It’s rare to take on Paul Krugman in an argument and win, and I agree with him most of the time anyway (these two facts are correlated!). So, this is the first time, and will probably be the last, when I can claim a win in such an argument.
Krugman has long criticised the eurozone on the grounds that it is not an optimal currency area and that the European Central Bank must therefore pursue an unsatisfactory “one size fits all” policy, too contractionary for economies that are doing badly and too expansionary for those that are doing well. Back in February, I argued that in fact ECB policy was “One size fits nobody” and that even Germany was vulnerable to its contractionary effects.
The latest statistics suggest that German growth was already stalling then. Today, Krugman is also pointing to a “one size fits none” policy.
At this point, it’s time for a suit of clothes, and that means a new tailor. And, in that respect, the bad news may have a silver lining.
The silver lining can be seen in today’s New York Times, which reports new proposals from Merkel and Sarkozy, pushing in the direction of fiscal union. They refer to a requirement for a “golden rule” balanced budget requirement to be enshrined in EU member constitutions. Assuming that the “golden rule” refers the standard interpretation of “budget balance over the cycle”, and not the crazy US Republican proposal for annually balanced budgets, this is, in essence the “hard Keynesianism” Henry and I have been pushing for some time. I haven’t yet read the fine print, but it’s hard to see how this proposal can be made acceptable to the periphery without an accompanying shift away from hardline austerity and monetary contraction in the short run. That means, in particular, overriding the opposition of the European Central Bank.
At the personal level, the impending departure of Jean-Claude Trichet provides the ECB with an ideal opportunity to dump his failed policies. His designated successor Mario Draghi (ex GS, and widely regarded as a Trichet clone) does not look promising, but he has both an ideal opportunity and some strong incentives to make a break with the past.
{ 20 comments }
mpowell 08.16.11 at 10:47 pm
Can they also change the ECB mandate? When can that happen? As long as the ECB has a target of keeping inflation under 2% at all costs, attempts at short term fiscal expansion will be compromised by monetary tightening.
Christiaan 08.16.11 at 11:43 pm
Though I see that you nailed it more than him on this, I don’t really see that you “win” an argument from Krugman. You just went a bit farther than him, you did not contradict him. The fact that the ECB at best can or should pursue a one-size-fit-all policy does not contradict the fact that it does not do even that. Also, the actual one-size-fits-none is a failure of the ECB / Trichet, not of the principle of a single currency area in Europe.
As for the golden rule, I really don’t share your optimism. I really think they’re talking about dumb balanced budget requirements rather than hard-Keynesianism. The talk in Europe has been all about strictly enforcing deficit (3%) and debt (60%) requirements, that should really tell it. And remember that the current “leaders” in Europe are all in the austerity-now-now-now corner, even in the face of persistent slow growth in much of the Euro area. So they hardly sound like people who know about or understand Keynes.
mattH 08.17.11 at 1:08 am
Neo-Hooverism all the way. I wish I was a betting man, or maybe just had some money I could bet here.
Jim Harrison 08.17.11 at 2:54 am
Whatever the deal between Germany and France accomplishes in a purely economic vein, it will worsen the democratic deficit in the E.U. Of course, that’s a plus from the point of view elites on either side of the Atlantic. Both technocrats and plutocrats love international deals because they make it harder and harder for majorities in individual countries to affect policies, and nobody who matters has any use for democracy in any case. The problem is that if the gradual decline in the legitimacy of the neoliberal holy league ever results in a crack up, it will be a hell of a crack up.
Latro 08.17.11 at 9:28 am
And we have Sarko and Merkel asking for constitutional deficit limits in our our countries.
Didnt they said something about a refoundation of capitalism a few years ago? Something about the need to change the system that wrought us there?
Seems we are going to change it – to be even more in line with the flawed principles that crashed our economies in the first place.
Kevin Donoghue 08.17.11 at 9:35 am
“…it’s hard to see how this proposal can be made acceptable to the periphery without an accompanying shift away from hardline austerity and monetary contraction in the short run.”
dsquared has suggested that the sales pitch might be: it puts the lotion on its skin or it gets the hose again. He was referring to Ireland but I think the same might go for Greece and Portugal. I don’t think Merkel or Sarkozy want any fancy cyclical adjustments. They want a hard rule (which of course they will be able to break if they must but smaller members won’t).
ajay 08.17.11 at 10:05 am
Though I see that you nailed it more than him on this, I don’t really see that you “win†an argument from Krugman. You just went a bit farther than him, you did not contradict him.
True; it is axiomatic that one cannot prove Krugman wrong, one can only prove oneself to be even more correct than Krugman.
