The ECB Method

by Henry on January 3, 2012

Two months ago, I wrote a post which argued, among other things, that the European Union used to be run according to the ‘Community Method’ (according to which member states often used to defer to each other on matters of vital interest, and the Commission had an important role), had moved to the so-called ‘Union Method’ (under which member states were supposed to do stuff on their own, in practice being led by France and Germany), and was now transitioning towards the `ECB Method’ (under which the European Central Bank determined politics). I suggested that this was going to be untenable, and hoped that we might see a push instead towards greater democracy. Well, we didn’t get one. Instead, what we’re getting is the ECB method on steroids. By supporting bank borrowing rather than sovereign state borrowing, the ECB has managed to prop up the system without openly changing its mandate. But by doing this under the table, and without very much in the way of an officially stated long term policy, it has retained and indeed arguably dramatically expanded its political clout.

I don’t have sufficient expertise to make strong claims about whether this will be a sustainable way of propping up bond markets for any significant period of time. What I am convinced of is that it will be a political disaster. As Cosma Shalizi and I argued (Cosma puts it much better than I did) about libertarian paternalism, the problem is that it “break[s] the feedback mechanisms which (1) keep policy-makers accountable to those over whom they exercise power, and (2) allow[s] policy-makers to tell whether what they are doing is working, and revise their initial policies and plans in light of experience.” This dynamic can be extended to explain why the European Central Bank is making a complete hash of the European economy. I’ve spoken to people at the European Central Bank – they are very smart, and very sincerely believe that the best path to long term prosperity is through enforced austerity. They are also – by design – nearly completely insulated from democratic pressure. And despite claiming that they are apolitical, they are in fact playing a profoundly political role, dictating the kinds of domestic institutional reforms that states need to implement if they want to continue getting ECB support.

This means that ECB decision makers are under no very great obligation to think about why they might be wrong, up to the point where complete disaster occurs. And disaster is very likely, if the lessons of the gold standard in pre-World War II Europe tell us anything at all. Enforced austerity does not produce economic growth. What it does produce is political instability.

This is why we should be deeply skeptical of claims for technocracy as a way of making political decisions. Technocracy is supposed to work better because it is insulated from political pressure. But exactly because of that, it is liable to go off the rails when left to its own devices. Expertise is a very good thing – when it is leavened by democratic accountability. When it is not, it is likely to be responsive instead to its own internal discourses and understanding of the world, which can lead it in some very problematic directions. It isn’t just that the eurozone is an experiment in the economic virtues of imposed austerity (as a means of creating confidence and hence a by-its-own-bootstraps cycle of virtuous growth). It’s that the experiment is already visibly failing. And it’s that despite this visible failure, there is little chance of any reversal of direction, because those who have the power to set the course have no obligation to listen to anyone else, and hence aren’t listening.

{ 137 comments }

1

Davis X. Machina 01.03.12 at 10:09 pm

Technocrats, my royal Irish arse. Technocrats aren’t going to choose an edifying moral spectacle over staving off an economic collapse.

2

taj 01.03.12 at 10:31 pm

Yes, I’m unconvinced that “technocrat” is the right word to describe these people,at least if the intent is to imply some sort of technical expertise. If this is technocracy, so was the Great Leap Forward.

3

Walt 01.03.12 at 10:32 pm

The current ECB policy can (if pursued at sufficient scale) probably stave off collapse, but will lead to economic stagnation. What I’m not clear about is the political consequences of stagnation. Will people appreciate the extent of the economic stagnation, and the cause, or is stagnation tolerable enough that it will become the new status quo?

4

stostosto 01.03.12 at 10:49 pm

Good post. The ECB’s institutional setup was modelled on that of the Bundesbank (whose ostensible success in managing the Deutschmark also made it a model for many other countries), in particular its insulation and independence from political interference. But I believe I read somewhere that the Bundesbank in practice was actually capable of pragmatic flexibility. It would seem that the ECB operates more orthodox than the Pope.

5

Rich Puchalsky 01.03.12 at 10:56 pm

“they are very smart, and very sincerely believe that the best path to long term prosperity is through enforced austerity. “

Self-contradictory phrases? I’m tempted to write that this means that “they are very smart” has no apparent meaning, and instead must mean something like “they are personable and well-to-do people from an upper-middle-class background”. But all right, let’s this at face value and assume it means that they are very smart. What does it mean that they are very smart, and yet very sincerely believe something so stupid?

I suggest that it means what I’ve written here many times, and what Henry has described as a bad functionalist explanation (or, worse, as a conspiracy theory): that jobs determine opinions. Insulate people from democratic accountability, and make it so that their personal good is tied up with the good of the banks — probably through some kind of revolving door system; I’d guess that their next jobs are going to be in the industry — and lo and behold, weirdly enough, these smart people start believing stupid things that benefit banks. Why, it’s as if their smartness is turned directly towards rationalizing whatever decisions will turn out to not lead to them finding a new line of work. I doubt it these people think of themselves as corrupt, or if they are even corrupt by any accepted definition, but they aren’t going to surprise anyone by suddenly using their smartness to see something that their job doesn’t encourage them to see.

That being the case, it’s important to decide what kind of jobs are created, or what kind you personally want to go into. None of which really goes against anything in the post, but it grates to see “they are smart people” used as if it means anything.

6

trapnel 01.03.12 at 11:11 pm

But it does mean something; it simply doesn’t mean as much as those who value hiring/being “smart people” think it means. If you give them well-defined tasks that engage cognitive capacities, they will do well at them. Alas, they will not necessarily arrive at true beliefs, nor reject erroneous ones. The social organization of beliefs and knowledge is something much less studied than it ought to be.

7

Peter T 01.03.12 at 11:31 pm

In my former life as a bureaucrat, I knew a lot of very smart people who believed – and did – very stupid things. And not because they personally benefited, or hoped to. Further, examples are not hard to find in history – of smart doctors persisting with harmful treatments, of smart scientists making silly statements and so on. In the end, I came to the conclusion that most people are smart only in limited domains, and very smart people often in very limited domains. It’s Henry’s point – the ECB folk are smart only at being economists, and the issues are bigger than that. Keynes’ great strengths were that he lived in Bloomsbury and married a Russian ballerina.

8

lupita 01.04.12 at 12:05 am

The Eurozone is not the experimental ground for technocrats; that would have been Pinochet’s Chile with its infamous “Chicago Boys”. The system was further refined in Mexico by three successive technocratic presidents with graduate degrees in Economics from US universities. There are three decades of evidence of IMF technocrats successfully collecting debt from even the poorest countries by slashing social spending and wages, redistributing wealth towards the already wealthy, and establishing the primacy of global finance over national economies and societies.

The experiment has not failed. Proof is that now the Eurozone has two governments headed by technocrats and is beheld by the ECB.

9

Martin Bento 01.04.12 at 12:21 am

Peter, the “stupidity” that the ECB is showing is within their area of expertise, not without it. Furthermore, there is broad consensus for the same errors. If a member of the ECB board publicly embraced global warming denialism, we might say it is an idiosyncrasy outside his area of expertise – he might still be a great economist. If they all do, however, we would have to conclude that they are all idiots or that something fishy is going on, and the latter is much more plausible, given their demonstrated technical intelligence (wisdom being another matter). Whether intelligence can be meaningfully collapsed to a single scalar value – e..g. IQ – is debatable, but I don’t think anyone is so skeptical of the concept as that. Rich is right. Hanlon is blinding us here.

10

Peter T 01.04.12 at 1:29 am

My comment was not meant to imply that smart people are smart in their own domains. I’ll amplify – smart people, meaning those who can think coherently and penetratingly on complex subjects, are often those trained in complex subjects. To be so trained is, in many areas, to be taught a coherent view of that domain. Things that don’t fit with the picture are taught as false or become inconceivable. Where the domain does have an underlying coherence, no problem. Where it does not (either because our knowledge does not permit us to bring together one or because it’s just so), then the smart people do dumb things even in their own domain, by training. There is a mess, best dealt with by rude empiricism, and they have been trained not to see a mess, to reject the idea that it’s a mess, and to reject crude empiricism as any way to deal with it.

I’m amplifying because I think Rich’s view – that it comes down to material interests – points to the wrong solution. If he is right, you just have to restructure the incentives. If I am right, you have to strengthen the feedback loops, bring in people with different or no training, force overview by people who do not share their views and so on.

11

Ebenezer Scrooge 01.04.12 at 1:34 am

The argument for technocracy in a democratic society is basically the traditional argument for the role of the Turkish Army: democracy breaks down occasionally, and the technocrats sometimes have to come out from their barrack/ivory towers/whatnot to put matters right, whereupon they retreat.
The sincerity of the Turkish Army was indubitable: they always retreated to their barracks in between crises, although they took much of the economy with them. But:
1. They did take much of the economy with them. The compensation of contingent rulers is–ahem–an interesting subject.
2. They encouraged democratic irresponsibility.
3. The Turkish Army wasn’t all that good at governing, even if it was okay at keeping external corruption down.

12

John Quiggin 01.04.12 at 1:48 am

I’m with Rich on this one, at least broadly. If the ECB policy works (that is, prevents a collapse of the euro and does not do so much damage to the real economy that it provokes a successful political reaction against it) the results will be highly beneficial to the ECB as an institution, maintaining it as a supreme and unaccountable economic manager. So, its unsurprising that the ECB as an institution should be pushing for this.

As regards the individuals who work for the ECB, it’s not only self-interest (shared with that of the institution) that’s at issue, but also selection effects. To take the most obvious example, it’s unlikely that the ECB is going to hire many old Keynesian advocates of fiscal policy, or that anyone of this description who does get hired will last for long.

13

Sev 01.04.12 at 1:56 am

Rich #5 “that jobs determine opinions.”

This doesn’t seem to be as true at middle and lower levels, but usually is at highest levels. Plenty of subversives or ingrates in the ranks, but I think ya gotta beleeve to make it to the top. Usually. I recall activists telling me years ago that the most propagandized members of society are always at the top; don’t know whose theory they were parroting, but the ECB crowd could be a sidebar in the revised edition.

14

Henry 01.04.12 at 2:34 am

bq. I suggest that it means what I’ve written here many times, and what Henry has described as a bad functionalist explanation (or, worse, as a conspiracy theory): that jobs determine opinions.

