Wednesday, July 25, 2012

Be very, very afraid

Paul Krugman cannot believe the lack of terror among German politicians about the spectre of a Greek exit from the Euro. Do they really think that if Greece is forced out, Spain will not be forced to follow?

In fact the disturbing news from Germany has got most economists spooked — or at least most economists who aren't willfully blinkered. Some time ago, I noted here that Simon Wren-Lewis was holding out some hope for the survival of of the Euro, because he felt sure Eurozone officials would eventually see that hard-line moral posturing was detrimental to their own interests (apart from being wrong). Sadly, it appears not even he is so optimistic any more:
Sometimes it seems as if Germany and its supporters are like a poker player with a very weak hand, who has managed to convince all the other players that their hand is much stronger than it is. But there is a danger that you may get so good at playing this bluff, that you may stop looking at your cards and actually believe you have a strong hand. Or worse still, that although your hand is weak, you deserve to have the better cards, and therefore you do have the better cards.
The situation with German public opinion is now so dire that although he is careful not to explicitly say so, I think Wren-Lewis now agrees with Greek economist Yanis Varoufkis' assessment that Germany actually doesn't want to solve the Eurozone crisis.

Which brings us back to Krugman's take on the foolish lack of terror.

Tim Duy agrees, asking whether a panic button even exists in Europe:
I doubt we will need to wait much longer to learn the outcome of Grexit. But the devastating train that is the debt crisis keeps rolling right along, currently crashing through Spain's economy.

And make no mistake, European policymakers have learned nothing from the Greek experience. One gets the sense that policymakers think the prescription was correct, but that the patient was simply unwilling to take the medicine. Where Greece failed, Spain will succeed, or at least so it is hoped [...] Spain is doing the right thing, apparently. It's just the markets that have it all wrong [...] And in return for this bailout, Spain will be pushed further down the same path of never ending recession as Greece. Because if once you don't succeed, try, try again. European policymakers will pursue the same path because they know of no other [...]

In my view, the lack of panic is downright scary. Is Europe completely devoid of new ideas? Or is everyone simply on vacation?
Surely, you feel, we will wake up soon and learn this was all a dream? Surely somebody will remember which country's banks it was that lent the money to Greece, Spain, Ireland, Italy, Portugal et al. in the first place, and which country's banks therefore stand to lose most if they collapse? Surely someone will remember who was "the sick man of Europe" before the introduction of the Euro helped turn their economy around?

But no. The words 'face', 'spite', 'chop' and 'nose' come to mind.


  1. There are a few issues that many non-German commentators seem to miss.

    First, on some issues, including this one, there is a huge discrepancy between public opinion in Germany and the opinion of most politicians (the recent circumcision debate is another good example). This won't change at the next election since any party with a different opinion would be unpopular on many other grounds, and voting for them for a single issue would not be worth it. There is no initiative and referendum for federal laws, the only serious shortcoming of the German political system and the root of most of the problems.

    Second, Germany's decisions will be viewed differently than the same decisions of other countries because they are from Germany. Again, the recent circumcision debate is a case in point, with one rabbi calling the court decision the biggest threat to Jews in Germany since the Holocaust (I am not making this up). In Greece, it is quite common to portray Merkel (who is the daughter of a Protestant minister and grew up in East Germany because her parents moved there before the wall was built) in a Nazi uniform. Why? Because Greece and Germany were on different sides in WWII. This has to be taken into account. A German politician who decided purely on rational grounds would immediately be assassinated by the English tabloid press.

    There was no referendum (see above), but if there had been, Germany would not have decided to join the common currency. However, it didn't really have a choice anyway, since joining the common currency was required in exchange for the WWII victors to agree to the re-unification of Germany. This is one reason for the seemingly irrational attitudes of many politicians with regard to the common currency.

    1. Hello Phillip. You make a good point about the difference between public opinion and government actions. I try to avoid making any statements about general public opinion because I hardly have my finger on the pulse. The link in the post above should have been more clearly labelled as the opinions of the German newspaper commentariat, rather than the nation as a whole.

      I appreciate your second point, but I don't think it has much relevance here. None of the pieces I linked to, with the possible exception of Yanis Varoufkis', could be said to be based on personal emotions rather than rational argument and economic evidence. Pointing out the illogic of the ECB and the Merkel government in this situation really has nothing to do with WWII.

