Transcript Controversial and novel features of the Eurozone crisis as

4 Lectures on the €uropean crisis
• Lecture 2: Events
Lecture 2: the events
• The events in Europe: emphimeral peripheral growth and the
German mercantilism
The origin of the crisis in capitalism
• Capitalism is based on the appropriation by the capitalist class of the
social surplus.
• The social surplus S is what is left of the social product P once
wages N (necessities) have been paid:
S=P-N
• The open question is: who is going to buy S, what Marx called the
‘realization problem’. Part of S is bought by the capitalist themselves
as luxury goods and part as investment goods, but this is not
generally enough.
• Rosa Luxemburg and Michale Kalecki argued that capitalism needs
‘external markets’.
• Examples of external markets are: Government deficit spending;
autonomous consumption financed by consumption credit; foreign
markets (for a single economy, there are not foreign mkts for the
world as a whole).
The origin of the crisis in capitalism (cont)
• Kalecki’s idea was that capitalists anticipate, through the financial
system that can create liquidity, the purchasing power to the external
markets  banks finance consumers’ credit, the central bank
finances gvt deficits, banks finance banks in foreign countries (chat
in turn finance consumption or residential bubbles).
• The problem is that consumers, States, foreign nations become
indebted with banks (or banks in the periphery with banks in the
core), in final with the capitalists themselves.
• This is a lesser problem for States, as long as they retain their
central bank (they are always solvent snce they can print money).
Note that the European periphery has given up its central bank.
The origin of the crisis in capitalism (cont)
• You may apply this model to the US crisis: consumers’ credit
sustained aggregate demand and growth in the last 25 years or so,
up until the model did not collapse (once too marginal consumers
were involved)
• You may apply this model to the European crisis where core-Europe
financed consumers credit, and sometimes gvt deficit spending in
the periphery up until the model did not collapse (once it was clear
some countries were not solvent). The credit-debt relation within the
EZ are the ‘European imbalances’
• Economic growth in the US drove economic growth in China where
the US MNEs had transferred production to weaken the American
workers’ bargaining power.
• This generated the so-called ‘global imbalances’ (actually (CH-US).
Europe: this time was not different
• The European crisis appears as the n-th “this time is different”
episode:
• financial liberalisation + fixed exchange rates  capital flows from
the centre to the periphery  housing bubble  current account
deficit and indebtness  “sudden stop” of capital inflows  default
(?)
• I personally find Reinhart and Rogoff (2009) a non well-organised
account of the history of defaults, but the title really conveys the
sense of this history. Seminal explanations Diaz-Alejandro, C.
(1985) Good-bye financial repression, hello financial crash
(excellent title also) and Frenkel & Rapetti CJE 2009
In a point F&R were not prescient (this is not a criticism!)
• “[this paper ] argues that the factors that trigger the booming phase
preceding a financial crisis are different in developed and
developing countries. The conditions that have led to financial crises
in developing countries typically arose from the implementation of
macroeconomic policies, which created incentives that ended up
generating the boom-and-bust cycles. On the contrary, in developed
countries the elements that trigger the booming phase have
developed endogenously within the domestic financial systems.”
• Well, the EZ case shows that similar events may take place also
among developed countries. But, indeed, also in the EZ a core and
a periphery are distinguishable.
De Grauwe in 1998 was impressingly prescient
• “Suppose a country, which we arbitrarily call Spain, experiences a
boom which is stronger than in the rest of the euro-area. As a result
of the boom, output and prices grow faster in Spain than in the other
euro-countries. This also leads to a real estate boom and a general
asset inflation in Spain. Since the ECB looks at euro-wide data, it
cannot do anything to restrain the booming conditions in Spain. In
fact the existence of a monetary union is likely to intensify the asset
inflation in Spain. Unhindered by exchange risk vast amounts of
capital are attracted from the rest of the euro-area. Spanish banks
that still dominate the Spanish markets, are pulled into the game and
increase their lending. They are driven by the high rates of return
produced by ever increasing Spanish asset prices, and by the fact
that in a monetary union, they can borrow funds at the same interest
rate as banks in Germany, France etc. After the boom comes the
bust. Asset prices collapse, creating a crisis in the Spanish banking
system.” 1998!!!!!
