The ECB Method

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

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?

“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.

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.

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.

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.

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.

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.

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.

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.)

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?

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.

@ 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.

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.

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.

““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.

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.

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.

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.

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.

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@

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.

“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).

@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 .

@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.

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?

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.

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.

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.

@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).

JW Mason? What happened to Lemuel Pitkin?

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

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)

@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.

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.

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.

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.

@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_.

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.

@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.

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.

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

@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).

@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.

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.”

@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.

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.

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.

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).

“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.

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

” 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?

@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.

“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.

“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.

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?

@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.

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.

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?

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’?

“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?

“@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).

The above was specifically about Europe in 2011/2012.

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?

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?

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.

@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.

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.

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.

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.