This is a “last call” for anyone who would have missed the fact that I’ve moved my writing to the sleek, new bilingual English/French blog at www.craigwilly.info (en français ici). This old blog still passively gets 20-50 clicks a day so I hope the new banner/sidebar-button are explicit enough.
Be sure to update your RSS feeds and follow me on Twitter:
You’re welcome.
Vladimir Putin, peering into the future.
Last November, when the euro-shit really started to hit the fan, Vladimir Putin – with his habitual freedom of expression – predicted the European Central Bank would need to intervene to the tune of €1.5 trillion.
Mario Draghi, who became ECB president that month, went on to prove the Russian premier two-thirds right by injecting a mind-exploding €1 trillion in low-interest three-year loans to eurozone banks. Things have calmed down since the wily Italian bowed to the inevitable and did this little bit of steal QE.
Still, as Charlemagne points out, there is still plenty that can go wrong, which might prompt the ECB to prove Putin 100% right.
C'est anti-social, l'Europe ?
Mario Draghi, le président de la Banque centrale européenne, a été appelé dans le magazine Foreign Policy « L’homme ennuyeux le plus important du monde ». En effet, dans le contexte actuel de crise financière et budgétaire, la BCE est peut-être l’institution la plus puissante d’Europe. Son refus d’acheter la dette italienne l’an passé, malgré le fait que cette dette diminuait rapidement que toutes les autres dans la zone euro, a provoqué la chute de Silvio Berlusconi et l’ascension de Mario Monti avec son programme de réformes libérales, sans devoir se donner la peine de gagner une élection. C’est la BCE seule qui a décidé de faire presque 500 milliards d’euros de prêts à trois ans à taux bas aux banques européennes pour calmer les marchés financiés.
Ces choses peuvent être bonnes ou mauvaises, mais il n’y a aucun moyen officiel-légal-ou-démocratique pour influencer ces décisions incroyablement importantes, qui peuvent renforcer ou détruire un gouvernement, prévenir ou provoquer une récession, et donner des sommes inconcevablement énormes d’argent gratuite aux banques (mais pas aux gouvernements). Ces décisions sont prises seules par le Conseil des gouverneurs de « l’indépendante » BCE, qui est composé de divers bureaucrates de Francfort et d’anciens employés de Goldman Sachs, répondant seulement à leur conscience.
Ceci étant, les préférences idéologiques, les préjugés et les mots de Mario Draghi et des autres hauts-fonctionnaires de la BCE sont extrêmement importants, même si la plupart des citoyens Européens, même au sein de la zone euro, les ignorent complètement (voire n’en ont jamais entendu parlés). Les investisseurs et les publications financières au contraire savent qu’il vaut mieux écouter très attentivement à leurs déclarations d’oracle.
Voilà ce que Mario Draghi a dit dans un entretien illuminant avec le Wall Street Journal (exclusivement disponible en anglais sur le site de la BCE, alors que l’Ireland et le Malte sont les seules pays anglophones de la zone euro…) lorsqu’on lui a demandé à propos des mesures d’austérité en Grèce malgré les « conditions voisines de dépression » :
Ceci est en faite une question générale sur l’Europe. Y-a-t’il une alternative à la consolidation budgétaire ? Dans notre dispositif institutionnel les niveaux de dette-au-PIB étaient excessifs. Il n’y avait pas d’alternative à la consolidation budgétaire, et nous ne devrions pas nier que cela est contractionnaire […] à court-terme. Dans le futur il y aura le soi-disant canal de confiance, qui réactivera la croissance ; mais ce n’est pas quelque chose qui arrive immédiatement, et c’est pourquoi les réformes structurelles sont si importantes, parce que la contraction à court-terme sera suivie par une croissance à long-terme durable seulement si ces réformes sont en place.