• We are living a De Grawe moment:
http://politicaeconomiablog.blogspot.it/2012/05/de-grauwe-momentimpressively-prescient.html
The failure of the neoclassical explanation of international
capital flows
• The simple patterns of events financial <liberalisation + fixed
exchange rates  capital flows from the centre to the periphery 
housing bubble  current account deficit and indebtness  “sudden
stop” of capital inflows  default> clearly suggests that external
financial inflows do not finance domestic investment (or not
necessarily), but consumption, mainly housing, bubbles.
• This empirically disproves the neoclassical theory that capital flows
from saving-rich/trade-surplus core-countries towards savingdeprived/trade-deficit peripheral-countries help the catching up of
these countries. (Blanchard & Giavazzi 2002)
• Saving do not determine investment neither in closed nor in open
economies (the world is, after all, a closed economy)  the results of
the capital theory controversy provide the rational for the empirical
disproof).
• Martin Wolf points out that peripheral countries have little space to
invest in manufacturing/export capacity given fierce competition from
mercantilist countries; so they invest in non-tradable sectors
The failure of the neoclassical interpretation and the
Keynesian explanation
• Moreover, foreign saving/trade surplus in the core are the result of
the trade-deficit in the periphery: the story of the financial crisis
validates the Keynesian story that financial credit precede
(investment and) autonomous consumption, and that saving is an expost result.
• Reinhart and Rogoff are indeed totally contradictory when they share
Bernanke’s saving-glut hypothesis; how could China obtain a tradesurplus if the American household did not spend in the first place!
• Blanchard and Giavazzi applied the neoclassical causality to explain
capital flows in Europe as a result of a catching up process of the
South (although they note that the saving rate in the periphery was
falling, not investment rising).
• The same argument we hear in Europe from Germany: German
savings financed the peripheral profligacy. In actual, these savings
are the result of a trade-deficit in the South financed by capital inflow.
• Note that the situation has been made worse my the symmetric
mercantilist policies adopted by Germany (on which more later on).
To sum up: the prevailing view is that the European crisis
is a balance of payment crisis. A perfect kaleckian storm
• Championed by Martin Wolf on the FT, this view is becoming
dominant (with the exception of the German politicians and
economists that continue to argue, for political reasons or ignorance,
that this is a fiscal crisis).
• So the model is perfectly Kaleckian-Luxemburg: capitalists in the
core-country (and satellites) repress domestic wages and
consumption and finance the “external markets”.
• So they “realize” the domestic social surplus (S = P – N, where P is
the social product and N the “necessities” to the workers) in the
“external markets”. As known, S = P – N = X – M, profits are equal to
net exports).
• The only problem is that the periphery accumulates a foreign debt! A
perfect Kaleckian storm
First explanation: diverging REERs
Second explanation: diverging ADs
Housing bubble
http://www.economonitor.com/blog/2011/12/which-graph-best-summarizesthe-eurozone-crisis/
An ECB fault?
• The ECB monetary policy (one fist all, or what fits the core fits all) is
often blamed for the crisis:
An ECB fault or a European policy fault?
• Of course, I do not subscribe the Taylor’s Rule and the idea that
monetary policy should have then been more restrictive, quite the
opposite: it is the fiscal and wage policies in the core that had to be
much more relaxed.
• The figure above is indicative of the (interested) ‘benign neglect’
with which the effects of financial liberalisation and the mounting
European imbalances have been looked at up to the crisis.
• We must be clear about this: had monetary policy been more
restrictive, given the German austerity stance, the EZ would have
avoided the foreign imbalances but at the price of a generalised
stagnation.
• The results in terms of CA and net foreign position (or net
International Investment Position)) unbalances we have seen above.
The specific Italian case
• Italy is not a peripheral country and neither it saw massive capital
inflows and an housing bubble.