      I find it interesting that there is so much ambivalence towards the common currency in Germany (I have also noticed it), because it is so much at odds with the facts. The German economy really has benefited from the Euro, and the failure of German politicians to acknowledge this or to break this news to their electorate is a real failure of leadership. Not that it would necessarily have been accepted by everyone, but at least there would have been better balance to the public debate. As you say, there is probably some historical/psychological element to this.

    2. With regard to the second point, what I meant was that there might be some, perhaps unconscious, attempt on the part of politicians to make the "politically correct" decision, even if it is not the best one. Case in point: at the beginning of the debate about NATO forces in former Yugoslavia (in the end Germany took part), most of it concerned whether German soldiers should be in the Balkans since German soldiers did bad things there before. In fact, it took a while for there even to be a debate, because everyone agreed on this. This has changed now, of course, but I'm pretty sure that German soldiers would never be in a peacekeeping force in Palestine, say, even under UN leadership. Similarly, many people (incorrectly) portray the entire debt/EURO problems as a German conspiracy to take over Europe. No logical person believes this, of course, but nevertheless I think many politicians might phrase things differently to avoid presenting themselves as a target for such (admittedly absurd) accusations. This was more obvious in the circumcision debate, where many politicians openly (which is not the case in the financial debate) said: the decision we have to make is clear, since otherwise we will be seen as antisemitic. The fact that German decisions are perceived differently is illustrated by the fact that male circumcision is illegal in Finland, but I don't hear any rabbis complaining.

      With regard to the third point, while the German economy has benefited, during the same time the inflation-adjusted wages of most people have actually dropped. Nothing to do with the Euro, of course, but I don't think one can blame the common people here for confusing correlation with causation. The message from the politicians should be: the economy has benefited from the Euro, so this should be reflected in wages. However, I think there is another issue: a common currency means common responsibility, as we are seeing now. There is the feeling that Germany pays much more in than it gets out. I think many people would want to avoid this, even if it hurt the economy somewhat. The retirement age in Germany is being raised to 67 in steps, so that those born in 1964 will retire at 67. It is less than that in most places and in some countries is actually being reduced. Before the Euro, one could say that that's fine if that is what that country wants. Now, people in Germany are working longer and their money is going to finance early retirement for people in countries which are now having financial problems. Hard to sell that to the man on the street. If there is a common currency, there should be common retirement age, common tax laws etc.

    3. I still don't see the relevance of the war to appropriate economic policy today. I do see the relevance to debates about perceptions of peacekeeping forces, circumcision laws etc., just not to the topic at hand.

      The median inflation-adjusted wage has remained stagnant or dropped since the 1970s in several countries not in the Euro, including the US and the UK. This is certainly a reflection of something wrong with the way advanced economies are run, but as you say it is not specifically a Euro problem.

      I'm afraid sometimes paying out during a crisis is the necessary corollary to having a working single currency. In the United States (a common currency region that actually works, despite not having common laws), during crises Washington gives - not loans, just gives - vast amounts of money to suffering states of the union, and the central bank guarantees debts. That's what common fiscal policy means. Further reading here. If Germans decide in that case they don't want a currency union and would rather go back to 1990s conditions, fair enough. But it is irresponsible for their politicians to pretend that this is not the choice.

  2. "I still don't see the relevance of the war to appropriate economic policy today."

    As I said, no logical person sees a connection. :-) Have a look at some Greek newspapers; many editorials directly connect WWII with the current fiscal problems. Some claim the current problems were caused by the war, some claim it is only fair for Germany to pick up the tab because their grandparents were Nazis etc. Again, don't look for logic here, but many people do make the connection.

    "If Germans decide in that case they don't want a currency union and would rather go back to 1990s conditions, fair enough."

    I agree, but the point is that there is no mechanism for them to decide. The EURO was not a choice (unless passing up re-unification was chosen instead, which would have caused far greater problems). Germany has two options, both of which entail staying in the common currency: (1) resist a fiscal union, which would more or less isolate Germany politically, (2) go for the fiscal union, which most of the population doesn't want. It is dangerous to make any decision. If Germany makes a decision and Greece leaves, then Germany is blamed for that, Hitler's revenge etc. If Greece stays, then Germany pays for it. Catch-22.