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 ! 

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!

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. 

Cyprus Cliffhanger

As announced in my last blog, I really wanted to write about a cockroach zombie roaming Germany and certain neighborhoods in Brussels. However, faced with an extraordinary Cyprus crisis cliffhanger, that will have to wait ‘til next time.

Due to the usual incompetence of EU officials combined with the incompetence and boneheadedness of leading German officials, we now have a situation in the eurozone which could lead to the collapse of the Cyprian banking system and the Cyprian economy if €5.8 bln in cash cannot be scraped together by Monday, March 25, the last day of ECB-liquidity help to the Cyprians. The euro crisis is back !

As no doubt you have all followed in the media, the catastrophy began to unfold when the gang of four (EU commissioner Olli Rehn, a representative of the IMF, ECB board memberAsmussen and German finance minister Schäuble) pretty much blackmailed the new president of Cyprus, Nikos Anastasiades, to finance a part of the EU bail-out with an obligatory tax of 9.9% on uninsured Cyprian bank deposits of €100.000 and above and a 6.75% tax on insured deposits below €100.000, effectively dismantling the EU deposit insurance guarantee. Otherwise, the ECB would stop its liquidity help to Cyprus' banks which would mean an immediate disorderly default. Mr. Anastasiades had no choice but to accept this poisonous deal.

While financial markets remained calm as the ECB reinsured investors that liquidity would be supplied to Cyprus' banks, the financial media, finance experts, and the Cyprian population went haywire when the news of the depositor bail-in became public. Some commentators called it “an unbelievably stupid decision”; a former ECB official from Cyprus even threatened that Cyprus would now sell gas exploitation licenses of  recently discovered natural gas fields to Russia instead of the EU. The best comment I read was only slightly more diplomatic, calling the deal “a huge blunder” and pointing out that, if the deal were to be approved by the Cyprian parliament, the EU would get the required €5.8 bln cash contribution to release €10 bln in EU-aid, yet it would still be too little, too late as depositors would withdraw all their deposits as soon as Cyprian banks reopened. The alternative (i.e. non-approval of the deal) would lead to the disorderly default of Cyprus' banks and possibly another massive bank crisis in other eurozone countries (see "Cyprus: the next blunder", March 18, 2013).

Today, 6 days later, we know that the Cyprian parliament rejected the deal and is desperately searching for another way to come up with the required €.5.8bln. The Russians have turned them down. The disorderly bank failures have not (yet) occurred as the ECB continues its liquidity provision until Monday, March 25. After that date, all bets are off. Interestingly, financial markets remained calm until the day the ECB made public the March 25 deadline. Since then, both equity and credit markets have reacted nervously. Depositors in other countries, however, apparently view the Cyprian situation as special and have not withdrawn their deposits. That is where we stand.

Now, it is easy to criticize the depositor bail-in deal without knowing all the facts, but difficult to come up with a better alternative in a strained situation. However, knowing our charm- and courtesy-challenged, boneheaded German machos, I am sure one could have easily handled the situation better and come up with a more democratic solution if one had treated the Cyprians with a little respect and negotiated with them as true partners, instead of assaulting them with a 'take-it or else'-type of proposition. My advice: next time in a critical situation, the EU should employ an all-women negotiating team !

The uproar in Cyprus has been gigantic, with swasticas and Merkel in nazi uniform displayed on many protest signs on the streets of Nicosia. With ongoing anti-austerity protests in Greece, Spain, Portugal and the 'vaffanculo' message from Italians, Germany now is easily the most hated country in the eurozone, its hard-won post-war reputation in shambles. Congratulation to the Merkel government ! We needed that like a hole in the head.

Olli Rehn, the EU commissioner already ridiculed and battered by Paul Krugman who labeled Rehn's policy decisions "cockroach ideas", has to serve as the scapegoat. Bloomberg reports that Rehn faced "a torrent of critiscm and a call to resign after helping broker a rescue package for Cyprus that fell apart." Nessa Childers, an Irish member of the EP, said in a telephone interview with Bloomberg: "Somebody somewhere has to be accountable and the buck stops with him"..."This was not only undemocratic, but incompetent. Was anyone thinking about the big picture?"

Right she is ! I think (and I'm not the only one), we need an entirely new, democratically elected leadership team for the eurozone. But first of all, the whole EU commission team responsible for the austerity policies plus the entire Merkel government should be fired. Let's do it at the ballot box this September !

Here is a good solution for the Cyprus crisis: take a page out of the book of Iceland.

Did Euro-Austerians blink ?

No, not really: just a little PR and a lot of self-justification, but the austerity course remains intact.

Let me explain...

On March 10, I reported about the EU's initial reaction to the Italian election results and the mounting trans-atlantic critique of the draconian fiscal austerity imposed in the eurozone to pay for EU taxpayer-financed (bank) bail-outs. Just a day later, the German mainstream press wrote about a draft EU summit declaration that proposes a "differentiated growth-friendly fiscal consolidation strategy" and "short-term government programs for more growth and employment". Even Olli Rehn is said to have indicated that selected governments will get more time to reach their fiscal deficit targets. As a nod to Italy, the draft summit statement even provides space for productive public investment spending.

Bloomberg reports that "German officials have backed the commission's approach, indicating that the Berlin leadership is sensitive to criticisms that budget cutting has gone too far." (Bloomberg, March 15)  Is this a reaction to the warnings of the market gods (see video here) or a face-saving mea culpa of the "cocooned elite in Brussels", preparing the ground for a gradual dismantling of the fiscal austerity strategy ?