Barry 08.17.11 at 11:34 am
John Q: “His designated successor Mario Draghi (ex GS, and widely regarded as a Trichet clone) does not look promising, but he has both an ideal opportunity and some strong incentives to make a break with the past.”
When one says ‘ex GS’, one is basically saying ‘spawn of Satan’. As for ‘ideal opportunity’, my money would be on ‘ideal opportunity for GS to steal more money’, and ‘strong incentives’ meaning ‘strong incentives to help GS steal more money’.
Guido Nius 08.17.11 at 11:56 am
It may be a little bit rash to declare victory over the numbers of 1 quarter (and re-stating the numbers of the quarter before that). There is a lot wrong with German policies, but it is still outperforming most economies over any reasonable cycle and if all countries were to converge on German policies (even with everything that is wrong with them) the large majority of countries would be much the better for it.
I think Krugman was wrong. First I thought he was just wrong about Europe, refusing to see anything but a narrow economical view on Europe for instance. Now I think he was just wrong all along, basically prescribing a one size fits all solution, regardless of context. In Europe, Greece has been a problem for a long time (together with Italy, Portugal, Spain and Belgium). The problem was political and resulted in extreme fiscal irresponsibility followed by even more extreme fiscal irresponsibility (in this Greece is different from the rest). There was no way in hell that that long standing problem (not using the right part of the cycle to reduce debt) was ever going to be solved in any way other than cutting spending drastically.
As John said: budget balance over the cycle. So you have to look case by case where it is and in Greece’s case for instance, independent of currency or other technicality, the balance needed to be restored. One can debate how best to restore it but it needs to be done (and it needed to be done regardless of the currency thing).
Many of those countries were accepted in the Euro despite not meeting the criteria, & the reasons for that were strictly political. The Euro is after all a political project even if it needed to be realized in a time period where Europe was dominated by neo-liberal thought. With some patience you will see all of the neo-liberal no-go areas vanish – it’s telling that a major part of the news was about fiscal harmonization & Tobin tax (quite non-neo-liberal concepts I would think).
In the end eurobonds and the whole shaboom will follow (Merkel did not shout ‘never’, she basically said ‘not yet’). The debate is unstoppable because whatever people think about the democratic deficit of Europe, there is a European parliament and it voted to investigate eurobonds. It is not illogical that Germany and others first want to ensure that there is budget balance over the cycle (whether 60%/3% or another number set that is far away from the 100+%/10% that was somehow not a problem in 2008 & ff.) before they lock into an instrument which, if it had existed for Greek politicans in the 90’s would, have seen Greek soccer clubs winning the Champions League every year.
All is far from perfect in Europe but it certainly is not as bad as some think. I think the announcement (and sometimes hand-wringing or wishful thinking) about the death of the European project are greatly exaggerated.
adam@nope.com 08.17.11 at 1:02 pm
Frosch: The European Union, we all love it so; But how it holds together, that’s what we don’t know.
Brander: A filthy song! Shame! A political song! A tedious song! My lads, thank God in daily prayer that running the Union isn’t your affair! I reckon it a blessing anyway that I’m not president of the EU or ECB today.
Tomboktu 08.17.11 at 1:03 pm
[http://www.europeanvoice.com/article/2011/february/merkel-sarkozy-present-competitiveness-pact/70165.aspx]
The full text from Angela Merkel and Nicolas Sarkozy outlining their plans for closer economic governance
“We are prepared to take further resolute steps: this pact aims at a long-lasting increase of competitiveness of the sates involved, in order to achieve a stronger economic convergence.
This is to happen on the basis of concrete commitments – more ambitious and binding ones than those already decided by the EU27. We should orient ourselves according to the respective best practice.
We commit ourselves to three quantifiable indicators which are decisive indicators for our national economies’ competitiveness:
1. Indicator to measure price competitiveness (eg, stability of real labour cost, realigning labour cost according to development of productivity);
2. Stability of public finance, from a comprehensive point of view (assessment measure still to fixed, under consideration of explicit and implicit public debt);
3. Minimum rate for investments in research, development, education and infrastructure of x% of gross domestic product (value still to be fixed).
We commit ourselves to let ourselves be evaluated according to these indicators, on the basis of a European Commission report (if necessary with the support of the European Central Bank or the European Systemic Risk Board).