Rich – that actually isn’t what you have argued. You have suggested that _roles_ (in some general social system) determine opinions – i.e. that someone’s role is to do this or that thing in maintaining the consensus. This is a much weaker argument than the argument that if someone’s job depends on him publicly claiming that he believes _x_, then he is likely to say that he believes _x_, where there are clear incentives at play. While the latter can be wrong – especially in cases where people frequently seem to hold opinions that are at deviance with their jobs, lose jobs (as in the case of one of the people whom you claimed this about) because they hold the wrong opinions etc, the former can’t even be wrong – since they are effectively unfalsifiable.

If I were to say that your function in the current system was to support social order by demonstrating the apparent possibility of dissent, through your habit of making crabby remarks in the comments sections of blogs with middling readerships, then this would be a functionalist argument. It would almost certainly be impossible to prove or disprove, because it depends on unprovable claims about what the ‘system’ of social order is, what it ‘needs’ to keep functioning, and how it ‘makes sure’ that those needs are filled. If I were to say that you were making the comments that you were making because either you were directly paid to, or because you were a signed up member of the Crabby Commentariat Guild, , it would be an argument-from-employment. It has micro-foundations, suggesting either that you have a direct material interest, or a professional identity that was bound up in commenting, which explains your behaviour. Obviously, it would not be a particularly _good_ argument of this kind, given that I presume you are neither paid for your comments, nor a member of a non-existent professional society. But it would at least be an argument that you could test and either find to be supported or undermined by the available evidence. In the case of the ECB, I’d be inclined to think that it was true, through a mixture of professional incentives, institutional culture, and deference from policymakers.

And smartness does mean some things. In this case, I think it means some very problematic things. When people’s apparent intelligence is validated by a whole host of social accolades – Ph.D.s, positions in prestigious institutions etc, it makes them less likely to consider the possibility that they might be wrong, and also means that others, who see them as validated ‘experts’ are more likely to believe them. This is a particular syndrome, and a very problematic one – Robert McNamara in Vietnam is another obvious example. Smart people can believe some really stupid shit. That’s the point I’m trying to make.

15

JMG 01.04.12 at 3:24 am

Any system in which the decision makers do not operate under the principle “If you fail, it’s your ass” will fail repeatedly. It doesn’t matter if the decision makers are smart, stupid, or in-between.

16

chris 01.04.12 at 3:33 am

Expertise is a very good thing – when it is leavened by democratic accountability.

Is it overly cynical to point out that in practice, democratic accountability works better when you have a couple billion dollars to back up your opinion? Or, in other words, we already don’t have democratic accountability, so how can anyone be sacrificing it?

And the high value hypothetically assigned to democratic accountability rests on the happy assumption that the demos aren’t convinced global warming is a myth, or the equivalent. Sure, smart people can believe some really stupid shit. Stupid people can believe much stupider shit and believe it in mind-bogglingly huge numbers. I’d like to see some data that shows that democratic feedback on average improves outcomes on these kinds of policy questions.

No doubt democratic feedback has a role in spotting the most obviously corrupt forms of self-dealing, which experts might be too busy patting each other on the back to bother doing anything about; but when the problem is that the experts don’t know what the heck they’re doing, I don’t see how you can expect input from the ignorant to be a force for good.

17

chris 01.04.12 at 3:40 am

Any system in which the decision makers do not operate under the principle “If you fail, it’s your ass” will fail repeatedly.

Who determines who failed, and on what basis? To take one example from a putative democracy, this year’s US presidential campaign seems set to operate mainly on the principle of blaming the President for various failures of domestic policy — an area in which Congress is quite clearly and by design in the driver’s seat. Some people have even suggested that the President’s political opponents have seen quite clearly that if they failed it would be *his* ass, and accordingly set out to fail, at which they have succeeded smashingly. If that’s democracy, maybe it’s time to look at the other thing, or look for some kind of Hegelian synthesis, or something. It certainly doesn’t seem like the kind of accountability mechanism that’s going to produce better results over time.

18

Olivier Simard-Casanova 01.04.12 at 6:25 am

The ECB empowering is a response to the lack of clear and sufficient political leadership in the EU. France and Germany are strong but they’re not democratic enough when they take decisions for the other 25 countries.ECB is a clear second (or more probably third) best.

19

Meredith 01.04.12 at 6:27 am

The accountability mechanisms are surely all messed up: I’m with Chris there. But that accountability is key: that’s the strength of Henry’s post for me. Not just to keep the expert elites from being distracted by their vanities or corrupt temptations, or just to keep feedback loops in play. But to keep things creative, to foster desiring and imagining and then trying to create new things. Which is the most important reason why listening is finally so important. (And why technocrats, for all they have to offer, are only part of the story. More or less by definition, technocrats aren’t imaginers.)

20

JW Mason 01.04.12 at 6:43 am

There’s an alternative explanation, which I’m not sure is right but might be worth discussing.

Central bankers may be unaccountable to democratic politics, but that doesn’t mean they are unaccountable full stop. Central bankers spend an awful lot of time talking to private bankers (and to some significant extent other people in the upper echelons of the business world), both because of the kind of personal-professional background that Rich P. talks about, and because it’s a practical necessity of doing their job. There’s real accountability and feedback there. I don’t imagine Draghi would be as blunt as Volcker, and tell European legislators “Look, your constituents are unhappy, mine aren’t”, but I don’t know that the basic dynamic is any different. Just because the ECB doesn’t answer to us, doesn’t mean it doesn’t answer to anyone.

But why would banks or businesses want austerity? Isn’t it bad for them too? Well maybe. But I think it’s at least worth considering the idea that some important part of the European business class sees rolling back social democracy (or putting the state on a sound fiscal footing, if you like) as an important project that can’t be achieved through normal political channels, and that is worth sacrificing some growth for. That we’re seeing a kind of game of chicken, in other words, which the ECB is winning precisely because they *seem* to be so indifferent to, or unaware of, the potential disaster it could lead to.

Or as somebody or other said, “what we are seeing here is a takeover of Europe by the neoliberal “permanent government” who failed to get their way by democratic means.” Something to think about, maybe.

21

Henri Vieuxtemps 01.04.12 at 7:21 am

Is it at all possible that this form of social democracy (high inequality/massive redistribution), that y’all are defending against evil bankers, is simply kaput, proved unworkable?

22

Chris Bertram 01.04.12 at 8:19 am

I’m surprised that no-one has made the obvious reference here, so I’ll make it: Sen on famines and democracy. I’m also reminded of Peter Griffith’s excellent the Economist’s Tale, all about dispensing the free-market medicine at the behest of the World Bank who didn’t really want to know about the effects on the ground in a Liberia on the edge of famine. The big difference here is that instead of this being the IMF or WB in action in a “3rd world country” now the expertly-administered medicine is coming from closer to home. Oh and another famine reference: Ireland.

23

Walt 01.04.12 at 8:49 am

Is it all possible, Henri, that you are trolling us?

Someone once said something here in the CT comment section that struck me as quite insightful. (I think it may have been JW Mason, actually.) The difference between class consciousness and people rationally pursuing the same goal out of self-interest is that class conscioussness can be irrational. As Lupita pointed out above, the ECB is pursuing the exact policies that the IMF long imposed on developing countries. Does this advance someone’s interests? Who knows? It’s the collective delusion of the European policy-making class. The correct analysis here would be in terms of the history of ideas, rather than as yet another example of Rational Economic Man in action.

24

Henri Vieuxtemps 01.04.12 at 10:05 am

No, Walt. The way I see it, there is the nordic model, with unionized labor, union representatives on boards of directors, collective bargaining by unions or local councils, and all that. In this, more syndicalist model, incomes are (better) equalized at the source. And then you have, elsewhere in Europe, a more liberal model, with the ‘tax and redistribute from the top down’ approach. The nordics seem to be doing fine, and the other model seems to be failing.

25

Random Lurker 01.04.12 at 12:20 pm

@ HW
I don‘t think that there is a model that works and another one that doesn‘t:
If you compare for example Sweden to Italy, you see that Sweden has an higher per capita GDP and is less unequal. However Sweden is much smaller than Italy and is more comparable to Lombardy in terms of population.
If you compare Lombard per capita GDP you will see that is (or was before the crisis) much closer to Swedish one.
What happened is just that some parts of Europe become industrial regions, while others didn‘t. the industrial regions could thrive because they exported to non industrial ones but this created umbalances that were covered up by an increase of debt. Now it isn‘t possible anymore to increase debt, so the choice is between devaluing it or economic depression. For some stupid reason we are chosing depression everywhere, including industrial regions.

26

James Conran 01.04.12 at 12:57 pm

“By supporting bank borrowing rather than sovereign state borrowing, the ECB has managed to prop up the system without openly changing its mandate.”

Obviously, though, the ECB can’t change its own mandate – that would need treaty change. So I’m wondering what the alternative option you would have the ECB take up is Henry? Obviously it could encourage more sensible policies than the destructive ones it currently favours, but that doesn’t get around democratic deficit issues.

It seems the ECB has no direct way of acting as lender of last resort to sovereigns – its options are either buying sovereign debt in secondary markets or funding banks who fund sovereigns. The former would (or could) be more transparent than the latter I grant you. But it would still grant the ECB enormous power over debtor states. Arguably the truly distinctive thing about the “secret sovereign bailout” option is that it also represents a sneaky way of recapitalising the banks out of sovereign funds – the banks pocket the difference between the yields on the sovereign debt and the rate they pay the ECB.

One thing I’m curious about is the mechanics of the operation – how can anyone be sure that the banks invest the ECB funds in their home country bonds instead of other assets that would also qualify as ECB collateral, e.g. German bunds? I wonder how explicit or implicit the understandings and quid pro quos underpinning these arrangements are.

27

Henri Vieuxtemps 01.04.12 at 1:31 pm

RL, according to wikipedia:
Sweden GDP by sector agriculture: 1.9%, industry: 26.6%, services: 71.5% (2010 est.)
Italy: GDP by sector agriculture: 1.8%; industry: 24.9%; services: 73.3% (2010 est.)
Not that different.
But Italy is 40% unionized vs Sweden’s 80%. I believe that’s your imbalance right there.

