Don't Trust the Statist Anglo-Saxon Socialist Predator Capitalists

Time for another post that most of my readers will hate! Paul Krugman, on the recent S & P devaluation of European countries, quotes the agency's FAQ:

We also believe that the agreement [the latest euro rescue plan] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.

Needless to say, Merkel continues to flog more austerity as the solution, even as she warns her country that it will face "difficult times" (g) in 2012. Difficult times caused, in no small part, because of her policies.

This is a pretty remarkable moment in European history: major European players are betting the future of millions of Europeans on the existence of the confidence fairy and expansionary austerity, despite the evidence that they don't exist:

One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012.

Europe's mainstream leaders are plunging millions of citizens into a severe, and largely avoidable, depression, based on a theory of fiscal policy that is already, visibly failing. And the debate about this policy failure, unfolding even as we speak, is filled with silly distractions. Instead of soberly posing the simple, empirical question whether the current policy is actually working, most German politicians* are instead:

• reciting the cherished, comforting morality tale of the the Thrifty Teuton v. the Profligate Southerner (Europe's speaking German! (g))
• shooting the messenger by criticizing the ratings agencies (g) -- even though, as the muted market reaction to the downgrade shows, the agencies were simply confirming what every sophisticated observer already knew
• Questioning the motives of the people who are questioning their policies (Socialists! Anglo-Saxons!** Slavish votaries of that Svengali Keynes!)

Overall, the debate reminds me of the American debate on the Iraq war in, say, 2005: even as things were going obviously pear-shaped, the war's most stalwart defenders resorted to basically the same kinds of distractions: shooting the messenger, impugning opponents' motives, etc. Just as in 2005, Europe looked on half in horror and half in bemusement as American shot itself in the foot over and over, the same thing is happening in reverse now -- but it's Europe doing the shooting.

* Except for the Left Party (Die Linke), of course. Remarkable how prescient the ex-Communists have been lately. And on this issue, they're pretty much the only real opposition.

** Note that opponents of more austerity are somehow both Socialists and Anglo-Saxons, although usually Anglo-Saxons are dismissed by Europeans for advocating too little government spending (undermining our Cherished Social Protections™), rather than too much. Conflicting political cultures make for strange bedfellows...

Comments

[noribori]

Here's Wolfgang Münchau's translation of a part of the S&P quote above from today:

"Wir glauben auch, dass die Vereinbarung (der europäischen Staats- und Regierungschefs vom 9. Dezember) die Ursache der Krise in Teilen verkennt. Sie basiert auf der Annahme, dass sich die aktuelle Finanzkrise in erster Linie durch unverantwortliche Fiskalpolitik der Peripherie ergibt. Aus unserer Sicht sind jedoch die finanziellen Probleme der Euro-Zone eine Folge steigender außenwirtschaftlicher Ungleichgewichte und Unterschiede in der Wettbewerbsfähigkeit zwischen dem Euro-Zonen-Kern und der sogenannten Peripherie."

Here's my translation:

"Wir glauben auch, dass die Übereinkunft auf Annahmen basiert, die die Ursache der Krise nur zum Teil erfassen: dass die aktuelle Finanzkrise in erster Linie durch unverantwortliche Fiskalpolitik der Peripherie der Eurozone verursacht wurde. Aus unserer Sicht hingegen sind die finanziellen Schwierigkeiten, mit denen sich die Eurozone jetzt befassen muss, ebenso sehr eine Konsequenz steigender Ungleichgewichte im Außenhandel und von Unterschieden in der Wettbewerbsfähigkeit zwischen den Kernländern der EU und der sogenannten 'Peripherie'".

Maybe I'm wrong and I see a difference which just isn't there. My English is by no means as profound as that of Mr. Münchau, who is a well known editor of the Financial Times. So, instead of claiming something, I'm just asking a question: is it possible that Mr. Münchau changed the meaning of the quote slightly in his translation because he wanted it to assert his position better than it actually does?

(And this is not about the financial crisis: I completely agree with Mr. Münchau that the imbalances are a huge and unaddressed problem. This is about something else. How shall I trust Mr. Münchau if he tries to manipulate me?)

In case my translation is wrong and I'm misguided here I apologize for questioning Mr. Münchaus's motifs.

[noribori]

So, S&P basically say that fiscal profligacy at the periphery of the eurozone is actually one source of the crisis and that a reform process based on fiscal austerity makes sense as long as it is not seen as panacea, but balanced with "a strong and consistent program to raise the growth potential of the economies in the eurozone"?

That's an interesting quote to prop up to undermine your conclusions.

[Mak]

I think many people confuse short-term outlook and long-term measures. Sure, cutting spending now means less money in circulation. BUT, if you have to borrow the money first before spending it, this means you have more debt in the future - and need more money to pay back the debt (only alternative: default). Therefore, if Merkel decides to cut spending now means hitting this generation instead of shifting the burden on future generations. You can't outgrow your debt - that much should be sure.
The only party winning by expanding the debt is the financial sector, i.e. those people turning debt into wealth (or making money from nothing). And they are dominating the financial press (and the GOP, but that is another story).
Keynesian economics have not withstood the test of reality and should be shelved.

[Alex]

I can't get lost of the impression, that you follow many anglosaxons, who adopted the "German Angst" in all euro-related themes, whereas many Germans already switched to "German Zuversicht". :-)

http://www.welt.de/print/welt_kompakt/print_wirtschaft/article13795198/German-Zuversicht.html

[Michael]

You are making the assumption that austerity and budget discipline is the same thing. But it is not: for example the average retirement age here in Austria is 58. Raising the retirement age to a more reasonable age is budget discipline, but not austerity.

And as far as Greece is concerned: Greece has (in % of GDP) the highest defense spending in the EU (2010, don't know of 2011). Is cutting defense spending in Greece really austerity (please take into account that Greece is not the US, they buy the defense stuff in other countries)? And is making sure that everybody in Greece pays the taxes austerity?

Of course it is true: if the deficit spending is money too, and that money will missed. And the money which is needed to pay back the loans will be missed too. But there is actually no way around that.