Comments on: Austerity is needed in the time of European crisis

By: day trading & proprietary trading

day trading & proprietary trading — Sat, 20 Sep 2014 07:50:57 +0000

Thanks for your marvelous posting! I really enjoyed reading it, you will be
a great author.I will ensure that I bookmark your
blog and will come back in the foreseeable future.
I want to encourage that you continue your great posts,
have a nice evening!

By: Armin

Armin — Wed, 22 May 2013 07:11:17 +0000

I could sign that statement completely – with one exception:

The low inflation rate in Germany is in my opinion not an outcome of a rat race to the bottom but rather a historically based fear of inflation (see economical aftermath of WW I with hyperinflation in Germany). It was not only Brüning with his austercity attempt but economical unsteadiness in total that caused unrest, and in particular the National Socialists to rise – a fact that still inflicts German economical policy with a general paranoia of “whatsoever”-flation.

By: Christian Pauschert

Christian Pauschert — Sun, 19 May 2013 11:24:46 +0000

Henry Ford once said: “Good that the people know nothing about how the economy works otherwise we had a revolution before tomorrow morning.” And seriously 5 years after the beginning of the crisis I am agitated about the persisting common lack of knowledge of basic macroeconomic relations. And I can not believe that we are having this debate since the devastating results of the politics of the last years are so evident. But I can not blame anyone personally since the popular media has not been contributing to the education of the people.
One common mistake is to believe that austerity works while it actually doesn’t. The arguments for austerity are usually rhetorically well performed but on a very thin factual basis. Take Ivan’s example for Germany in 1990. Germany was far from being “a sick man”. The term was used to create acceptance for cuts in wages and social welfare. The reason why this weakening of the domestic demand did not have a big negative effect is that we had a boom after the reunification when we had all of a sudden 20 million people more who had to catch up with their consumption and had good money to spend thanks to the 1:1 exchange deal for East- to West-Mark. Another positive factor was that Germany was surrounded by neighbours who were at that time willing to absorb our trade surplus by buying our exported stuff. But why don’t you take Germany in the 1930s as example? It resembles much more what we are seeing today. At that time Reichschancelor Brüning tried austerity measures to get Germany out of the great depression but instead he triggered a vicious deflation spiral killing what was left of the economy? The poor, unemployed and frustrated masses were an easy catch for the populists of the nazi ideology. An now extremist partys are on the rise almost everywhere in Europe. Mark Twain once said “history does not repeat itself – but it rhymes”. We are experiencing a rhyme on the 30s not the 90s!
So why does austerity not work? It is actually rather simple when thinking about it. But people keep on repeating another common mistake which is the comparison between your personal budget management and that of a country. You can save money by abstaining from some spendings. A country or government however is such a major player in whole economic balance that cutting spending leads to a perceivable decrease in the overall economic activity — leading to less tax income and to higher unemployment — leading to less domestic demand — leading to again less economic activity — leading to less tax income again… + the higher unemployment leads to higher expenses for social services. So the attempt so save money leads to less income and higher costs. It is a paradoxon at first sight but logic when looking closer at it and not too difficult to understand. To sum up: A country can not get our of a recession by cutting spending, it can only grow out of it!
Miguel mentioned the paper by Reinhart and Rogoff where major calculation mistakes have been discovered. This paper has been used as one of the main justification of the politics of the past years. Leading politicians including EU commissioner Olli Rehn have often mentioned the critical 90% debt mark that derived out of this paper while not mentioning that this doctrine has always been critisized by other economists of an equal reputation like Reinhart and Rogoff. Now the elephant in the room is that not only does this paper contain calculation errors but rather the whole approach of this paper is nonsense. They claim a correlation between a country’s debt and the economic performance exists be it that after the debt has reached a certain level (the 90%) negative effects on the economy arise. From the same numbers one can conclude the other way round that if the economy is weak the debt rises (that would make more sense to me). They never proved in which direction the correlation exists and further by just determining a statistical correlation between two factors it is not proven that a causal link between the two exists. For example I can prove you that there is a statistical correlation between the number of breeding stork couples and the human birthrate (this really exists). However you would not yet believe that the stork brings the babies, would you? This is a pseudo correlation given by the fact that more storks live in rural areas that also happen to have higher birthrates. One can conclude that macroeconomics as science is in a rather poor state these days. One could also say macroeconomics is the attempt to prove an ideology with numbers.
