Archive for the ‘Eurozone Crisis’ Category

The “German Problem” Is Not a Problem for Anyone to Worry About. Or Is It?

Jörg Bibow | July 19, 2017

It took a very long time. Too long. But just in time for the recent G20 meeting in Hamburg on July 7-8, The Economist’s cover page story featured Germany’s persistent current account surpluses as the world community’ new “German problem”; supposedly an issue of foremost interest to the G20. In fact, Germany has run up current account surpluses exceeding 4 percent of GDP in each and every year since 2004. For the last couple of years Germany’s surpluses even exceeded 8 percent of GDP. Running at over 250 billion euros annually, Germany is the world champion in what is often portrayed as a global competition by the German media and body politic, and not without pride. At close to 300 billion US dollars last year, China’s surplus of 200 billion dollars only came in as a distant second.

Just as with Germany’s, China’s external surpluses had started to skyrocket at the time of the global boom of the 2000s. It reached a peak at over 400 billion in 2008, amounting to close to 10 percent of China’s GDP at the time. Since then China’s current account surplus has roughly halved and amounts to less than 2 percent of China’s GDP today.

At least in that regard, China is a good global citizen. Reducing and containing “global (current account) imbalances” has indeed been one of the agreed upon objectives of the G20 from the time the group of leading countries took fresh prominence in the context of the global crisis. At the 2009 Pittsburgh summit, the G20 leaders conceived the group’s “Framework for Strong, Sustainable, and Balanced Growth.” While other countries have generally significantly reduced their current account deficits or surpluses, respectively, since the crisis, Germany is the conspicuous outlier as the country’s current account surplus has leaped into its unchallenged lead position of today.

The Economist was rather late in pointing this out so prominently on its cover page just prior to the G20 Hamburg summit. Perhaps it is too hard today to miss the writing on the wall that is a signature piece in Donald Trump’s “America first” strategy to global issues. The US president may get some of the details wrong about Germany’s trade and may also be wrong in bringing a sharp bilateral angle to the matter. But, globally, the situation is simply undeniable: Germany is the world champion of large and persistent current account surpluses. The country is in continuous breach of the “rules of the game” without showing any signs of discomfort about an “achievement” that much of the country even takes pride in. continue reading…

Comments


Why Macron Should Not (and Cannot) Follow the German Model

Jörg Bibow | June 2, 2017

The Economist‘s analysis of Germany’s job market miracle of the past ten years offered in “What the German economic model can teach Emmanuel Macron” is more balanced than the usual accounts one hears in Germany itself. Germans are in love with the idea that structural reform of their labor market and persistent budgetary austerity were solely responsible for the German economy’s superior performance in recent years. The Economist highlights that Germany was fortunate enough to embark on its route for national salvation – the decisive lowering of its labor costs relative to its European partners – at a time when the world economy and global trade were booming, when China was craving German capital goods, and German companies were restoring their special relationship with a region reemerging from behind the iron curtain. No doubt France and its struggling euro partners are facing a far less benign regional and global environment today.

The Economist would have done well to remind us that despite enjoying a more favorable economic context, Germany became known at the time as “the sick man of Europe/the euro.” Between 1996 and 2006, Germany managed to almost persistently suffocate domestic demand to such an extent that the economy was growing, if barely, on exports alone: the background to Germany’s 8.5 percent-of-GDP current account surplus today. As for France, the bar is much higher today, not only because of stagnant export markets, but also for the fact that France is a far more closed economy than Germany. In other words, there is more to suffocate in terms of domestic demand, but less to gain in terms of exports. In short, the chances of France getting seriously sick by mimicking Germany are very high indeed.

Also, if Europe’s second-largest economy were to embark on the deflationary path earlier trodden by Germany, bear in mind here that the European Central Bank is already in a quagmire. After overcoming many obstacles, legal and intellectual, the bank is applying its full weaponry today in trying to move Eurozone inflation back closer to its 2 percent price stability norm – while facing the prospect of soon running out of ammunition in terms of the fast-shrinking German public debt available for purchase on the market.

And this directs the attention to the true challenge that France and Europe are facing today: German public debt is shrinking fast because Germany runs a sizeable budget surplus. Quite obviously – as the vast imbalance between private saving and investment reveals, which is closely related to the surge in inequality in Germany –this is only made possible by the fact that Germany runs a massive external surplus: the counterparts to which are current account deficits and rising debts of other countries. The upshot of all this is that France and Europe have a zero chance to rebalance for as long as Europe’s largest economy refuses to rebalance too; which means that Germany’s evangelized, but greatly distorted, narrative of its own success will need some fine-tuning too.

