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.”
haven't posted for a while due to the usual X-Mas season stress, a bout with the flu, an unusually busy December at the office, and campaigning for the European election in 2014 (yes, dear readers, I am involved - how could I not be ?). However, nothing shall keep me from wishing you, dear readers from around the globe, a very happy, peaceful christmas with your loved ones and a healthy, happy, and successful New Year 2014.
"Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality. Such an economy kills."[Papas Francesco, Evangelii Gaudium, para 53pp, Vatican press 2013]
I believe, perhaps naively, that there is good and bad in all of us. May the good prevail in the New Year 2014 and beyond! In this spirit I leave you, dear readers, with a true story that gave me hope for humankind:
"He had just saved her [a pregnant dog] from a fire in her house, rescuing her by carrying her out of the house into her front yard, while he continued to fight the fire. When he finally got done putting the fire out, he sat down to catch his breath and rest. A photographer from the Charlotte, North Carolina newspaper noticed her in the distance looking at the fireman. He saw her walking straight toward the fireman and wondered what she was going to do. As he [the photographer] raised his camera, she came up to the tired man who had saved her life and the lives of her babies and kissed him just as the photographer snapped this photograph." [Charlotte Observer, 4/18/2005]
Wednesday last week, after over two months of exploration and negotiation, chancellor Merkel’s CDU, CSU, and the leaders of Germany's social democratic party finally signed, sealed, and delivered their Grand Coalition Agreement entitled “Shaping Germany’s Future”. The 185-page oeuvre contains eight chapters on topics ranging from growth, innovation, and well-being (chapter 1), to full employment, good work, and social security (chapter 2), solid government finances (chapter 3), equal opportunities (chapter 4), governance in a modern state (chapter 5), Europe (chapter 6), international relations (chapter 7), and the coordination and cooperation among the coalition parties (chapter 8).
A thorough analysis of the
relatively short chapter on Europe confirms my expectation of September 2012: "Both [coalition] combinations [either Merkel’s CDU and the conservative wing of the SPD or Merkel’s CDU and the conservative wing of the Greens] would mean a continuation of the current austerity
policies for Europe, albeit with a stronger focus on investments and
growth.”
…And so it is written
on page 157: “For
Europe to find a lasting path out of the crisis, a comprehensive
approach is needed which combines structural competitiveness reforms and sustainable fiscal
consolidation with investments for future growth and employment in a socially balanced manner.”
This does not sound
like a well thought-out strategy but a highly manufactured statement,
as if both parties wanted to pack into one sentence everything their
respective voters care about: fiscal consolidation and structural competitiveness reforms for CDU voters; social balance and investments for
growth and employment for the voters of the social
democrats, whereby the insert “in a socially balanced manner” sounds like an
afterthought…easily forgotten as soon as the going gets rough. See also my post of June this year: "Less Austerity in return for more 'Competitiveness' Reforms - a Pyrrhic victory for Europeans".
And,
please, could someone explain to me how demand-lowering fiscal
consolidation and wage-lowering competitiveness reforms can be combined with growth- and
employment-generating investments, not to speak of in a socially
balanced manner ? Which rational investor would risk her money in a
country where the people have little or no money to spend on the products or services she
offers ? The experience in Greece, Spain, and Portugal clearly shows that fiscal consolidation (i.e. austerity) combined with
structural ‘reforms’ (i.e. cuts in wages and non-wage social security contributions combined with wage-compressing 'flexibilization' of labor markets) increase unemployment and poverty, shrink
the economy and lead to DEFLATION,
rather than investments, employment and growth. And when the economy shrinks,
public debt ratios rise !
It is futile to
repeat ad nauseam that
the high public debt ratios need to be scaled back by continued fiscal consolidation (as at the bottom of page 158 of the
coalition agreement) when these public
debt ratios are raised, not lowered, by the austerity policies
applied in the euro zone in the past four years and again recommended in the coalition
agreement. And it is hypocrite to write that the linkage between
private bank debt and public debt needs to be broken (see top of page
158) when this very link was created by
the taxpayer-financed bank bail-outs designed by the same CDU officials who now serve as authors of
this coalition agreement. Instead of demanding that private banks
willbe
held liable for their own risky
investments in the future,
why not make them pay now ? So far, euro zone countries have
recovered only between 15% (Germany, Ireland) and 40% (Spain) of the
taxpayer-financed support extended to the financial sector (see
table 7 of the IMF Fiscal Monitor, October 2013, table 7 on page 16). Instead of
demanding the entire bail-out payments back from EU banks, the citizens (read: small taxpayers) of euro zone countries are punished with strict
conditionality for fiscal consolidation (read: the shrinking of the public sector and the dismantling of the
welfare system) and structural reforms (read: liberalization of labor
markets and wage compression) in return for financial assistance from the EU (see top of page 159). Crazy !
But that is not all ! Merkel's new Grand Coalition is about to fire off the next stage of her rocket
toward a leaner, meaner Europe: as stipulated on page 159 of the
coalition agreement, each euro zone country is to sign a legally
binding and enforceable reform agreement with benchmarks for
competitiveness reforms, solid finances, growth, and employment in
return for investment funds from the European Investment Bank, the EU
budget, and EU structural funds. This is nothing else than a lever
to dictate economic policies in the entire euro zone, vulgo: blackmail !
All in all, the short chapter on Europe contains the same old employer- and investor-friendly, supply-side non-sense that got us into the mess we’re in, enriched with placebos like ‘social balance’, ‘solidarity’; the ‘protection of consumers, the environment, and employees’; the ‘fight against youth unemployment, wage and social dumping’; ‘investments for the future’, etc. etc. but without the funds to realize those lofty goals. Hence, based on my analysis of just one short chapter of the coalition agreement, I come away with the impression that it lacks credibility and sincerety, not to speak of a well thought-out strategy to end the euro crisis.
If I were a member of the social democrats, I would NOT vote for this agreement.
Once upon a time, a former World Bank colleague from Mexico asked me why European nations fight so much among themselves and still speak so many different languages. To a citizen of Mexico, this doesn’t make sense because Europeans share a common culture and history that goes back over 2000 years and are basically the same people thanks to a constant mingling of their genetic code.
