Let’s explode the myth that a surplus economy is good and a deficit economy is bad. The euro zone will work only if deficit (South) countries can borrow to keep the surplus (North) countries trading. It is stupid and arrogant to think otherwise.
We are the strong, the others are the weak. The Dutch-German mantra is not only arrogant, it’s stupid. Whoever utters it only shows that he has not the slightest idea of co-operation between nations.
“Where there is need, foolhardiness becomes wisdom,” Niccolò Machiavelli once said – and he is right. In times of need, it shows who is the child of whose spirit, who can be trusted and who cannot be trusted. It also shows who has the intellectual ability to leap over his own shadow and question his own dogmas. Germany, the Netherlands and Austria are just showing that they do not have the foolhardiness that becomes wisdom. That will have dire consequences.
To know exactly what this is all about, you only have to listen to the interview that Federal Minister of Economics Peter Altmaier gave to Deutschlandfunk Thursday, April 9. There it is clear again that only those in Europe “who have really made an effort in the past few years” can now have the opportunity to borrow the money they need to fight the corona crisis without any problems and without any interest surcharge. Altmaier said literally:
“The state… we are all part of it. But together, by adhering to the debt brake, by consolidating public finances in recent years, we have created the conditions for us to be able to take money in hand now, for us to be able to temporarily increase government spending significantly in order to save companies, to save jobs, to save the prosperity of this country”.
Which, conversely, can only mean that “the others”, who have not done just that, cannot now take money in their hands either, because they have none. They have not created the conditions for saving their economy today.
And the German media – how could it be otherwise – have jumped right on this government bandwagon. In a special programme by the German state television station ZDF this week, there was repeated talk of the “weaker” countries in the South and the “economically strong” ones in the North, who are supposed to be liable for the weak. ntv has the effrontery to talk about the “credit addicts” in the South. But also DIE ZEIT says that countries kept afloat by the ECB could “slide into bankruptcy” if interest rates do not remain permanently low.
The weak logic of the “strong”
“Weak” and “strong” seem to be quasi natural categories. Weak countries are those that have not succeeded in consolidating their national budgets and reducing their public debt since the financial crisis of 2008/2009. And this despite the fact that a country like Italy has made greater efforts to save money than any other European country. “Strong” are those who, like Austria, the Netherlands and Germany, have taken advantage of the “good times” to prepare themselves for an emergency like the present one.
All this, to put it bluntly, is the German view, which is narrowed down to a tunnel vision, which has absolutely nothing to do with macroeconomic logic and therefore nothing to do with the reality of European Monetary Union (EMU). At the same time, it is an impressive testament to intellectual poverty. The underlying error is the years of refusal by German policymakers and the mass of the German media to acknowledge the importance and consequences of Germany’s current account surpluses. After all, whether or not it is possible to reduce public deficits depends almost exclusively on whether or not it is possible to build up current account surpluses under present global economic circumstances.
It is precisely at this point that there is a logical restriction in the form of a zero-sum game, because not all countries in the world can post current-account surpluses at the same time. Nor can EMU as a whole build up huge current-account surpluses because it would then provoke counter-reactions in the rest of the world, especially in the USA. The euro would appreciate in value and prevent a current-account surplus strategy on the scale that Germany and the Netherlands have been pursuing for years. The very fact that every surplus country necessarily needs deficit countries is a reason why the arrogance of surplus countries is completely out of place. The classification of strong and weak is stupid from the outset.
The same logic applies to the argument over competitiveness. People say that the countries in the South have lost competitiveness and pretend that this is all their fault. Anyone who has understood that EMU cannot have persistently large current-account surpluses vis-à-vis the rest of the world also understands how void of any logic is the idea that within EMU all countries could and should have improved their competitiveness. This idea has not become any more logical over the years, even though it has been repeated like a mantra by most German politicians, above all Angela Merkel, and because it was and still is seriously considered an economic strategy for Europe.
It is precisely because, for logical reasons, not all EMU members can become more competitive together that the northern members of EMU needed the loss of competitiveness of the southern members, otherwise they would never have been able to increase their own competitiveness so enormously. And how was that possible? Contrary to the economic rules of EMU, the northerners did not increase their wages as much as would have been appropriate in view of the jointly agreed inflation target. If all countries had tried to pursue the same wage restraint policy from the outset, EMU would have been in a deflationary situation much earlier and no country would have improved its competitiveness. The statement about competitiveness (those who increase it are right, those who decrease it are wrong) is therefore just as nonsensical as that about current-account balances (surplus countries are right, deficit countries are wrong).
