What top international economists think about economic policies in the euro zone
There was nearly uninanimous agreement that the euro was saved by ECB president Mario Draghi’s now historic words uttered in July 2012: “the ECB is ready to do whatever it takes to preserve the euro”, and the ingenious Outright Monetary Transaction (OMT) program that followed up on his words. On August 2012, the Governing Council of the ECB announced that it would undertake outright transactions in secondary, sovereign bond markets, aimed “at safeguarding an appropiate monetary policy transmission and the singleness of the monetary policy” (ECB press release of September 6, 2012). In other words: the ECB was ready to do “whatever it takes” to scuttle speculative attacks on the euro.
Had Mario Draghi not acted so courageously against the opposition of German monetary hawks like Bundesbank president Jens Weidman and his predecessor Axel Weber, the euro zone would have collapsed and Germany would be in a deep economic depression today. Stanley Fisher has equally strong views on this issue. During the IMF/World Bank meetings he shared his little veiled criticism of Jens Weidmann’s opposition to Draghi’s emergency measures: “If central bankers think they have to teach politicians a lesson under the pretext of preventing ‘moral hazard’, thus risking a global economic crisis just for the principle, they overstep their mandate.” (paraphrased citation)
It's the Germans (again), stupid*
The general mood about economic policies in Germany seems to be a mixture of incomprehension and bitterness. There is, for example, widespread incomprehension about the reasons why Germany continues to build up current account surpluses, thus rendering the adjustment and rebalancing process in the euro zone much harder for the countries in the euro zone periphery. While Greece's government imposed austerity measures on its people so severe that Greeks are suffering an economic and humanitarian crisis of epic proportions, Germany let its current account surplus grow so large that it has surpassed China’s. And to add insult to injury, Germans openly celebrate their 'export championship', in the face of austerity-driven record unemployment, poverty and hunger in Southern Europe.
Not surprisingly, people in the euro zone periphery strongly resent this situation and react with bitterness. Southern European officials correctly point out that the situation would be quite different if the D-Mark still existed in a flexible exchange rate regime: the D-Mark would have strongly appreciated and German wages and income would have risen. German exports would have grown less, and the strong D-Mark would have allowed more imports from and tourism to Southern Europe, thus balancing out the trade imbalances. Now that the euro zone has a fixed exchange rate regime, this automatic adjustment does not occur but can be 'manufactured' with internal devaluation, i.e. cuts in wages and pensions to lower price levels, the hard way imposed by Merkel’s austerity diktat.
My view: it doesn’t have to be that way. Adjustment could take place without so much of human hardship and suffering if only Germany were prepared to act as a real partner and contribute its share of adjustment by allowing German wages to rise, thus strengthening aggregate demand for domestic goods, for investments in infrastructure and for imports from and tourism to the euro zone periphery. But trying to convince the powerful German exporters of the necessity to strengthen Germany’s domestic economy instead of exports is like banging one’s head against the wall. German exporters' profits would fall, and that’s a no-go. It’s not their problem if Germany's export goods are so superb that the whole world scrambles to buy them; hence it’s not their fault if the euro zone collapses under the weight of current account imbalances. The deficit countries just need to work a little harder and accept wage cuts to become more competitive. That’s the attitude among many Germans, including many officials in the Merkel government.
Stupid German money
US officials resent this attitude. They correctly question the rationale behind the generation of huge export profits if German banks then invest these profits in worthless mortgage-backed securities and risky sovereign bonds. As Michael Lewis wrote in his book “The big Short”, it was “stupid German money” that US and British bankers could count upon when they needed idiots to invest in their toxic CDOs full of worthless mortgage bonds.
And then, when the chickens came home to roost and produced huge losses, German taxpayers willingly rescued their German banks and seemingly want little in return: data from the IMF Fiscal Monitor show that the bail-outs of German banks have increased public debt by 12.8%age points of GDP, of which only 1.9% have been recovered five years after the crisis ! (see IMF Fiscal Monitor, table 7, page 16). By contrast, the U.S. spent 4.6% of GDP on supporting their banks, but also recovered 4.6% plus earned interest after widespread public outrage with the banks --->see President Obama proclaiming “we want our money back”:
And then, when the chickens came home to roost and produced huge losses, German taxpayers willingly rescued their German banks and seemingly want little in return: data from the IMF Fiscal Monitor show that the bail-outs of German banks have increased public debt by 12.8%age points of GDP, of which only 1.9% have been recovered five years after the crisis ! (see IMF Fiscal Monitor, table 7, page 16). By contrast, the U.S. spent 4.6% of GDP on supporting their banks, but also recovered 4.6% plus earned interest after widespread public outrage with the banks --->see President Obama proclaiming “we want our money back”:
It’s not that Germans don’t want their money back from their banks as well. But, whenever someone dares to propose a financial transactions tax or suggests tax increases on the wealthy like the Green party did before the last national election, the 'evil empire' initiates a thundering PR campaign against the tax levies….and what started as a tiger ends up as a little pussy cat (in German: “als Tiger gesprungen und als Bettvorleger gelandet”). The Greens lost 3%age points in the national election and the social democrats (SPD) do not even dare to say the word ‘tax’ anymore.
IMF recommendation: tax the rich !
Doesn’t anyone of our German politicians have any cojones ? If the alpha males are too scared to go against powerful entrenched interest groups, then move over and let the women do what needs to be done. We even have the IMF on our side now ! For someone who knows the IMF well, that is the single most surprising news out of Washington: the IMF actually recommends tax increases on the wealthy !!! (see The Guardian, "IMF eyes tax potential of the world's super-rich"). You go, girl !
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*this is a word play on the Clinton campaign slogan "it's the economy, stupid"
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