But, you see, she doesn’t understand. The culture and mentality of modern-day Europeans is still very much defined by the borders of the former Roman empire along the Rhine river nearly 2000 years ago:
North and east of the Rhine live the Teutonic peoples, roughly covering modern-day Germans, Austrians, the Dutch, English, Finns, Swedes, Norwegians, and Danes. The territories south and west of the Rhine belong to the Latin peoples including modern-day France, Italy, Spain, Portugal, Greece, and the Balkan countries. While Teutons were (and still are) considered less civilized, rough, and physically and mentally hardened (barbarians), Latins are viewed as highly cultured and courteous peoples with a taste for gourmet food, fabulous wines, elegant clothes, and beautiful, musical dialects. And just like Asterix, Obelix and his village of indomitable Gauls tirelessly fight Roman occupation, modern-day Latins desperately try to resist the teutonic usurpation of their life styles. Meanwhile, the Teutons fight against what they perceive as a Latinization of their rough but highly successful economies.
The most recent fight took place at the European Central Bank (ECB) whose Italian president Draghi and the ECB board decided to cut the benchmark interest rate from 0.5% to 0.25% due to the risk of deflation looming over Southern Europe. Disregarding the fact that the deflationary conditions in the South are largely the result of the austerity and competitiveness policies imposed by the capital-rich North, the capital-surplus teutonic countries prefer rising interest rates so they can earn a higher return on their substantial savings. The final ECB vote showed a clear split between the teutonic hawks, including two Germans, an Austrian, and a Dutch board member, and the other 17 board members who voted for the cut in the benchmark interest rate.
This rhethorical diarrhea from our German 'elite' leaves me speechless, but I suddenly feel an urge to bang my head against the wall.
Fittingly, Hans-Werner Un-Sinn’s attack appeared in the popular “Bild” newspaper, a tabloid akin to the trashy National Enquirer in the U.S. or the U.K.s The Sun. Fortunately, Germany also has more sensible economists who commented that Un-Sinn’s statements would lead to a failed grade in their economics courses. Un-Sinn’s economic incompetence, however, seems to be shared in the German banking community which is constantly fretting about not just inflation, but hyperinflation in Germany ! In Q2/2013, while Germany registered a CPI of 1.6% (see table A6 of the IMF World Economic Outlook, October 2013), the banking magazine “Die Bank” published an article entitled “Hyperinflation – in a downward spiral toward currency devaluation.“
I sometimes wonder whether these people live on another planet or suffer from a case of Germanic economic mythology.
How do you deal with a stubborn child ? That is a question one is tempted to ask with respect to Germany’s obsession with austerity and competitiveness policies to generate exports and current account surpluses in the euro zone, to the detriment of the rest of the world. These policies have generated a record current account surplus in Germany (7% of GDP in 2012) and a euro zone surplus of 2.3% of GDP in the first half of 2013. Quite correctly, the US Treasury points out that, “at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment”.... “Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing." .....“The net result has been a deflationary bias for the euro area, as well as for the world economy".(see page 25 of the US Treasury Report to Congress on International Economic and Exchange Rate Policies, October 30, 2013).
On my own blog, I have argued multiple times against the deflationary austerity policies imposed on the Southern European periphery and, in a June 30 post entitled “Economic rebalancing in Europe requires Germany to reduce Inequality at Home” I wrote about the widening current account imbalances, Germany’s record external surplus in 2012, and its link to rising inequality and excess savings in Germany due in part to Agenda 2010 wage-deflating competitiveness policies.
So, the arguments against Germany's beggar-thy-neighbor competitiveness policies are not new. They have been put forward many times in a professional and diplomatic manner by foreign economists and officials. Yet, Germany has done nothing to support domestic demand and help reduce economic imbalances. So, having acted like a stubborn child, Germany should not be surprised if the world community is losing patience and demands change. The urgency of a change in policies is underlined by the data ---> see below the economic results after four years of austerity and competitiveness reforms in the euro zone. To prevent a deflationary downward spiral, we URGENTLY need to follow Paul Krugman's advice: "Germany, live it up."
Economic results after four years of austerity and competitiveness reforms
Current Account Balance as % of GDP(IMF World Economic Outlook, October 2013, p.170) Greece: -1,0%est. in 2013 vs. -11,2% in 2009 Portugal: 0,9%est. in 2013 vs. -10,9% in 2009 Spain: 1,4%est. in 2013 vs. -4,8% in 2009 Ireland: 2,3%est. in 2013 vs. -2,3% in 2009 Italy: 0,0%est. in 2013 vs. -2,0% in 2009 Euro Zone: 2,3%est. In 2013 vs. 0,2% in 2009 GERMANY: 6,0%est. in 2013 vs. 6,0% in 2009
source: IMF World Economic Outlook, October 2013
source: German Surpluses: This Time is Different, Paul Krugman NYT blog
German unit labour costs, OECD data from Paul Krugman, German Surpluses: This Time is Different
Unemployment rate (source: Eurostat)
Greece: 24.3% in 2012 vs. 9.5% in 2009
Portugal: 15.9% in 2012 vs. 10.6% in 2009
Spain: 25% in 2012 vs. 18% in 2009
Ireland: 14.7% in 2012 vs. 12% in 2009
Italy: 10.7% in 2012 vs. 7.8% in 2009
GERMANY: 5,5% in 2012 vs. 7,8% in 2009
Growth in % of real GDP (IMF World Economic Outlook, October 2013, p.154) Greece: -4,2%est. in 2013 Portugal: -1,8%est. in 2013
Spain : -1,3%est. in 2013 Ireland : 0,6%est in 2013 Italy: -1,8%est in 2013 GERMANY: 0,5%est. in 2013
Debt as % of GDP (IMF Fiscal Monitor, October 2013, p.72) Greece: 175.7% in 2013 vs. 129.7% in 2009 Portugal: 123.6% in 2013 vs. 83.7% in 2009 Spain: 93.7% in 2013 vs. 54% in 2009 Ireland: 123.3% in 2013 vs. 64.4% in 2009 Italy: 132.3% in 2013 vs. 116.4% in 2009 GERMANY. 80.4% in 2013 vs. 74.5% in 2009
Cyclically adjusted primary balance as % of GDP (IMF Fiscal Monitor, October 2013, p.70)
The European election
campaign must have started - at least three significant events
occurred recently, designed to impress Europe’s electorate:
First,
seemingly by mistake, an economist at the European Commission
released a not-yet-approved-for-publication paper critical
of the austerity policies in the euro zone. EconomicPaper #86 by Jan in ‘t Veld argues that the “spillovers
of fiscal consolidations are large”,...especially “the spillovers
from consolidations in Germany and [the] core EA [euro area] have
worsened the overall economic situation.” The paper is very
critical of Germany which could be the reason why it disappeared from
the Commission’s site shortly after its online release, and was put
back only after it became known that the paper had already been downloaded
by journalists (see the Wall Street Journal blog article "Paper by EU economist backs austerity critics"). The re-published paper’s abstract reads: “A
temporary fiscal stimulus in surplus countries can boost output and
help reduce their current account surpluses”, a statement clearly
directed at Germany.…Chancellor Merkel and her minions are not
amused!
Second,
Germany’s green party MEP Sven Giegold announced an investigation of the Troika’s activities, complete with parliamentary hearingsand a final report. Giegold argues that the Troika’s work is too
intransparent and has failed to attain its own policy goals: “The
contraction of the economy was more dramatic, the increase in
unemployment was far stronger, and also sovereign debts were far
higher than foreseen by the first Troika programmes. For these
reasons many European citizens expect that the European
Parliament finds out what lead to these alarming results.” Well
done ! It is high time someone looks into the secretive work of
a bunch of non-elected alpha male bureaucrats who, with the stroke of a
pen, decide upon the life or death (literally, in the case of retired
persons whose pensions have been cut so severely that they cannot
afford live-saving medicines) of thousands, if not millions, of European
citizens. Unfortunately, though, investigating and supervising the
Troika of EU Commission, ECB and IMF will not be sufficient anymore, as future conditionality-based aid payments will be disbursed by
another bunch of non-elected bureaucrats from the European Stability
Mechanism (ESM), directed by the German Klaus Regling, another fox guarding the hen house.
Third, just in time for halloween:
the return of the cockroach zombie, chancellor Merkel’s beloved competitiveness agenda (see my posts on this issue listed below).
After the failed austerity diktat in Southern Europe,
Merkel now wants competitiveness reforms extended
to all countries in the euro zone, beyond the framework of existing economic governance vehicles like the six-pack and two-pack, to ensure closer
macroeconomic cooperation. Merkel’s plan calls for bi-lateral
contracts between the EC Commission and each euro zone country signing a commitment to implement structural reforms in the labor market, in
the health and welfare system, as well as in social security
regulations. To integrate these competitiveness contracts into the
existing EU legislation, Merkel
wants to change protocol 14 of the European contracts.
On this blog, I have
warned on numerous occasions about chancellor Merkel’s obsession with competitiveness and the economic dogma behind it
see the following posts in chronological order:
If Merkel gets her way, her competitiveness doctrine will turn the European continent into an ueber-efficient Anglo-Germanic Europe and, by assigning an economic value to everything and a clock to every activity, extinguish the charming sensuality and inefficiency of the Mediterranean culture, crush the savoir-vivre of traditional France and the creative spirit of Italians and Spaniards, and spoil everything that makes life worth living.
What top international economists think about economic policies in the euro zone
There was nearly uninanimous agreement that the euro was saved by ECB president Mario Draghi’s now historic words uttered in July 2012: “the ECB is ready to do whatever it takes to preserve the euro”, and the ingenious Outright Monetary Transaction (OMT) program that followed up on his words. On August 2012, the Governing Council of the ECB announced that it would undertake outright transactions in secondary, sovereign bond markets, aimed “at safeguarding an appropiate monetary policy transmission and the singleness of the monetary policy” (ECB press release of September 6, 2012). In other words: the ECB was ready to do “whatever it takes” to scuttle speculative attacks on the euro.
Had Mario Draghi not acted so courageously against the opposition of German monetary hawks like Bundesbank president Jens Weidman and his predecessor Axel Weber, the euro zone would have collapsed and Germany would be in a deep economic depression today. Stanley Fisher has equally strong views on this issue. During the IMF/World Bank meetings he shared his little veiled criticism of Jens Weidmann’s opposition to Draghi’s emergency measures: “If central bankers think they have to teach politicians a lesson under the pretext of preventing ‘moral hazard’, thus risking a global economic crisis just for the principle, they overstep their mandate.” (paraphrased citation)
It's the Germans (again), stupid*
The general mood about economic policies in Germany seems to be a mixture of incomprehension and bitterness. There is, for example, widespread incomprehension about the reasons why Germany continues to build up current account surpluses, thus rendering the adjustment and rebalancing process in the euro zone much harder for the countries in the euro zone periphery. While Greece's government imposed austerity measures on its people so severe that Greeks are suffering an economic and humanitarian crisis of epic proportions, Germany let its current account surplus grow so large that it has surpassed China’s. And to add insult to injury, Germans openly celebrate their 'export championship', in the face of austerity-driven record unemployment, poverty and hunger in Southern Europe.
Not surprisingly, people in the euro zone periphery strongly resent this situation and react with bitterness. Southern European officials correctly point out that the situation would be quite different if the D-Mark still existed in a flexible exchange rate regime: the D-Mark would have strongly appreciated and German wages and income would have risen. German exports would have grown less, and the strong D-Mark would have allowed more imports from and tourism to Southern Europe, thus balancing out the trade imbalances. Now that the euro zone has a fixed exchange rate regime, this automatic adjustment does not occur but can be 'manufactured' with internal devaluation, i.e. cuts in wages and pensions to lower price levels, the hard way imposed by Merkel’s austerity diktat.