Saving companies and surplus freaks as trading partners
Since, for reasons of logic alone, government savings and consolidation are only ever possible if another sector is willing to run up debt, countries with current-account deficits today find themselves in a hopeless situation. A current-account deficit means that one country “absorbs” the savings surpluses of another country through indebtedness (whether by the private sector or the state). In other words, the demand gap in the deficit country is widened by the surplus countries. But because the corporate sector has become a net saver almost everywhere in the world, and because no democratic state can force its private companies to go into debt, a deficit country whose trading partners do everything possible to maintain or even expand their current-account surpluses no longer has any way of limiting the deficits in its national budget.
What this means is that the surplus countries of the North are directly responsible for the fact that the austerity efforts of the Italian state have not borne fruit. Anyone who does not take note of this and pretends that it is only a matter of political will in the country concerned, whether or not it is consolidated successfully, lacks the necessary expertise – perhaps even common sense. If a country in the South has Nordic surplus freaks as trading partners and is in a monetary union with them, it must rely on there being enough intelligent people in the Nordic countries themselves, or at least in the European Commission, who understand these connections and support the deficit countries. If that is not the case, the country is lost, especially in a global economic crisis such as the current one.
High debts forever and everywhere
Another purely logical consequence of this crisis also escapes most observers. It is argued that in a few months’ time, 100 percent debt relative to GDP will be as problematic as it was at the beginning of this year (if it ever was). Italy is projected at 180 percent and this is a startling figure. But it is meaningless. Even according to the prevailing doctrine it is only meaningful in relation to the corresponding figures in other countries.
If, in the course of the global corona crisis, the ratio of public debt to GDP increases by 30 or 40 percentage points in almost all countries, the economic policy assessment of a state’s debt level will depend at most on a comparison with other states, but not on a comparison of the pure figure with any norms that applied previously. The EU, with its once established norm of 60 percent, will also have to learn this. Anyone who insists that all countries must return to this norm after this crisis – the Federal Minister of Economics (see the interview linked above) seems to actually believe such a thing – is making a huge mistake.
There has never been a substantive justification for the 60 percent written into the Maastricht Treaty. The attempt to force the entire euro zone to adopt a savings course for public budgets towards the 60 percent target after the corona crisis will not succeed because of the net saving role of companies. On the contrary, any attempt in this direction will cement the savings wishes of both the corporate sector and private households, because they will make any positive macroeconomic development after the crisis more difficult and therefore every single economic actor will anxiously want to keep his money together. Will the northerners then try once again to go the way of wage dumping and new current-account surpluses at the expense of the southerners in order to appear as the good and strong?
That is obviously absurd, and anyone who tries will have the fate of Europe on their conscience. Should it come to that, the southerners, including France, will have to insist that the “virtuous” northerners leave the euro in order to bear the consequences of their austerity measures themselves in the form of a strongly appreciating currency and new mass unemployment.
Monetary policy is still a taboo
The Bank of England announced yesterday that it will temporarily – i.e. to bridge the crisis – finance the state directly, so that the route via the capital markets is no longer necessary. This pragmatic stance of the Bank of England, explicitly described as a crisis measure, also shows that in a crisis, apparent foolhardiness can simply be wise. In the euro zone, and especially in Germany, on the other hand, it is still a taboo to talk at all about the role of monetary policy and the fact that monetary policy must and will of course finance the states in the crisis.
Once again, our own dogma about the independence of the central bank and the complete autonomy of fiscal policy stands in the way of a sober and appropriate action. Instead of arguing about corona bonds, the finance ministers should for once be foolhardy enough to say that the ECB must ensure that all countries can borrow at exactly the same low interest rates, because there are no merits from the past that give the players on the capital markets the right to rank countries on any scale and play them off against each other in order to enrich themselves in this game. Because there is neither good nor bad, neither strong nor weak, they would have to say, we have decided to do exactly what is necessary, namely to give all the countries in the euro zone the chance to protect people from the economic consequences of a natural disaster at this exceptionally difficult time.
Article originally published at Makroskop (german) and flassbeck economics international (english)