28

nnyhav 01.04.12 at 2:06 pm

Democratic accountability has long been shifted by elected representatives to counterparts insulated from political pressures, whether in relying upon monetary policy to manage gaps in difficult fiscal policy issues, or upon the judiciary to resolve legislative lacunae, above and beyond the protections afforded by bureaucratic obfuscation (for which the British civil service serves as exemplary). It seems disingeneous to portray the ECB as out of touch for hewing to Merkel’s line for the short term.

29

Barry 01.04.12 at 2:29 pm

I agree with Rich, and agree more strongly with JW Mason.

The half-acknowledged elephant in the room is the fact that these policies fit best with a model in which the financial elites pursue their short-term interests, and have massive clout.

They want to get bailed out and not prosecuted; all else is very secondary.

30

Bruce Baugh 01.04.12 at 2:40 pm

“Can be subverted by decades-long often-consciously-coordinated action” is not best pronounced “failed”, I don’t think.

31

MPAVictoria 01.04.12 at 3:10 pm

““Can be subverted by decades-long often-consciously-coordinated action” is not best pronounced “failed”, I don’t think.”

Ding, ding, ding! We have a winner. Look we know that social democracy works. We also know that it works by preventing the top 0.1% from extracting every single penny for their own pockets. Hence it must be killed and if they can’t kill it at the ballot box they will kill it with a fountain pen. The bastards.

32

Jeffrey Davis 01.04.12 at 3:39 pm

The ECB beezers are all moles put in place by the Chinese Communists. It’s the only thing that accounts for their willed stupidity.

33

otto 01.04.12 at 4:03 pm

If the situation is as Henry describes, what can one do? The German political establishment backs the ECB’s strategy, and this may be all the political constituency that the ECB appears to require. The German political establishment cannot be voted out by e.g. Irish or Greek voters, so, well, there we are.

34

politicalfootball 01.04.12 at 5:00 pm

It seems disingeneous to portray the ECB as out of touch for hewing to Merkel’s line for the short term.

Germany’s polity is, as you say, well-represented by the ECB. There are other countries in Europe, though.

35

otto 01.04.12 at 5:14 pm

Thinking this over, what if anything would be wrong about referring to the “German method” rather than the “ECB method”? There clearly is an essential political constituency for the ECB’s policy-making and it may be better not to euphemise this.

36

mpowell 01.04.12 at 5:33 pm

Explanations for this kind of policy are over-determined. Unfortunately, that makes it hard to figure out what the true story is. But I do resent the description of ECB staffers as ‘smart’. Rich may have the right of it, but there are actually smart people in this world, ie people who consistently arrive at correct conclusions when given reasonable evidence to work with. It’s quite easy to sound smart without actually being smart. And whatever the folks at the ECB are, they’re not smart by my understanding of the term.

37

bianca steele 01.04.12 at 5:53 pm

Agreeing with those above who say “they’re not technocrats,” at one time I used to think “technocrats” were the kind of civil servants depicted in Yes, Minister who, however petty and small-bore authoritarian in their own little realms of power, could actually claim to have a better grasp on conditions “on the ground” than the politicians, not only necessarily economists.

38

nnyhav 01.04.12 at 7:00 pm

So, today sees Germany lose ECB economics division leadership to Belgian Peter Praet, but gain int’l/Euro relations portfolio for Joerg Asmussen; Merkel discounts claims that this represents a loss of influence.

(sorry ’bout disingenuous spelling)

39

Martin Bento 01.04.12 at 7:14 pm

Bianca, that’s “no true scotsman” territory. Technocrats have been given a role in the system and nowhere more so than in central banks, where they are expressly isolated from democratic accountability on the presumption that their wisdom will ultimately serve society bettter than the ignorance of the hoi polloi. To vest them with such power using such a justification, and then claim they do not count as technocrats if they do things that are stupid or that serve narrow interests with which they are aligned at the expense of the general interest is forcing success from technocracy by playing with the semantics: whenever technocracy fails, well, that is not *true* technocracy. Any system is great that can rule out its failures by definition.

40

Minor nonsense 01.04.12 at 7:36 pm

No organization that has over 10 levels of organization can be a technocracy. It is totally impossible. After 10 levels of personnel, all decisions are taken by people with a personal political slant. They reach the top by politicking, not by whether or not they are qualified to hold the position by experience or proven leadership.

They are politicians. They are only loyal to themselves. They make all decisions strictly based on their self interest. Their underlings follow like lemmings.

Lately, research has begun to substantiate that most “leaders” in all fields are psychopaths.

41

Random Lurker 01.04.12 at 7:39 pm

Two reflections:
1): I read very often the idea that european policy is more responsive to Germans than to other europeans, or that the ECB goes against the will of the people whereas elected national governments would not. However, I don‘t see any Italian political party that says that Italy should default, or asks for an hgh inflation policy. In absence of those two options, austerithy is a given, and will also affect negatively German workers by a fall in exports. So it seems to me that the problem is that just everyone in power believes the class based liberist ideology of wich austerithy is the product.
2): When I was a@

42

Random Lurker 01.04.12 at 7:47 pm

Sorry I have problems typing from my cellphone .
When I was a kid, I was told that the Italian constitution gave more power to the legislative branch than the executive. because the dominance of executive on other powers was an hallmark of dictatorships. However it seems to me that everywhere executive. is gaining influence. on other powers, and beyng the ECB a form of executive power this is a further sign. Is this really a common path and if so why?

43

bianca steele 01.04.12 at 7:48 pm

Martin Bento,
There was a time when I used to think “democratic accountability” meant having to do what (usually outside) people voted on, usually w/r/t goals but sometimes w/r/t means, not having to answer to clients’ perceptions of whether goals were being met.

44

Henri Vieuxtemps 01.04.12 at 9:09 pm

However, I don‘t see any Italian political party that says that Italy should default, or asks for an hgh inflation policy. In absence of those two options, austerithy is a given

The way I see it, you can default or inflate, but then no one in their right mind will lend you again at any reasonable rate, for as long as those imbalances still exist. And a default won’t make them go away.

So, assuming the imbalances are still there, you’ll need a combination of austerity and permanent bailouts, by German taxpayers (aka ‘tighter fiscal union’). Some want more austerity, others more bailout, but you’ll need both anyway. With that you create a dynamic similar to that of the suburbia vs urban ghetto in the US, or northern vs southern Italy. This dynamic leads to resentment (that turns into racism) on one side, and bitterness and hopelessness on the other.

45

Sebastian H 01.04.12 at 9:44 pm

“The way I see it, you can default or inflate, but then no one in their right mind will lend you again at any reasonable rate, for as long as those imbalances still exist. And a default won’t make them go away.”

This is true of Greece but not true of Italy. In Italy’s case almost all of the imbalance is debt payments. Italy has been running at or near a budget surplus for more than ten years until the global depression hit (which is the time you expect/want a government to spend into deficits).

46

chrismealy 01.04.12 at 10:02 pm

JW Mason? What happened to Lemuel Pitkin?

47

Random Lurker 01.04.12 at 10:09 pm

@HV
I disagree that nobody would lend to Italy or Greece as long as umbalances exist, since everybody lent up to some years ago, when default become imminent .
Also I think that when you speak of permanent bailouts you refer to a transfer system, but this is not what is happening since German. taxpayers. are just lending money to italywhich. is very different .

48

Henri Vieuxtemps 01.04.12 at 10:41 pm

If you default, don’t change anything, and try to borrow again, then another default is very likely to become imminent in the future. Then, simply by the logic of backward induction, you’ll have to pay a higher interest on your borrowing.

since German. taxpayers. are just lending money

I get the impression that by ‘tighter fiscal union’ they actually mean transfers. And in any case, if you’re planning to default eventually anyway, then how is it different from a transfer?

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Random Lurker 01.05.12 at 3:01 am

@HV
You seem to think that the troubled nations would need continuous defaults.
I believe that, even if the umbalances persist, those nations could go on for tens of years as happened. in the past. In, say, twenty years, many things could happen, and the umbalances could be solved. You also seem to think that, if a nation. defaults , mostly foreigners would take a hit, but most Italian public debt is held by Italians, which is the reason no Italian party roots for default imho.

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Martin Bento 01.05.12 at 8:12 am

Bianca, I’m not sure I understand you right. Are you contrasting satisfying voters with satisfying clients, the latter being distinct in that they are compensating you for a result with something other than re-election?

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Henri Vieuxtemps 01.05.12 at 8:33 am

RL, since not having to borrow too much seems to be an equivalent of dreaded austerity, and that’s bad, – sure, I expect these troubled nations to continue (on average, there can be temporary bubbles here and there, of course), spending much more than they can collect in taxes.

Unless their basic socioeconomic structure, their income distribution at the source, changes dramatically, which was my point in the first place.

most Italian public debt is held by Italians

Again, if default becomes an accepted policy tool, then the interest rates should, logically, go thru the roof.

For default not to become an accepted policy tool, the money has to come from somewhere. That ‘somewhere’ can’t be private investors, so it will have to be a public institution, public institution with a surplus, so let’s call it, for example, ‘German taxpayers’. Where am I wrong here?

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Martin Bento 01.05.12 at 9:06 am

Henri, the money can just be printed, in which case it doesn’t “come from somewhere”, it comes from thin air. The threat here is inflation, but in deflationary times, and times of excessive debt overhang, that can be a feature.

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Henri Vieuxtemps 01.05.12 at 11:02 am

Yeah, this is a confusing part, that I don’t really understand. If you print bills and simply hand them over to Greece, to the Greek government, then it sounds like you’re still taking something from Germany, doesn’t it? So, you’d have to print and somehow buy something useful from Greece, and hope that a part of that money will be collected by the Greek government. But chances are it may not work (wages are low, and nobody wants to, or can afford to pay taxes), or, to whatever extent it does work, it might still be just a short-lived relief.

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Shay Begorrah 01.05.12 at 1:18 pm

Firstly there is not a solution to Greece’s excessive debt problem that does not involve striking off some of the debt. Austerity never works, it certainly can not work where the country is still borrowing in another countries currency (and for all intents and purposes the Euro is really the German currency).