My view: it doesn’t have to be that way. Adjustment could take place without so much of human hardship and suffering if only Germany were prepared to act as a real partner and contribute its share of adjustment by allowing German wages to rise, thus strengthening aggregate demand for domestic goods, for investments in infrastructure and for imports from and tourism to the euro zone periphery. But trying to convince the powerful German exporters of the necessity to strengthen Germany’s domestic economy instead of exports is like banging one’s head against the wall. German exporters' profits would fall, and that’s a no-go. It’s not their problem if Germany's export goods are so superb that the whole world scrambles to buy them; hence it’s not their fault if the euro zone collapses under the weight of current account imbalances. The deficit countries just need to work a little harder and accept wage cuts to become more competitive. That’s the attitude among many Germans, including many officials in the Merkel government.
Stupid German money
US officials resent this attitude. They correctly question the rationale behind the generation of huge export profits if German banks then invest these profits in worthless mortgage-backed securities and risky sovereign bonds. As Michael Lewis wrote in his book “The big Short”, it was “stupid German money” that US and British bankers could count upon when they needed idiots to invest in their toxic CDOs full of worthless mortgage bonds.
And then, when the chickens came home to roost and produced huge losses, German taxpayers willingly rescued their German banks and seemingly want little in return: data from the IMF Fiscal Monitor show that the bail-outs of German banks have increased public debt by 12.8%age points of GDP, of which only 1.9% have been recovered five years after the crisis ! (see IMF Fiscal Monitor, table 7, page 16). By contrast, the U.S. spent 4.6% of GDP on supporting their banks, but also recovered 4.6% plus earned interest after widespread public outrage with the banks --->see President Obama proclaiming “we want our money back”:
It’s not that Germans don’t want their money back from their banks as well. But, whenever someone dares to propose a financial transactions tax or suggests tax increases on the wealthy like the Green party did before the last national election, the 'evil empire' initiates a thundering PR campaign against the tax levies….and what started as a tiger ends up as a little pussy cat (in German: “als Tiger gesprungen und als Bettvorleger gelandet”). The Greens lost 3%age points in the national election and the social democrats (SPD) do not even dare to say the word ‘tax’ anymore.
IMF recommendation: tax the rich !
Doesn’t anyone of our German politicians have any cojones ? If the alpha males are too scared to go against powerful entrenched interest groups, then move over and let the women do what needs to be done. We even have the IMF on our side now ! For someone who knows the IMF well, that is the single most surprising news out of Washington: the IMF actually recommends tax increases on the wealthy !!! (see The Guardian, "IMF eyes tax potential of the world's super-rich"). You go, girl !
____________________________________
*this is a word play on the Clinton campaign slogan "it's the economy, stupid"
While Brussels seems paralyzed by the post-election standstill in Germany during chancellor Merkel attempts to form a stable government, the problems in the euro zone continue (the following section is drawn from various sources, including but not limited to Nachdenkseiten.de, Frankfurter Allgemeine Zeitung, Macroeconomic Policy Institute (IMK Report #86, “Krise überwunden ?”), u.a.:
Greece
Though the Samaras government is forecasting a primary budget surplus (i.e. without taking into account interest payments), this indicator used by the troika means nothing to investors who want to see sustainable growth and consumer demand before they decide to invest in Greece. Instead, due to the severe austerity measures implemented in Greece, unemployment has shot up to record levels (28%) and consumer demand collapsed, the country’s economy has shrunk nearly 20% since 2009, and the ratio of public debt to GDP increased from 121% in 2009 to 176.2% in 2012 and an estimated 156% in 2013 (Bloomberg; my own estimate of the public debt ratio in 2013 is more in the order of 186%). New financing gaps have opened up in the social insurance funds and elsewhere estimated at a total of €10 bln for 2013. The IMF and international investors view a second debt cut as unavoidable to allow the Greek economy breathing room to recover and attract investment funds. And yet, despite the obvious failure of austerity and 5 years of deep recession caused by pro-cyclical austerity policies, further expenditure cuts are planned to comply with the conditionality of Troika 'aid' payments. As a result, the political situation has become increasingly tense: in late September, teachers and other government employees went on strike to protest the planned mass firings of 40.000 public-sector employees, nine universities closed down in protest of the firing of 37% of the staff, and 200 schools are being occupied by their students.
Faced with 28% unemployment, resistance to the Troika’s conditionality comes not only from affected employee groups and the parliamentary opposition but also from the governing coalition, all the more so as the Samaras government is increasingly threatened by neo-fascists on the right and by the socialist Syriza on the left. According to polls taken in mid-September, Syriza would get the largest share of votes (30.5%) in a national election, and the neo-nazi Chrysi Avgi 15% ! Since it became public that a member of Chrysi Avgi is accused of the murder of anti-fascist musician Pavlos Fyssas there have been daily protests against fascist terror and the dismantling of the welfare state. On top of all this, there is mounting evidence that powerful economic and political interest groups, including some officials from the Samaras government, actively support the violent suppression of worker protests by the police and special anti-terrorist forces. (see “Griechenland: Proteste gegen Sozialabbau und faschistischen Terror"). In response to these events, a military union demands that the Samaras government steps down to allow the formation of a ‘government of national unity’ in support of an immediate confiscation of German assets in the country.
Portugal
Due to a government crisis in July, the Troika postponed its supervisory mission to mid-September, with mixed results so far:
- While the economy seems to be recovering (Q2 growth +1,1%), public debt has increased to 123.6% in 2013 (from about 65% in 2009, see Bloomberg and IMK report #86, page 23), raising doubts about the country’s debt sustainability.
- The unemployment rate peaked at 16% in 2012 but is now on a declining path. - Trade performance is good, with exports up sharply and imports growing less; the trade balance is positive.
- Popular resistance to Troika-imposed public expenditure cuts is strong and supported by a recent constitutional court decision that confirms the undemocratic nature and unconstitutionality of policy measures imposed by unelected foreign officials. As a result of the court stoppage of public expenditure cuts, the Portuguese government will not be able to fulfill the troika’s deficit targets, risking the non-disbursement of financial aid.