À première lecture, Draghi semble suggérer qu’il y a quelque chose de spécifiquement européen à propos d’un ratio de dette-au-PIB élevé. C’est faux. La dette moyenne brute des pays de l’UE est de 82,2 % et de 87,4 % pour la zone euro (les chiffres les plus récents). Comme le WSJ le rapporte dans un autre article, les chiffres équivalents sont 107 % de dette-au-PIB pour les États-Unis et un faramineux 230 % pour le Japon. L’Italie, de loin en pire situations des grandes économies de la zone euro, ne semble pas si mauvaise avec ses 128 %. Notons aussi que la dette de la zone euro était en train de diminuer l’année passée jusqu’à ce que la mauvaise gestion de la crise par la BCE et le Conseil européen ait provoqué la récession à double creux (double-dip recession).
Draghi a raison lorsqu’il dit que le « dispositif institutionnel » – l’architecture disfonctionnelle de la zone euro d’aujourd’hui – veut dire qu’elle ne peut gérer même un niveau de dette sensiblement plus bas que ceux d’autres pays développés. Une solution serait de changer ce dispositif, mais pour Draghi il n’y a tout simplement pas d’alternative (un type d’argumentation bien connu sous son sigle anglais « TINA ») aux réductions de dépenses. Il ne peut suggérer des réformes, en partie parce que c’est incompatible avec son poste, en partie parce que cela voudrait dire reconnaître le rôle de la BCE dans la récession et les perspectives fiscales en détérioration de l’Europe.
Si les Européens souffrent plus et doivent consolider avant les autres – même si leurs dettes sont plus petites ! – c’est parce que leur banque centrale ne peut ou ne veut pas agir comme la fait la Banque du Japon, la Banque d’Angleterre ou la Réserve fédérale américaine en achetant systématiquement la dette publique. C’est aussi pourquoi ces pays peuvent emprunter à des taux très bas sur les marchés financiers malgré leurs perspectives fiscales comparables-voir-pires (et non tout ce blah blah sur la compétitivité, la paresse des Méditerranéens, le gaspillage des systèmes sociaux européen, etc).
Deuxièmement, cet entretien est terrifiant dans la mesure que Draghi ne voit aucune différence entre la Grèce et le reste de l’Europe sur ce sujet. Les manifestations de solidarité « Nous sommes touts Grecs » ont complètement raison sur ce point car, pour la BCE au moins, le reste de l’euro zone va souffrir le même sort. Ceci est mis en évidence par la réponse de Draghi sur comment atteindre l’équilibre budgétaire, où il décrit « une bonne contre une mauvaise consolidation budgétaire » :
Dans le contexte européen les niveaux d’impôts sont élevés et les dépenses de l’État sont focalisées sur les dépenses courantes. Une « bonne » consolidation est une où les impôts sont plus bas et les dépenses publiques plus basses sont sur les infrastructures et d’autres investissements.
Pour Draghi, l’équilibration budgétaire doit passer exclusivement par des réductions de dépenses sur des services publics « gaspilleurs » comme les pensions, la santé, les allocations chômages ou l’éducation (qui forment l’écrasante majorité des dépenses de l’État national). Il n’est pas complètement clair s’il soutient des réductions d’impôts, mais ce n’est qu’un pas logique de l’interprétation plus généreuse de son commentaire.
Notons qu’il n’y a pas de corrélation forte – dans un sens ou dans un autre – entre de bas impôts, la croissance et l’équilibre budgétaire. Néanmoins, il se trouve que dans l’UE-15 les pays avec les plus petites dettes sont aussi ceux avec le plus d’impôts (Danemark, Finlande, Suède…).
Si l’on exclut comme le fait Draghi les modèles scandinaves et considérons exclusivement une baisse d’impôts, cela entend une réduction massive des dépenses et services publics. Comme le remarque le « FactBlog » de le OCDE, ces services réduisent de moitié la pauvreté en Europe. Cette réduction interviendrait aussi au moment où, comme le montre une étude de l’Organisation Internationale du Travail, l’inégalité au travail et de revenue ainsi que précarité ont crû de manière dramatique en Europe à cause de la récession et de l’austérité. En bref, Draghi demande des réductions massives aux budgets des politiques publiques au moment même que celles-ci sont le plus nécessaires.
