Home » Affari Internazionali » Mercantilism, Austerity Psychosis, and the Need for a Stronger ECB – Mercantilismo, psicosi da austerità e la necessità di una più forte BCE

Mercantilism, Austerity Psychosis, and the Need for a Stronger ECB – Mercantilismo, psicosi da austerità e la necessità di una più forte BCE

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from: fairandunbalancedblog.blogspot.com

This post is the second of a series on the European economic crisis. In the previous post I pointed out one of the reasons why the EU failed to respond to the crisis and I advocated for the development of a common European fiscal policy.

I also briefly discussed the flawed approach to the crisis pushed by Germany&Co, and I’d like to go a little bit more in depth here. Let’s start with two facts: 1) Germany runs a neo-mercantilist policy, namely it concentrates its economic growth on export capacities at the detriment of domestic consumption; 2) Germany’s core trade partners are European countries, with 57% of all goods delivered to the member states of the European Union. This policy automatically creates trade imbalances for the other European countries. The figure below illustrates German exports’ growth and the concomitant increase of periperical countries’ trade deficits, namely the so called GIPSI (Greece, Ireland, Portugal, Spain, and Italy).

Export

The German mercantilism is evidently an unsustainable economic policy at European level, inasmuch as German surpluses are other countries’ deficits. Unfortunately, the advocates for austerity favored another version that considered GIPSI’s fiscal troubles as the essential cause of the European crisis. Figure 2, however, shows us that the trend of debt-to-GDP ratios in GIPSI countries was stable until 2008, the year in which it actually exploded.

debt-to-GDP

As Paul Krugman puts it in End This Depression Now!:

“So here’s Europe’s Big Delusion: it’s the belief that Europe’s crisis was essentially caused by fiscal irresponsibility. Countries ran excessive budget deficits, the story goes, getting themselves too deep into debt- and the important thing now is to impose rules that will keep this from ever happening again. […] As a result, the problem of dealing with the crisis is often couched in moral terms: nations are in trouble because they have sinned, and they must redeem themselves through suffering.”

This is not to neglect the importance of domestic debt for which serious measures need to be taken (just not during a period of crisis, but rather during booms). What I want to point out here is the weaknesses in the German&Co approach to solve the crisis. Besides pushing for austerity measures, Germany has also criticized Mario Draghi, the President of the ECB, when he announced that he would have bought an unlimited amount of government bonds to reassure the markets and lower the borrowing cost for GIPSI.

Along with the absence of a European fiscal policy the lack of a lender of last resort is, indeed, the second major weakness of the European system. But why did Germany oppose Draghi? Again, because of the German austerity psychosis. German representatives affirmed that these interventions would have brought high inflation. Because of the historical legacy of hyperinflation that occurred in the 1920s, Germans tend to see inflation even when there isn’t any trace of it. The danger today is indeed the opposite and much more troublesome, namely deflation. In times of crisis (as I have already pointed out in the previous post) demand goes down, investments go down, and therefore consumption go down. This downward spiral brings prices down, not up, and results in years of stagnation.

So far Germany has reaped the benefits of the EMU. It’s time to understand the monetarist policy is unsustainable for the rest of the members of the Union. What is the way out? First of all, again, develop a common fiscal policy and launch a fiscal stimulus in lieu of austerity measures. Second, give more power to the ECB in order to let it act as a lender of last resort (more similar to the Fed) and accept the idea of having somewhat higher levels of inflation at least in the short term (instead of raising the interest rate in the midst of a crisis because of the inflation paranoia). Third, countries with large trade surpluses should increase their demands for imports from countries with high deficits, so to adjust trade imbalances.

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Questo post è il secondo di una serie sulla crisi economica europea. Nel post precedente, ho descritto una delle ragioni per cui l’UE non è riuscita a rispondere alla crisi e mi sono espresso a favore dello sviluppo di una politica fiscale europea.

Ho anche discusso brevemente la debolezza dell’approccio di Germania&Co, e toccherò quest’aspetto un po’ più dettagliatamente in questo post. Incominciamo da due fatti: 1) la Germania conduce una politica neo-mercantilista, ovvero punta alla crescita economica concentrando le capacità produttive nell’export a discapito del consumo interno; 2) I principali partner commerciali tedeschi sono i Paesi membri dell’UE, che ricevono il 57% dell’export tedesco. Questa politica crea automaticamente squilibri commerciali negli altri Paesi europei. Il grafico qui sotto illustra la crescita dell’export tedesco e la concomitante crescita dei deficit commerciali nei Paesi della periferia, ovvero i cosiddetti GIPSI (Grecia, Irlanda, Portogallo, Spagna e Italia).