Even if Portugal were able to meet its compliance targets, a second aid program may be needed after the current €78 billion rescue package's expiration in mid-2014, because capital market funding is getting very expensive again: with financing sustainability in question, spreads on Portuguese sovereign credit risks have started to rise to over 500 basis points (=5%), compared with less than 250bp on Spanish and Italian sovereign credit risk. A second aid programm will most likely be be without the participation of the IMF as the institution cannot lend to a country with debt levels judged unsustainable. A precautionary credit line from the ESM seems to be under consideration.
Spain
Even though Spain did not sign up to a conditionality-based EU aid program (Spain received a €30bln credit line from the EU for a capital infusion of its banks but without conditionality), the Rajoy government followed a similar fiscal consolidation strategy as other Southern European countries subject to aid conditionality. The first fiscal adjustment measures were adopted when risk spreads for Spanish sovereign debt suffered from Greek 'contagion' and started to explode. The measures included cuts in public wages and severe cuts in public expenditures, esp. for capital formation and public investments. The results of the self-imposed austerity: negative GDP growth, a higher public debt ratio (84,2% in 2012 compared to around 50% in 2009), record unemployment (26%), and growing popular resistance to public expenditure cuts.
Italy
The country has huge refinancing needs in 2014 but strongly rejects the German austerity ‘Diktat’. Policymakers in the euro group fear a renewed increase in Italian credit spreads, but so far, thanks to the intelligent monetary policy of Italian ECB-Chief Mario Draghi, euro zone credit spreads remain moderate. Italian 10-year bond yields even fell 5 basis points as the nation auctioned off €6 bln of sovereign bonds due between 2016 and 2028 on October 11, after Draghi said that “a pledge to keep interest rates low explicitly allows for cuts in borrowing costs if market volatility resumes” (see Bloomberg: “Italian bonds advance with Spain’s on US debt ceiling optimism”). Other auctions of Italian debt also went very well, with yields on three-year notes declining 50 basis points and yields on 15-year bonds declining 30 basis points.
***
While crisis conditions have receded on Europe's financial markets, thanks to ECB president Mario Draghi, much unnecessary, avoidable, and potentially long-lasting damage has been done to the real economies in Europe, especially in Greece. The Troika's rescue funds were used to bail out bank creditors and investors who made bad investment decisions, but the costs of the bail-outs are borne by the average citizens and taxpayers. Public debt levels are higher than before the 'rescue' and unemployment rates are at record levels, producing a lost generation of young people with no perspective to ever find a job and lead a normal life. Many citizens have lost their health insurance and cannot afford to buy medication because their pensions and wages have been severely cut. The severe austerity measures imposed on Southern Europe have caused an economic and humanitarian crisis of epic proportions. Hunger and poverty-related diseases have returned to Europe and neo-nazi parties are gaining popular support.
Nothing is better in Europe, on the contrary. Oxfam's excellent report on the true cost of austerity and inequality in Europe correctly argues that Europe is facing a lost decade with high unemployment, poverty and inequality; the deterioration of human and physical capital; and little to no economic growth. Based on the experience with similar austerity (structural adjustment) policies implemented in Latin America, South-East Asia, and sub-Saharan Africa during the 1980s and 1990s, Oxfam predicts that "an additional 15 to 25 million people across Europe could face the prospect of living in poverty if austerity measures continue."
Nobel laureate Joseph Stiglitz sums up Europe's plight:
"The wave of economic austerity that has swept Europe in the wake of the Great Recession is at risk of doing serious and permanent damage to the continent's long-cherished social model. As economists, including myself, have long predicted, austerity has only crippled Europe's growth....Worse, it is contributing to economic inequality that will make economic weakness longer-lived, and needlessly contributes to the suffering of the jobless and the poor for many years."
(foreword to Oxfam report "A Cautionary Tale")
If the EU policy makers responsible for this mess had any decency and integrity, they would take their hats and resign. Unless, this is exactly what they and their sponsors wanted to achieve, namely a dismantling of the European welfare state. In this case, they can celebrate a roaring success.
No, I’m not talking
about Iran, nor Irak or Al Qaeda. I am talking about powerful corporate & financial interest groups that do not know any country
loyalty nor follow any universally accepted moral code. Their only
code is the rate of return on their investments. To safeguard their investment returns, they fight against anything and everything that might reduce them, esp. taxes, labor costs and the cost of social welfare. --> see the Tea Party crazies in the US right now, risking a default and an economic catastrophy in their own country because they don't accept the already approved national healthcare plan (vulgo: Obama care) that provides health insurance to millions of currently uninsured Americans who cannot afford market-based coverage.
These interest groups have
been very active during the national election campaign in Germany and
are still very active now, as Merkel’s victorious conservative
block of CDU and CSU starts explorative talks for coalition
negotiations with either the social democrats SPD and/or the Greens:
Shortly after
the CDU’s Mr. Schäuble made a step toward the SPD, the potential partner in a grand coalition, by announcing that his party might consider tax increases, a huge PR campaign broke out against tax increases so that the CDU had to disclaim Mr. Schäuble’s
statement. And so, while German schools and public libraries crumble, the explorative coalition talks begin this week with the slogan
“Absolutely no tax increases, under
any condition !” Doesn’t this
phrase sound eerily familiar, esp. to US-Americans ? Seems like the evil
empire operates on both sides of the pond.
Even more blatant was the most recent lobby work of the evil empire: yesterday, the employer-financed initiative Neue Soziale Marktwirtschaft presented their reform program for Germany. They named it "Chance 2020" ! Not Agenda 2020, to prevent the negative connotation to the much maligned Agenda 2010, but "Chance" 2020 as chance has a much more positive ring to it ! Excellent PR if it weren't so obvious.....
Also obvious and predictable is the employer- and investor-friendly supply-side gist of the reform program that clearly caters to the demands of the evil empire. "Chance 2020" calls for:
lower taxes
lower public debt, but without tax increases
a smaller public sector
lower non-labor costs through reductions of social insurance programs
the minimization of social welfare programs focused only on those who cannot work
NO minimum wage
no publicly financed early retirement
no EU aid for highly indebted euro nations
and many more tortures, pardon: reforms.