I want to point at another common mistake. The fact that we are talking about a debt crisis is a public relations master piece. Before the crisis all of the now troubles economies except Greece were performing quite well. Spain’s debt was lower than the one of Germany. Ireland was practically booming. If you don’t believe that Eurostat is your friend. What then happened was the collapse of several large banks that had to be saved by these countries which made their budget go out of control. So this has been a banking crisis from the beginning and it has not stopped to be one just because the public took over the debts of the banks. So “punishing” these countries now with austerity for that is just pure insanity.
Last but not least I’d like to do away with the perception that Germany is an example or role model for Europe. Germany has long given up the politics of being “a good neighbour”. What we have now is almost an economic fascism that uses brute force to accomplish own interests. Germany is looked up to these days as being the strongest economy in Europe appearantly not affected by the crisis. But in fact Germany is part of the problem. We have a common inflation target of 2% in Euro area. Only France has met this more or less. Southern Europe had higher inflation – which is not good. Germany had inflation well below – not good either. This made it possible to have stagnating wages in Germany for more than a decade. Taking inflation into account wages have even been droping. That lead to a massive increase in competitiveness of Germany compared to the rest of Europe. Normally the currency of Germany would upvalue and those of the others downvalue compensating this competitiveness gap. In the currency union this is not possible. So the weak south is the insurance of Germany’s export industry. Out of the currency union the Germany currency would suddenly upvalue around 30% making exports too expensive. The other countries in Europe get pushed against the wall by Germany’s aggressive striving for competitiveness so that even France that has met the central bank targets now runs into trouble. Now Germany says do it like we did. Lower your wages increase competitiveness etc. forgetting that competitiveness is no absolute term – it is relative. You can only increase competitiveness compared to somebody. So if everybody tries to increase competitiveness compared to their trade partners we end up in a bizarre race to the bottom where at the end nobody has an advantage over the other – just that the demand for goods has been killed since wages are so low that there is nobody left who could actually buy the stuff we produce. Germany tends to forget that, being high on the fact of being export champion they don’t see that 60% of German exports go to Europe. If we kill the demand in the European economies China or the rest of the world can not compensate this. And this is exactly what is happening. Last economic figures for Germany show a growth of 0.1% which was celebrated in the German media. The ugly German mind is satified as long as they are better than others. As long as they can claim others are less capable more lazy etc. These are the kind of narratives you win election with or you sell newspapers with in Germany – sad but true. A realistic interpretation of the figures would be that this is a sign that the European crisis is spreading out from the periphery to the core and that Germany is just the last one with dry feet on a sinking ship. They are the last ones who can reach the steering wheel but instead of taking responsibility they are waving good bye to the others. Europe has to understand that Germany as it is now is not a team player. Germany has never understood the historic chance that lies in the Euro and I don’t think they will get it before the election in September.
If you have read my post so far you might ask yourself why many of my arguments are so underrepresented in the public debate and in the media. This has enough potential for another debate but to me it is obvious that the public debate is too much geared to the views of an elite that has no interest in solving this crisis. They see a crisis as chance to pull through structural reforms that the people would otherwise not accept. It is crucial to look for alternative points of views besides the common mass media. My recommended readings:
economists:
Paul Krugman (blogs for NYT), Heiner Flassbeck, James Galbraith
other:
Naomi Klein “The Shock Doctrine”, Colin Crouch “Post-democracy”, Colin Crouch “The Strange Non-death of Neo-liberalism”.

By: Pablo Laboreo

Pablo Laboreo — Fri, 17 May 2013 14:42:20 +0000

In my opinion it is not a matter of ‘austerity: yes or no’ but of how austerity should be imposed and whom it should be directed.
I agree, rules are rules and every country must comply to the maximum extent possible, always taking into account the countries’ different economic sectors, stakes and possibilities. Of course every country must be responsible upon their taken decisions and not to assume other countries will pay for their losses.

What I do not agree with is the way which national governments, encouraged and pushed by EU institutions, bring austerity measures into play. After several years of austerity-beliefs dinasty directed against social expenses, consequences are evident: lower-income citizens have seen their situation worse and worse: losing their job, social services, etc. while higher-income ones have increased their purchasing power. That is, money made money and poverty made more poverty.
Privatization tendencies in the name of cutting expenses and saving public budget have clearly favoured a certain group of society and condemned the future structure of public services. Everything (and I mean everything, including education and health care of future -unemployed-professionals) seems justified in order to reduce debts and deficit.

How can you expect that those who are the cause of the current situation (politicians, banks and private investors) will now be the rescuers only by giving them more (debt) money with no other requirement than ‘austerity measures’ and keeping paying the interests due?

If THIS is austerity, then I see myself in the NO side.

By: Armin Weckmann

Armin Weckmann — Thu, 16 May 2013 20:32:48 +0000

PPS: http://economictimes.indiatimes.com/news/international-business/francois-hollande-wants-euro-zone-government/articleshow/20089759.cms?prtpage=1

By: Armin Weckmann

Armin Weckmann — Thu, 16 May 2013 20:10:20 +0000

PS: I forgot to add that my last sentence doesn’t necessarily exclude austerity – but it has to follow tight constrains.

By: Armin Weckmann

Armin Weckmann — Thu, 16 May 2013 20:06:46 +0000

Good evening, folks!

It is hard for me to take sites in this debate since I kind of agree with both of you – first of all I will focus on Ivan’s point of view, then approach the opposing statement.

Everybody of us has to have a sustainable balance in money questions. Any reasonable person would agree that it is not wise to spend more than you can pay for. When this applies on the daily basis of ordinary people, why should it be different for states? A state which spends more money than it can pay back will neither cover it’s debts nor attract further investors because they have to fear to never get the money back. Plus, this strategy yells of inefficency in some point – if you have to spend more than you can afford, you are doing something wrong, either with gaining or with spending money. Hence there is need for improvement. And if the gain cannot be enhanced, this calls for cuts, for austerity.

However, the situation is not that easy to describe – when it comes to big amounts of money other than daily rules apply. These may be things like hedgefonds, credit default swaps (a kind of insurance against money loss due to a debtor’s bankrupt), or such basic things that the crash of one deptor causes such a rupture in the financial market that it the deptor *has* to be bailed out of his messy situation. This demands money spending of states in times of crisis when economy and banks fail. Additionaly austerity always hurts especially middle and low class citizens of a state – you cannot just switch your citizenship when the social welfare system of your home country gets severly thin, especially when you have to rely on this system. The option of moving is for the rich ones who can avoid austerity measures…

To sum up, austerity may be appropriate sometimes but will only help in special cases since the great expenses of a state normally are made of the social welfare system, education, unemployment aid. Proceeding as nothing has happend is also wrong – it will not stimulate improvement, which might be desperately needed. So what to do?
In general a state can downgrade its currency and thus pay off debts. If the debts have to be paid in another currency or the state is a member of a currency union (as the Euro states are) situation gets more complicated and demand a debt cut or, in the latter case, a uniform household which can be steered centrally by all the union members in order to up- or downgrade the currency in (altruistic) cooperation.
This demands an equally strong economy in every Eurozone member state – hence crisis should be tackled with an sustainable economical growth programme, not a shortcut programme…