Export

Il mercantilismo tedesco è evidentemente insostenibile a livello europeo, in quanto il surplus tedesco corrisponde al deficit degli altri Paesi. Sfortunatamente, i promotori dell’austerità hanno invece preferito dare un’altra versione della crisi, considerando i problemi fiscali dei GIPSI come la causa essenziale dei problemi europei. Il secondo grafico, però, mostra che il trend del rapporto debito-PIL nei GIPSI è rimasto stabile fino al 2008, l’anno in cui è invece esploso.

debt-to-GDP

Come descrive Paul Krugman in Fuori da questa crisi, adesso!:

“Ecco qui la Grande Delusione europea: è la convinzione che la crisi sia stata causata essenzialmente da politiche fiscali irresponsabili. La storiella ci dice che i Paesi hanno mantenuto livelli di deficit fiscali troppo alti e si sono ritrovati con debiti troppo elevati. La cosa importante, ora, è imporre regole in modo tale che situazioni del genere non succedano mai più. […] Il risultato è che questi problemi vengono spesso trattati da un punto di vista morale: i Paesi sono nei guai perché hanno peccato e quindi devono redimersi attraverso la sofferenza”.

Con questo non intendo negare l’importanza del debito nazionale per cui ci vogliono misure serie (ma non durante un periodo di crisi, bensì di boom economico). Ciò che voglio dimostrare qui è la velleità con cui Germania&Co tentano di risolvere la crisi. A parte promuovere politiche di austerità, la Germania ha criticato Mario Draghi, il Presidente della BCE, nel momento in cui aveva annunciato di voler comprare illimitatamente titoli di Stato per rassicurare i mercati e ridurre lo spread dei GIPSI.

Insieme all’assenza di una politica fiscale europea, la mancanza di un “prestatore di ultima istanza” è infatti la seconda maggiore debolezza del sistema europeo. Ma perché la Germania s’è opposta a Draghi? Ancora una volta, a causa della sua psicosi da austerità: i rappresentanti tedeschi hanno affermato che tali interventi avrebbero portato ad alti livelli di inflazione. Il retaggio storico dell’iperinflazione degli anni Venti, porta i tedeschi a vedere inflazione anche dove non ce n’è traccia. Il pericolo oggi è infatti l’opposto ed anche più critico, ovvero la deflazione. In periodi di crisi (come ho già descritto nel post precedente) la domanda decresce, gli investimenti scendono e i consumi si riducono. Questa spirale verso il basso porta i prezzi in giù, non in su, e il risultato sono anni di stagnazione.

Finora la Germania ha beneficiato dell’ UME. E’ arrivato il momento di capire che la politica neo-mercantilistica non è sostenibile per il resto dei membri dell’Unione. Qual è la via d’uscita? Prima di tutto, ancora una volta, sviluppare una politica fiscale comune e lanciare un programma di stimoli fiscali abbandonando l’austerità. Secondo, dare più poteri alla BCE per permettere di agire come un “prestatore di ultima istanza” (più simile alla Federal Reserve) e accettare l’idea di avere livelli di inflazione un po’ più alti almeno nel breve periodo (invece di alzare i tassi di interesse nel bel mezzo di una crisi a causa della paranoia per l’inflazione). Terzo, i Paesi con surplus commerciali dovrebbero incrementare la domanda per import da parte dei Paesi con alti deficit, in modo da riequilibrare la bilancia commerciale.

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16 Comments

  1. Cristina P. says:

    Good luck with that! Did you know Bank of Cyprus closed down in Romania for one week because of the situation in Cyprus and is currently discussing closure? I see a domino effect here… Greece-Cyprus-Eastern Europe in terms of banking. Not to mention Western Europe and bailouts…

    • Hi Cristina! Thank you for your comment! I don’t really understand one thing, what do you wish me luck for?

      • Cristina P. says:

        Hey, well you were making some suggestions about the ECB and fiscal union and in return I pointed out how they got to close a bank in Romania out of the blue because of Cyprus. I meant things are getting worse, that’s how it’s seen over here. Romania is not in the eurozone, however everything related to it affects us too of course.