Not surprisingly, one of the key authors of "Chance 2020" is Wolfgang Clement, former economics and labor minister under chancellor Schroeder (1998-2005) and a key contributor to Agenda 2010. Mr. Clement views the reform program as an opportunity for the victorious conservative parties to distance themselves from election campaign promises. Yesterday's presentation, however, is only the start of a major PR initiative that will 'guide' the upcoming coalition negotiations. INSM director Pellengahr already announced that the reform program will be advertized in major news papers and street posters. If necessary, INSM may also put targeted pressure on unyielding politicians some of whose election campaign was financed by the same employer groups as those that finance the INSM (e.g. the electro and metal industry employer organization contributed €60.000 to the CDU of North-Rhine Westphalia, the largest and most industrial Bundesland in Germany).
Meanwhile, the Greens beat themselves up about their election proposal for tax increases because they think it explains their 3%age point election loss, ignoring the fact
that their polling numbers did not only NOT decline after their
proposal went public, they actually increased by 1-2%age points! They also ignore the fact
that the majority of Germans are in favor of tax increases on
higher incomes as well as a special wealth tax (see M. Hartmann,“Soziale Gerechtigkeit und die deutschen Eliten”).
What really damaged the Greens was not their tax proposals but the untimely 'veggie day' proposal and the disgusting 30-year old pedophile stories dug up by the evil empire, PLUS the blocking of their only power option by conservative alpha males of the SPD and the Greens. As I pointed out in my posts of September 1 and September 8, the largest voter group, namely women over 50, viewed this macho attitude as childish and undemocratic, with the result that they voted for the level-headed and sober-minded Angela Merkel.
Oh and, speaking of veggie day ! Take a look at the following video and decide whether you really are happy living in a world governed by the evil empire: If not, do something about it ! You decide !
As
predicted in my post of September 8, “Germany’s
current chancellor Merkel will [most likely] also be the new one”. Voters gave Merkel and her Christian Democratic party CDU close to an
absolute majority of votes (41.5%) while her current coalition
partner, the market-fundamentalist liberal party FDP, was heavily
punished for going against Merkel’s wishes on several important
issues. They lost 10 percentage points and ended up with
only 4.8% of the votes, just below the 5% minimum needed to enter the
Bundestag.
Analyzing the election results by gender and age, my predictions of September 8 also came true: women over 50 largely voted for Ms. Merkel, while younger women preferred the Greens and men preferred Steinbrueck and his social democratic party SPD (see Spiegel Online: „Bundestagswahl 2013: So wählten die Deutschen“).
Results
for the opposition parties
While Steinbrück’s social democratic party SPD was able to gain 2
percentage points compared with the results of the last national
election in 2009, his party garnered only 26% of the votes this time. All other
opposition parties lost votes: only 8.6% chose the Greens and the
Linke, respectively. The Pirates didn’t even make it into the
Bundestag, nor did the €uro-critical AfD (Alternative fuer Germany).
First, chancellor Merkel lost her current coalition partner, the free
marketeer FDP. As noted above, with only 4.8% of the votes they were unable to
surpass the 5% hurdle and dropped out of the German Bundestag. The
significance of this event for economic policy making in the €uro zone lies in
the fact that the FDP has always been the party that insisted on strict conditionality for EU aid and prevented a
moderation of the severe austerity course in Greece and other
Southern European €uro members. Now that the FDP is gone, a less rigid adjustment process combined with the financing of
desperately needed employment-creating investments and economic
growth might be possible.
Second, the new, €uro-critical party AfD (alternative for Germany) did not make it into the German Bundestag. Had they entered, they might have stopped any financial help to €uro members and would have insisted on Germany’s exit out of the €uro zone and a return to the Deutsche Mark, with disastrous consequences for the €uro and the economies of the entire European continent, if not the planet.
Third, the economically very progressive Linke has become the
third-largest party in the Bundestag, after the CDU/CSU and the SPD,
and in front of the Greens! This development could very well be the most significant event for
economic policy making in Germany and the €uro zone. Not only does
the Linke promote higher German wages and pensions, as well as a
reinstatement of former social security benefits and employee
protections, thus supporting aggregate demand in Germany.and a
reduction of economic imbalances in the €uro zone. The Linke also
calls for an immediate stop of austerity policies in the €uro zone
and the implementation of a massive investment program in Southern
Europe to promote employment and growth. Furthermore, if I interpret
their public statements correctly, the Linke calls for a write-off of
sovereign debt related to the bail-out of banks and a clean-up of the
entire European banking sector. Exactly the kind of policies that I
and other progressive economists across the planet have been
advocating.
Fourth, the opposition block of SPD (25,7% of the votes), the Linke (8.6%)
and the Greens (8.4%) together garnered 42.7% of the votes, 1.2% more
than chancellor Merkel’s conservative block’s 41.5%. Thus, the
progressive block actually has the majority of seats in the German
Bundestag and the power to form a government, including the nomination of a
chancellor of their choice !
However, for reasons no rational person understands, the leaders of
both SPD and Greens refuse to even speak with the Linke to explore
the formation of a three-party coalition, the famous R2G
(red-red-green) coalition, even though it is the only power option to replace the
Merkel government and implement the desperately needed progressive,
demand-side economic policies in Germany and the €uro zone. Conservative alpha males of the SPD and Greens even reject the
formation of a two-party (SPD+Greens) coalition government
‘tolerated’ by the Linke ! As I noted in my post on “The Progressive Option for Germany and the Euro zone”, that kind of behavior is "undemocratic and childish. Time for a woman to tell those
alpha males to go to their room and stay there until they are
reasonable.”
Meanwhile, since the views of the alpha male leaders of the SPD and Greens do not necessarily represent the majority view of the parties’ membership base, reasonable women and men can
discuss and design a workable coalition to replace the economically
destructive Merkel government. And that’s where
it gets interesting. As I noted in my post of September 15, “Analysis of Bavaria’s state election results“: "At that point
the left [progressive] wings of the SPD and the Greens would push
their party leaders to begin discussions with the Linke to form a
progressive coalition instead of going into opposition of a third
Merkel government.”