Lorsqu’il a été demandé si cela voudrait dire la fin du modèle social européen, Draghi a répondu : « Le modèle social européen déjà n’existe plus ». Une raison comme une autre pour démanteler et arrêter de financer se qu’il en reste.
La BCE n’est pas une institution « neutre » ou « apolitique ». Les positions que Draghi exprime sont intensément hostiles à la pensée de centre-gauche en Europe et plus généralement aux grandes réalisations socio-chrétien-démocratiques de l’après guerre. L’institution est peut-être dans son rôle lorsqu’elle demande la responsabilité fiscale de la part des membres de la zone euro, mais elle ne peut pas légitimement dicter comment ces membres doivent l’atteindre.
Le candidat socialiste à la présidentielle française François Hollande a dit qu’il veut lancer un « débat » sur le rôle de la BCE. Étant donné que les traités européens sont quasiment immuable lorsqu’un grand pays s’y oppose – voir l’opposition française à un siège unique pour le Parlement européen même si cela veut dire un gaspillage de 200 million d’euros par an – nous pouvons être pessimistes sur toutes perspectives de réforme. Les chances que l’Allemagne permettent des changements aux règles de Maastricht sont infimes, même si celles-ci dévastent les économies de la périphérie, la démocratie-sociale, voire l’idéal européen lui-même. Néanmoins, si nous pouvions avoir les débuts d’un débat pour remettre en cause le creux, insipide et en fin de compte catastrophique « consensus » sur la gouvernance de la zone euro, ce serait déjà quelque chose.
Because I care.
Mario Draghi, president of the European Central Bank, has been called “The world’s most important boring man”. Indeed, in this context of financial-fiscal fiscal crisis, there is perhaps no more powerful institution in Europe than that which he heads. Its refusal to buy Italian bonds, despite the country then-having the fastest-shrinking debt in Europe, effectively led to the fall of Silvio Berlusconi and the rise of Mario Monti with his election-free reform agenda. It alone decided to lend almost €500 billion to European banks in low-interest three-year loans last December to calm the financial markets.
These may or may not be good things, but there is no official-legal-democratic way of influencing these incredibly important decisions, which can prop up or topple a government, prevent or cause recession, and effectively give mind-bogglingly massive amounts of free cash to the banks (but not governments). These decisions are the lone preserve of the “independent” ECB’s governing council, made up of assorted Frankfurt bureaucrats and Goldman Sachs alumni, answerable only to its conscience.
As such, the ideological preferences, prejudices and words of Draghi and other ECB high officials are intensely important, even if most Europeans even within the eurozone are completely ignorant of them. Investors and financial publications, in contrast, listen on every oracular pronouncement.
This brings us to what Draghi had to say in an enlightening interview with the Wall Street Journal when asked about his assessment Greece’s austerity measures, given the “depression-like conditions” in the country:
This is actually a general question about Europe. Is there an alternative to fiscal consolidation? In our institutional set up the levels of debt-to-GDP ratios were excessive. There was no alternative to fiscal consolidation, and we should not deny that this is contractionary in the short term. In the future there will be the so-called confidence channel, which will reactivate growth; but it’s not something that happens immediately, and that’s why structural reforms are so important, because the short-term contraction will be succeeded by long-term sustainable growth only if these reforms are in place.
At first reading, Draghi appears to suggest there is something uniquely European about high debt-to-GDP ratios. This is false. The average gross debt of EU nations is 82.2% and for the eurozone 87.4% (most recent figures). As the WSJ reports elsewhere, the comparable figures are 107% debt-to-GDP for the U.S. and a whopping 230% for Japan. Italy, by far the worst of the big eurozone economies, doesn’t then look so bad with 128%. Also note that eurozone debt had been decreasing last year until the ECB and European Council’s mismanagement led to Europe’s double-dip recession.
Draghi is correct in noting the “institutional setup” – the eurozone’s inherently dysfunctional design as of now – means that it cannot manage debt levels even significantly lower than other developed countries’. One solution would be to change this setup, but for Draghi There Is No Alternative (TINA) to budget cuts. He cannot suggest any such reforms, partly because his role precludes it, partly because this would mean acknowledging the ECB’s own role in Europe’s worsening debt outlook and recession.