      • Hi Cristina! I agree that the situation is getting worse and this is exactly why I tried to point out what are the drivers of this mess and what could be a way out of it. What I did not understand is if you agree or not on the receipe proposed by Krugman and other economists in the post! Thank you for your reply btw!

      • Cristina P. says:

        You’re welcome. I was a bit confusing but meant I agree with your reasoning here; it still is a long process. Today the ECB chose to hold the interest rates waiting for what happens next in Cyprus. Draghi said he would still wait to see what happens in structural reforms and growth.
        Again, I am not a specialist but waiting is not enough: closing down banks just like that in other countries because of Cyprus is a big sign of trouble ahead. People over here were crowding to ATMs just like in Cyprus some days ago, it was shocking.

      • Yep, the ECB is not doing enough and for whatever anti-crisis measure it takes (see the decision to buy unlimited bonds from troubled countries) it also has to face the sheer opposition of Germany&Co and their recessive austerity policies. It’s very painful to watch!
        PS: Wow! Thanks for the insight about the situation in Romania, I’m stoked!

      • Cristina P. says:

        You’re welcome. It’s really nothing because Chevron already got its permits so they are pretty much useless. I think it got us (Romania) into NATO in exchange of US industrial interests. P.S. We’re fed up with Russian interests by now.

  2. Staffan says:

    All in all, you’re saying, let’s have a country called EU and lets have a economic policy of channeling money from rich regions to poor. I remember Sweden spending a lot of tax payers money to support the northern part of the country and people complained but after all they were Swedes. In your own country there is a similar tension with the southern part of the country being seen as the leech. In light of this, will the Germans say, after all Italians and Greeks are Europeans like us?

    I think it will be impossible to convince the Germans that they will benefit from that kind of policy in the long run, or that they owe others something. Polls show a majority of them want to leave the euro. To them this seems like a good time to cut their losses and move on. So even if what you’re saying is true, it will be impossible to implement. So either you do a stimulus of your own or you face austerity. I just can’t see a third alternative.

    • Unfortunately we can’t do a stimulus on our own, because unlike Sweden, we are part of the Eurozone and we have ratified the Fiscal Compact. So whenever we try to pass measures to ease the current economic disastrous situation, the troika raises its eyebrow and asks how are we gonna cover those measures financially, which means that they want us to cut spending and/or to rise taxes. The change in policy must necessarily take place at European level. The way you paraphrased my words is rather oversimplified. I look at the current situation in Europe and I ask myself: Is this the optimal situation possible? Is the current situation sustainable in the future? And the answer is no. So, the next question is: What direction shall we go for? Integration or disintegration? My answer, as I have already explained in previous replies, is integration. No one is saying the is going to be simple. What you probably haven’t noticed is that Germany is also being hit by austerity and its economic growth is going down (http://www.tradingeconomics.com/germany/gdp-growth-annual), because Germany bases its growth on exports and European countries are Germany’s principal trade partners. So, guess what happens if partners have to tighten their belts? Germany will make a favor to Germans citizens would it shift from these absurd austerity policies. The alternative would make us worse-off in the medium and long run. Not only economically but also politically. The overall historical objective of integrating Europe to promote peace amongst countries that have witnessed the most cruel wars for centuries will be over. Of course, I am not saying the the collapse of the EU will correspond to a European war. Tensions, however, are rising in a lot of countries. Have you noticed that many people show Angela Merkel with Hitler-style mustache in different countries hardly hit by the crisis? What about what’s happening in Hungary? What about the rise of the extreme right in Greece? These are all worrying symptoms to me. Economically, if the EU collapses there will be room for the rise of parties advocating for protectionism. Investments will also go down because of the expectations of sudden devaluation and because of the skyrocketing costs associated with the re-introduction of different currencies and exchange rates. I don’t think pushing for more integration is impossible. We need to raise awareness on what the consequences would be would we go the opposite direction. Everything is up to political will. Hollande, for instance, embraces a different economic policy compared to Sarkozy. A political shift to the Left would certainly benefit this process.

  3. Staffan says:

    I meant you should do the stimulus outside the euro if that’s what you think is best. I think corruption is the major obstacle here. Even if done at the European level the money is eventually transferred to the national level and then it just disappears. The GIPSI score 53 on Corruptions Perceptions Index which is on level with the best countries in Africa.The countries that are supposed to bankroll the stimulus score 82. It’s reasonable to be a skeptic given that situation – you have this same skepticism within Italy with Lega Nord and others.

