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, April 28, 2013

Über-Austerians Schäuble and Merkel: GO HOME

The necessity to regain the confidence of financial markets has always been the key justification for fiscal austerity and the often inhumane cuts in public expenditures. Well, following the debunking of the intellectual edifice of austerity economics, even the confidence argument has evaporated when Bill Gross, manager of the world's largest $289 bln Bond Fund, said that it was a mistake to think bond markets wanted governments to impose fiscal austerity measures: "Bond investors want growth much like equity investors, and to the extent that too much austerity leads to recession or stagnation then credit spreads widen out....I think, fiscally, that governments everywhere have erred....and they certainly haven't induced investment...which, we all know, is ultimately the way to prosperity."  (see "Bill Gross attacks UK and EU austerity", April 22, 2013)  

Bill Gross' comments are another indication of a trans-atlantic shift in views following mounting criticism of Europe's severe austerity course and dire warnings that europe risks 'endless depression'. George Soros, US Treasury Secretary Jack Lew, IMF Managing Director Christine Lagarde and other high-level officials at the G-20 meeting in Washington this April urged Europe's leaders to ease off austerity measures and generate demand to boost growth. The voices of top EU officials have joined this international chorus, including Martin Schulz, president of the European parliament, EU commission president Barroso and Laszlo Andor, EU commissioner for social policy, who demands a radical change of course from Germany, encompassing the introduction of minimum wages and a renunciation of its export-centered economic model.

Unfazed by his international isolation, Germany's finance minister Schäuble says NO, the eurozone has to continue the austerity course. During a recent interview with the Deutschlandfunk he defends the austerity policies and, when confronted with the news that elder Italians are committing suicide following the recent austerity cuts in pensions, displays a level of indifference, brutality, and misanthropy that is untenable for a high official of Germany. Torsten Hild, Founding Editor and Economist of the blog "Wirtschaft und Gesellschaft", thinks that Schäuble should be asked to resign. I fully agree !  After all the suffering Germany imposed on the peoples of Europe during the second world war, I find Schäuble's arrogance and publicly displayed callousness unbearable


Twice in the 20th century has Germany destroyed the European order with war, crimes, and genocide to subjugate the continent. It would be an irony and a tragedy, if now, at the beginning of the 21st century, the reunited Germany were to destroy the European order a third time.
 (Joschka Fischer, translated from German)   

Sunday, April 21, 2013

Austerity, competitiveness, and wealth distribution in Europe - economic incompetence or indoctrination ?

Following the IMF's underestimation of the fiscal multiplier and its sensational mea culpa of last year, the recent discovery of data presentation errors, statistical and analytical errors in influential economic policy papers seriously call into question either the competence or the political neutrality of the studies' authors.

Austerity

The most striking examples of statistical and analytical bias are the widely publicized papers by Reinhardt & Rogoff ("Growth in a Time of Debt") that established a 90% of GDP threshold for the negative effects of debt on growth, and by Alesina and Ardagna which "supposedly showed that spending cuts were....expansionary". Alesina & Ardagna's paper on expansionary austerity was closely examined by IMF economists who found that A&A used a statistical technique that was supposed to identify episodes of large fiscal contraction but picked up extraneous effects that correlated with positive economic developments such as a stock market boom. A&A incorrectly interpreted these findings as support for their argument that fiscal austerity has expansionary economic effects.

In an attempt to replicate Reinhardt & Rogoss's findings, Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts Political Economy Research Institute (PERI) found "that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period." For example, growth data for Australia, Belgium, and Canada had been myteriously excluded from the statistical analysis, data that significantly alter the results, against austerity policies. 

With the debunking of these two papers, the intellectual edifice of austerity economics has crumbled, causing quite a sensation and media-frenzy in the US because - and I had not realized this until I saw the Colbert Report of April 23 (see link below) - the R&R paper had been actively cited by US congressmen and political pundits (the VSPs in Washington) as scientific proof for the alleged 90% debt cliff:  take a listen to Paul Ryan, US Congressman and the US mainstream media (hilarious, esp. the pics of Olli Rehn and Jens Weidman and Colbert's pronunciation of Jean-Claude Trichet and Lord Lamont of Whatchamacallit !). Also, meet Thomas Herndon, the graduate student who discovered the excel coding error in the R&R paper and the 'mistakenly' omitted data.

Competitiveness

Another example of biased statistical analysis is the 'evidence' for the alleged labor cost competitiveness problem of France, Spain, Italy, and Portugal, presented to eurozone heads of state by non other than ECB president Mario Draghi (see slide #10). The problem is, Mr. Draghi apparently compares apples and oranges in slide 10, namely real GDP per employee as indicator of labor productivity with nominal wages ! Had he correctly compared real GDP per employee with real wages, the results would have been starkly different (see here), with far-reaching implications for economic policy adjustments in the eurozone: France shows a near perfect match between productivity and real wages, Germany and Italy are the countries with the biggest competitiveness problem. In the case of Germany, real wages trail far behind German productivity due to the wage-depressing Agenda 2010 policies. So, instead of remaining silent in shock, the president of France Francois Hollande should have demanded that Germany adjust its real wage levels upward so as to adhere to the stability norm for balanced growth in a monetary union. But France is waking up ...