If Europeans have struggled and have to consolidate before others – even though their debt is lower! – it is because their central bank cannot or will not act as the Bank of Japan, the Bank of England or the Federal Reserve and systematically buy up public debt. That is why those countries can borrow at rock-bottom rates on the markets despite comparable-or-worse bad debt outlooks.
Secondly, the interview is terrifying in that Draghi sees no difference between Greece and the rest of Europe on this issue. The “We Are All Greeks” protests are exactly right in that, as far as the ECB is concerned, the rest of the eurozone is next on the chopping block. This is evidenced by Draghi’s answer as to how to achieve balanced budgets, when he describes “good vs. bad fiscal consolidation”:
In the European context tax rates are high and government expenditure is focused on current expenditure. A “good” consolidation is one where taxes are lower and the lower government expenditure is on infrastructures and other investments.
For Draghi, the best way to balance the budget is actually to have lower taxes. It isn’t completely clear whether he is advocating outright tax cuts, although in any event that’s only one logical step away from the more generous interpretation of his comments.
Effectively the ECB is saying the burden of austerity must not be met by any additional taxes on those with means, but must be met exclusively though budget cuts on “wasteful” public services like pensions, healthcare, education, unemployment relief, etc (which make up the vast majority of national budgets).
Note that there is no strong relationship – in any direction – between low taxes, growth and balanced budgets. In the EU-15 the countries with the lowest debt are also those with the highest taxes (Denmark, Finland and Sweden).
If we exclude the actually-working Scandinavian models and focus on lower taxes, what Draghi is effectively advocating is achieving balanced budgets exclusively through cuts to public services, even if it leads to Greek-style social catastrophe. As the OECD’s FactBlog points out, public services in Europe effectively halve poverty rates. This is also at a time, as a new International Labor Organization study shows, when workplace and income inequality as well as economic insecurity for the bottom rung of society, have increased dramatically across Europe due to recession and austerity. In short, Draghi is urging massive cuts to public services at precisely the moment when these are most necessary.
When asked if all this might not mean the end of the European social model as we know it, Draghi answered: “The European social model has already gone”. As good a reason as any to defund and dismantle what’s left of it.
The ECB is not a “neutral,” “apolitical” institution. The positions Draghi expresses are intensely hostile to centre-left thought in Europe and more generally to the great Christian-Social Democratic achievements of the postwar era. Arguably the institution is within its role in demanding fiscal responsibility from members of the euro, it has no right however to tell members how to go about doing so.
French Socialist presidential candidate François Hollande has said he wants to start a “debate” on the role of the ECB. Given that EU treaties are virtually unchangeable if any major country opposes it – see French opposition to a single seat for the European Parliament, even if it means wasting €200 million every year – we can be pessimistic at his chances of reform. Germany is extremely unlikely to allow any changes to the Maastricht rules no matter how much these devastate the economies of the periphery, social democracy, and indeed the European ideal itself. Still, if we can have the beginnings of a debate to question the hollow, insipid and ultimately economically disastrous “consensus” of eurozone governance, that would be a start.
Apparently a new phenomenon.
The leading magazine of the global politico-economic elite – The Economist – has an article on the recent controversy over bankers’ pay warning of “The death of meritocracy”. I guess it’s noteworthy for this normally laissez-faire capitalist publication to recognize inequality of opportunity as a problem. Although, perhaps because of its free market ideology, it has a particularly strange way of discussing the issue:
[RBS Chief Stephen Hester stands for] the idea that the unusually talented may deserve extraordinary rewards. Yes, people are paid unequal amounts, but don’t forget how wealth is created and the successful motivated, he says. In essence, he is making the case for meritocracy.
Merit is a fine principle. But the most painful revelation of the debate on high pay may be this: many Britons are not convinced that they live in a functioning meritocracy.
