Halloween in Europe: the Return of the Cockroach Zombie

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:

• "The German Competitiveness Dogma, part I" (Jan. 13, 2013)
• "The German Competitiveness Dogma, part II" (Jan. 20, 2013)
• "The German (and British) Competitiveness Dogma, part III" (Jan. 27, 2013)
• “CameroMerkel’s Austerity cum Competitiveness-Agenda 2020 for the EU” (Feb. 10, 2013)
• “And what about Germany’s ‘Synthetic’ Competitive Devaluation Strategy ?” (Feb 17, 2013)
• "Invasion of the Cockroach Zombie Agenda 2010, reloaded as Agenda 2020" (April 7, 2013)
• "Austerity, Competitiveness, Household Wealth Distribution in Europe - Economic Incompetence or Indoctrination ?" (April 23, 2013)
• “Less Austerity in Return for More ‘Competitiveness’ Reforms – a Pyrrhic Victory for Europeans” (June 2, 2013)

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.

Please stop this nightmare !

News and Views from the IMF/'World Bank meetings in Washington

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 !

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*this is a word play on the Clinton campaign slogan "it's the economy, stupid"

Meanwhile in the Euro Zone - where do we stand ?

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. 

The Evil Empire Strikes Again (update)

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 !