Considering the brilliant and highly competent management of ECB monetary affairs by Mario Draghi, Andrew Watt is justified in questioning Mario Draghi's ideology. But to introduce such an obvious, plump data bias into a presentation, and expect to get away with it, one would have to be either naive or extremely impertinent. Mario Draghi does not give me the impression of fitting either one of these descriptions. Another possibility: some other interested party introduced the wrong data into the presentation without his knowledge..... That would be outrageous, yet this post by Yanis Varoufakis suggests that Mario Draghi has made some enemies among German policy hawks.

Household wealth distribution in Europe

The ECB's survey of household wealth in the eurozone represents an even more egregious misuse of data for political purposes:

The data on median net household wealth by country show - lo and behold ! - that the median German household is the poorest in the eurozone, while the median household in Greece is twice as rich and the median household in Cyprus has five times the net wealth of a median German household. The median households in Spain and Italy are three times wealthier (see table 4.1, page 76). Which observation, then, comes immediately to mind ? Of course: it is unacceptable that the poor Germans pay for the bail-out of rich Greeks, Cypriots, and other Southern European debtors (see, for example, articles in the Wall Street Journal, Financial Times, and Frankfurter Allgemeine).

Paul de Grauwe, professor of political economy at the London School of Economics and a former member of the Belgian parliament, analyzed the ECB's household wealth survey and reported some other surprising observations in his article "Are Germans really poorer than Spaniards, Italians and Greeks ?". He found, for example, that when looking at mean household net wealth, Germany is suddenly four times richer than Greece, and, computing the mean/median ratios which illustrates the distribution of household wealth within countries, he finds that Germany has the most unequal distribution of household wealth in the eurozone.

He also questions whether household wealth is a good indicator of the wealth of a nation as a significant part of a nation's wealth can be held by the corporate sector and not by the household sector. He then used Eurostat and OECD data to compute the total capital stock per capita, defined as domestic capital stock and net international investment position, and found that, based on this measure, Germany is the second most wealthy nation in the eurozone.

He concludes: "The facts are that Germany is one of the wealthiest countries of the Eurozone. The problem is that this wealth is very unequally distributed in Germany, creating a perception among less wealthy Germans that these transfers [to the Southern European periphery] are unfair." 

Exactly, except that the unfairness of transfers from Germany to Southern Europe is a fairy tale consciously disseminated by the Merkel government and the mainstream German media. In fact, the money transfers flow into a completely different direction, namely from German and EU taxpayers to German and French banks ! 

Sunday, April 14, 2013

Austerity: Human Costs of a Trans-Atlantic Plague

Following many warnings by economists, social scientists, and others about the disastrous human, economic and social costs of the fiscal austerity policies imposed on Greece, Spain, and Portugal, we now have scientific evidence. In April 2013, the health journal Lancet published a study that examines the health effects of austerity. The findings are dramatic: sky-rocketing suicide rates and outbreaks of infectious diseases such as HIV, Malaria, West-Nil or Dengue fever are becoming more common as a result of "state retrenchment". The situation is most dramatic in Greece where hospitals have difficulties to maintain minimum medical standards. Moreover, budget cuts have restricted access to health care and medication as many can no longer afford medical insurance. Suicides in Greece have risen by 40% in one year (2011). By contrast, the financial crisis has had no discernible effect on people's health in Iceland, a country that rejected austerity and instead invested in public services. The lead scientist of the study, London medical professor Martin McKee, accuses Europe's politicians to deny the dramatic health effects of their most recent rounds of austerity imposed on the Southern European periphery. In fact, the EU commission is obligated to examine the consequences of their policies on health, says McKee. So far, this has not been done.

Across the Atlantic, the situation is very similar. The ideological focus on fiscal austerity to reduce public debt in the US has resulted in sticky high unemployment rates, downward pressure on already low wages, reduced health care and retirement benefits, and a general retrenchment of social services. On both sides of the Atlantic, at the beginning of the 21st century ideology and money seem more important than human lives. Hello ?! Are we going back to the middle ages or has a rare cockroach zombie eaten people's brains ? What ever happened to inalienable human rights such as life, liberty, and the pursuit of happiness ?

