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.”


Friday, November 8, 2013

Germany's Deflationary Competitiveness Obsession endangers Economic Recovery in the Euro Zone


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).

German government officials may well seethe at this US critique, but empirial evidence confirms the US Treasury view: recently published Eurostat data show that inflation in the euro zone has dropped to 0.9% in September and to 0.7% in October, prompting the ECB to lower the interest rate at which it lends to banks to 0.25%. Furthermore, the US Treasury view is shared by many non-German officials and globally respected economists (see my post “News and Views from the IMF/World Bank meetings"), including German economists. Heiner Flassbeck, for example, has drawn attention to the desastrous effects of deflationary competitiveness policies numerous times on his blog and during his time as chief economist of UNCTAD -->see the Flassbeck interview below:




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)
Greece: 4.2% in 2013 vs. -13.6% in 2009
Portugal: 0.6% in 2013 vs. -6.8% in 2009
Spain: -1.8% in 2013 vs. -8.7% in 2009
Ireland: -1.0% in 2013 vs. -8.5% in 2009
Italy: 4.3% in 2013 vs. 0,.7% in 2009
GERMANY: 2.0% in 2013 vs. 1.1% in 2009
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