    As for protectionism it’s clear that European countries already outside the euro aren’t very protectionistic, at least not according to the ICC. Sweden, Switzerland, Norway and Denmark are all above average on the Open Markets Index. UK is average.

    The tension between countries is nothing that worries me, we are not going to war that’s just a given. Even North Korea seems unlikely to start a war. Sure the extreme right is on the rise, but that’s largely a reaction against the influx of Muslims which makes sense to me. It’s the lack of reaction that frightens me. We have suburbs were young men patrol the streets and instruct women on how to dress while the politicians pretend like everything is alright. Hungary is more classical fascism and that is a problem, but looking at the bigger picture, I don’t see a problem.

    • Corruption is a humongous problem in Italy, that’s for sure. I don’t think, however, that has anything to do with potential money coming from the EU. First of all, because it’s not money where politicians can put their hands on. Parties (Lega Nord included as we have witnessed in several scandals that have hit the party) are the main vehicle whereby politicians get bribes. Another channel are public contracts; but corruption has to do with an exchange of favors (in the case of public contracts or foundations, etc.) or, more in general, parties get money from Italian taxpayers and they’ve been caught many times blowing up taxpayers money for private use.

      This has nothing to do with the EU. Indeed, Italy is not even able to spend all the money coming from the EU every year to fund infrastructural and other sorts of work, which means that every year we return money to the EU because we are unable to spend it (according to your point of view this shouldn’t be happening, as all the money should end up in corruption). I don’t really understand what you mean by “you should do the stimulus outside the euro.” Are you suggesting that Italy should go out of the Eurozone to be able to do a fiscal stimulus? Because this would be the only option (in practice, unfeasible). Again, this is because we are bound to the rules of the Fiscal Compact.

      Changing subject, the extreme Right is rising primarily because of the economic conditions (in Greece, against the strings attached by the troika in order to get the bailout) that are also the main driver for this new nationalist anti-european sentiment. Muslims, or more in general immigrants, might also be a factor, but just because of the inherent xenophobia of the extreme Right and their propaganda that scapegoats immigrants in times of economic hardship. You can’t really believe that extremists are rising primarily because of immigration. I haven’t seen, indeed, anyone trying to burn Qur’an or lynching Muslims, but only protesters showing a “hitlerized” Merkel.

  4. Staffan says:

    It seems likely to me that EU financed projects would be bought with bribes from politicians and then the money used to buy the contract would be paid for from the project budget – money disappearing.

    Yes, realistically you could only do a stimulus if you leave the euro. Consider the polls showing more than half of all Germans already want out.

    I believe Muslims are the main factor. Anti-immigration parties are very popular in really rich countries like Norway and Switzerland too. It’s not a matter of lynching anyone or burning the Quran. It’s like I said above, a matter of women with EU citizenship becoming oppressed and victimized. It’s about staggering murder and rape rates. It’s about anti-semitism – here in the town of Malmö Jews have practically been harassed out while the mainstream politicians do nothing.

  5. First of all, thank you for your comments! I do enjoy discussing those matters from different viewpoints.

    Practically speaking, getting out of the Euro is not something that can happen in a matter of days, or months for Italy. So, it is far more feasible to have the ECB expand the monetary base and the EU to launch a fiscal stimulus, than Italy breaking out of the Euro and do it on its own. The fact that the majority of Germans want out (and I am not 100% confident about it) doesn’t really say much to me. It would be pretty complicated to dissolve the European Union anyways, as institutions, structures, bureaucracies do not simply disappear overnight (without even considering all political tensions, power struggles that would come about).

    On the rise of extreme Rights. I understand what you’re saying but I feel like it goes beyond the scope of our discussion. I would not consider the SUDDEN rise of extreme Rights in relation to a “Muslim scare,” but to economic hardship. IN GENERAL though, I agree that immigration plays a role in such rise.

  6. Want to see a super-embarrassing development for austerity proponents?

    Reinhart & Rogoff’s research on debt and economic growth was based on crap data and an Excel coding error!!!

    http://rolandchlapowski.com/2013/04/16/shocking-paper-claims-that-microsoft-excel-coding-error-is-behind-the-reinhart-rogoff-study-on-debt/

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