For the sake of Europe, let us hope that Angela Merkel’s newfound wisdom that “we Europeans must really take our destiny into our own hands” means that Germany is finally getting ready for a decisive course change to its own economic affairs. Failure to do so, leaving France out in the cold under Emmanuel Macron, would bring Marine Le Pen back into the limelight much sooner than in five years’ time.

Comments


Gexit: The Case for Germany Leaving the Euro

Jörg Bibow | May 18, 2016

The case for or against a British exit from the EU – #Brexit – is headline news. For the moment the earlier quarrel about a possible Greek exit from the Eurozone – #Grexit – seems to have taken the back seat – with one or two exceptions such as Christian Lindner, leader of Germany’s liberal FDP. Most EU proponents are deeply concerned about these prospects and the repercussions either might have on European unity.

Yet, while highly important, neither of them should distract Europe from zooming in on the real issue: the dominant and altogether destructive role of Germany in European affairs today. There can be no doubt that the German “stability-oriented” approach to European unity has failed dismally. It is high time for Europe to contemplate the option of a German exit from the Eurozone – #Gexit – since this might be the least damaging scenario for Europe to emerge from its euro trap and start afresh.

Germany’s membership in the eurozone and its adamant refusal to play by the rules of currency union is indeed at the heart of the matter. Of course, it was never meant to be this way. And it was not inevitable for Europe to end up in today’s state of never-ending crisis that impoverishes and disunites its peoples. I have always supported the idea of a common European currency as I believed that it could potentially provide a monetary order that is far superior to the status quo ante of deutschmark hegemony: the Bundesbank – in pursuit of its German price stability mandate – pulling the monetary strings across the continent. While I have also always held that the euro – the peculiar regime of Economic and Monetary Union agreed at Maastricht – was deeply flawed, I kept up my hopes that the political authorities would reform that regime along the way to make the euro viable.

In this spirit I proposed my “Euro Treasury” plan that would, among other things, fix the Maastricht regime’s most serious flaw: the divorce between the monetary and fiscal authorities that is leaving all key players vulnerable and short of the powers required to steer a large economy like the eurozone through anything but fair weather conditions, at best. Watching developments over in Europe from afar my hopes are dwindling by the day that the failed euro experiment will usher in reforms that could save it. Instead, the likelihood of some form of eventual euro breakup seems to be rising constantly. It is undeniable that the euro has turned out to be an instrument of widespread impoverishment rather than shared prosperity. It seems increasingly unclear for how much longer pro-European politics will be able to somehow cover up the blunder and hold things together – particularly as politics is turning more and more nationalistic and confrontational everywhere.

The quest for monetary stability in Europe was always about two things: price stability and the absence of “beggar-thy-neighbor” distortions in competitiveness and trade. Monetary stability was seen as a pre-condition for peace and shared prosperity. Today, the eurozone is on the verge of deflation, domestic demand is still below the level reached eight years ago, and unemployment remains extremely high, especially in over-indebted euro crisis countries. How did we get here? And how could #Gexit help? continue reading…

Comments


Tcherneva: The Biggest Existential Threat to the Eurozone Is Its Design

Michael Stephens | March 18, 2016

 

Related: “Euroland’s Original Sin” (pdf)

Comments


As the Euro Time Bomb Ticks Away the ECB Turns Desperate

Jörg Bibow | March 9, 2016

These are not happy times for Europe. Ukraine, Russia, and rising anti-democratic influences in Hungary and Poland represent latent threats at the European Union’s eastern front. The prospect of Brexit is a more acute one at its western front.

After letting loose manifold conflicting forces that continue shaping internal politics in many EU countries and setting them on collision course with their partners, the refugee situation appears to be on the verge of bestowing another humanitarian crisis on the union’s most vulnerable and unfortunate member: Greece. Never mind the Catalan question: it almost appears minor by comparison, but actually represents yet another fundamental challenge to the European project. “Misfortune seldom comes alone,” a German saying goes; the nation that is increasingly pulling the strings in European affairs but appears at risk of alienating itself even more so than its partners while doing it.

Considering all this, the European political authorities may almost be forgiven for having lost sight of the smoldering crisis of the euro, the union’s flagship endeavor that was meant to foster prosperity and political union – but turned out to deliver quite the opposite. One key player, the European Central Bank (ECB), does not wish to partake in the peculiar mix of denial and delusion about the state of the euro. As the specter of deflation and lasting “Japanization” (or worse) is taking hold, again, the euro’s guardian of stability readies itself for unleashing a fresh round of unconventional policies to prop up the Eurozone’s feeble recovery.