• The Italian public debt (PD)matured as a consequence of the EMS
from 1979 (de te fabula narratur) and of the “divorce” bewteen the
Treasury and the Bank of Italy in 1981. The high interest rates
combined with an enduring and tollerated tax evasion determined the
explosion of the debt.
• During the EMU the lower interest rates permitted a reduction of the
PD/GDP ratio from 120% to 105% expecially pursued by the centreleft governments. These policies and the loss of external
competitiveness, led to the stagnation of the GDP and of productivity
growth (I think a full account of the events has yet to be written).
• In spite of the stagnation, the external account deteriorated.
• This was due to the German policies (see below) but also on the
persistent inflation gap with Germany
• The inflation gap does not originate in the real wage dynamics (in
fact real wages have declined over the last decades) but on the nontradeble sector (that can fix prices). Anyway, Italy made an enormpus
effort to reduce inflation to quasi-German levels, but you cannot beat
Germany in its favourite game of having inflation always below
competitors.
German mercantilism
• Germany since Bretton Woods has always found fixed exchange
rate arrangements perfectly suited to her mercantilist stance: since
the time of Erhard the German strategy was to maintain the inflation
rate a little below that of competitors to sustain exports while
enjoying a strong currency, what has been named ‘Monetary
Mercantilism’ (Holtfrerich)
Criticism to German (presumed) mercantilism is not new . Few
examples*
- The German stabilisation policies of the late 1940s/early 1950s
were criticised by the American economists.
- Also in the 1950s Germany preferred to blame the others:
‘inflationary policies’ abroad led to the German export upsurge and
obliged her to ‘sterilise ‘imported inflation’ by pursuing a fiscal
surplus. The surging of the German trade surplus led, after the
American and French criticism, to the DM revaluation in 1961
- The case of the ‘locomotive theory’ is well-known: in the late 1970s
chancellor Schmidt reluctantly accepted the idea that Germany had
to pull the world economy along the US and Japan. The 2° oil shock
came: he swore that never again Germany would have played the
domestic expansion game.
At the origins of the German policy stance: monetary mercantilism?*
• The pre-miracle German policy choices that shaped post-war
Germany, in oarticular the centrality of price stability, have been
denominated ‘monetary mercantilism’ by the historian Carl-Ludwig
Holtfrerich.
• Holtfrerich, as others (e.g. Bibow), denies that the obsessive
objective of price stability by the Buba is due to the memory of the
great hyperinflation of 1922.
• Indeed, some economists maintain that this “memory” is a well
fabricated invention by the Buba (memories are a social construct).
An independent central bank is not even a German tradition (the
opposite is true), and indeed Adenauer opposed it (he thought that a
CB should be accountable!)
• Why price stability then? Holtfrerich: “found the clue” in the early
German policy decisions.
Monetary mercantilism (cont)*
In the early 1950s “As protectionist tools could not be used…a
different way of achieving mercantilism, namely export surpluses,
had to be found. The solution was to keep domestic demand
restrained by monetary and fiscal policies, thus keeping imports and
domestic inflation low and freeing production resources for more
exports. This strategy was contingent on a system of fixed exchange
rates…The early Bretton Woods system…left countries the
opportunity to gain in international competitiveness by realising
relatively more price stability than abroad”.
(The main Holtfrerich’s paper is published in a book edited by the
Buba celebrating the 50° DM anniversary!)
• Observe the combination of lower domestic inflation and fixed
exchange rates! The same combination Germany obtained later
through the EMS and the EMU!
Monetary mercantilism (cont)*
• Monetary mercantilism was “conceived and planned” particularly by
the president of the Bank deutsche Lander (the Buba was created in
1957) Wilhelm Vocke “as a long-term strategy for German monetary
policy” : “keeping domestic affairs tight in order to strengthen
exports”. Vocke was lucky:
• 1) the Allies forced for an independent CB in 1949 when a Federal
gvt was not existing yet; 2) Erhard endorsed Vocke’s policy; 3) the
Korean war gave a big push to German exports and the opportunity
to keep inflation lower than the competitors.