However the ECB are implacably opposed to investors taking a hit (because of both class interests and the longer term political goals enabled by the austerity agenda) and their German coconspirators will not accept printing money in the quantities needed to make the debt manageable, even if that money was spread in such a way that Germany was somehow “reimbursed” for the inflation by being given even more money than Greece, as inflation is not politically or socially appealing in Germany (where much pension planning is through cash for instance).

Sadly there is no way for the EU to retain its progressive character in this situation but if you are the ECB or a German conservative this is a feature and not a bug. Our only hope is that the first quarter of the year sees Spain or Italy unable to roll over debt and that this causes either the collapse of the Euro or a change in the ECB mandate.

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bianca steele 01.05.12 at 3:04 pm

Martin,
I may have been confusing Yes, Minister with a movie about a civil servant trying to fix a window for a constituent. The poor old lady whose window is broken is the client. To some extent the civil servants have to account to “everybody” for each one of their actions and the justifications for their actions and so on, but presumably at some point that stops.

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Zamfir 01.05.12 at 3:06 pm

@HV, the eurozone is obviously not producing at full capacity. So at least in theory it should be possible to give stuff to people without making others worse off at the same rate, if the mechanism involved raises production. Or really the converse: austerity seems to make some people poorer without making others richer by the same amounts.

It’s doubtful that there is a perfect mechanism that doesn’t make anyone worse off. But there is a healthy case to be made that the creditworthy countries of the eurozone are in a position to help the less-creditworthy country at a cost to themselves that is far smaller than the benefits to the others.

If that’s the case, they (we) should do it. No out of pure altruism, but because there’s hopefully enough trust left in Europe, enough confidence that others will do the same if they are in such a position.

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bianca steele 01.05.12 at 4:03 pm

Martin,
But what’s the deal here? My initial point was pretty narrow, but admittedly a mild contradiction of the OP in one small point. Your responses seem to broadening the scope. Are you hoping I’ll pull out a theory explaining everything that lies behind my initial comment? Or, are you trying to teach me why “technocrat” truly means (and always did mean) world-government economist–which I could figure out for myself if I thought about it quietly before posting, and should have? Or, I don’t know, some people on the Internet like to say things they know won’t be understood and then point out that “mindreading” or whatever isn’t legitimate, I didn’t think you were one of those.

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Martin Bento 01.05.12 at 9:11 pm

Bianca, it figures that Yes, Minister references would go over my head as I’ve never watched the show. I’m not trying to set any rhetorical traps, though. What I’m objecting to is treating “technocrat” as a sort of honorific for which people are disqualified if they do things wrong. The “crat” indicates an actual exercise of power, which is certainly what we are seeing. The choice to apportion power in this way must, like all such choices, be subject to fair evaluation, and this is impossible if its failures don’t count as failures of technocracy. Central bankers, and international institutions of similar function such as the IMF, are the archetypal technocrats – granted great power expressly because more democratic regimes are held, by the defenders of these institutions, to be intrinsically too stupid, short-sighted, and/or corrupt to be entrusted with the power. Regardless of what they do or how good it is, central bankers are technocrats because they hold power with technocratic justification. If they “are not technocrats” just because they use that power poorly, technocracy becomes another ideology that can never fail because its failures are not “true technocracy”.

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Random lurker 01.05.12 at 9:56 pm

@HV 53
Sorry for the very late answer.
I think that you are making some errors:
In case we are speaking of defaults, the defaulting countries would need to borrow. much. less after default because they would not need topay interest on older debt. Also the cost of debt is extremely high today for them because of a self fulfilling prophecy that would not hold after default. Lending to a country that might default in a distant future. is still a good idea if you think you can cash out before it happens.
In case you are speaking of inflation, you have to balance the fact that austerity in southern Europe means recession in Germany, as is already quite obvious but will be discovered in surprise in a few months, so it isn’t obvious that Germans would pay for inflation more that they will pay for austerity.
Lastly, I agree that some changes have to happen in the social structure of the debtor countries but I believe that austerity is a push in the wrong irection (that is Italy will be less productive because of austerity and not more).

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Henri Vieuxtemps 01.06.12 at 7:20 am

None of this contradicts anything I said.

Of course if you can’t maintain the debt, you’ll have to default, and you’ll probably borrow after the default at less interest than just before it. But you’ll have to pay even less interest, much less perhaps, if the default is ruled out completely, if your credit rating is the highest possible.

Germans would pay for inflation more that they will pay for austerity.

But ‘Germans paying for austerity’ doesn’t really mean ‘paying’, does it. It’s just a figure of speech.

It’s one thing, when you have to work at a factory, full time, – and see your wage going down in real terms. That’s paying.

It’s quite a different thing to work 10 hours less in a week, for the same pay you would be getting in the first scenario. That’s not paying, not really. Why would I want to choose the the first scenario?

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JW Mason 01.06.12 at 7:26 am

JW Mason? What happened to Lemuel Pitkin?

I decided it was time to take off the pseudonym and blog naked.

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Henri Vieuxtemps 01.06.12 at 8:30 am

that is Italy will be less productive because of austerity and not more

If you keep maintaining a system that doesn’t work well, if you keep it going by injecting money from the outside, with outside people making sacrifices, then the system won’t change in the foreseeable future.

There will be all kinds of bad consequences: for example, people who make sacrifices (call them ‘Germans’) will start thinking that something must be inherently wrong with the people trapped in that bad system; and those (call them ‘Italians’) in turn will soon come to believe that the Germans must be inherently corrupt and prevent them from succeeding. It’ll be getting worse and worse.

Something has to give. How, by austerity or by something else, I don’t know, but austerity sounds like it may, actually, become a vehicle of change.

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rf 01.06.12 at 8:57 am

I think “default” alone means many things, (when it happens, in what context, who you owe money to, what you “default” on etc).
The reality is there are a whole lot of people, in ‘peripheral’ countries, waiting on a core country meltdown, Spain Italy maybe France, to take the heat of them and allow some sort of political opening. (Which cant be healthy)
Thats the only hope that appears to exist. So dont buy the EU propaganda, its much of a muchness really. (Merkel/Sarkozy/Cameron/Kenny would be far to Obamas right on some matters these days)

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Guido Nius 01.06.12 at 9:31 am

Henri said it. The only reason for the left to be upset with the European project is that it’s currently dominated by the right (although for sure a right that is, when maybe not to the left of the person Obama, is to the left of the policies in the current US). But if the left will have any chance of enacting its preferred policies it will be because there is the European project that will give them the scale of actually going against the dynamics of big finance. So it is better to take the fiscal convergence now and try to convince the voters that once it is there it should be used in another way. Going against the European project will never yield anything else than going in the opposite direction of the aims of the international.

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gastro george 01.06.12 at 9:49 am

@HV It’s far from clear that it’s the Germans who are making the sacrifices and Italians that are taking the benefits. Germany is benefiting from an artificially low exchange rate both inside the Eurozone and outside. Their profits and fiscal security is based on “unfair trading”. Fiscal convergence – as defined by the ECB – is an impossibility in the current structure. As somebody (was it Krugman?) stated – the problem is not fiscal imbalances but trading imbalances. If Germany wants a trade surplus with the southern states, then that money has to be recycled in some way or is unsustainable. Austerity is on solution to that conundrum.

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gastro george 01.06.12 at 9:50 am

“on solution” = “no solution”

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Henri Vieuxtemps 01.06.12 at 10:32 am

Austerity is not a solution, but it may give an incentive to the populations of Italy, Greece, Spain to fix their problems: to organize, to go after their billionaires Swiss accounts, to demand higher wages, transparency, and so on. And then, perhaps, trade imbalances will disappear too.

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Random Lurker 01.06.12 at 10:56 am

@HV
I think you get it wrong on many points:
First as Germans are lending money to Italy at an interest in the end it is Italians that are giving money to Germans not the opposite. This is true even in the case of the German taxpayers who lend money to distressed countries at an higher interest than the one they pay on their loans.
second because of austerity many Germans will lose their jobs, while it is not obvious that they would lose money in real terms with inflation since their wages would rise faster than Italians .

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Random Lurker 01.06.12 at 11:04 am

Also speaking of sacrifice please note that Italians are less payd than Germans,work longer hours and have a smaller welfare both in absolute and relative terms.
Italians are less competitive because they are less productive wich likely depends on the kind of low tech industry that is prevalent in Italy .
I doubt that austerity can change this.

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Random Lurker 01.06.12 at 11:10 am

@HV
Sorry I think we crossposted.
Unfortunately austerity in Italy is having the opposite effect that you said:
Since the idea is that wages have to fall taxation becomes more regressive while unions are bashed.

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Henri Vieuxtemps 01.06.12 at 11:10 am

Germans practice work sharing, so they won’t lose many jobs. Besides, what’s a job? A job is just work. It’s not as important to have a job, as to be paid for doing work.

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SusanC 01.06.12 at 11:19 am

There’s something rather reminiscent of Plato’s Republic in the side-discussion above of what it means to be a technocrat. It’s a good Greek root too, τεχνη.

What should we call a form of government where the rulers aren’t elected and don’t inherit power, and instead claim they have the right to power because they have some special skill — but don’t really possess the claimed skill.

Tyranny, maybe.

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soru 01.06.12 at 1:20 pm

@72: Isn’t is the case that the technocrats would ideally like to implement transfer payments or some reasonable facsimile, but feel constrained from doing so by german public opinion? Whereas for unclear reasons the results of Greek, Irish or even Spanish elections don’t impose a comparable constraint. Which means the boundaries of the possible, within which the technocrat must choose, are set more by potential violence, or at least mass protest, than what the people directly affected would vote for.

Kind of resembles a British late -imperial civil servant who ideally would have liked to raise taxes to pay for famine relief in some governed country, but felt the electorate back home would not be easily persuaded of the case.

Is so, the ism form of word you are looking for is _imperialism_. No such thing as imperialocracy, presumably because Athens was an empire in this sense, so it was always implicit in the classical term _democracy_.

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Henri Vieuxtemps 01.06.12 at 1:32 pm

First as Germans are lending money to Italy at an interest in the end it is Italians that are giving money to Germans not the opposite.

My objection is not to lending, but to a bailout (in whatever form: transfer, inflation), which, seems to me, is the alternative to austerity at the moment. And, if nothing changes, there will be other bailouts, it’s bound to happen again.