So it’s Draghi showtime again. But how much good, if any, can the ECB really do at this point? I fear the ECB showman’s display of apparent power may be turning into a sad saga of hope and desperation. The ECB can no longer camouflage the fact that ample central bank liquidity alone will not heal the manifold and deep euro fault lines that are plaguing the currency and symbol of European unity. Make no mistake: Europe will very likely be facing crunch time this year – with nowhere to hide for anyone. continue reading…

Comments


The Next Step: Boosting Public Investments

Jörg Bibow | February 19, 2016

The eurozone has been in crisis since 2008. By the end of 2015 domestic demand was still 3 percent below its pre-crisis peak. Throughout, the European Central Bank (ECB) has acted as the eurozone’s prime crisis manager.  As capital flows reversed and inter-bank lending seized up, the ECB provided emergency liquidity to keep banking systems afloat.

However, for legal and political reasons, the ECB was restrained in supporting sovereign debt. But, given that there are close linkages between banks and sovereigns, supporting only one party in the duo proved insufficient. From 2011–2012, interest rate differentials between eurozone members soared and credit dried up, as the risk of default on national debt and currency redenomination became investors’ foremost concern. In the end, Mario Draghi’s famous promise to “do what it takes” calmed the markets – at least for now.

The ECB’s monetary policy course was rather less helpful. The ECB is legendary for its reluctance to ease interest rates in the face of downside risks, and it even prematurely hiked rates in 2011. And so it took the ECB until the summer of 2014 to finally contemplate unconventional monetary policy measures to counter deflation risks, which were by then acute. Meanwhile, the ECB has indeed adopted a negative interest rate policy, pushing short-term money market rates below zero. It has also embarked on quantitative easing, including the large-scale purchase of national sovereign debts, as part of monetary policy rather than for government financing reasons.

Falling Interest Rates Reduce Incomes

The ECB’s more aggressive monetary policies are working, to some extent. Credit and the economy are growing again – albeit sluggishly – after years of shrinkage. Overall, however, the eurozone’s recovery remains fragile and uneven, while the ECB is falling short of its primary price stability mandate by a wide margin.

Arguably, the ECB’s negative interest rate policy even risks self-defeat: as a means to weaken the euro, the ECB’s global competition is getting fiercer; as a means to boost lending, it may not help to undermine bank profitability by effectively taxing them as the negative deposit rate amounts to taxing banks. Quantitative easing has at least successfully diminished interest differentials and reduced borrowers’ interest burden, opening up some fiscal space, among other things.

However, there is a downside, as falling interest rates actually reduce incomes. In the end all may come to nothing unless someone boosts spending. Neither exports nor private spending are a promising proposition here. Government spending is the last resort. Halting the brutal austerity policies that were imposed from 2010 until 2012 was an important first step towards ending the two-year decline in domestic demand. Today it is time to take the next step: governments must step in and boost infrastructure investment spending. continue reading…

Comments


Auerback on European Growth, Brexit, and Negative Rates

Michael Stephens |

Comments


How to Make a Mess of a Monetary Union, and of Analyzing It Too

Jörg Bibow | February 12, 2016

Servaas Storm means well. He is alarmed that the eurozone’s official strategy of “internal devaluation” might do more harm than good by unnecessarily forcing countries that have lost their competitiveness into deflation (see here, here, and here). This is a very real concern indeed and Storm should be applauded for raging against the colossal folly that is wrecking Europe. Unfortunately, Storm goes astray in seemingly dismissing any role for unit labor cost competitiveness and German wage moderation in causing the still unresolved eurozone crisis in the first place.

Referring to bits and pieces of evidence derived from mostly partial-equilibrium empirics of one type or another, Storm fails to notice that no coherent macroeconomic analysis of the eurozone crisis emerges unless German wage moderation gets assigned a prominent role in the play. At the heart of the whole confusion is Storm’s attempt to attribute to those who emphasize German wage moderation as a key causal factor in the eurozone crisis the view that “expenditure switching” would explain 100 percent of the eurozone’s internal current account imbalances (and related balance sheet troubles). This would be a very peculiar view indeed – and I am not aware of anyone who actually holds it. Certainly the proponents of the “wage moderation hypothesis” that I know, including those who responded to Storm’s “critical analysis” (see here and here, and also this author), definitely do not hold this view. Effectively, Storm set up a straw man that he then defeats with flying colors; not realizing that his arguments are self-defeating and make a mess of the whole analysis of monetary union. continue reading…

Comments


How Long Until Greece Recovers?

Michael Stephens | February 5, 2016

The Levy Institute has completed its most recent medium-term projections for the Greek economy. The outlook, unsurprisingly, isn’t reassuring.