• Erhard: “A great opportunity for the future of German exports has
arisen out of the current situation. If, namely, through internal
discipline we are able to maintain the price level to a greater extent
than other countries, our exports strength will increase in the long
run and our currency will become stronger and more healthy, both
internally and with respect to the dollar”
Monetary mercantilism and Ordoliberismus*
Price stability was also the obsessive policy target of Ordoliberismus (or Freiburg school or social market economy), the
dominant economic school in the reconstruction and miracle period.
Price stability was associated by the ordo-liberals to the smooth
functioning of the price mechanism. In practice, price stability is
synonymous of wage and social discipline.
• Wage and social order imply that exports, rather than wage
consumption, become the natural debouche of the surplus (in the
classical-marxian sense). Indeed, income distribution has never
been particularly favourable to labour in Germany.
• An export-oriented economy becomes in turn a powerful political
instrument to obtain labour consent and discipline (reinforced by the
German trade unions pursue of co-determination rather than strong
wage claims why German trade unions have been so docile in the
post-WW period is not clear to me yet).
The German model*
• The success of the model in leading to improved standards of life
(although income distribution, not surprisingly, has never been
particularly fair in Germany) and the traditional paternalist
Bismarkian welfare state did the rest.
• Erhard, declared in 1953: “Foreign trade is quite simply the core and
premise of our economic and social order”.
• This declaration seems to allude to an export-led model as a way to
enforce social order, and to social order as a way to sustain exportled growth:
Social order
export led growth
Price stability
The pillars of the German model and why they do not
want to give it up
• The three institutions pillars of “monetary mercantilism”: neocorporativism, mercantilist micro, meso and macro institutions and
policies, and …the Bundesbank.
• The former implied a direct involvement of the labour movement both
at the micro and the macro level in the maintenance of a competitive
system, particularly in the export sector.
• At the micro-level Germany has a excellent training, educational and
R&D system; at the meso-level the reliance on export-led growth
creates an ideological climate that induce cooperation and discipline
(Crouch 2008); at the macro level the system keep wage-growth
below or in line with productivity growth. The government domestic
and foreign policies have the promotion of German export as the
priority. Paternalism is a traditional attitude of the German
government; the sense of the national community, traditions and
nature (heimat) is the main component of the “German ideology”.
This perfectly suit the mercantilist tradition (Heckscher), particularly in
its German version (Cameralism, Historical School)
• This model has brought welfare and order in Germany: would you
easiliy give it up?
Arsenic and Buba
• But, of course, as Voltaire said: “Incantations will destroy a flock of
sheep if administered with a certain quantity of arsenic”
• Just in case, the watchdog role of the model was assumed by the
Bundesbank in a unique wage bargaining process directly involving
the central bank and the leading trade union IG-metall (Franzese
and Hall 2000: 182-83).
• This role of the Bundesbank as the watchdog of the German
mercantilist model is very important to understand the German
opposition to the reform of the ECB from its present “monetarist”
constitution.
The Buba and the labour market*
• A ‘credible’ CB was a central element of the German economic policy,
where by credibility is meant that the trade unions considered the
German CB commitment to fight inflation at any cost as convincing.