We agree as a first step a programme of six points for more competitiveness of which the measures will have to be implemented nationally in a period of 12 months:
1. Abolition of wage/salary indexation systems;
2. Mutual recognition agreement on education diplomas and vocational qualifications for the promotion of mobility of workers in Europe;
3. Foreseeing the creation of a common assessment basis for corporate income tax;
4. Adjustment of the pension system to the demographic development (ie, average age of retirement);
5. Obligation for all member states to inscribe the debt alert mechanism into their respective constitutions;
6. Establishment of a national crisis management regime for banks.
We will review on a regular basis the implementation of the pact.
We will establish the necessary procedures and adopt the necessary institutional provision in view of the organisation of our work and of our supporting decisions.
We invite the Commission to present within 12 months a report on the implementation of the six measures and to include its recommendations. Furthermore, we will examine the introduction of a sanctions mechanism.
We are convinced that the reinforced coordination of our policies for the competitiveness of the eurozone and the new mechanism for crisis manage will provide for the continuous stability for our currency. Those two new cornerstones of economic and monetary union will provide the balance between our basic principles of responsibility and solidarity.
We contribute herewith to secure the happiness of European unification for future generations.”
Alex 08.17.11 at 1:22 pm
Hmm, happiness without wages keeping pace with inflation. *plonk*
It seems to be a very big problem for the European project that all arguments get channelled into the supranational/intergovernmental dualism, without anywhere near as much debate of the actual content of the policy that either supra or inter institutions are meant to implement.
“Economic government” is a proposal the French Foreign Ministry and the EMU directorate-general have been kicking around since Nice. I don’t think I’ve ever seen a detailed proposal of what the fuck one is, what the benefits are meant to be, what its budget will be, and how it differs from the Commission (especially as the latest idea is apparently that the Commission President heads it in personal union).
I mean, is it just another stability pact because the first one was such a cracker?
Jasper Milvain 08.17.11 at 1:41 pm
At this point, it’s time for a suit of clothes, and that means a new tailor. And, in that respect, the bad news may have a silver lining.
That sounds like an impressively shiny suit.
Sebastian 08.17.11 at 4:06 pm
“Abolition of wage/salary indexation systems”
Does this mean what it looks like it means?
Alex 08.17.11 at 5:02 pm
Yes, and it can fuck right off.
mds 08.17.11 at 5:33 pm
What are the odds that demonstrated enthusiasts for further destruction-via-austerity are going to push for rigorously implemented genuinely countercyclical policy? No, this would end up entirely equivalent to the “hard cap on spending” idiocy in the United States. No one should be talking about balanced budgets right now, yet politicians are doing nothing but yap about them. Could we try some more actual Keynesianism first, then talk about “hard-” when we’re not crashing back into recession? (Yes, yes, it’s more difficult to make the “hard” choices when times are good, but I’m not convinced anyway by the notion that nations must balance their long-term budgets, not simply run sustainable deficits in perpetuity.)
… And thanks to Tomboktu @ 11, we confirm what the cut of Merkel and Sarkozy’s jib is. Adjustment of the pension system to the demographic development (ie, average age of retirement)? Obligation for all member states to inscribe the debt alert [and only the debt alert] mechanism into their respective constitutions? Unspecified measures of “stability” of public finance and minimum targets for public investment to be penciled in later, after the debt restrictions get hardwired in ASAP? Looks like doubling down on neoliberalism to me. So what Alex @ 15 said.
Barry 08.17.11 at 7:15 pm
Sebastian, it means what neolib rhetoric *always* means – more money for the top, less for everybody else.
Random Lurker 08.17.11 at 8:09 pm
5. Obligation for all member states to inscribe the debt alert mechanism into their respective constitutions;
In case you are interested, it seems that here in Italy the government wants to push a “balanced budget” bound in the italian constitution.
It is said that it was a request from the ECB, but nobody either in the government or in the (leftish) opposition disagrees with this in theory.
It seems to me that, since the various european economies are most obviously interrelated and the currency union bars some policy options to single countries, it makes sense that also the fiscal policy should be taken at the european level: thus eurobonds and strict limits on deficits for single states.
However, the problem lies in the fact that there is apparently no european institution able to perform active fiscal policy; for example, I don’t think the ECB has a mandate for it. In fact, I think that a pan-european fiscal policy would be a politic nightmare, although it might be necessary.
Harold 08.17.11 at 9:51 pm
In case anyone missed it:
http://www.ritholtz.com/blog/2011/08/der-spiegel-interview-with-george-soros/
John Quiggin 08.17.11 at 10:46 pm
Great quote from the Soros interview
” if a double-dip recession was in doubt a few weeks ago, it is less in doubt now, because financial markets have a very safe way of predicting the future. They cause it.”
Comments on this entry are closed.