The baseline simulation, which assumes the continuation of current policy, shows the GDP growth rate turning positive in 2017 and reaching 2 percent in 2018. Yet, in a reflection of how much damage has been done by the crisis, even if Greece managed a growth rate around that pace (2.1 percent per year), it would take until 2030 for real GDP to return to its 2006 level. It’s fair to wonder whether such a delayed recovery — with little relief on the horizon for the elevated numbers of poor and unemployed in Greece — is politically and socially sustainable.

And there’s worse news in the report. The baseline generated by the authors’ model for Greece reflects a scenario in which future growth would be export-driven. But this increase in Greek exports would not be generated primarily by price competitiveness (“the price elasticity of Greek exports is low while the income elasticity is high”). That is, the decline of Greek wages — the centerpiece of the official “internal devaluation” strategy — isn’t projected to produce much of a payoff in terms of net exports.

Instead, the rise of exports in this scenario is almost entirely due to assumptions about the economic health of Greece’s trading partners; assumptions taken from the IMF. And as the authors caution, the IMF is likely overstating European growth prospects. So this lost decade-and-a-half for Greece (more, if you’re counting from the onset of the crisis) is actually the “optimistic” scenario.

What can be done? Some of the plans being considered are simply too tame. The authors run a second simulation based on the implementation of a “Juncker Plan”: an increase in public investment for Greece, funded by European institutions, of €1 billion in 2016, €2 billion in 2017, and €3 billion in 2018. The results suggest such a program could help raise GDP growth rates (to -0.4 percent in 2016, 2.9 percent in 2017, and 2.8 percent in 2018), but according to the authors the lag between output and jobs would still leave unemployment too high for too long. Something better targeted, and less reliant on the good will of European institutions, is required. More on that soon.

Read the full Strategic Analysis here and the One-Pager version here.

Comments


Stormy Fantasies about Labor Cost Competitiveness

Jörg Bibow | January 27, 2016

Lamenting that intellectual inertia is responsible for slow progress in economics, Servaas Storm sets out to teach a lesson to everyone who may still be foolish enough to believe that relative labor costs matter for international competitiveness and that diverging unit labor cost trends – specifically persistent wage moderation in Europe’s largest economy, Germany – may have played a rather critical role in sinking Europe’s monetary union. It is a dangerous myth, Storm proclaims, that labor costs drive competitiveness. He suggests that the eurozone crisis originated from a different set of causes altogether; German wages are little more than trivia.

I fear that Servaas Storm will further add to existing confusions about both German wages and the widely misdiagnosed and never-ending eurozone crisis more generally. His blog of January 8, 2016 titled “German wage moderation and the eurozone crisis: a critical analysis” (see here) is hardly a masterpiece in analytical coherence. I will focus on some key issues.

Storm appears to be making three big points. First, German wage moderation is a mere fiction. If Germany’s competitiveness improved at all under the euro, that was the result of nothing else but its engineering ingenuity: “It was German engineering ingenuity, not nominal wage restraint or the Hartz ‘reforms’, which reduced its unit labor costs. Any talk of Germany deliberately undercutting its Eurozone neighbors is therefore beside the point.” Second, Storm essentially agrees with the “consensus narrative” recently proposed by a group of CEPR-associated researchers (see here) which sees the origin of the eurozone crisis in rampant capital flows causing massive intra-eurozone current account imbalances. German wage moderation does not feature at all in the consensus narrative, a conspicuous neglect that prompted Peter Bofinger’s recent critical response (see here; and also here). Storm’s attack therefore reserves some special venom for Bofinger (amongst various other proponents of the wage moderation hypothesis, including this author). Third, the eurozone’s real underlying problem, according to Storm, is that the euro has “not led to a convergence of member countries’ production, employment, and trade structures, but rather to a centrifugal process of structural divergence in production.” Somehow – but other than through wage moderation! – Germany got even stronger in high value-added, higher-tech manufacturing under the euro, while the eurozone South remained stuck with low value-added, lower-tech manufacturing.

In the course of presenting these three points (or hypotheses) Storm not only thoroughly misrepresents the “wage moderation hypothesis,” he also fails to shed any new light on the supposed role of capital flows, while ending up with the rather disheartening proposition that the euro is essentially nonviable until the eurozone’s production structures converge to the German standard.

Regarding the first point, the idea that German wage moderation may be fiction rather than fact, I am simply baffled. The wage moderation hypothesis (at least as I have presented it; see here, here, and here, for instance), starts from the following facts (data courtesy of Eurostat and the OECD). First, Germany’s unit labor cost trend stayed persistently below the common stability norm as set by the ECB; reneging on the golden rule of currency union. Second, German wage inflation was the clear outlier in the downward direction. Third, German productivity growth barely met the euro area average. continue reading…

Comments