Germany's Progressives are fighting while Latin Europe suffers and Big Business triumphs

For those who had hoped that Europe's progressives will, for once, work together to defeat conservative and ultra-right parties during the 2014 European election campaign so as to end the misery in the Southern European periphery, the recent attacks by leading members of Germany's green party against Sahra Wagenknecht (co-chair of Germany's LINKE) is a huge disappointment.

But first the background to all the fuss:

On February 13, Zeit Online published an interview with Sahra Wagenknecht in which she states the obvious, namely that the Euro system - as it is now - does not function very well but divides Europe. Following that, a number of suggestive questions by Zeit Online meant to make the reader think that Ms. Wagenknecht agrees with her partner Oscar Lafontaine who favors a replacement of the euro with a new European currency system. 

The Greens responded by Blitz-attack: on the same day, Simone Peters, co-chair of the Green party, accused Wagenknecht of nationalism and populism on the same level as the AfD (Alternative für Deutschland), the new ultra-right party in Germany.  Two days later, Sven Giegold, MEP co-leader of the German greens' European election campaign, challenged Ms. Wagenknecht to support progressive economic policies, insinuating that she was instead following down the path of the "nationalist grave diggers of the euro" (his words). Here is a very good rebuttal to Giegold's non-sense: "Sven Giegold und die grüne Verdrängungsmaschine".
   

The attacks from the Greens came on the heel of a scandalously rude and disrespectful interview of Ms. Wagenknecht by a talk-show moderator on German public TV who attempted to convince the audience that Wagenknecht was out to destroy the euro. Even the mainstream Spiegel Online thought that was too much, opining that this interview was "the expression of an aggressive conformism that pervades the entire ZDF". (ZDF, the second German public TV station is financed by tax payers but heavily influenced by Big Business with key supporters on Germany's public media board).

Considering the above-mentioned events, an interest-led PR campaign against the LINKE doesn't seem far-fetched. Question is: are the Greens, as the direct competitior of the LINKE, being instrumentalized by Big Business or are they preparing for a future coalition with Merkel's pro-Big Business CDU ? Or are they just desperate in view of the negative press coverage they had recently ? ---> see "Europa-Parteitag: Pragmatisch, grün, langweilig",  "Grosses Gerangel um Spitzenpositionen", heute-show: Lutz van der Horst im Einsatz gegen das Charisma-Defizit der Grünen:

Whatever may be the reason for the greens' aggressive behavior against the LINKE, striking is the complete lack of humor among the German greens displayed in the video, with the sole exception of Claudia Roth. But what's really deadly is the desperate but futile attempt of Germany's leading greens to appear cool - sad ! 

Meanwhile, Big Business and Big Finance are living it up, enjoying the fruits of their successful 'divide and rule' strategy among Europe's (and America's) progressives: see "Troika consultancies: a multi-billion business beyond scrutiny" and "I crashed a Wall Street Secret Society".

Is the Intellectual Edifice of the Competitiveness Doctrine crumbling as well ?

Following the crumbling of "the intellectual edifice of austerity economics" (see also "Austerity....in Europe - economic incompetence or indoctrination ?") and the waning political support of austerity measures in the euro zone (see "Public Opinion in Germany turning broadly against Austerity"), the intellectual edifice of the Anglo-Germanic competitiveness doctrine (see also here) seems to be wasting away as well.

A recent World Bank contradicts the competitiveness doctrine with evidence that "changes in competitiveness, measured by real exchange rates or by unit labour costs, have not been strongly associated with external imbalances in the Eurozone periphery" (see the table below from the World Bank study "Tracking the causes of Eurozone external imbalances: new evidence", Sanchez and Varoudakis, February 2014). Instead, Sanchez and Varoudakis' analysis corroborates that:

"....the growing external imbalances in the Eurozone periphery were mainly driven by a domestic demand boom triggered by greater financial integration and the resulting surge in credit and intra-regional capital flows.".... "Growth and real interest rates have played a more important role in current-account dynamics in the Eurozone periphery than in the core."

Percentage of variation in current account explained by column variable

 (panel VAR estimated over 1996–2011)

Source: World Bank study, Sanchez and Varoudakis, February 2014, Table 1.