Let’s hope that this will happen. This coming
Friday, the SPD will hold a party convention with the task to decide
on the future course of the party, i.e. either a grand coalition with
Merkel, or a progressive R2G coalition or no coalition at all. The
Greens are planning a party convention in mid-October. Let’s hope
that the convention delegates of SPD and Greens will recognize that:
economic
policymaking in the €uro zone is not a question of left or right,
it’s a question of right or wrong !
As all three parties on the left agree that Merkel's economic course in the €uro zone is deadly wrong and urgently needs to be changed, perhaps the irrational fear of the big,
bad Linke can be overcome.
Germany has voted for the safe option, with a call for more social equity.
My personal analysis of the vote will follow early next week as the evening is full of discussions and reviews. Plus, I have again killed my laptop and need to find another blogger tool.
The state election results in Bavaria have little to NO significance for next week's national election in Germany as the conservative values and structure of Bavarian society is not representative of Germany as a whole. A leading German politician put it this way today: "the clocks are ticking differently in Bavaria", namely slower and more sedate since one cannot move very fast with a belly full of beer :-) [last part of the sentence = author's interpretation].
However, there is one clear pattern recently repeated in several German states: the liberal democratic party (FDP), champion of free enterprise and markets unconstrained by government regulation and interference, was unable to surmount the 5% minimum voting share and thus will not be represented in state parliament. If the same happens next week on the national level, it would mean that the current governing coalition of CDU/CSU and FDP could not continue and Merkel would have to look for another coalition partner.
That's when it gets interesting:
If the Greens have similar weak voting results as in Bavaria, we will get a new grand coalition of CDU (Merkel) and SPD (Steinbrueck) as the two parties together would have a stable, comfortable majority of 60% or more. If, on the other hand, the Greens were to attain strong results of 12% or more, it would still not be enough to form a stable coalition with the CDU, not to speak of substantial differences in their political programs. However, a Green showing of 12% or more PLUS 25% or more for the SPD plus 8% or more for the Linke together would be enough (45%) to truly threaten the formation of a new Merkel government. Because at that point the left wings of the SPD and the Greens would push their party leaders to beginn discussions with the Linke to form a progressive coalition instead of going into opposition of a third Merkel government. (see my post "The progressive option for Germany and the euro zone").
These discussions could divide the party members of the SPD and the Greens but, in my view, are necessary as one cannot simply ignore the democratic choice of nearly 10% of the German population that support the Linke and the power option they open up ---> see the discussion among leading German journalists and party members chez Anne Will:
I shall end my last post before next Sunday's national election by wishing each voter in Germany godspeed in making the right decision at the ballot box, for Germany AND for Europe as well. Let us remember that we, as descendants of a country that brought unimaginable horrors and suffering over the peoples of Europe, have a special responsibility to our European euro partners and neighbors. I pray that the good in us will prevail and NOT confirm the impression Thomas Mann had of Germans right after the end of world war II:
„Alle meine Eindrücke
und viele direkte Nachrichten deuten darauf hin, das sich in
Deutschland wenig oder nichts geändert hat, dass es das alte
Nazi-Land ist, überheblich wie je, frech gegen die Sieger, ich
erfüllt, einzigartig, ohne jedes Eingeständnis von Schuld,
unverschämt und nicht bereit, sich ‚umerziehen’ zu lassen. Es
wäre dort ein so schlechtes Wohnen wie um 1930, dessen bin ich
gewiss.“ (Thomas Mann, „Essays VI 1945-1950).
My imperfect translation of Thomas Mann's words:
All my impressions and many direct news reports indicate that nothing much has changed in Germany, that it has remained the old Nazi country, arrogant as ever, insolent vis-à-vis the victors, narcissist, one-of-a-kind, without any confession of guilt, impertinent and not prepared to be re-educated. It would be a miserable life there like around 1930, of that I am certain.
Having watched last Sunday's debate and the debate in the German Bundestag the following week, I am convinced that Germany's current chancellor Merkel will also be the new one. Not because she has more convincing arguments than her challenger, but simply because she comes across as more trustworthy, modest, and less aggressive than her challenger, Peer Steinbrueck.
While the ma(i)nstream press is convinced that Steinbrueck caught up to Ms. Merkel thanks to his strong performance during the debate, the gentlemen of the press neglect the preferences of the largest voter group that holds the key to this national German election: women over 50 ! These are women born before 1963 who experienced or actively participated in the women's movement of the 1960s and 1970s. These women - many of them highly educated, professionally successful and financially independent - do NOT appreciate overly confident, arrogant, and borderline aggressive alpha males like Mr. Steinbrueck who openly threatened Ms. Merkel during both debates. Plus, as noted in my post of last Sunday, Steinbrueck is acting childish and undemocratic by refusing a coalition with the LINKE, a democratic party supported by roughly 10% of the voters.
For all these reasons, women over 50 will most likely not vote for Mr. Steinbrueck's party, and that, Mr. Steinbrueck, is a huge loss as women over 50 make up 28.1% of the German voting population (see the data on the German voting population compiled by the Bundeswahlleiter here). These women will either vote for chancellor Merkel or for the LINKE, not for the SPD, nor the Greens due to their most recent pedophile scandals. My prognosis is all the more likely as the largest voter group has been completely ignored by Mr. Steinbrueck's party and the Greens: driving through a major city in central Germany one can observe that SPD campaign posters display almost exclusively middle-aged white men while the Greens focus on young women and children. Only the campaign posters of Ms. Merkel's party, the CDU, depict smartly dressed middle-aged and older women. Well, if the largest group of women voters in Germany is being ignored by the SPD and the Greens, why should these women vote for them ?
"....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."
Three weeks before
Germany’s (and Europe’s) most important election since 2009, the polls continue to predict a near-stalemate (Patt) between the two
opposing camps. The governing conservative coalition of CDU/CSU &
FDP is estimated to garner 45%, the opposition of SPD (red=R),
Greens (=G), and the LINKE (red=R) together would atttain 44%, of which the SPD with chancellor candidate Steinbrueck would contribute only 23%.
