 2012 out of great concern for the fate of the €uro currency area, once again on the verge of collapse due to the economically ill-advised and heartless austerity policies imposed on Greece, Spain and other heavily-indebted €uro area countries by a christian democratic German chancellor impressed with the budgeting skills of Schwabian housewives. Meant to reduce the public debt and put the countries back on a path to economic growth, these macro-economically idiotic policies are doing anything but cause "pointless misery" as Paul Krugman so aptly describes it (Bloomberg, July 23-29, 2012).

Instead of reducing public debt, the austerity measures set in motion a vicious cycle of economic contraction, rising unemployment and poverty, lower tax revenues, private capital flight, and rising public debt shares as the economy declines faster than the public debt. What’s more, the austerity-driven ‘blood, sweat and tears’ policies recommended to the European periphery derive from the same economic doctrine that brought us to the brink of disaster in 2008. These policies are not only misanthropic and counterproductive to economic growth and debt reduction in Europe, but will prove explosive for the €uro currency area unless a drastic change of course takes place - and soon.

While I do not pretend to have ‘the’ solution for the €uro crisis, I would like to offer alternative economic perspectives and views on current events, and hope to chart a more humane path toward a balanced, socially fair, and sustainable economic future for the €uro area.

On the origins of the 2008 Great Financial Crisis:
90+% of traders are men, and they bet all of our bank deposits on liar loans which froze credit leading to 40% average losses passed on to ordinary taxpayers; then begged for trillion-dollar bailouts upon which they paid themselves 50% higher boni.”


Sunday, October 28, 2012

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)


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