Savings–investment imbalances and competitiveness gaps 

in the Eurozone core and periphery (1990–2011)

Source: World Bank study, Sanchez and Varoudakis, February 2014, Figure 2.

Translating from economeze to understandable english: Sanchez and Varoudakis found that the introduction of the euro and the consequential disappearance of exchange rate risk in the euro zone led to a surge of capital flows from the capital-rich core to the periphery. This capital surge in turn led to increases in economic growth, unit labor costs, and prices; thus, to an increase in inflation rates, a decline in real interest rates, and an appreciation of the real exchange rates of the euro zone periphery countries vs. the core. As a logical economic consequence of these developments, the current account balances of the euro zone periphery countries registered growing deficits while current accounts in the euro zone core showed rising surpluses, thus generating growing imbalances in the euro zone as a whole.

Given these developments, the often proclaimed loss of competitiveness due to higher unit labor costs is an endogenous explanatory factor for the problems in the euro zone periphery, i.e. a factor derived from other, more significant, economic developments as described above. Hence, the policy recommendations to correct the problems in the euro zone periphery should be directed at the economic factor(s) that caused the problems, in this case mainly the capital surge from the euro zone core.

Sanchez and Varoudakis hold similar views, albeit framed in rather 'diplomatic' language. They conclude that "Tighter regulation of credit markets, including through macroprudential measures, might .... be needed to thwart excess leverage and concentration of lending in investments prone to speculative bubbles."

With respect to the ill-advised, deflationary competitiveness measures favored by Merkel & Co. (i.e. cuts in wage and non-wage labor costs to reduce unit labor costs = internal devaluation), they suggest that "Internal devaluation may have certainly contributed to a contraction of domestic demand....an unintended consequence of this correction has been a potentially large redistribution of income at the expense of wage earners in the periphery." 

Finally, Sanchez and Varoudakis recommend a very different reform agenda to remedy external balances, prevent future crises, and attain medium-term economic growth:

"Structural reforms that improve the business environment and investments that enhance productivity hold the key to external rebalancing and stronger medium-term growth (Gill and Raiser 2012). This broader structural reform agenda, as well as complementary, productivity-enhancing public investments in physical and human capital, should not be lost from sight ...."

Quite in line with my own policy recommendations, with the exception of the well-worn phrase "structural reforms that improve the business environment" (code for wage-depressing, deflationary labor market liberalization).

Economic Policy Recommendations to prevent a Lost Decade in the Euro Zone

As a follow-up to my summary of the first Troika impact report, here are my economic policy recommendations to prevent a lost decade of deflation, depression, rising unemployment and poverty in the euro zone:

First: implement an immediate STOP of the deflationary austerity and competitiveness policies, at least until all the results of the Troika investigations have been reviewed and analyzed. After that, a democratic decision should be taken on how to proceed.

Second: for the short- to medium term, I recommend a macroeconomic strategy change toward active, job-creating economic policies with, for example, sound investments in renewable energy projects to reduce the costs of oil imports into the euro zone, and the massive employment of the most valuable renewable energy of the continent, namely our people, in the social service sector to benefit fellow Europeans, native animals, and the protection of the environment.

The financing of such welfare-enhancing investments and services should be derived NOT from new debt, but from the revenues of an adequately designed financial transactions tax as well as bank fees for the speedy reimbursement of tax payer-financed European bank bail-outs amounting to hundreds of billions of Euros (see the estimates by Sven Giegold at the bottom of his article). According to IMF data, only 15%-40% of these funds have so far been returned to Europe's taxpayers. The money is desperately needed NOW, not later, to repair the damage caused by the misguided austerity and competitiveness policies in the euro zone. If banks have the money to pay million-Euro bank salaries and boni again, they also have the funds to reimburse Europe's taxpayers !

Currently, we are saving at the wrong end and are rescuing the wrong ones, namely zombie banks that would not be able to survive without taxpayer support. That is why I also recommend:

Third, structural adjustment programs for Europe's banks, with strict conditionality for the orderly closure of zombie banks, and a restructuring of the remaining banks along the lines of the 14-point reform and adjustment program noted in my post of August 29, 2012 and the forthcoming study by Sven Giegold of the European Greens: “Banking structural reform; a Green perspective”. The conditionality of the structural adjustment programs should be regularly supervized and inspected by competent and democratically legitimized inspectors.