• According to Franzese and Hall the centralised wage bargaining in
Germany, led by the IG-Metall, made a peculiar interaction between
the German CB and the trade unions possible: “The highly public pas
de deux between the Bundesbank and the principal wage bargainers,
which occurs at the time of every wage round in Germany, is a
prominent feature of politics. The bank often issues pointed
comments on the initial wage demands made by the union involved in
the leading settlement, accompanied by detailed commentary about
the state of the economy and warnings about the policy
consequences of overly inflationary wage settlements. ... this kind of
dialogue between wage bargainers and the central bank is
completely absent from U.S. economic politics. … The Federal
Reserve and the Bundesbank speak differently because they have
audiences with different institutional structures”. …
Corporative social-democracy and mercantilism
• Interestingly, the Bundesbank’s credibility was reinforced by the
export-led model, given the concentration of the strongest trade union
in the export sectors: “The German case also suggests that the
effectiveness of such signalling mechanisms may be enhanced when
the export sector is large and plays a pivotal role in wage bargaining
(…). The metalworking sector, which produces the lead bargain in
most years, has a high export concentration. In itself, this induces
lower settlements because wage bargainers in export sectors are
especially concerned to maintain unit labor costs at internationally
competitive levels. Actors in such sectors are also especially sensitive
to signals from the central bank, however, because the restrictive
monetary policies that the bank wields not only depress the level of
economic activity but also tend to appreciate the exchange rate,
thereby threatening export sectors especially severely by rendering
their products more expensive in world markets.” The direct
involvement of the German CB in wage bargaining has been inherited
by the ECB. Just recall again the two infamous rate increases in July
2008 and April 2011.
• Is it a case that most (all?) northern corporative social-democracies
are export-led economies (Colin Crouch)? This might be due to the
smallness of those countries, but this is not the case of Germany.
Corporative social-democracy and mercantilism
• Interestingly, the Bundesbank’s credibility was reinforced by the
export-led model, given the concentration of the strongest trade union
in the export sectors: “The German case also suggests that the
effectiveness of such signalling mechanisms may be enhanced when
the export sector is large and plays a pivotal role in wage bargaining
(…). The metalworking sector, which produces the lead bargain in
most years, has a high export concentration. In itself, this induces
lower settlements because wage bargainers in export sectors are
especially concerned to maintain unit labor costs at internationally
competitive levels. Actors in such sectors are also especially sensitive
to signals from the central bank, however, because the restrictive
monetary policies that the bank wields not only depress the level of
economic activity but also tend to appreciate the exchange rate,
thereby threatening export sectors especially severely by rendering
their products more expensive in world markets.” The direct
involvement of the German CB in wage bargaining has been inherited
by the ECB. Just recall again the two infamous rate increases in July
2008 and April 2011.
• Is it a case that most (all?) northern corporative social-democracies
are export-led economies (Colin Crouch)? This might be due to the
smallness of those countries, but this is not the case of Germany.
Social-democratic mercantilism*
• As seen, export led-growth is also functional to secure labour
acquiescence and discipline, solving therefore the second Kaleckian
concern about the inconsistency of full employment and capitalism.
• Germany appears as a high-productivity/low wage economy. This is
a classic definition of a mercantile country.
• The model, in the German case, is self sustained in the sense that it
brings about social and distribution discipline (associated to decent
standards of living), that in turn supports the model.
• The question is the international sustainability of the model, but
perhaps Germans see themselves as a small player at the global
level so that they expect the world to tolerate this policy. But they
have to solve the European situation first.
• There is no reason why Germans (of any social class) would like to
abandon the model, so be politically realist and do not talk of
European solidarity.*
•
*See my The European crisis: political and institutional failures or method in
the madness? In www.networkideas.org, re-published by www.irishleftreview.org
References
• Cesaratto S. (2013). Controversial and Novel features of the
Eurozone Crisis as a Balance of Payment Crisis, in Febrero E. et al.,
editors, Post Keynesian Views of the Economic Crisis and its
Remedies, Routledge, 2013. Working paper: http://www.econpol.unisi.it/dipartimento/it/node/1649.
• Cesaratto S., Stirati A. (2011) Germany in the European and Global
Crises, International Journal of Political Economy, vol. 39, no. 4,
Winter 2010–11, pp.56–87; working paper version: http://www.econpol.unisi.it/dipartimento/it/node/1267
• Cesaratto S. (2011), Europe, German Mercantilism and the Current
Crisis, Quaderni del dipartimento di economia politica, in Brancaccio
E., Fontana G. (a cura di), The Global Economic Crisis. New
Perspectives on the Critique of Economic Theory and Policy,
Routledge, London. Working paper version Quaderni del
Dipartimento di Economia politica,, n. 595 (www.econpol.unisi.it/dipartimento/it/quaderni)