These results come as no surprise to me given my earlier assessment
of Peer Steinbrück
(see my post "What do recent events mean for the EU and economic policy in the eurozone?").
As a former finance
minister responsible for the deregulation of Germany’s financial
sector, and a millionaire from speaking fees he made while on the
payroll of the German taxpayer, he not only lacks credibility as a
candidate for the average voter. He also comes
across as arrogant, old-fashioned and macho, an attitude that does
not sit well with the largest group of voters: namely women over 50,
many of whom share the experience of being passed over for leadership
positions by a less qualified and less experienced German alpha male.
Yet, what hurts
Steinbrueck the most is his continued support of former chancellor
Schroeder’s Agenda 2010 policies which punched huge holes into Germany's social safety net, created a new bottom-feeding low-wage
sector (down to €1 an hour) and precarious employment conditions for many workers, esp. the young, the low-skilled, and those with an immigrant
background. This in a country whose 19th century chancellor Otto von Bismarck pioneered the introduction of a social security system for workers and which derived much of its post-war stability and economic success from its tightly knit social safety net and good treatment of its
highly productive German employees ! Not surprisingly, following the
introduction of Agenda 2010 policies in 2003, Schroeder's coalition with the Greens was quickly voted out of power in 2005, allowing
Merkel to take over. That lesson should have been learned by now –
but NO, not by Steinbrueck & Co. He even decided that former
chancellor Schroeder – the nemesis for many Agenda-hating Germans –
should help him in his campaign. Result: SPD polling numbers
declined by 1-2%age points.
The understandable
reaction of voters who don’t wish a repeat of the SPD/Greens coalition of
2003 but don’t want a continuation of the Merkel government either: choose the LINKE instead,
the only party that plans a reinstatement of the German safety net,
the dismantling of the low-wage sector, and the reinstatement of
former employee protections on Germany’s labor market. According to
the latest polls, roughly 10% of the voters would choose the LINKE,
sending a loud message to the SPD and the Greens: we don’t want a
repeat of the SPD/Greens coalition that implemented the Agenda
policies, therefore we are voting for a strong LINKE to enable a red-red-green coalition (R2G = SPD+Linke+Greens). Public reaction of
the SPD (and some Greens): we will not
form a coalition with the LINKE, period. The problem is: an
SPD/Greens coalition alone will most likely NOT get a majority which
means that SPD and Greens would (again) have to yield power to another Merkel
government.
Helloooo !!!!! Anybody home
????? Do you (conservative members of the SPD and Greens) really want to ignore 10% of the voting
population because your alpha males don't want to 'play' with the LINKE ? That’s
undemocratic and hopelessly childish. Time for a woman to tell those
alpha males to go to their room and stay there until they are
reasonable. While the alpha males sulk
in their rooms, reasonable women and men are free to think of other ways out of this dilemma. The only other option for voters who neither want a continuation of the Merkel government nor a repetition of the 2003 SPD/Greens coalition is a progressive G2R coalition (Greens+SPD+LINKE) led by Juergen
Trittin of the Greens. In contrast to Peer Steinbrueck, Trittin has
no Agenda skeletons in his closet and, to my knowledge, has never ruled out a coalition with the LINKE, which holds the key to the only true
power option to send the Merkel government
packing and reshape economic policy in Germany and the eurozone.
Germany’s current chancellor Angela Merkel used her power to influence important elections in your country. Why not return the favor ? By doing that, you could help your own austerity-damaged economies AND help German voters at the ballot box on September 22.
Here is the problem:
According to the latest polls (Emnid), Germany's voting populace is evenly split (45% vs. 45%) between the governing coalition of Merkel's CDU/CSU & FDP (liberal party) and the opposition combination of social democrats (SPD=25%), Greens (12%), and the left (Die Linke = 8%). Even when including the new party AfD (Alternative for Germany) on the conservative side and the pirates on the left (3 % each), we still have a stalemate. Furthermore, a large portion of the German voting population say that they might change their minds (72%) and the rest (roughly 30%) still does not know whom to vote for.
Why not help German voters make up their minds ?
In fact, you should, as this national German election will largely determine future economic policymaking in the entire euro zone. As it stands now, the choices are not great: we will either remain stuck with Merkel, Schaeuble & the FDP, or a new Grand Coalition of 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 even 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. (see my posts "What do recent events mean for the EU and economic policymaking in the eurozone" and "A progressive alternative to Merkel's muddle-through government").
YOU, dear fellow eurozone member, could provide the jolt needed to lead Germany back to the right path, a path of true solidarity with its eurozone partners and economic policies that generate balanced, job-creating economic growth combined with a stable social safety net for the weakest members of society throughout the eurozone.
How ?
Make yourself heard, by any means possible, and address social equity-loving Germans directly. Make sure they know that their tax money has not been used to help the citizens in Southern Europe but instead to bail out the banks and rich investors by transfering toxic and worthless assets from the private sector to the public sector, in other words: to YOU, the taxpayer. Make sure to let German voters know that this toxic asset transfer, combined with Merkel's austerity policies have INCREASED, not reduced, your country's debt load as the shrinking of your economies and, thus, the tax base also shrank tax revenues and economic growth. As a result, on top of a higher debt burden, your countries now have record unemployment and a lost generation of young people without any perspective to find a job.
Make sure German voters know about the economic and human misery chancellor Merkel's austerity policies has inflicted on your people, as the information about your people's suffering is largely withheld or smoothed over by Germany's mainstream press. Finally, make sure German voters realize that Merkel's social safety net-busting economic policies and their negative effects will NOT stop at Germany's borders but are planned to be extended throughout the eurozone with the help of the new Convergence and Competitiveness Instrument and the planned trans-atlantic trade and investment partnership TTIP.
May be, just may be, this will shake German voters so they'll finally wake up and smell the skunk Merkel's somniferous campaign wants to hide from them. The following videos from our Austrian euro partners may help as well (unfortunately only available in Austrian German, source: ORF):