Wait, what? The “most painful revelation” is not that famously class-based Britain isn’t meritocratic, but that people have stopped believing that it is? Right-O.
Incidentally, meritocracy in the UK hasn’t “died” because it was never really there in the first place: the differences in life chances there have long been particularly vast between those who Warren Buffet calls “members of the lucky sperm club” and those children stuck in “postcode poverty”.
The UK is one of the developed countries were the income of an individual is most determined by the income of one’s parents. As the OECD pointed out some years ago, Britain is even worse than the United States of America in that respect. With university tuition rising to £9,000 a year in universities across the country, the situation is set to get significantly worse.
The magazine takes no comfort in Britons’ growing awareness of this fact and their worries that their extremely well-paid executives might not be entirely deserving. “This is a dangerous mood, transcending labels of left and right. Indeed, it sometimes feels as if all political parties are following, not leading, public opinion.” Sounds ghastly.
…last year. Between June and September 2011, the debt of eurozone governments as a percentage of GDP fell from 87.7% to 87.4%. The recovery’s combination of GDP growth, rising revenue, and falling unemployment meant debt was falling at an annualized rate of a full 1.2% points.
The kicker? The country in which it decreased the most was Italy, where it fell by an incredible 1.6 percentage points in a single quarter. Spain’s debt-to-GDP remained unchanged and recently-downgraded France’s debt-to-GDP fell by 0.8% percentage points. Virtuous Germany, on the other hand, was barely in the black at 0.2%.
That is to say – before the European Central Bank, under intense pressure by German officials both in and outside the bank, refused to shelter Italian and Spanish bonds from the Greek contagion, causing the double-dip recession – all the big eurozone countries had neutral or improving debt outlooks. If Berlin had had less influence over Frankfurt, there would actually be far less debt in the peripherals for German taxpayers to worry about.
Berlin looks to be unfazed. As far they are concerned this recession and debt crisis were caused by fiscal profligacy – certainly not bone-headed monetary policy. German officials apparently “simply don’t understand” what the rest-of-the-world (especially the U.K., U.S. and I.M.F.) is disinterestedly advising them to do.
But no. Despite being the most fiscally responsible member of the eurozone, Italy must make further cuts because of the mistakes of Frankfurt-Berlin. Actually, it is not necessarily a “mistake,” at all. Wonks in Brussels regularly describe what is happening, dispassionately, as an intentional strategy: The ECB refuses to do what it takes to drive Italian bond yields down in order to force the country to adopt the reforms the bankers, all-knowing as the Frankfurt office-dwellers are, think best (budget cuts, job market liberalization, privatization of public services, etc).
Note that this amazing quarter of fiscal performance on Italy’s part was immediately before Jean-Claude Trichet and Mario Draghi issued their September letter to Italy demanding these reforms (The Economist readily described it as “diktat”). And that’s how, in the euro system, those who cause crisis in fiscally responsible countries still get to dictate what policies and governments those countries must have.
The most striking thing highlighted by the Eurostat figures is the perversely moralistic and anti-economic aspect of the European debate on austerity. German journalist Alan Posener, in a fine essay in Die Welt, attacks what he imagines to be Angela Merkel’s Protestant pain-now/payoff later attitude and suggests that having more debt for future generations is acceptable if it means growth now:
Compared to that [Germany recently fully repaying WW1 reparations debts], future generations should be glad to pay debt accumulated by a government that shelled out for unemployment benefits, pensions to mothers, health costs for the poor or college educations – even if it was a little dilatory about tax collection.
But in fact, the figures suggest there is not even any such trade-off: Had growth been maintained through an intelligent monetary policy then we would actually have less debt. The argument is not over whether we should pass on more debt to future generations to have growth today. It is about a status quo in the euro system, defended above all by Germany, which means Europe being both poorer and more indebted.
Other than that quibble, Posener’s essay is right on the ball. He concludes: “But the key is not savings. It’s growth. The green-Protestant, post-democratic austerity regime could end up destroying Europe.” With one-in-two youth unemployed in some countries and years more of recession still in sight, who could disagree?
