In advance of this week’s Ford–Levy Institute conference in Athens, Greece (Nov. 8–9), Jörg Bibow gave an interview with George Papageorgiou, senior editor of newmoney.gr, on the role German policy has played (and still plays) in generating and exacerbating many of the problems plaguing the eurozone periphery — something Bibow was warning about back in 2005 (see here, for instance). He also addressed where the eurozone needs to go from here, touching on a plan for a Euro Treasury he’ll be discussing at the Athens conference.
The English text of the interview follows (Greek version here):
You have been critical of German policy. How does it really affect the rest of Europe? In what ways does it cause harm to the peripheral economies?
Yes, indeed, German policy bears foremost responsibility for the euro crises and German policy is key to Europe’s future. Germany is Europe’s largest economy. For that reason alone whatever happens in Germany inevitably significantly impacts the eurozone economy. For instance, when Germany prescribed itself an extra dose of wage repression and fiscal austerity in the early 2000s, this had rather fateful consequences for the currency union. For one thing, stagnant domestic demand in Germany constrained its euro partners’ exports to Germany. For another, stagnation in Germany provoked some degree of monetary easing from the ECB, monetary easing which was both too little for Germany but too much for the euro periphery where wages and domestic demand were thereby propelled further. In other words, Germany undermined the ECB’s “one-size-fits-all” monetary policy stance. This happened alongside cumulative divergences in intra-area competitiveness positions, current account imbalances and the corresponding buildup in foreign asset and debt positions. Together this meant that the currency union was going to face trouble as soon as those imbalances would start to unravel. I started warning of these developments in 2005, but the euro authorities were sleeping at the wheel for many years to come.
This is the background to the still unresolved euro crisis, which is primarily a balance-of-payments and banking crisis that only became a sovereign debt crisis as a consequence. Adding insult to injury, the crisis has left Germany in the driver’s seat in eurozone policymaking. Germany punches above its weight in current policy debates. Unfortunately, in misdiagnosing the true nature of the crisis, Germany’s policy prescriptions have focused on nothing but fiscal austerity and structural reform. The consequences are proving a disaster for Europe. In particular, since Germany refuses to adjust its massive external imbalance and continues to have very low inflation, the ongoing rebalancing process inside the currency union is proving deflationary for everyone else. Essentially, as average eurozone wage and price inflation has fallen to extremely low levels, euro crisis countries are forced into debt deflation. Predictably, the wreckage is truly enormous. Policies and consequences are akin to what U.S. President Hoover and German Chancellor Brüning attempted in the 1930s. As we know, this sad experiment in macro policy folly gave the U.S. FDR, the New Deal, and Social Security, while outcomes in Germany were far less benign. It is as yet unclear which path Europe will take this time; the constructive or the destructive one.
What drives then Germany’s current policy? Doesn’t its leadership recognize the danger it poses for the future of the eurozone?
Confusion, a load full of ideological baggage, and short-sighted vested interests, I suppose. Apparently the German authorities do not understand the futility of their favored policies. My reading is that they have never quite understood that Germany could only succeed with its peculiar economic model in the past because and as long as its key trading partners behaved differently. Today Germany is forcing Europe to become like Germany. The trouble is of course that not everyone can be super-competitive and run perpetual current account surpluses at the same time. Somehow the German authorities are stuck in a deep ideological hole on this issue – and they keep on digging.
If Germany continues practicing its current policies, what would be the most likely outcome? Will we head towards the dissolution of the eurozone or with the permanent two- or even three-tier Europe and with the periphery in a quasi colonial situation?
Without a fundamental U-turn in Germany policy I expect the euro experiment, which has clearly failed at this point, to end in full-blown disaster: dissolution. Germany can only run perpetual current account surpluses vis-à-vis its euro partners with fiscal transfers as their counterpart. But such a “transfer union” is precisely what Germany dreads most. Somehow the German authorities, supposedly under pressure from Germany’s powerful export lobby, have trouble seeing the inevitable link between the two. Or perhaps they have convinced themselves that, as Germany’s euro partners become just like Germany, the eurozone as a whole can from now on run up a large external imbalance. If this is the new master plan, they are kidding themselves. The U.S. Treasury has just fired a broadside at Germany for this foolish endeavor, making it very clear that repeating at the global level the very strategy which has wrecked Europe was unacceptable. Let me add that the Germany finance ministry’s response that Germany’s seven-percent-of-GDP current account surplus was neither a problem to Europe nor the world is truly scary, once again highlighting that the German authorities are bathing themselves in delusion and denial.
What’s your reading of the economic situation in Greece? The government is celebrating the realization of a small primary surplus, but the debt burden keeps increasing and unemployment will soon hit the 30% mark. What are the kind of policies needed for a highly indebted nation like Greece in order to witness recovery taking place?
I am not an expert on Greece. But the key macro data speak a rather clear language: the Greek economy is in a deep mess. That the Greek finance ministry can now finance its primary outlays by taxes is little relief as such. As long as both the Greek human and physical capital stocks are allowed to decay, Greece’s future is a grim one. Ideally, fiscal transfers and debt relief would play their part. And as the debt burden continues to rise some form of debt restructuring will be inevitable anyway. But resistance against transfers seems to be insurmountable at this point. Arguably, the bigger part of the problem is that the rebalancing inside the currency union, which is needed unless transfers are to become permanent, is happening in a highly asymmetrical and deflationary fashion. Much would be gained if domestic demand in the eurozone as a whole were to recover. In my view, a recovery program cannot focus on Greece (or crisis countries) in particular but must be broad-based and region-wide, implying particularly strong domestic demand growth and temporarily higher wage-price inflation in Germany.
Do you anticipate changes in Germany policy as a result of a coalition government between SPD and CDU?
No, not at this point at least. The two parties are way too much alike anyway. The two parties appear to subscribe to the same kind of economic policy dogma and folly focusing on nothing but austerity and competitiveness – even as the SPD might like a minimum wage a little better than the CDU. I fear we will see another crisis escalation before anything real might happen. At that point the union will either dissolve or embark on a more constructive path. The euro experiment has failed. So much we know. For the time being we may remain in a state of denial and delusion about it – perhaps for as long as the markets let the champagne flow and remain in “happy mode.” But we also know that things can change pretty quickly in the markets.
Given the nature of the design of the eurozone, what would be the proper economic policy for Germany and Europe to adopt? (It would be very helpful if you could address the feasibility of financial transfers from the North to the South without additional political integration and economic governance.)
In my view, the design of the euro currency union was inherently flawed from the beginning. In a benign global economic environment the euro regime may have seemed superficially viable for a while, but only if the kind of divergences and imbalances that German wage repression bestowed upon the union had been avoided.
I think that at this point the situation has deteriorated to a point that adopting the “proper economic policy for Germany and Europe” while staying within the current regime design is not really feasible anymore. I don’t think we will get out of this mess without putting the euro on a whole new track by fundamentally re-designing the euro policy regime.
I think there is no way around it: we need to complement the euro currency union by a fiscal union, we need to pair up the ECB with a Euro Treasury. This move would re-establish the powerful axis between the fiscal and monetary authorities that we observe at the center of any sovereign state, the very axis of power that is so strangely divorced in the current regime, leaving all parties more or less impotent.
The trouble is of course that the eurozone does not have fully-fledged democratic institutions in place at this point. So how can we have a fiscal union then? Also, resistance against a fiscal union of the transfer-union type seems insurmountable at this point.
We therefore have to be very creative. At the Levy conference held in Athens this weekend I will talk about what I call my “Euro Treasury” plan. At the heart of the plan is the idea of pooling public investment spending at the eurozone level and have it funded by issuance of Euro Treasury securities. The plan establishes a fiscal union that is specifically designed not to be a transfer union as both investment grants made by the Euro Treasury to the member states and member states’ shares in the tax revenue needed to service the interest on the Euro Treasury debt are based on GDP shares. Member states are henceforth required to balance their structural current budgets, that is, excluding public investment pooled in the capital budget at the center.
I cannot go into details here – the research paper in which the plan is laid out will be published shortly – but I believe that this kind of Euro Treasury is really the missing element in the euro regime without which the euro will not fly but die. In the absence of political union, and given the political reality of resistance against a transfer union, we cannot have a full-blown fiscal union at this point. I do believe however that my Euro Treasury plan features a minimalistic but functional fiscal union that would finally put the euro on a viable track.
By the way, Germany’s role in all this is not to embark on a national fiscal expansion. Germany’s own fiscal space is actually too limited for that and, while the markets may chose to ignore this fact at their peril, Germany is actually in an extremely vulnerable position itself. What we need from Germany is to emerge from its current state of delusion and denial, and to allow and facilitate the regime reforms needed to put the euro on a viable track. Without the Euro Treasury, the “strengthened” so-called Stability and Growth Pact and the “Fiscal Compact” are nothing but the euro’s deathtrap. By contrast, the Euro Treasury to-be turns the flawed project into a viable one. Needless to say, this would be in Germany’s own national interest, while, ultimately, its current policies are not. Germany has much to gain from a viable euro regime – just as breakup of the euro would prove extremely costly to Germany.
Bibow’s recent publications can be found here. Here are some of his recent posts on Germany and the eurozone: