Angela Merkel’s Grand Euro Deal: Tell Me How This Works
Another half dozen or so news/analysis articles — in the New York Times (here and here), The Financial Times, Telegraph, etc — discuss the Euro crisis. Most focus on the proposed grand bargain being pushed by Germany’s Angela Merkel for a new, improved fiscal union that will somehow save the Euro and rescue us all from another dreadful recession.
Amazingly, few of today’s articles ask whether what is being proposed makes any sense. For that, you have to reach back a few days for people like Martin Wolf, Wolfgang Münchau or Nouriel Roubini (or Krugman, et al here). Some were written before the week’s misplaced euphoria for the coordinated central bank actions, in which the Federal Reserve offered to make dollars available for Euros at a lower price, and five other central banks graciously agreed to accept the gift.
Each of these recent articles appears to buy Angela Merkel’s proposal for a more disciplined fiscal union in which every Euro nation would be bound to strict rules for balancing their respective budgets and penalized somehow if they failed to comply. Everyone would embrace this austerian, deficit hysteric’s dream of perennially balanced budgets.
In exchange, the relatively stronger economies — primarily Germany but also others — would condescend to allow the “independent” European Central Bank (ECB) to do something more to help debtor nations. Unfortunately, the “more” is unspecified, with deliberately vague hints from Mario Draghi, the new head of the ECB. To see how hollow this promise is, see comments of Germany’s central banker, a board member of the ECB.
Germany’s demands are directed at nations with high total debts — e.g., Italy, Spain, Greece. Their new governments are now composed of just elected deficit hysterics (Spain), unelected “technocrats” who are also deficit hysterics (Italy) and bankruptcy conservators (Greece) appointed by creditors (Germany and France). As a condition for not really solving their immediate debt problems, Germany would demand they comply with stringent austerity programs to slash spending, worker salaries or pensions, or increase revenues while — and this is never explained — simultaneously boosting their economies to avoid the onrushing recession.
Even the casual non-economist must be struck by how disconnected this entire package of remedies is from even a theoretically plausible set of solutions. As I wrote a few weeks ago, there are multiple, related problems that still need to be understood separately, but much of the media continue to confuse long-run remedies, some unworkable, with immediate crises that could crash the system next week or next month. Once again:
1. There is an immediate crisis — a massive investor run on banks and the sovereign debts they hold. This crisis demands immediate financial intervention from an entity with unlimited funds, not a long-run commitment to balanced budgets. There appears to be a consensus among economists and many non-participants that this requires massive, convincing intervention by the ECB — as in “we will provide as much lending (liquidity, monetary easing, whatever) as it takes, as long as it takes.” No such offer is on the table, and those in the best position to effect this change remain adamantly opposed. If this is not addressed, and quickly, all long run plans become irrelevant.
2. There is also an immediate need to avoid or mitigate an onrushing serious recession throughout Europe. That will engulf the supposedly “stronger” economies, too, and via various linkages, threaten the US economy. Greece’s tiny economy is already in depression with no way out; it’s not much better in Portugal; Italy is close to recession, Germany and France’s growth has slowed to near zero and is headed south, along with the UK, a major trading partner whose idiot government is committed to solving the lack of demand by depressing it further. Every one of these countries is pursuing austerity policies that have already slowed growth, increased unemployment, and if continued will ensure recessions. They are all strangling themselves and proposing to cure that by squeezing harder. Merkel wants to make the bleeding remedy mandatory, with penalties.
3. There is a desperate need both here and in Europe for a shared, coherent vision of how national economies work and how a federal government’s actions affect them during downturns [when caused by financial crisis]. Here we find Angela Merkel saying things that are not much different from the loonies running Congress or for the US GOP presidential nomination. Merkel’s vision is a compact among states all committed to enforce balanced budgets. It’s the equivalent of saying that the US can get out of a recession and deep unemployment if only each US state will cut spending and government services enough to balance its own state budget. This is economic gibberish.
The US is currently failing to function effectively as a national “fiscal union,” leaving 25 million either unemployed or underemployed and its GDP functioning well below its potential. That’s a huge economic waste creating and tolerating a shocking level of human suffering. But it could be worse, and it would be worse if Angela Merkel’s remedies were applied here — or if the GOP in Congress get their way.
America’s economic plight would be far worse if the federal government did not perform a few critical functions, and it would be far better if it did more of them. Most US states already balance their respective budgets, but that’s not helping. What a balanced budget requirement makes them do in a downturn is to cut spending and/or raise taxes — measures that only make matters worse. Why is this so hard to understand?
The rational policy for the federal government is to make up for the depressed demand. At a minimum this means picking up the increased safety-net costs states would otherwise incur — Medicaid, food stamps, unemployment insurance, etc — and help the states avoid massive layoffs of public employees and cuts in public services. Boosting demand further through increased federal spending to make up for the fact the private sector is depressed and “deleveraging” from its high debt levels is the next step to get out of the hole.
The 2009 stimulus tried to do these things, and it should have done more and for longer. The extent it fell short helps define the gap in what the economy could be doing in output and employment and where we find ourselves. This is math, not ideology.
Where is this essential federal responsibility in Angela Merkel’s proposal for a more disciplined fiscal Euro union? It seems to be missing. Instead, she proposes to force all Euro nations into a economic straight jacket on the theory that austerity will both keep Europe out of recessions and get them out when they occur. But where is the plausible economic theory explaining how this is even logically or mathematically possible? How does it square with national income accounting?
As Krugman, Dean Baker, et al repeatedly remind us, Europe’s crash, like our own, did not result from excessive government spending or unsustainable deficits/debts. Except for Greece, most Euro countries had small deficits or even surpluses before the crash. It resulted more from irresponsible lending by the banksters of the US and Europe, massive bankster-driven bubbles in housing, and equally massive crashes when the bubbles burst, followed by some sovereigns bailing out their banksters. We are still waiting for the criminal banksters and their criminally irresponsible regulators to be hauled away, but there’s nothing in Merkel’s vision that includes that image.