Sunday, January 20, 2013

Austerity begins to bite in Germany after eating much of the eurozone economies

William Black catches the Wall Street Journal and the New York Times flaking for German Chancellor Angela "Frau Fritz" Merkel, as he explains in German growth goes negative but Merkel’s press becomes more glowing New Economic Perspectives 01/16/2013. As he puts it, "It is good to be Angela Merkel. Growth in Germany goes sharply negative in the last quarter of 2012 and press reports emphasize how sound the German economy is because it is a net exporter."

Germany has perversely been able to benefit for a while form the austerity Frau Fritz has succeeded in imposing on Greece, Ireland, Italy, Portugal and Spain. Or, probably better put, it has continued to reap the benefit for its exports of having the euro currency that is cheaper than a separate German currency would be.

But recession in the rest of the eurozone, severely exacerbated by Frau Fritz' austerity drive for the "periphery" eurozone nations, is catching up to Germany itself:

The reality is that austerity drives reduced demand, which reduces output, which reduces growth (and can turn it negative), which reduces employment, which increases inequality, emigration, and budget deficits.

Berlin's insistence on inflicting austerity on the Eurozone has produced five quarters of no growth or negative Eurozone growth. Spain, Italy, and Greece have Great Depression levels of unemployment – and unemployment is rising.
Black points to an irony implied by the WSJ report:

Germany hopes that the U.S. and Chinese economies will act like tow trucks and pull Germany out of an incipient recession. Germany’s only realistic hope for avoiding a recession (two consecutive quarters of negative growth) rests with the two Nations that most famously used stimulus to respond to the Great Recession. Stronger growth in the U.S. and China leads to increased demand for German exports. The great irony is that German austerians are praying fervently that the U.S. not adopt austerity.
Conventional wisdom in the US seems to be that the European Central Bank (ECB) has ended the euro crisis by its arcane money magic. And it's true that the ECB's expressed willingness to buy up large amounts of troubled eurozone debt seems to have eased the pressure in the second half of 2012 on interest rates. But the fundamentals haven't changed. And with the eurozone apparently slipping further into recession, the euro crisis is going to be with us for some time. Especially since the EU, under Frau Fritz' direction, is following its now-standard approach of going as slowly as possible on substantive fixes to the eurozone's problems. Black reports that "a delegation of Latin American heads of state recently sought to convince the extremely conservative leaders of Spain and Portugal to learn from the failure of austerity in Latin America. Ecuador’s President Correa is an economist who wrote his doctoral thesis in part on the failures of austerity." And he offers this reality-check:

Merkel's austerity policies were once unpopular among many Germans, but the sad paradox is that the euro, whose proponents claimed it would lead to "ever closer union," is now the single greatest threat to European unity. As the peoples of the European periphery have been pushed into far more strident ideological and ethnic divisions by austerity and depression-level unemployment they have often directed their ire at Berlin. The dominant German meme spread by Merkel's party is that the virtuous Germans have selflessly bailed out the profligate South and received scorn in return. Only Prussian discipline can save southern Europeans from themselves. Merkel's popularity has surged as this meme of the slothful peripheral ingrates engaged in Berlin-bashing has become dominant in Germany.
Greek cartoonist Yannis Ioannou shows Frau Fritz presiding over Europe, ..βιλλαμαλιώτιδα! 01/10/2013:

Bloomberg Businessweek's Peter Coy promoted the idea of ECB's head Mario Graghi's Maestro-like genius in "The Stich-Up Artist" in the print edition, How Mario Draghi Found a Way to Rescue the Euro online 01/17/2013. Coy seems to take Draghi's stopgap action as something equivalent to a New Deal-type bold governmental intervention:

What Draghi grasped last summer in London was the importance of "multiple equilibria," the idea that an economy can operate persistently on either a full-employment track (good) or a low-employment track (bad). Government, Draghi realized, can flip an economy from a bad equilibrium to a good one. Others are following his lead. In Japan, newly seated Prime Minister Shinzo Abe is trying to work a similar flip by urging the Bank of Japan to break the nation’s deflationary spiral. In the U.S., in contrast, the sickening standoff over the debt ceiling threatens to execute a back-flip to a low-growth equilibrium.
That's kind of an amazing comment, because Draghi's bond buying plan wasn't about boosting employment at all. It wasn't a jobs or stimulus program. Good grief!

It's really kind of an odd article, because later on he spells out more of what's happening in the real economy:

All that said, Europe isn’t out of the woods by any means. Output in the 17-nation euro zone has been flat to sinking since late 2011. Unemployment is 16 percent in Portugal and 27 percent in Spain. (To sense Spaniards’ pain, check out the poignant YouTube (GOOG) video of musicians playing Here Comes the Sun in a Madrid employment office.) Output is likely to keep shrinking through the first half of 2013, according to economists surveyed by Bloomberg News.
Well, duh!

Coy also reports:

But the strongest headwind for Europe is deficit-cutting — even by countries such as Germany that face no market pressure to balance budgets. Here, Draghi isn't doing himself or Europe any favors. He supports harsh austerity measures, even though the International Monetary Fund has begun to warn that they cause "significantly" more unemployment than forecasters once estimated. There's only so much the ECB can do on the monetary side to offset tightening on the fiscal side. Another interest-rate cut could force the deposit rate into negative territory, which might hurt lending between banks and money-market funds. Brzeski, the economist who warned last summer that Draghi had maneuvered himself into a difficult position, remains worried. "The ECB will secretly keep its fingers crossed, hoping that better financial market conditions and structural reforms eventually really lead to an economic recovery," he says now. The good news: "The crisis has delivered a surprising degree of wage flexibility and labour mobility," Charles Wyplosz, an economist at the Graduate Institute in Geneva, wrote in an article for the VoxEU website on Jan. 4. [my emphasis]
The cynical clinical terms used by Establishment economists is sometimes crazy-making; "wage flexibility" means people are earning less, "labour mobility" means they have to move to find jobs. As Bill Black puts it in his post, even in Germany, "Unemployment is low, but German workers’ wages have been reduced materially in real terms as productivity has grown. The result is very large corporate profits and ever higher inequality."

As Black explains, even though the "periphery" countries have been the most dramatic victims of Frau Fritz' austerity policies, Germany is itself now being hurt by them both indirectly and directly:

... Berlin demanded the policies that took the "struggling economies of Southern Europe" and threw them into Great Depression levels of unemployment that are causing their university graduates to emigrate in droves. Berlin did not "stabilize the euro zone as a whole" – it threw it into recession. In so doing, it did not help ordinary Germans. German growth would have been far more robust but for their own austerity. It is no coincidence that German growth went sharply negative as soon as it balanced its budget.
Tags: , , , ,

No comments: