Alemania no acaba de consumir, solo ahorra…
Esto dice Martin Wolf del FT:
Germany is the eurozone’s biggest problem
The monetary union will fail if it is run for the benefit of creditors alone
Why is conventional German thinking on macroeconomics so peculiar? And does it matter?
The answer to the second question is that it matters a great deal. A part of the answer to the first is that Germany is a creditor. The financial crisis has given it a dominant voice in eurozone affairs. This is a matter of might, not right. Creditors’ interests are important. But they are partial, not general, interests.
Recent complaints have focused on the European Central Bank’s monetary policies, especially negative interest rates and quantitative easing. Wolfgang Schäuble, Germany’s finance minister, even claimed that the ECB bore half of the responsibility for the rise of the Alternative for Germany, an anti-euro party. This is an extraordinary attack.
Criticism of ECB policies is wide-ranging: they make it unnecessary for recalcitrant members to reform; they have failed to reduce indebtedness; they undermine the solvency of insurance companies, pension funds and savings banks; they have barely kept inflation above zero; and they foment anger with the European project. In brief, ECB policy has become a big threat to stability.
All this accords with a conventional German view. As Peter Bofinger, an heretical member of Germany’s council of economic experts argues, the tradition goes back to Walter Eucken, the influential father of postwar ordoliberalism. In this approach, ideal macroeconomics has three elements: a balanced budget at (almost) all times; price stability (with an asymmetric preference for deflation); and price flexibility.
This is a reasonable approach for a small, open economy. It is workable for a larger country, such as Germany, with highly competitive tradeable industries. But it cannot be generalised to a continental economy, such as the eurozone. What works for Germany cannot work for an economy three times as large and far more closed to external trade.
Note that in the last quarter of 2015, real demand in the eurozone was 2 per cent lower than in the first quarter of 2008, while US demand was 10 per cent higher. This severe weakness in demand is missing from most of the German complaints. The ECB is rightly trying to prevent a spiral into deflation in an economy suffering from chronically weak demand. As Mario Draghi, ECB president, insists, the low interest rates set by the bank are not the problem. They are instead “the symptom” of insufficient investment demand.
The history of the German economy since its labour market reforms of the early 2000s demonstrates that “structural reform” is most unlikely to solve this problem. The most important macroeconomic fact about the country is that it is unable to absorb almost a third of its domestic savings at home, despite ultra-low interest rates. In 2000, before the reforms — which cut labour costs and workers’ incomes — German corporations invested substantially more than their retained earnings. The opposite is now true. With households in surplus and the government in balance, a vast external surplus has duly emerged. (See charts.)
Why should others be able to make productive use of savings Germans cannot apparently use? Why should structural reforms elsewhere, as advocated by Germany, generate the investment surge lacking at home? Why, not least, should one expect indebtedness to have fallen when demand and overall growth is so weak in the eurozone as a whole?
What has happened, instead, is the conversion of the eurozone into a weaker Germany. The current account balance of the eurozone is expected to shift towards surplus by close to 5 per cent of gross domestic product between 2008 and 2016. Every member is forecast to be in balance or surplus. The eurozone is dependent on the willingness of others to indulge in the spending and borrowing it now eschews.
Yet the rest of the world is cautious, too. The ECB has adopted negative real (and nominal) rates because additional savings are now worth so little. It has also learnt from the dire results of the rise in interest rates in 2011. The easing it has adopted since 2012 is at least bearing fruit in a meaningful, if inadequate, recovery: real demand has risen by 4 per cent since its nadir in the first quarter of 2013; and core inflation, albeit only about 1 per cent, has at last stabilised. This is not failure. It is success.
Inevitably, such policies are unpopular in creditor countries. But the argument that the threat is excessively loose monetary policy ignores the dangers posed by excessive tightening. It assumes that deflation would pose no problem. Yet it would raise real indebtedness, undermine the flexibility of real wages and even impair the effectiveness of monetary policy, since it would be far harder to generate negative real interest rates when needed. A deflationary spiral would be a much bigger threat than negative interest rates.
Above all, the eurozone will fail if it is run for the benefit of creditors alone. Policy must be balanced. The ECB’s determination to avoid deflation is an important part of that aim. Achieving better balanced demand at the national level is another. A huge deficiency of demand (relative to aggregate supply) in the eurozone’s biggest economy is highly problematic. The EU’s “excessive imbalance procedure” should be far more critical of Germany’s surpluses.
Germany’s ideas and interests are of huge importance to the eurozone. But they should not determine everything. If Germans believe this fatally weakens the legitimacy of the European project, they should use their exit option. To do so would also entail accepting great short-term disruption. But, so long as the country stays in the euro, it must also accept that the ECB has a job to do. If the latter does so, it will not make the eurozone work well. But it is surely a vital contribution to that end.
Abrazos,
PD1: John Mauldin dice algo parecido:
Two polls were recently released that call the European Union in question.
A poll in Italy reported that the Five Star Movement (a populist political party that wants to hold a referendum on whether Italy should remain in the European Union) was the most popular political party in the country ahead of local elections scheduled for next month.
On the same day, British researchers who surveyed nine EU countries reported that 45 percent of respondents believed that their country should hold a referendum on whether to remain in the EU.
48% of Italians want to leave the EU
Reuters tried to explain that political scandals, which have undermined public confidence in current Prime Minister Matteo Renzi’s Democratic Party, affected the poll numbers. But this is Italy we’re talking about, the same country that brought us Silvio Berlusconi.
The country is no stranger to political scandals. A few instances of corruption would not be enough to make an anti-establishment party like the Five Star Movement as popular as it has apparently become.
The problem in Italy is economic. Unemployment in at least four of Italy’s southern provinces is over 18.8 percent, and in the other southern provinces, it is between 12 percent and 18.7 percent. And Italy hasn’t yet solved its non-performing loan problem.
Two simultaneous phenomena are occurring here. The first is disillusionment with the Italian government. What was an economic problem has become a political problem, and since Italy is a democracy, its leaders can be voted out of office. The next general election is not until 2018, but if developments continue to unfold in Italy, the situation is only going to get worse for mainstream political parties.
The second, deeper question is whether Italy wants to stay in the European Union. A Euroskeptic party is becoming the most popular political party in the eurozone’s third-largest economy. The rise of euroskepticism manifests itself in the polls, too—58 percent of Italians wanted a referendum on EU membership, and 48 percent would have voted to leave the EU.
In France, one of the twin pillars of the EU, 55 percent of survey respondents agreed a referendum should be called, and 41 percent said they would vote to leave.
Brexit debate adds fuel to the fire
Most debates over Brexit have revolved around potential consequences for Britain—whether Scotland might push for another independence referendum and join the EU on its own terms, or whether and how much (in terms of money and jobs) the UK would lose as a result of a decision to exit.
What was less addressed, however, is how Britain’s stand against the EU and the public debate is dividing the rest of Europe. Prime Minister David Cameron negotiated a series of exceptions early this year. Even if the UK remains, it will have a new set of understandings with Brussels, and other countries may follow its lead.
If Britain leaves and doesn’t undergo an apocalyptic depression, poll numbers might begin to trend upward—and they don’t have a long way to go to become the majority in some of the EU’s most influential states.
Germany is a ticking bomb
At the center of the European Union is Germany whose export-dependent economy is gradually falling apart. (Geopolitical Futures, in partnership with Mauldin Economics, has published a detailed study of the German economy. Click here to claim your free copy).
The German economy has thus far been able to avoid the crisis of the exporters that has affected every other major exporting country in the world - from the producers of manufactured goods like China and South Korea to commodity exporters like Russia and Saudi Arabia.
The US Treasury Department recently announced that the US would monitor China, Japan, Korea, Taiwan, and Germany for potential currency manipulation.The report noted that Germany has built up a significant bilateral trade surplus with the US, in addition to holding the second-largest current account surplus in the world, at approximately 8.3 percent of GDP.
It isn’t currency manipulation that has put Germany on this monitoring list. It is the fact that European and Chinese demand for German products has fallen. As a result, the US has become the destination for Germany’s exports in order to make up the difference. Export to the US, however, is a Band-Aid on a deeper wound.
There are a number of factors besides exports that go into Germany’s current account surplus. Germany has become a significant creditor. Its net foreign assets rose from almost zero in the 1990s to around 40 percent of GDP by the end of 2010, according to economic scholar Jörg Bibow.
Interest rates are low, and German banks are viewed as a safe haven in the European Union for stashing money. But since Germany is a creditor, many of the assets on German books are the unpaid debts of other eurozone countries.That means Germany is deeply exposed to a eurozone that still has not meaningfully recovered from the 2008 crisis.
Account surplus is usually seen as a positive. But if Germany has a surplus of 8.3 percent of GDP, why not use that surplus to stimulate domestic demand?Germany must be either unwilling or unable to use the surplus to stimulate domestic demand. This is in part because Germany is a creditor and invests abroad and in its own banks and companies.
And this gets at the root of the entire problem. Germany exports almost half of its GDP. Germany imposed austerity on the EU after 2008, which has resulted in stratospherically high unemployment rates in southern Europe.
Demand has not returned to pre-financial crisis levels. Germany has been able to skirt the crisis while most of Europe is either still suffering or is in the doldrums.There are limits to US demand and its tolerance of German exports.
All of this offers different unique prisms through which to see how the European Union’s connective tissue is fraying as the bloc’s economic logic becomes increasingly illogical.
Germany is the powerhouse of the EU and the fourth-largest economy in the world. But the truth is, the Germans are facing a profound crisis - and there's no way they can prevent it.
PD2: Y este otro:
Peter Bofinger
At first sight, it is difficult to explain why the macroeconomic debate and macroeconomic policy in Germany differ considerably from other countries, despite the same academic textbooks and models being used as elsewhere. This column explains how a specific paradigm of macroeconomics, developed by Walter Eucken and diametrically opposed to Keynesian economics, is behind the German formal theoretical apparatus. The success of German macroeconomic policy can be attributed to the openness of the German economy, which allows it to benefit from macroeconomic policies pursued in other major countries.
There is no doubt that the macroeconomic debate and actual macroeconomic policy in Germany differ considerably from other countries. At first sight this is difficult to explain, as in academia the same textbooks and models are used as in other countries. But behind the formal theoretical apparatus stands a specific paradigm of macroeconomics which was developed by Walter Eucken and which is diametrically opposed to Keynesian economics. From the experience of the Great Depression, Keynes drew the conclusion that active demand management is necessary. Eucken, however, developed from the specific German experience of the 1930s a theory according to which ‘full employment policy’ leads to a centrally planned economy. While Keynes saw the Depression as a result of the inherent instability of the market economy, Eucken attributed it to an insufficient flexibility of wages and an inadequate monetary order. In his view, with flexible prices and wages and an adequate monetary order the instability of the market system can be avoided. Eucken’s dismissal of macroeconomic policy helps to explain the German focus on balanced budgets, price stability, and structural reforms and the neglect of aggregate demand at the German as well as at the European level. The obvious fact that the German economy did quite well with this approach can be explained by its very pronounced openness. Thus in spite of its size, Germany can be regarded as a relatively small economy which can rely on the rest of the world to sustain its aggregate demand. As this is not the case with the Eurozone, the application of the German paradigm leads to negative outcomes.
The German macroeconomic policy paradigm
The German macroeconomic policy paradigm rest on three pillars:
+ An almost religious fixation1 on balanced fiscal budgets, which reflects a very sceptical assessment of the effectiveness of demand management and the ability of governments to identify profitable investment projects. In 2009 this philosophy was legally enshrined in the so-called 'debt brake', which has become a part of the federal constitution. The ‘fiscal compact’ which was enacted in 2012 obliges the other member states to implement similar regulations in their national constitutions. The neglect of the demand-side effects of fiscal policy shapes the German approach to the EZ crisis and the insistence on austerity at any price.2
+ A very strong preference for price stability as the overarching target of monetary policy with an asymmetric tolerance for deviations. While inflation rates above the ECB’s target of “below, but close to 2%” are regarded as dangerous, to many economists the actual EZ inflation rate of 1% is not a matter of concern (Issing 2016).
+ A deep conviction that flexible prices are the most important contribution to the solution of unemployment problems. This is reflected in the German ‘wage moderation’ of the years 2000 to 2007, which was designed as a strategy to reduce unemployment in Germany (Bofinger 2016). This also explains the plea of German economists for structural reforms as the main solution to the problems in the Eurozone.
This specific German paradigm has effectively shaped German macroeconomic policy, which stands in strong contrast to the policies of other major economies. This applies above all to fiscal policy since the crisis. While the US, the UK, and Japan allowed very high deficits for a prolonged period of time, in Germany the deficit was rather limited and already in 2011 it was almost back to balance (Figure 1).
Figure 1 Fiscal balances (% of GDP)
Source: OECD Economic Outlook, Annex Tables
A German influence can also be identified in the monetary policy of the ECB. Its reaction to the Great Recession was much weaker than the reaction of other major central banks. In 2011 the ECB even raised its policy rate although the Eurozone was in the middle of the crisis. And while the other major central banks had started comprehensive quantitative easing programmes rather early, the ECB waited until 2015.
The German approach to unemployment is reflected in the development of unit labour costs. With the exception of Japan, since the start of the monetary union all the other major advanced countries have had much stronger increases in unit labour costs than Germany (Figure 2).
Figure 2 Unit labour costs
(1999=100)
(1999=100)
Source: European Economy, Statistical Appendix.
Whatever one may think of the German macroeconomic paradigm, there is no doubt that it has been relatively beneficial for German economic performance, at least in the longer run (Figure 3). While German growth was weaker than in the US and the UK, it was in line with France and better than in Italy and Japan. Especially impressive is the reduction of unemployment in Germany since 2005.
Figure 3 Real gross domestic product
(1999=100)
(1999=100)
Source: IMF, World Economic Outlook Database.
The living heritage of Walter Eucken
At first sight, the specific macroeconomic policy paradigm is difficult to explain. German university students read the same macroeconomic textbooks as students in other countries and at the advanced level the standard DSGE models are taught and applied. But behind the formal theoretical apparatus one can identify a specific paradigm to economic policy, called ‘Ordnungspolitik’, which in this form does not exist in other countries. While there are no university courses on this topic, Ordnungspolitik plays an important role in German academic debate on policy issues and actual economic policy.
For an understanding of this paradigm, it is useful to have a closer look at the works of Walter Eucken (1891-1950). Eucken taught at Freiburg University from 1927 until his death and he is regarded as the spiritus rector (guiding spirit) of the so-called ‘Freiburger Schule’. The recent celebrations of his 125th birthday underline his impact for present-day policymakers. In her speech at this occasion, Angela Merkel (2016) emphasised that the principles of the ‘Freiburger Schule’ had lost nothing in relevance and importance.
Walter Eucken’s philosophy of economics can be presented in a positive and a negative message (Oliver 1960). The positive message is presented in his ‘constitutive’ and ‘regulatory principles’. Without going into detail these principles do not look very original, they are almost trivia.[3] As Oliver (1960) argues, they are very similar to the programme which was developed by the Chicago School, above all by Henry Simons (1948). In fact, most economists outside Germany would more or less agree with these principles as a precondition for an optimum allocation of resources.
Table 1 Eucken’s constituent (K) and regulatory (R) principles
Source: Van Suntum et al. (2011)
For the macroeconomic policy paradigm, the more interesting elements of Eucken’s philosophy concern his negative messages. They include not only an outright dismissal of central planning, which was prevalent at the time when Eucken was active, but also a very strong critique of what he calls the ‘policy of full employment’. He uses this term for a Keynesian style expansionary fiscal policy but without mentioning Keynes. In his works, Eucken only discusses the German experience in the 1930s, which was dominated by the takeover of the Nazi government in 1933. Eucken draws a direct line from the ‘policy of full employment’ to price controls, rationing, and central planning:
“Thus the policy of full employment, like the corporative structure of the labour market, resulted in a marked tendency towards central control of the economy. The one, like the other, was conducive to an unstable economic system with a tendency to move in the direction of central control. So there were two strong historical forces impelling German economic policy along the path to central control: firstly, the formation of comprehensive economic and social pressure groups, and secondly, the policy of full employment.” (Eucken 1952a, p. 60)
Thus, it was not the Nazis that brought Germany under dictatorship, but trade unions (the “corporative structure of the labour market”) and Keynesian demand policies. The complete neglect of the extreme political situation in Germany in the years from 1933 to 1945 also becomes obvious in Eucken’s analysis of the consequences of Hitler’s economic policy:
“It is one [a disturbance, P.B.] in which, though all factors are engaged, human activities are not properly co-ordinated and investments are not in line with one another, with the result that bottlenecks form.” (Eucken 1952a, p. 80)
A more awkward description of the German war economy is difficult to imagine. From this very flawed analysis of the German experience in the years 1933 to 1945, Eucken develops a general theory of ‘full employment policy’.
“Thus, our review of the German experience leads us to a grave and serious conclusion: Economic policy is faced with a dilemma: on the one hand, mass unemployment necessitates a full employment policy; on the other the policy of full employment makes for an instability on other markets, which is extremely dangerous, and in addition forces economic policy in the direction of central planning. This dilemma is perhaps the most crucial economic and social problem of our time.” (Eucken 1952a, p. 66).
In the path from ‘full employment policy’ to centralisation, Eucken sees an important role for inflation:
“Not only did the inflations destroy the price system and hence all free types of economic order, not only did they engender or decisively foster the tendency to central planning, but they were also a precondition for the existence of central planning.” (Eucken 1952a, p. 73)
Eucken’s solution to the dilemma is related to his analysis of the main causes of the deflation in the years 1929-33.4 In his view, price and wages were not sufficiently flexible:
“In the crisis year, 1931, Berlin builders, for instance, had to reckon with relatively firm prices of materials, such as iron and cement, which were fixed by syndicates, and also with relatively fixed wages, where housing prices were dropping rapidly.” (Eucken 1952a, p. 78)
In addition, the monetary system had a destabilising effect on the economy:
“When price fell, money contracted further, and so on indefinitely, the fall in prices causing contraction of money and a further fall in prices.” (Eucken 1952a, p. 67)
This leads Eucken to the conclusion:
“It can be firmly established that unstable market forms and monetary systems are bound to lead to cumulative depression and mass unemployment. This being so, economic policy should concentrate on developing systems conducive to market equilibrium, and in this respect the configuration of the monetary system is particularly important.” (Eucken 1952a, p. 67)
And if this can be properly organised, a permanently stable equilibrium can be reached:
“The policy of full employment will then no longer be necessary and the great dilemma will have been overcome.” (Eucken 1952a, p. 67)
These are strong conclusions. They stand in some contrast to Eucken’s view on the theory of the business cycle that he develops in his book Grundlagen der Nationalökonomie (Principles of Economics) (Eucken 1949). In this book, he adopts a completely agnostic standpoint. He maintains that theories trying to make general statements on seemingly regularly occurring changes in economic development are bound to fail.
All in all, Eucken’s economic philosophy can be regarded as the complete antithesis to Keynes. As Riese (1972) argued, both Eucken and Keynes were children of the Great Depression. But while Keynes developed a theory which explains why market economies are not perfectly self-stabilizing even if prices are fully flexible, Eucken saw the instability as caused by insufficient price flexibility and a destabilising monetary system. Thus, Riese is correct when he argues that the messages of Keynes and Eucken are incompatible (Riese 1972, p. 45).5
In retrospect, it is quite astonishing that Eucken thought he could develop general economic principles from the very specific historical experience of Germany in the years 1933 to 1945.6 It may be due to the difficult times when he was writing his books that he does not make any explicit reference to the dictatorship of the Nazis and the very specific economic and political conditions of a country that is in a ‘total war’. It is also difficult to explain why Eucken does not discuss the writings of John Maynard Keynes that were published in the 1930s or, for example, those of Hayek (1929). In fact, he does not make any specific reference to the leading economists of his time or to the vast theoretical literature on economic cycles that was available at the time he worked. Eucken also makes no attempt to support his reasoning with any statistical material. The severe limitations of his analyses and his complete unawareness of this may be regarded as a symptom of the isolation of German intellectuals under the comprehensive totalitarianism of the Nazis and the growing devastations of World War II.7 In fact, Eucken died as early as March 1950 so he had almost no chance to discuss his views with a broader international academic community.
If one compares Eucken’s narrow macroeconomic analyses with the comprehensive theories of Keynes, Hayek or Schumpeter, his long-standing popularity and reputation in Germany is hard to understand. Above all there is no doubt his crude dismissal of ‘full employment policies’ has been refuted by the evidence. Jewkes (1952a), who wrote an introduction to the English translation of Eucken’s works, mentioned the rather successful full employment policies of the US and the UK, which did not lead to a centrally planned economy. And since then repeated applications of ‘full employment policies’ have contributed to macroeconomic stabilisation in the global economy without leading to central planning. On the contrary, the centrally planned economies have lost ground in many countries.
In the 1950s Eucken’s popularity in Germany can be explained by a lack of internationalisation of the German academic community. But today it is difficult to understand why German politicians and academics still regard him as an outstanding economist and why his philosophy still shapes the German paradigm of macroeconomics. One explanation could be that he is simply used as a symbol of a neoliberal approach and that most of his followers have never read his works on macroeconomic issues.
But there is no doubt that Eucken’s heritage is very much alive in the German macroeconomic paradigm as it has been already described:
+ Eucken’s aversion to ‘full employment policy’ by means of fiscal policy is reflected in the German approach to fiscal policy at the national and the European level;
+ Eucken’s negative attitude towards trade unions and corporatism is reflected in proposals for ‘structural reforms’ which reduce the bargaining power of trade unions;
+ Eucken’s theory that inflation destroys “all free types of economic order” shapes the German attitude towards monetary policy.
Why has German macroeconomic policy been successful?
The strong support for the anti-Keynesian paradigm in Germany can be explained by the quite successful economic performance of the German economy since World War II and again since the mid-2000s. Given the limitations of the theoretical framework of the German Ordnungspolitik, this raises an obvious conundrum. It can be solved if one takes into account the relatively large size of the German economy and its pronounced openness. In terms of GDP German is the third largest economy in the group of advanced economies (Figure 4).
Figure 4 GDP based on purchasing power parity valuations of countries
Source: IMF, World Economic Outlook Database.
But in terms of openness (exports as a percent of GDP), Germany ranks among relatively small economies (Figure 5). Due to this openness, the German economy is able to follow a passive macroeconomic policy approach as it strongly benefits from macroeconomic policies pursued in other major countries. In other words, the German economy is supported by the ‘full employment policies’ of other countries. This is reflected in the very large fiscal deficits in all other major economies in the period after 2007, which successfully helped to avoid a reappearance of the Great Depression. In other words, the German economy is supported by the demand management policies of other countries that are heavily criticised by mainstream German economists.
Figure 5 Openness: Exports (% of GDP)
Source: World Economic Outlook Database.
Editors’ note: This column first appeared as a chapter in the EPC ebook, “German macro: how it's different and why that matters”, edited by George Bratsiotis and David Cobham.
PD3: "Qué hermoso sería si cada noche pudiéramos decir: Hoy he realizado un gesto de amor hacia los demás", Francisco. Es así de simple, cada día, al menos un gesto, al menos un acto de amor hacia los otros…