Raymond Aron, it is no secret, is my favorite French intellectual of the twentieth century. He was not a Great Philosopher, nor did he create an all-encompassing system, but I think if one had to read one single author to understand the modern world, there is perhaps no one better than this liberal democrat and inveterate enemy of Russian Communism and French Socialism.
He also did not have the penchant of so many French intellectuals to fall into over-zealous moralizing (Sartre) or resorting to willfully dense, apparently meaningless, prose (Althusser, Derrida, Baudrillard).
Aron was also one of the great believers and advocates of Western Europe, in itself, as a collection of mixed-market liberal democracies (this is true throughout his career and writings but above all in his In Defense of Decadent Europe). Yet I am struck, having almost reached the end of his mammoth memoirs, that he has almost nothing to say about European integration.
Granted, having died in 1983, he did not live to see the movement’s greatest achievements: the Single Market, the Schengen area of free movement, the euro, and the reunification of Europe with waves of eastern enlargement.
But still. Aron wrote on many topics – Marxism, industrial civilization, war and peace, and Western Europe – but it appears he had neither the time nor the interest to devote much attention to the various still-born and successful projects for European military, economic and political unity.
Aron was skeptical of all grand, apparently Utopian, designs, and it seems he put the lofty aspirations of European federalism in that category. The (then) European Economic Community he describes favorably as an organization of experts and economists to collect and interpret data and coordinate European economies, but it is not as an embryonic polity.
For Aron, democracy and citizenship are necessarily national. They cannot be shared between countries. This passage on diaspora Jews and Israel perhaps illustrates this most unambiguously:
Reason would prevail over conviction if Jews today aspired to integration, if their Jewishness remained wholly spiritual. From the moment that their consciousness binds them to Israel, a State among others even if it presents certain particularities, non-Jewish Frenchmen have the right to ask to which political community they belong. As long as humanity is divided between “States of power”, Jews of the diaspora, free to determine their destiny, must choose between Israel and their “host country,” that has become their nation [patrie]. Citizens of the French Republic, they legitimately maintain their spiritual or moral ties with Israelis, but, if those ties with Israel become political and take precedence over French citizenship, they should logically choose Israeli citizenship. (Mémoires, 1983, p. 709)
In short, the interests of Israel are not the same as those of France and, when push comes to shove, one has to choose. This passage is naturally of interest to the current so-called “Israel-firster” debate (Aron was, incidentally, Jewish and his writings are sympathetic to and largely uncritical of Israel). But it is of much broader interest to other hyphenated identities emerging due to immigration (Turkish Germans, Arab Frenchman) and European integration.
If a citizen cannot legitimately be loyal to two nations – Israel and France – what likelihood is there that the officials of the European Commission or the European Central could stand for an entire continent of nations? Are they not reduced to being, not the enlightened embodiment of the European interest, but apatrides (nationless) bureaucrats representing no interest beside that of their institution? Today, Aron seems to imply, Germany (for example) can only act in the German interest. It cannot, plausibly, be expected to act in the imagined European interest if it interprets this to be in a contradiction with its own. The denial of this truth leads to all manner of negative consequences.
This may be a slight caricature or imply an idealization of national democracy. But if one observes the interaction between the member states (Council), the Parliament and the Commission, it is hard to escape the impression that they defend not any European interest but only their institutional power.
Aron’s point is naturally somewhat disagreeable to me. As an Anglo-Franco-American (si, si), my background may not be as inherently subversive as some other national combinations, but it is never comfortable to have to face the prospect of being torn between loyalties.
It is also naturally in opposition to the United States of America’s concept of citizenship, with its hyphen identities. It has long been accepted that foreign policy be partly determined by ethnic pandering and lobbying – by and for Cubans, Irish or Jews, for example – even if it makes it much less clear that that policy is in the national interest.
Gideon Rachman of the FT has great run-down of his recent conversations with German officials and diplomats.
There is considerable impatience with the Davos-led, Lagarde-Cameron-Geithner line that Germany has to throw more money at the problem, by building a bigger firewall and rebalancing its trade. “I simply don’t understand them,” says one senior official. “This is a problem that will not solved by the ECB or bazookas or bigger firewalls. It can only be solved by growth. And the only long-term route to growth is structural reform.”
Cool. I will posit two things. First, bureaucrats, diplomats and dare-I-say even economists have never been able to fully explain where long-term growth comes from.
Second, this “simply not understanding” by a senior German official I can only describe as incredibly weak. One has to be talking about willful incomprehension when this issue has been thrashed out and explained ad nauseum over the past 18 months in the major newspapers’ op-ed pages (including the FT) and by too many celebrated/prize-winning economists to cite.
The “Lagarde-Cameron-Geithner line” is really the Lagarde-Cameron-Geithner-Putin-Sarkozy-Krugman-Eichengreen–Roubini-Sarkozy-andlotsofothersmartand/ordisinterestedpeople line. It’s basically the “everyone-except-Germany” line.
So meh. I’ll chalk that “not understanding” as a case of the cognitive dissonance of one German official – who must imagine himself serving the public and European interest on some level – having to defend a policy that is manifestly ruining the European economy, destroying the EU’s image across Europe, and is, beside that, unsustainable. It’s interesting, if depressing, that even after the thrashing at Davos the German high authorities appear so completely unreconstructed.
Lots of other good stuff in the post.
I’ve been reading Molly Ivins so I almost put “like heartless, dumb bastards” but that wasn’t quite in keeping with the style of the publication:
Was it the fact that both the IMF and the World Bank warned that the eurozone’s economic mismanagement could trigger another global recession? Or that the world’s economic and political elite was dismayed by Angela Merkel’s business-as-usual speech in Davos? Or perhaps because the EU was due to announce that eurozone unemployment is still rising, reaching a new all-time record of 10.4% (even as it has dropped to 8.5% in the U.S.)?
In any event, it seems some EU leaders were worried that all this happening in the days before the summit to finalize a fiscal discipline Treaty, mandating more-of-the-same-budget-cuts-and-tax-hikes that have failed to prevent the worsening crisis, might make them look… well, not just heartless, but stupid too.
…and so they came up with an amateurishly bad Growth & Jobs Plan/spin operation. Read all about it on Future Challenges, where I report from the Brussels Think Tank Forum, the EU/national think tanks’ big annual shindig. The Eurowonks were pretty grim.
I came across a December 1998 article in Fortune magazine by the indomitable Liberal economist and Nobel prize winner in which he takes a critical look at the monetary union the Europeans were creating. It’s quite amazing how much has not changed in the concerns he raises, whether it’s on Germany vs. the rest, EU central bankers’ insensitivity to economic performance in favor of “hard money”, or the efforts of “subtle Europeans” to come up with dense, unclear and loop-holey texts so as to have something that can pass for “agreement”.
Most impressive of all is how Krugman describes the weaknesses of the emerging euro system as one that not only jammed together disparate economies but set its core institution, the European Central Bank, on an “autopilot” hostile to both growth and jobs. I can do no better than to quote him at length:
But come actual monetary union, this subtlety [hiding German preferences/predominance behind inscrutable bruxellois] will no longer work, because a truly unified currency must have someone – a European Central Bank – explicitly in charge. How could this institution be set up to give each country an equal voice, yet satisfy the German demand for assured monetary rectitude?
The answer was to put the new system on autopilot, pre-programming it to do what the Germans would have done if they were still in charge.
Krugman then notes the characteristics for maintaining “autopilot”, including the ECB’s independence, it’s “very narrow mandate: price stability, period – no responsibility at all for squishy things like employment or growth”, and appointing the monetary über-hawk, Dutch central banker and bouffant enthusiast Wim Duisenberg as the first ECB president.
