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.