Also speaking of sacrifice please note that Italians are less payd than Germans,work longer hours and have a smaller welfare both in absolute and relative terms. Italians are less competitive because they are less productive wich likely depends on the kind of low tech industry that is prevalent in Italy .

Because they are paid less and work longer hours, there is less incentive to innovate. Businesses tend to innovate and introduce technological solutions where there is upward pressure on wages.

Since the idea is that wages have to fall…

I don’t think this is the idea. The idea may be that after-tax incomes have to fall, but why should the wages fall?

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Shay Begorrah 01.06.12 at 2:56 pm

One of the revealing things about the European component of the global financial crisis is how the enthusiasm of Europhiles for the EU, their project – right or wrong, has become so fundamental to their political outlook that it has caused those of a nominally left wing bent to adopt positions normally associated with the right of the political spectrum (for example monetarism, authoritarianism and centralism).

Guido Nuis imagines that an EU that has gradually become an unapologetic advocate and enforcer of market liberalism and a defender of banks and investors somehow represents the best hope for the left in Europe to defend itself against these same forces while Henri Vieuxtemps sees the results of Germany’s geographical position and social structures and the flaws of the Eurozone instead as indicators of German virtue.

I mean it is strange that national virtue attenuates the further one gets from Europe’s geographical and political centre, eh?

Its been the case at least since the Lisbon treaty that leftist Europhiles have had difficulty facing the realities that the Euro and the nature of EU governance has reduced the level of international solidarity in the EU, strengthened the hands of Europes mobile and wealthy elite, set the working classes of various countries against each other through deflationary wage competition and that an unelected and right leaning institution (the same ECB) now exercises strong control over EU economic policy.

It is not a new syndrome on the left at all, both left anti-communists and Irish revisionists eventually found that the cognitive dissonance of the their positions forced them to the right (Conor Cruise O’Brien would be the classic Irish case). It is still sad to see.

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MPAVictoria 01.06.12 at 3:15 pm

“My objection is not to lending, but to a bailout (in whatever form: transfer, inflation), which, seems to me, is the alternative to austerity at the moment. And, if nothing changes, there will be other bailouts, it’s bound to happen again.”

Henri why can’t the lenders just take a haircut on the loans? They made the loans freely and charged a risk premium (the interest rate). Why must they be paid at the expense of the suffering and death of a large number of people?

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Random Lurker 01.06.12 at 3:23 pm

@HV 74
The whole point of austerity is that wages have to fall.
The problems is that Italians, Greeks. etc. are not competitive, wich means that their. wages are too high respect to their productivity. But nobody knows. how to improve productivity,so policy is focused on compressing wages.

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gastro george 01.06.12 at 3:33 pm

@RL 77
Precisely. Without the Euro, trade imbalances would be sorted by the respective currencies floating. With the Euro, the only theoretical balancing mechanism (without fiscal transfers) is forced internal devaluation = wage suppression.

The problem is that wage suppression and austerity just make deficits worse (as we are seeing), requiring more fiscal transfers.

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Henri Vieuxtemps 01.06.12 at 4:41 pm

RL, like I said, you increase productivity by applying an upward pressure on wages.

In a sweatshop with a thousand women sitting in a basement sewing garments for $2/hr, you’ll spend a few bucks on a thousand 1930s style rusty singer sewing machines; you’ll make good money, and your ROI is fabulous. If they refuse to work for less than $15/hr, you’ll have to buy some modern equipment. And when they demand $40/hr, you’ll have to go for the state of the art, super duper fully automated stuff.

I get the impression that austerity refers to cutbacks in government spending and raising taxes, and this is what your guy Monti is about to do. It certainly doesn’t seem to have anything to do with the wages in the private sector.

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gastro george 01.06.12 at 5:38 pm

@HL 79
But if there is no demand, or they are undercut by Germany’s artificially low exchange rate, they’ll be unemployed. It would be a brave business that invests in top-of-the-range kit with no demand – so the pressure goes on wages, which are also dragged down by the pool of unemployed.

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Henri Vieuxtemps 01.06.12 at 5:45 pm

What do you mean by “Germany’s artificially low exchange rate”? It’s the same currency.

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gastro george 01.06.12 at 7:13 pm

If Germany had it’s own currency, it would be massively higher in value than the Euro. Instead, despite the fact that it’s running a big surplus, Germany has seen the Euro devalue against the pound by 20-30% over the last few months. So Germany’s exchange rate with non-Euro countries is most definitely artificially low.

It works the same way, but to a different degree, inside the Euro. Germany’s industrial production is massively profitable, so they can afford to invest in top of the range kit, increasing their productivity, and at the same time German workers haven’t seen their wages rise significantly. Southern Euro nations haven’t been able to compete with this, and can’t devalue their currency to improve their competitivity. So Germany has an exchange rate imbalance inside the Euro as well.

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Random Lurker 01.06.12 at 7:32 pm

@HV 79
I agree that the real way to raise productivity would be to increase the capital intensity of Italian economy.
Unfortunately however. this is not what the Monti government. is doing neither what the ECB asked for:
The main point of the program are liberalizations, privatizations, increase of retirement age, increases of the VAT, decreases of expenses for services .
An example of this is the request of the repeal of the “article 18” of the workers’statute that says that if a business whith more than 25 employees fires an employee it has to explain the cause of the firing (to prevent businesses to fire,for example, unionized workers and replace them with non unionized ones).

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Henri Vieuxtemps 01.06.12 at 8:15 pm

LP, good, so this may prompt your fellow countrymen to do something. To organize and fight back. Prodi and Berlusconi governments are not exactly the model worth preserving.

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Henri Vieuxtemps 01.06.12 at 8:29 pm

@82, I don’t understand what you’re saying.

Germany has seen the Euro devalue against the pound by 20-30% over the last few months, but so did Italy, Greece, and Spain.

If indeed Germany’s industrial production is massively profitable, then it should be very easy to compete against. Unless the Germans are a race of supermen, or something.

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Shay Begorrah 01.06.12 at 11:15 pm

Henri@85

If indeed Germany’s industrial production is massively profitable, then it should be very easy to compete against. Unless the Germans are a race of supermen, or something.

Come come Henri, Germany simply has to exploit its efficiencies of scale and location to undercut its former European partners, who find themselves both trapped in a currency union with Germany and under the thumb of a central bank wholly sympathetic to German priorities. The game is rigged.

You could say that the creation of the Euro zone was a mistake made by many countries but Germany has been in the best position, in multiple senses, to exploit its weaknesses and, demonstrating a remarkable sense of national purpose, it has done so. Now Germany seems quite content to use the advantage gained to destroy any progressive character that the EU has had, and the democratic process in several countries, in order to guard its winnings. This kind of economic imperialism can only persist for so long before national interests start to trump the efforts of Europe’s wealthy and mobile technocratic and financial elite to keep the project on track to its bleak new destination.

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Henri Vieuxtemps 01.06.12 at 11:44 pm

I don’t think so, Shay; I don’t think Germany is exploiting anybody. They just managed to create a better, more successful social democratic system. And they shouldn’t have to pay for maintaining the crappy ones. Let them collapse, and let’s hope that in the ensuing struggle something better emerges there.

Try this: http://www.remappingdebate.org/article/tale-two-systems?page=0,0

Workers in the German auto industry maintain high wages and good working conditions through two overlapping sets of institutions. First, in the auto industry, virtually all workers are unionized members of IG Metall, the German autoworkers’ union. With such union density, workers have considerable power to keep wages high. German autoworkers have the right to strike, but as Horst Mund, head of the International Department of IG Metall explained to Remapping Debate, they “hardly use it, because there is an elaborate system of conflict resolution that regularly is used to come to some sort of compromise that is acceptable to all parties.”

In addition to high trade union density supporting the power of German autoworkers’ wages, the German constitution itself includes a second mechanism for keeping employees involved in the decisions of the firm for which they work. The Works Constitution Act provides for the creation of Works Councils in each factory. The Works Councils provide a mechanism through which a company’s management must work with employees, whether they are in a union or not, on issues affecting work life, such as shop floor conditions, scheduling shifts, and other issues particular to the factory. This system, according to Mund, institutionalized “direct contact for workers’ representatives with management at various levels, from lower to middle to senior management in daily affairs. So you exercise some kind of dialogue where you don’t always wear your management pin or your union pin.”

Mund points out that the German example goes “against all mainstream wisdom of the neo-liberals. We have strong unions, we have strong social security systems, we have high wages. So, if I believed what the neo-liberals are arguing, we would have to be bankrupt, but apparently this is not the case. Despite high wages…despite our possibility to influence companies, the economy is working well in Germany.”

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Henri Vieuxtemps 01.07.12 at 12:09 am

…and perhaps the main reason they did manage to create this decent (more or less) system is that during the cold war their country was supposed to serve as a glittering window display of the capitalist way of life, for the trabant-driving poor east European folk. Which is not exactly a high priority these days, so it can easily get destroyed.

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Shay Begorrah 01.07.12 at 12:41 am

@Henri Vieuxtemps

I do not mean to patronize but are you familiar with the Hartz Labour reforms or other changes in the German approach to employment that occurred in the early years after joining the Euro? Life outside of the unionized manufacturing sector has most definitely not improved with life expectancy for the poorer half of society decreasing over the last decade. Germany’s apparently exemplary low unemployment owes much to so called mini jobs and an increasingly indifferent attitude to the long term poor.

The Germany of today is a very different country to the pre Euro one in many ways, inequality has risen very sharply (though from good levels pre Euro) and as someone on the left I do not think it is not a good example of a more successful social democratic system at all. It is an example instead of a wrong headed commitment to mercantilism which flourished in a badly designed currency union.

It took the European component of the financial crisis to make me look at Germany again but the admiration I felt in the past has gone. The Euro has helped the conservative political tradition in Germany and hurt the social democratic one Europe wide. Which brings us back to the ECB and the new method of European governance.

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Guido Nius 01.07.12 at 11:05 am

Hartz certainly was a step in the wrong direction but it was implemented in the context of a Germany facing the same issues that the rest of Europe is facing now. Whilst it hurt a lot of people it did manage to keep the basic Rhineland model intact in a world dominated by Anglo-Saxon neoliberalism. One can hardly fault German voters for not understanding it when the rest of Europe is not able to go through the same pain in order to defend against what is basically a speculative attack against the basics of the European welfare states.