He goes on to lament that despite falling inflation, double-digit unemployment and the rise of pro-stimulus centre-left governments across Europe (including France, Germany, Italy an the U.K.), there was no sign that the Bundesbank/the embryonic clique of eurobankers might favor a looser monetary policy:
Instead of an “asymmetric” economy, in which some countries want tight money while others want a boost … and all of the major governments agree that the central bankers should emulate (EMUlate?) that wild and crazy guy Alan Greesnpan, and loosen up. So there is, in the end, no conflict of interest. Indeed, EMU could get off to a rousing start by cutting interest rates and making everyone happy.
But EMU wasn’t designed to make everyone happy. It was designed to keep Germany happy – to provide the kind of stern anti-inflationary discipline that everyone knew Germany had always wanted and would always want in future. So what if the Germans have changed their mind [under social democrat Gerhard Schröder], and realized that they – along with all the other major governments – are more worried about deflation than inflation, that they would very much like the central bankers to print some more money? Sorry, too late: the system is already on autopilot, and no course changes are permitted.
To say yes, to give the politicians what they want even if what they want is entirely reasonable, feels like a betrayal. In fact, the more the politicians demand action, the more the central bankers dig in their heels.
The latter, incidentally, is probably why Nicolas Sarkozy, even as he has been pushing for a more interventionist ECB, has relegated his efforts to private lobbying rather than public exhortation, lest he offend the technocratic priesthood in Frankfurt.
Krugman’s account is a good explanation as to why the ECB, by its very structure, failed to manage the sovereign debt crisis of 2009-201?. The bank was unfazed by the damage a $1.40-€1 exchange rate was having on exports, had no mandate to guarantee low interest rates on government borrowing by buying up bonds (thus avoiding self-fulfilling debt-spiral in the periphery-minus-Greece), and indeed had no inclination to encourage business by lowering its main interest rate below 1%.
In short, the ECB’s “autopilot” meant it behaved in the exact opposite manner of other central banks, including the Fed, the Bank of England, and the Bank of Japan, which all engaged in rock-bottom interest rates and guarantees of low interest rates for government borrowing. So, now, Europe alone has a double-dip recession, rising unemployment and an exponentially worsening debt outlook. Oh, and according to the World Bank, the Old Continent is likely, in due course, to drag everyone else down with it.
In addition, both the European models of integration and of social protection have been tarnished as a result. The latter is particularly vexing as U.S. Republicans and other opponents of the welfare state can quite reasonably point to Europe as “proof” that it is synonymous with economic disaster – spending beyond one’s means, etc. – even as eurozone countries’ actual debts and deficits are no worse, and sometimes better, than other developed countries’.
Krugman concludes by saying “These Europeans, they are a subtle race. And this time they may have subtled themselves into a very tight corner.” Indeed, nowhere is this “tight corner” clearer than in looking at France and the U.K., comparable in terms of economy and budget. But because one is shackled to the euro and has ceded the responsibility for choosing the right economic policy to whims of Frankfurt, it is France alone which pays higher interest rates and has lost its triple A rating.
The “European subtlety” of hiding differences and (in)action behind verbose bruxellois has been at the heart of integration since the beginning. It may be fine for ever-so-slowly breaking down trade barriers, adopting product standards, and so on. But it is fatal when decisive and reactive leadership is necessary (which is indeed why “Europe” has failed whenever there was a crisis, notably in foreign policy, see Iraq, Yugoslavia…).
The non-discourse and remorseless, inscrutable and/or imaginary consensus of “subtlety” continues: We will have the Necessary fiscal compact even if the Luxembourgish foreign minister says it’s a “waste of time”, the ECB will not print money (lest the Germans protest) but will engage in stealth quantitative easing by making €489.2 billion (sic) in loans to banks, and all PMs and presidents (minus the Brits) are in total agreement on the direction Europe is going even as national politicians voice dissent, are cowed and vow to renegotiate the new treaty.
The result is no one really – be it professional observers, markets or, least of all, public opinion – has any idea what’s going on. Perhaps the European ruling class, multinational as it is, must necessarily articulate its thoughts in the habitual diplomatic subterfuge and techno-bureaucratic platitudes. I just hope they don’t doom a generation, mine, to perpetual unemployment and a ruined welfare state as a result. That wouldn’t be very subtle.
Letters from Europe 