Hélas, I don't think so. I think, it's just part of a successful PR strategy pioneered by chancellor Merkel which is working like a charm in Germany: publicly, take a compromising step toward your opponents, slab a catchy name on the new strategy, introduce a few miniscule policy changes but leave the core strategy as is and publish a scholarly article to justify it (see "Fiscal policy in Europe: Searching for the right balance") 

Paul Krugman's comment on this "self-justifying piece on fiscal austerity":  "how does that 'delicate balance' [mentioned by the Commission] feel in countries with 15, 20, 25 percent unemployment ?"

                                 source:  Paul Krugman, "Of cockroaches and commissioners"

The EU commission's arguments to justify a continuation of austerity in the eurozone sadly demonstrate that the expansionary austerity zombie still roams our beautiful continent.

In my next post, I will report about a new PR campaign for a particularly indestructible zombie:
the cockroach zombie Agenda 2010, re-loaded.  

The Euro-Austerian Empire strikes back

The reaction of EU austerians in response to the Italian election results was predictable: "Euro chiefs urge austerity", demanding (!) "that euro members press on with budget cuts to end the debt crisis" reports Bloomberg. Merkel is quoted: "Now in Europe, after the Italian election, it seems to be a case of either austerity and savings programs or growth, but that's a completely false premise" (she considers austerity measures combined with Agenda 2010-type labor market reforms as growth-enhancing). Of course, Merkel's minion Olli Rehn, EU economics commissioner, supports the view of the dominant economic power in Europe: "Given that average debt exceeds 90% of GDP in the EU, I don't think there's any room for manoeuvre to leave the path of budgetary consolidation" reports the UK Telegraph. It also comes as no surprise that Italy's president Giorgio Napolitano is exploring the creation of a second technocrat government with central bank governor Ignazio Visco to brake the political patt in Italy and calm markets in case Italy's parties are unable to form a stable government.

While Beppe Grillo dismissed these explorations as cattle market trading and vowed to "bring down the old system" in a civic revolution, the boneheaded austerity stance of EU commissioner Rehn provoked a hilarious trans-atlantic cockroach war between Paul Krugman (said to be one of Beppe Grillo's economic advisors) and three tweeters from Brussels. 

For economists, the battles between different economic ideologies may be fascinating and hilarious, especially when the tone of the debate slips into kindergarten-territory, but let's not forget that in the meantime people suffer. Many of the commentators from Europe are clearly in favor of Paul Krugman using "wild words" to draw attention to the desperate economic situation in Southern Europe and the incompetence of the "cocooned Brussels elite". Unfortunately, Paul Krugman's commentators are also correct in suggesting that all the empirical evidence and public uproar about the misery caused by austerity will not faze the EU power elite as a economic and humanitarian crisis may just be what they want: --> see my post on the role of crisis for the troika's economic shock therapy in Europe. "Only a crisis—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. 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." (Milton Friedman, “Capitalism and Freedom”) 

Meanwhile, however, the winds of change are picking up in Europe. Even mainstream German talkshows and newspapers have started to report about the true destinations of taxpayer-financed EU bailouts (namely French and German banks instead of the people in Greece, Ireland, or Portugal) and the lies being dished out by the Merkel government. Both the political left and the right in Germany have filed lawsuits in constitutional court to stop future taxpayer-financed bank bailouts while Europe-wide coordinated social movements are planning huge demonstrations in the spring. Seems all the trans-atlantic educational efforts of anti-austerians are beginning to have an effect.

Message from Italy to Europe's Austerians: VAFFANCULO !!!

The big surprise in last Sunday's national election in Italy is the strong showing of former comedian Beppe Grillo’s “Five Star Movement” (with well-attended V-Day celebrations where V stands for Vaffanculo) which garnered 25% of valid votes, clearly ahead of Mario Monti's austerity-friendly centrist coalition which barely passed the 10% threshold. 

Italy's centre-left alliance led by Pier Luigi Bersani obtained a thin majority of votes (29.5%), but a secure majority of seats in the Chamber of Deputies thanks to a constitutional majority bonus of seats. Silvio Berlusconi’s centre-right alliance followed close behind with 29.2% of valid votes. In the Senate, no political group or party won an outright majority. (see “The Italian General Election of February 2013”)

Some say, the election results spell chaos for Italy and disaster for the EU and the euro project, others complain that Italians have chosen two clowns to run the country, referring to Berlusconi and Beppe Grillo. Well, that may be true, but just as the fools in Shakespeare’s plays, Italy’s so-called clowns are no fools at all. Just as their Shakespearean counterparts, Italian 'fools' are fearless in speaking the thruth and in uncovering deceit and misdeeds of people of higher standing. They do not follow any ideology and reject all appearances and traditional moral codes to make a valid point: that Italy's politicians are corrupt and that the austerity measures imposed by unelected EU technocrats are undemocratic, inhumane and unacceptable !

To me, the message to Italy's political caste and Europe’s austerians is loud and clear: We will not stand any longer for the fiscal austerity imposed by you on our people while you are filling your own pockets. If this is your vision for the European Union, then Vaffanculo - get yourself f.... !

Europe’s Very Serious People would do well NOT to deride or ridicule the democratic choices of Italians but should instead take heed and reassess their policies. Or would Europe prefer the rebirth of a new Mussolini? As Paul Krugman pointed out days before the Italian election results, “disreputable politicians are on the rise all across Southern Europe. And the reason this is happening is that respectable Europeans won’t admit that the policies they have imposed on debtors are a disastrous failure. If that doesn’t change, the Italian election will just be a foretaste of the dangerous radicalization to come.” (see “Austerity, Italian Style” NYT Feb 24, 2013)

I hope, the Independent European Daily Express is right in concluding, “Observers see the defeat of the reformer Monti and the surpisingly good results for EU critics Berlusconi and Grillo as a clear signal directed at Brussels that the austerity drive is coming to an end.”