There are two reasons why speculators can attack the system:

– European countries have too much debt and therefore are dependent on financing
– Europees economic and fiscal policies are divided such that it is easy to single out a country, push it to compete fiscally against the other countries such that these need to either up the ante or face being singled out

The analysis is simply that it isn’t the single currency which is the issue but an absence of a single economic policy. The priority is to achieve the latter even if short term this can only be achieved in, to European standards, a right wing consensus. Why only on a right wing short term consensus? Because that is the overwhelming democratic vote in Europe whether we like it or not. You can fault Europe for that but it would be closer to the truth to fault the inability of the left to come up with a truly European program.

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Guido Nius 01.07.12 at 11:07 am

Sorry, don’t know what went wrong there, again with better formatting.

Hartz certainly was a step in the wrong direction but it was implemented in the context of a Germany facing the same issues that the rest of Europe is facing now. Whilst it hurt a lot of people it did manage to keep the basic Rhineland model intact in a world dominated by Anglo-Saxon neoliberalism. One can hardly fault German voters for not understanding it when the rest of Europe is not able to go through the same pain in order to defend against what is basically a speculative attack against the basics of the European welfare states.

There are two reasons why speculators can attack the system:

– European countries have too much debt and therefore are dependent on financing

– Europees economic and fiscal policies are divided such that it is easy to single out a country, push it to compete fiscally against the other countries such that these need to either up the ante or face being singled out

The analysis is simply that it isn’t the single currency which is the issue but an absence of a single economic policy. The priority is to achieve the latter even if short term this can only be achieved in, to European standards, a right wing consensus. Why only on a right wing short term consensus? Because that is the overwhelming democratic vote in Europe whether we like it or not. You can fault Europe for that but it would be closer to the truth to fault the inability of the left to come up with a truly European program.

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Henri Vieuxtemps 01.07.12 at 11:22 am

Well, generally, more mercantilism/less neoliberalism is fine with me; the purpose of a polity is, after all, to take care of the needs of its population.

It does seem silly, though, to accuse the state that joined (organized, in fact) the EU and Euro, probably the most famous and powerful international free trade institutions in history, of excessive mercantilism. If you detest mercantilism, you should despise Switzerland (in the neighborhood), and China (globally). Germany? Not even close.

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Shay Begorrah 01.07.12 at 12:54 pm

guido@91

Whilst it hurt a lot of people it did manage to keep the basic Rhineland model intact in a world dominated by Anglo-Saxon neoliberalism.

I understand your preference but have you become a Rhineland capitalist first and a leftist second?

There is no name yet for the combination of defeatism and double think that has come to characterize left European enthusiasm for the current structure of the EU but it is clear that it has weakened the left across Europe and the world in the name of furthering a project which has not only been thoroughly coopted by the right but now has right wing objectives legally baked in (through the ECB, the commission, the growth and stability pact and so on) in a self reinforcing way.

The logic of the initial attack was simple, the Euro and “convergence” has enforced competition on the worker (and though welfare reform on the unemployed) while fostering a solidarity among both Europes’s wealthy (who all count themselves European now), financial capitalists and the EU’s technocratic elite (ever closer union with ever less popular democratic control). The current direction of the European project is decidedly to the right and do not imagine that the left will be able to retrieve it afterwards. When Thatcher broke British society she did it for decades (and perhaps for good) and our new Teutonic Thatcher seems determined to destroy the progressive character of the EU in the same way.

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Shay Begorrah 01.07.12 at 1:02 pm

Sorry to post so much.

henri@92

Well, generally, more mercantilism/less neoliberalism is fine with me; the purpose of a polity is, after all, to take care of the needs of its population.

Quite so, but Germany now effectively controls the policies of the EU in a way that is distinctly unhelpful to the health of the polities not sharing a border with it. When exactly did the protection of what remains of the pre Euro German model and German mercantilism (rather than some greater idea of European solidarity and social progress) become the goal of the EU? Should I clap Merkel and the ECB on the back for playing a good game for their respective constituencies with a well subverted European project?

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Guido Nius 01.07.12 at 1:12 pm

Well, I am for a better society first and a leftist second, that’s for sure.

Rhineland capitalism as you call it is still by far the best system ever to be put in place. It even survived – although not without damage – both Reagan and Thatcher. It was a major achievement of the left and, as long as the left is not able to articulate some new constructive proposal and limits itself to nagging about how others are successful, I’ll take it and prefer it.

You are right on the fact that the model is being eroded but you are wrong on its cause. The cause of erosion is not the European project but the lack of a European project. It forced us too much in the direction of the US and the UK. Letting the Euro go, making us more dependent on financing and hitting the employed with more inflation is what’s potentially going to make the direction irreversible for decades (never for good as the truth will in the end always prevail).

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Henri Vieuxtemps 01.07.12 at 1:34 pm

Shay,
the word “solidarity” is used a lot, but what does it mean exactly in this context? If ‘solidarity’ is understood as bailing out the Italian government and restoring it to its berlusconi-land normalcy, then, I’m afraid, solidarity is actually preventing any social progress.

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FromGreece 01.07.12 at 3:23 pm

“LP, **good**[emph. added], so this may prompt your fellow countrymen to do something”

Given the huge hardships for millions of people that this continued forced austerity causes, the above sentence, and in general HV’s line of “argument” borders on trolling.

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FromGreece 01.07.12 at 3:26 pm

“hitting the employed with more inflation”

A 3-4% inflation is definitely a much easier hit on the employed than the pink slip many will receive during the continued Great Recession.

It is amazing that in a time of huge unemployment and GDP shrinkage in the EU, with inflation well below 2%, supposed progressives talk about the dangers of … inflation…

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Henri Vieuxtemps 01.07.12 at 5:17 pm

Appealing to hardship without addressing the point smacks of concern trolling.

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Guido Nius 01.08.12 at 11:36 am

98: it is not because unemployment is a real issue that inflation isn’t. The question is what policy is best, over time, to address the conglomerate of potential issues. I said before in a thread ‘reculer pour mieux sauter’ but in fact it is ‘sauter pour mieux reculer’, we have imho to jump to fiscal convergence in Europe with less dependency on financing even if this means in the short term a loss of some things already gained. It will be the only way (again imho) to get to a situation where we reverse the trend of the last 3 decades of this constant pressure on social achievements in Europe. Maybe we can consider it as a dead end requiring us to make a U-turn which will temporarily take us farther from the shortest path. If so, the co-pilot to the left of us may use the time to actually articulate an alternative which is neither utopian nor only defensive.

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FromGreece 01.08.12 at 1:38 pm

” It will be the only way (again imho) to get to a situation where we reverse the trend of the last 3 decades of this constant pressure on social achievements in Europe. “

That’ll certaintly do the trick: Giving up social achievements so that we reverse the rend of pressure on social achievements. Krugman has often commented on that tactic on his blog (as it pertains to the US): Giving up Social Security now, so that it doesn’t collapse in the future.

In the long run we’re all dead. You write “it is not because unemployment is a real issue that inflation isn’t” but this is disngenuous.: inflation isn’t a real issue now, not in the least. Unemployment is. How more wrong can the priorities be if one worries about moderate inflation *in the future* than huge unemployment *now*? And if wrong strikes you as the wrong word, how illustrative of one’s sociopolitical agenda?

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FromGreece 01.08.12 at 1:40 pm

trend, disingenuous…

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Shay Begorrah 01.08.12 at 3:42 pm

@From, Greece

Giving up social achievements so that we reverse the rend of pressure on social achievements. Krugman has often commented on that tactic on his blog (as it pertains to the US): Giving up Social Security now, so that it doesn’t collapse in the future.

The essential characteristic of Leftism with EU characteristics has been its emphasis on a serious of strategic retreats from principle in the belief that eventually, with enough retreats, the attackers will change their minds and the remaining redoubt of mildly socialist outcomes (industrial workers close to the Rhine) can be saved. Bravo.

Guido Nuis@91 said:

Rhineland capitalism as you call it is still by far the best system ever to be put in place. It even survived – although not without damage – both Reagan and Thatcher. It was a major achievement of the left and, as long as the left is not able to articulate some new constructive proposal and limits itself to nagging about how others are successful, I’ll take it and prefer it.

but of course it was not Reagan and Thatcher the left in Europe needed to worry about but Schroeder, Blair and the New Democrats. There is a left now but one too timid to do anything other than try and preserve what looks vaguely like socialism in the most influential countries in the EU at the expense of the others.

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Guido Nius 01.08.12 at 3:52 pm

I agree with the last part of 103 and I surely hope I am wrong rather than of ill faith. Yes, I disagree with Krugman. I disagree wholeheartedly. If we would have followed a German course in 2008 we could have had a chance of avoiding the issues of 2011. This may well be a wrong assessment but when not following a gospel leads to being accused of ill faith, at least the argumentation process is broken somewhere.

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Sebastian H 01.08.12 at 5:23 pm

“Rhineland capitalism as you call it is still by far the best system ever to be put in place. It even survived – although not without damage – both Reagan and Thatcher.”

Germany is an enormous net exporter nation. This isn’t something that can be universally replicated because it is mathmatically impossible for everyone to be a massive net exporter nation.

Which leads us to ECB policy. Is it more appropriate for Germany or for the rest of the Eurozone? Plausibly the policy looks great for Germany, non awful for a few of the tiny countries surrounding Germany, and pretty awful for everyone else.

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Henri Vieuxtemps 01.08.12 at 8:23 pm

So what are the implications of the opposite policy, the one that’s good for the rest of the Eurozone? Is it that Germany stops being an enormous net exporter? Suppose a half of German factories close, then what? Are they going to migrate to Spain and Italy and pay the same wages as the German factories are paying now? So, what’s the mechanism behind this idea?

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FromGreece 01.08.12 at 8:52 pm

“So what are the implications of the opposite policy”
There is no mention of an “opposite” policy? There is though the radical idea that the ECB becomes a lender of last resort and prints more Deutschmarks Euros so that pressures on sovereign debt are relieved and countries like Spain and Italy can get back to the business of running their economies, instead of running them into the ground with austerity measures in the middle of a private sector bust.

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FromGreece 01.08.12 at 8:54 pm

Guido

it’s unclear to what you disagree with Krugman: He’s pointing out the absurdity of the “tactic”. If you give up social achievements, you give them up. Period. One may have to give them up, but to give them up in order to save them is nonsensical.

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Henri Vieuxtemps 01.08.12 at 10:06 pm

If, as 105 said, the ECB policy “looks great for Germany, … and pretty awful for everyone else”, then your policy must be looking at least not so great for Germany.

My question is: for Spain and Italy to “get back to the business of running their economies”, what is it, between ‘not great’ and ‘awful’ that should be happening in Germany? Is Germany still going to be building a lot of cars, or will it be growing olives instead?

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gastro george 01.08.12 at 10:32 pm

ECB policy may look great for Germany in the short term, but not so great for the German economy in the long term when the south stops buying German cars and white goods. Although they will still have their competitivity advantage while both remain in the Euro.

The Germans need to start buying olives, not growing them. At the moment German profits are being extracted by the business class, and not passed to the workers – who have had a similar no-growth of income over the last 20-30 years as the rest of Europe. The German surplus needs to be reduced by buying goods from the rest of Europe, which means putting cash in the hands of ordinary people.

Instead the lack of wage increases to ordinary Germans is being used in internal politics to blame the “self-indulgent” south.

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Random Lurker 01.08.12 at 10:45 pm

@HV

I’ll explain my point of view in somehow stupidized, but I hope clearer, way:

Italy has a net trade deficit with Germany. Suppose that both Italians and Germans produce chikens, but a German produces 6 chikens a year, while an Italian produces 4 chikens/year.
However Italians consume 5 chikens/year, living beyond theyr means, while Germans also consume 5chikens, giving their extra chikens to Italians. Since chikens cost 10€ each, after 10 years Italians owe 100€ to Germans, equivalent to 10 chikens.
At this point, Italian debt becomes unsustainable, so we have to pay it back.
“Austerity” means that we have to stop consume 5 chikens while we produce just 4, we have to consume 3 chikens a year and sell the excess chiken to Germans, so that in 10 years we will be able to pay back our debt.

In this sense, saying that Italy has to pay back his debts and that Germany has to become a net importer is exactly the same, there is no way that deficit countries can pay back loans without Germany becoming a net importer.

But this implies that Germans have to consume 7 chikens instead than the 5 they are used to consume (the six they produce plus the one Italians plan to sell them).
If they still go on consuming only 5 chikens, the following will happen:

1) 2 chikens a year will go unsold; this will make the price of chikens fall from, say, 10€ to 5€. This means that Italians will have to sell back 20 excess chikens to pay back their debt, that is set in nominal € terms (deflationary trap). This causes the growth of debt/GDP that is already happening in Greece, and means that Italy and Greece will default anyway (that is, austerity is self defeating).

2) Since chikens are produced by businesses, that are in for profits, when the chikens go unsold many businesses will close, thus causing unemployment both in Germany and Italy. Both Italy and Germany become less productive in absolute terms.

Now, It is quite easy to force Italians to consume 3 chikens instead of 5, all you have to do is rise taxes and let real wages fall (that is what is happening). But how do you make the Germans consume 7 chikens, since they already underconsume? (they are net exporters, which means that they underconsume).

This rises the question: why do Germans underconsume?
In some sense, the fact that Italians overconsume seems “human”, everybody likes high living standards; but the idea that a whole nation consciously chooses to underconsume seems strange. Also, private debt in Germany is higer than in Greece or Italy, so I think we can rule out the idea that Germans are more thrifty.

The point is that German economy is highly export dependent (see this article http://www.nakedcapitalism.com/2012/01/wolf-richter-%E2%80%9Cgerman-success-recipe%E2%80%9D-or-blip.html in Naked Capitalism).
So in order to keep German economy alive, the German government and German unions agreed to keep wages relatively suppressed in the ’90s (I don’t know the details, I read this on many articles though), thus praticing a “mercantilist” policy.

It seems to me that the only possible solution to this is to engineer a Europe-wide wage-price spiral: this way, Germans would consume more because of higer wages, while the debt burden of PIIGS would be eased; this assumes that, in case of a wage-price spiral, German wages would rise faster than Italian wages and, as a consequence, also faster than prices- so German workers would not loose in terms of real wages, they would actually gain.

But there are several political problems in this approach: first, all governments (including the German and the Italian one) seem keen on the idea of austerity, that really is a form of mercantilism, so they are implementing policies that basically try to prevent wage-price spirals; second, the ECB and the Germans really, really don’t want inflation, and third this policy can work only if applied in a coordinated way on the whole Europe (so yes, we really need more centralization in the EU, I agree with Guido Nius on this).

The alternative is, sadly, that:
1) some or all the PIIGS defaut;
2) possibly some countries exit the Euro;
3) this leads to intra european mercantilist trade wars, which really would be a tragedy for european economy, that is very interdependent, and also make for ugly politics.

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Random Lurker 01.08.12 at 11:02 pm

Another point on the “underconsumption” idea:
At first sight, the idea that some people choose to permanently underconsume seems irrational.
However, it becomes more understendable when you realize that, in a credit-based capitalist economy, underconsumption is a form of rent seeking:
You consume less than what you produce, and the rest of the money becomes “credit” to someone else, who use it to consume your “excess” production. This way, the someone will have to pay back debt, plus interest, that is a form of rent: thus underconsumption is quite a winning strategy.
Unfortunately, this can work only as long as total debt can grow, that is as long as the payment of interest doesn’t exceed the ability of the debtor to pay back – at which point you have a big underconsumption/overproduction crisis, that appears in the form of a financial crisis, which is were we are now.

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Henri Vieuxtemps 01.08.12 at 11:27 pm

Nah, I don’t like this allegory much.

To start with, I’m not buying the premise of Germany and Italy being separate economies, in the sense of producing and consuming stuff. They are both in the eurozone, with a common currency, open borders, and no tariffs. This is a bit like saying that people in Palo Alto are underconsuming and and in East Palo Alto overconsuming.

The issue appears to be not with Italians and Germans consuming chickens, but with the Italian and German governments collecting and spending taxes, enacting and enforcing labor laws, providing services, and so on. The German government (pushed by social forces behind it) is good at it, and the Italian one sucks. And so, why should it be bailed out? Bad governments should collapse, and then reformed, or redesigned anew, from scratch.

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Random Lurker 01.09.12 at 12:00 am

Germany has a trade balance surplus: this means that if it exports for 100€, it only imports for 90€; ergo Germans underconsume for 10€. This is a fact, not an allegory.

Wether the Italian government sucks or not (I agree that it sucks, but I think that you are overstating the case: Prodi, for example, praticed or tried to pratice the kind of policies that you seem to like) is important because it might explain why, in my example, Italians only produce 4 chickens instead of 6, but it has no bearing on the fact that Germany runs a trade surplus IMHO.

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Shay Begorrah 01.09.12 at 12:32 am

Henri@113

To start with, I’m not buying the premise of Germany and Italy being separate economies, in the sense of producing and consuming stuff.

That is so interesting!

The issue appears to be not with Italians and Germans consuming chickens, but with the Italian and German governments collecting and spending taxes, enacting and enforcing labor laws, providing services, and so on. The German government (pushed by social forces behind it) is good at it, and the Italian one sucks.

Can you imagine a situation in which a country enjoyed a number of advantages in efficiency of production and the cost of living (lets say proximity to markets, scale of production, population density, historical specialization on goods now in high demand, setting international monetary policy to its own needs…) but where these national advantages were not reflected in the strength of the currency that its goods were sold in to another inherently less efficient country, a country that could not charge tariffs to protect its own industries?

Would these be separate economies, in the sense of producing and consuming stuff. or not?

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Henri Vieuxtemps 01.09.12 at 12:50 am

Again, “Germany has a trade balance surplus” is not a very meaningful statement, because Germany is not an economic entity, it’s merely a political one.

I’ll give you this parable: two towns, next to each other. One is well run, the population is actively participating in municipal affairs, pursuing a sort of enlightened self-interest. Modern infrastructure, law and order, etc.

The other has a corrupt government, black market economy with almost no taxes collected in a 2/3 of the town’s territory, criminal and quasi criminal enterprises all over.

If you’re a ‘respectable’ businessman, looking for a place to open a long term enterprise, where are you going to build your factory? Surely you’ll do it in the first town. The rest, all that over and under consumption, the debt, the surplus, all that follows.

You see what I mean? This is rather trivial, really. Otherwise, it seems to me you’d have to demonstrate that, as others here stated, Germany somehow takes advantage of Italy; that Italy is, in effect, its exploited colony, or imperial province of a sort, or something like that. But that, I think, would be very difficult to show.

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Henri Vieuxtemps 01.09.12 at 1:06 am

Shay, Germany was completely destroyed 60 years ago, lost 10% of its population, and quite a bit of its territory. A big chunk of it (GDR) was severely underdeveloped until only a few years ago. What ‘scale of production’?

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Keith 01.09.12 at 2:37 am

I think Henri Vieuxtemps is being deliberately obtuse here. The whole Eurofinancial crisis problem arises from the fact creating a single currency zone on its own does not create a single European economy. It was mere properganda that adopting a single currency would produce some costless integration of the economies of European states; as Thatcher and Lawson pointed out at the time while being dismissed by the mainstream left. Prof. Krugman pointed out at the time that the project was doubtful for this reason. Differences of productivity and structure between the economies of say Italy and Germany or elsewhere are of long standing and unlikely to go away quickly or easily. The Euro has allowed a speculative boom in Spain and made the Spanish economy boost its imports as a result. Following the theory that private capital must always be right and can be allowed free reign but rigid rules must apply to elected Governments; ignoring the fact, and it is a fact, that capital can be foot loose and short termist. No one stopped to add up the sums and ask if Spain could pay the assumed financial burden implied by the flow of funds across national boarders. The failures of Italian politicians are not really a justification for impoverishing millions of Italians or other people. That is a easy diversion from the fact that the perfect market theory is repeatedly shown not to hold true in the actual financial world. Creating rigid rules based systems like the euro simply acts as a system that Capitalists can game and exploit for speculative gain. Then when it goes tits up they pass the buck and some how the unemployed and disabled must be pauperised for the failures of a contrived economic arrangement.

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MPAVictoria 01.09.12 at 4:20 am

“The failures of Italian politicians are not really a justification for impoverishing millions of Italians or other people. “

This is the main problem with Henri’s perspective. How many widows and orphans should be paupered for the sins of politicians’ Henri?

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Random Lurker 01.09.12 at 8:11 am

@HV 116

“I’ll give you this parable: two towns, next to each other. One is well run, the population is actively participating in municipal affairs, pursuing a sort of enlightened self-interest. Modern infrastructure, law and order, etc.

The other has a corrupt government, black market economy with almost no taxes collected in a 2/3 of the town’s territory, criminal and quasi criminal enterprises all over.

If you’re a ‘respectable’ businessman, looking for a place to open a long term enterprise, where are you going to build your factory? Surely you’ll do it in the first town. The rest, all that over and under consumption, the debt, the surplus, all that follows.”

Ok, but in your example, the first city would have big problem in selling their products to the impoverished inhabitants of the second one: Living standard would be much higer in the first city, but no financial crisis would ensue.

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VasVas 01.09.12 at 8:30 am

“@Ok, but in your example, the first city would have big problem in selling their products to the impoverished inhabitants of the second one: Living standard would be much higer in the first city, but no financial crisis would ensue.”

Moreover, the second city would still be receiving unemployment benefits, money for pensions, teacher salaries (if not in US), and a bunch of other “fiscal transfers”.

I agree with the comment above: Henri is deliberately obtuse (to the point of trolling, I might add).

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Guido Nius 01.09.12 at 8:50 am

108: Sorry. I disagree with Krugman on the fact that an expansionary policy will lead to a better situation (both short term and long term). I also disagree with Krugman on that the Euro is a failed project because it’s a currency that applies to too fundamentally different core economies. I further disagree with Krugman (and with my own P De Grauwe for that matter) that the ECB should print more money or buy more sovereign debt, risking some higher levels of inflation. I finally disagree with Krugman on that we’re given up the basis of our social model in this current austerity wave.

In 2008, in a first wave most countries in Europe took Krugman’s medecine. I think it led to a short improvement in symptoms but did not address the disease of debt. That means we are now experiencing a worse crisis than we would otherwise have seen. It’s simply not true that there are no structural problems in the European model – and it is simply not true that addressing these problems cannot but break the social system. In Belgium alone we have a system of para-political jobs (basically funding the parties) at a huge cost, we also have a tax administration consisting of 1000s of people that used to shove paper around and 100s of people that can track money digitally, we have the system of statutory civil servants that earn less but get the best pensions meaning that almost all new civil servants doing the same job are being hired in a non-statutory type meaning they not only earn less but get the worst pensions, we have a great system of automatic compensation of wages to inflation but it applies to all wages including the highest ones at the same time as not applying to non-wage income such as pensions (not even the smallest pensions). We also have a system of company tax deduction in which multinationals de facto pay around 3% of taxes, and a system of company cars given as a non-taxable alternative to wages. In some way or another all of the above is part of our particular austerity plan (which is around 50% more income and about 50% less expenses – structural expenses not infrastructure expenses).

I mean, you can do as if the US is economically monolitical and you can do as if Japan explains every crisis, but there are details and the details matter. Fiscal convergence in Europe sure should have been started together with the Euro. It didn’t. Better late then never. It would be better if we could converge on automatic compensation of inflation in wages (and welfare income) but nobody puts this forward whilst everybody is taking the big brush of paint and just working out its aggression on the canvas.

No problem if you disagree.

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Guido Nius 01.09.12 at 8:51 am

The above was specifically about Europe in 2011/2012.

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gastro george 01.09.12 at 9:15 am

I have a better story for you, Henri.

Town A has an excellent school, and turns out highly intelligent and productive students when they graduate. Town B has a bad school, and therefore less intelligent and low productivity graduates. Your solution is to cut the wages of the teachers in Town B and tell them to pull their socks up. Not a recipe for success, I think.

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Henri Vieuxtemps 01.09.12 at 9:32 am

How many widows and orphans should be paupered for the sins of politicians’ Henri?

I hope you’re being ironic here, but I’m not 100% sure. But it certainly does sound like a mockery of all the irrelevant concern trolling above.

LP, Ok, but in your example, the first city would have big problem in selling their products to the impoverished inhabitants of the second one.

But that’s the point of it all: for as long as second town’s government can borrow, they can manage to hang on, and keep the scam going.

And if, when it finally turns into a crisis, they can default and immediately start borrowing again, or if they get a constant flow of transfers from the first town, then they can have it going forever. How is that a good thing?

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Henri Vieuxtemps 01.09.12 at 9:53 am

Gastro, productivity is not a function of the quality of schools, and, at least in my experience, the average Italian is not suffering the lack of intelligence. What they do exhibit, almost universally, is overwhelming cynicism wrt their political system. But that’s something they (and only they) can change.

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Peter T 01.09.12 at 10:00 am

Random Lurker’s example is interesting. I wonder if it applies to Britain in the 19th century? Wages and conditions were lousy, yet it exported capital on a huge scale, and a very large number of people lived off the rents of that capital. The urge to lend was so strong it passed over numerous instances of default and of investing in very risky propositions (Turkish bonds, Peruvian mines and so on). The political requirement to protect rentiers led not only to gunboat diplomacy, but also to sustained diplomatic (and sometimes military) pressure. Is Germany repeating this? If so, where is the pressure coming from? Are the banks really that influential, or do numbers of Germans stand to lose their pensions? And what drives the pressure to lend, rather than the urge to borrow?

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Henri Vieuxtemps 01.09.12 at 10:05 am

…I must say, btw, that productivity doesn’t sound like a good explanation of this crisis anyway. It seems quite possible to have lower productivity, and, consequently, lower standard of living (or working more hours), and yet go on without excessive borrowing. That’s not it.

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gastro george 01.09.12 at 11:07 am

Lower productivity and a lower standard of living, in times of recession, tend to go with lower tax receipts and higher unemployment, which would give that country a hefty deficit. Which is what we are seeing.

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Henri Vieuxtemps 01.09.12 at 11:30 am

Oh, I don’t know. Intuitively it seems that, ceteris paribus, in a global recession large export oriented businesses should be affected more than smaller, more local ones. You’ll still buy bread, but may decide to go for a Seicento instead of Golf.

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Random Lurker 01.09.12 at 11:40 am

@HV

In facts, the problem is that for some countries (such as Italy), the government didn’t go on “excessive borrowing”, but since economic was low to negative in the last two decades debt relative to GDP worsened.
So the problem is not exactly low productivity but lower productivity growth (relative to Germany’s).

On the broader point, on a loan there are two parts: the borrower and the lender.
You seem to think that the responsibility of the loan is on the borrower, thus countries that loan too much should be “punished” so that they change route – in your opinion it is Italian borrowing that causes German mercantilism.
I on the other hand believe that the responsibility is on the lender, so that applying policies that further disadvantage the borrower is counterproductive – in my opinion it is German mercantilism that causes Italian borrowing.

Why do I believe that German mercantilism is the cause, and Italian borrowing the consequence?
Because, in my Marx-influenced opinion, “overproduction” (which is the same than underconsumption) is the natural tendency of any capitalist system, whereas other policies such as the non-hard Keynesianism are just second best policies that governments that for any reason can’t resort to mercantilism are forced to adopt.
Case in point is that Italian governments (mostly Prodi’s, but on a more limited scale also Berlusconi’s) actually tried to reduce the deficit (in fact Italian primary account, i.e. without considering payment of interest, is in surplus, which menas that Italian government is actually draining money out from the economy, since I think the early 00s), and if I’m correct Monti won’t be able to reduce Italian debt do GDP ratio (because austerity will be ultra recessive, as in Greece), thus causing default anyway.

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Random Lurker 01.09.12 at 11:54 am

@HV 130

“Intuitively it seems that, ceteris paribus, in a global recession large export oriented businesses should be affected more than smaller, more local ones.”

Well, first of all, Italy is also an export oriented economy (meaning that a large share of GDP comes from exports), though less succesful than Germany (this is true for most European countries IMHO, which is what “European economies are very interdependent” means).

Second, yes German economy took a bigger shock than Italian economy during the early years of the recession, although it recovered faster. However, since trade balances will have to be rebalanced one way or the other, I don’t see how can Germany come out as a winner in this crisis, which is why German policy is IMHO schizophrenic (asking Italians to not eat the extra chicken, but then trying to sell them the extra chicken anyway).

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Henri Vieuxtemps 01.09.12 at 12:06 pm

in your opinion it is Italian borrowing that causes German mercantilism

I hold no such opinion. Like I said, in a single currency region without borders, without customs, with restrictions on export subsidies, and so on, you’d really have to buy into conspiracy theories (or ethnic stereotypes) to see it this way.

I think you’re right that what (as I heard last night, in fact, from someone who just spent 2 week back home in Piemonte) Monti is doing, like raising taxes in the most regressive way possible (gasoline, heating fuel, etc.) is not going to help anything. So, hopefully he’ll get kicked out, and, hopefully, some meaningful reforms will follow.

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gastro george 01.09.12 at 12:43 pm

I’m interested to know what you think “meaningful reforms” might be, and how they would address the situation.

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Shay Begorrah 01.09.12 at 1:24 pm

Henri, as someone who is himself sometimes accidentally obtuse I gave you the benefit of also being so.

It is not open to debate that Germany and Italy are distinct economies in distinct regions with different strengths, any analysis that proceeds on the basis that this is irrelevant to the trade imbalances and associated debt problems would be foolish, and I do not think you are a fool.

Which leaves troll. This thread should be closed.

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Tim Wilkinson 01.09.12 at 3:04 pm

Use of the term’conspiracy theories’ is very well correlated with trollery, if that helps. (See also http://crookedtimber.org/2012/01/07/kafkaesque/comment-page-3/#comment-395284)

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Henri Vieuxtemps 01.09.12 at 10:51 pm

It’s even open for debate whether the US and China are distinct economies, let alone Germany and Italy, that clearly are not. That is what the term ‘eurozone’ mean, it describes an economy.

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