It is, again, a woman's voice that attempts to insert some humanity and reason into this miserable state of affairs: on April 10, IMF Managing Director Christine Lagarde gave a most remarkable speech on the global growth outlook to (mostly) finance professionals at the Economic Club in New York city. Here are a few extracts from my notes:

"With over 200 million people out of work in 2013, job creation is an urgent priority....because a high level of employment is the best guarantee for a vibrant economy and a healthy society....the best way to create jobs is through growth, with the right mix of demand-side and supply-side policies....Governments / policymakers can deploy labor-market policies to spur job creation more directly while at the same time accepting fiscal policy sustainability: through education, vocational training, wage and childcare subsidies, lower taxes on labor, etc."....."In addition to growth and jobs, we need more equity and inclusion....A more balanced distibution of income leads to more sustained growth and economic stability. Inequality today is too high in too many countries....Equity also matters because of adjustment fatigue....Just as the pains of adjustment have to be shared, the gains of growth need to be shared as well....We should protect the people most affected by crises and make adjustment as fair as possible...by protecting basic social services, by ensuring progressivity in the tax system and by combating tax evasion." (source: Bloomberg videos)

I have just one question: why do IMF adjustment programs in Greece and elsewhere not reflect Madame Lagarde's views ?  As they used to say at Harvard: Don't just do the talk, walk the walk!

Sunday, April 7, 2013

Invasion of the cockroach zombie Agenda 2010, re-loaded as Agenda 2020 for the eurozone

After some travelling and vacation time around the Easter holidays I am finally fulfilling my promise to report on an old cockroach zombie roaming Germany and selected neighborhoods in Brussels. In case you forgot Paul Krugman's famous definition of cockroach ideas and zombie ideas: a cockroach idea is an idea that keeps coming back even though you repeatedly flushed it down the toilet. A zombie idea, however, is an idea that's really dead but, against all evidence from the real world, still roams the streets. A cockroach zombie is the worst combination: an undead idea that keeps coming back even though real world evidence has repeatedly killed it

Such is the case with a cockroach zombie that recently reappeared in Germany and, dressed in new clothes as the 'Competitiveness Pact for Europe', was promptly shipped to the EU commission in Brussels. I am, of course, talking about Germany's Agenda 2010, a supply-side package of labor reforms announced in 2003 that allegedly cured the re-unified country claimed to be the 'the sick man of Europe'. With great fanfare, Germany's 'elite' recently celebrated the Agenda's 10-year anniversary, repeating the claims that the Agenda reforms successfully reduced Germany's unemployment rate, laid the foundation for more dynamic growth and are the reason why Germany was able to cope so well with the 2008 Great Financial Crisis. This first-rate cockroach zombie has been killed many times by the evidence and a number of economists, including myself (see my post "The Blueprint of Labor Reforms for Greece: Germany's Agenda 2010"). In that same post, I analyze the political economy of Agenda 2010 in the context of  "The role of crises for Troika shock therapy": Even though Germany’s trade surplus nearly tripled from EUR 55 bln in 1990 to EUR 133 bln in 2002, an articifial competitiveness crisis needed to be constructed to reduce public debt levels through cuts in Germany's pensions and other social security benefits, effectively passing on the reunification costs (see chart below) to lower and middle income groups.
The highly successful PR-strategy that paved the way for the implementation of Agenda 2010 against the opposition of Germany's powerful unions was the argument that Germany urgently needed to improve its competitiveness to reduce unemployment and increase economic growth. In reality, the rise of Germany's unemployment rate in the early 2000s was not due to a lack of competitiveness but due to the restrictive monetary policy implemented by the new ECB in response to higher inflation rates following Germany's reunification boom. The restrictive monetary policy was further reinforced by the pro-cyclical fiscal austerity policies of the red-green governing coalition, attempting to push down public debt levels.  A macroeconomic double whammy, born out of the incompetence of economic policymakers !

Fast forward to the eurozone in 2013. Unfortunately, the competence of Germany's economic policymakers has not improved. Spell-bound by the same obsession with competitiveness (for a critique, see my posts on the "German competitiveness dogma", part I, part II, and part III), policymakers now attempt to copy the successful PR strategy to introduce Agenda 2010, re-loaded as Agenda 2020 for the eurozone: first, create an artificial or real crisis true to Milton Friedman's recipe, "Only a crisis—actual or perceived—produces real change". Second, make sure that every man, woman, and child knows about the crisis and the urgency for reforms. Then, shove down the throat of the population the labor market reforms and welfare cut-backs you always wanted, but never thought possible "until the politically impossible" became "politically inevitable". [see Milton Friedman, Capitalism and Freedom: "That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable."]

Well, the crisis in the eurozone is obvious and real. The second strategic step, namely the spreading of the fairytale about the eurozone's 'labor cost competitiveness problem' is well under way (see this article about Mario Draghi's presentation to EU heads of state at the European Council), as is the competitiveness doctrine focused on wage reductions and reforms to improve labor prodcuctivity, putting the burden of adjustment solely on workers. With the publication of the EU's new Convergence and Competitiveness Instrument in late March EU policymakers have now entered the third strategic stage: the formulation and implementation of specific economic torture measures, pardon: structural reforms modelled upon Agenda 2010 and IMF structural adjustment programs. 

Is there any stopping the Schwabian housewives in Berlin ? I certainly hope so for all of us in Europe.