Here’s a clue: Two months ago Olli Rehn, Europe’s commissioner for economic and monetary affairs — and one of the prime movers behind harsh austerity policies — dismissed France’s seemingly exemplary fiscal policy. Why? Because it was based on tax increases rather than spending cuts — and tax hikes, he declared, would "destroy growth and handicap the creation of jobs."And when practitioners of Angie-nomics talk about reforms, or structural reforms, or reforms to enhance competitiveness, they are also preaching the same Herbert Hoover/Heinrich Brüning sermon:
In other words, never mind what I said about fiscal discipline, you’re supposed to be dismantling the safety net.
Oh, and when people start talking about the wonders of “structural reform,” take it with a large heaping of salt. It’s mainly a code phrase for deregulation — and the evidence on the virtues of deregulation is decidedly mixed. Remember, Ireland received high praise for its structural reforms in the 1990s and 2000s; in 2006 George Osborne, now Britain’s chancellor of the Exchequer, called it a “shining example.” How did that turn out?He looks at the same issue in his blog post Ideological Ratings 11/08/2013:
If all this sounds familiar to American readers, it should. U.S. fiscal scolds turn out, almost invariably, to be much more interested in slashing Medicare and Social Security than they are in actually cutting deficits. Europe's austerians are now revealing themselves to be pretty much the same. France has committed the unforgivable sin of being fiscally responsible without inflicting pain on the poor and unlucky. And it must be punished.
OK, another dirty little secret. What do we know — really know — about which economic reforms will generate growth, and how much growth they’ll generate? The answer is, not much! People at places like the European Commission talk with great confidence about structural reform and the wonderful things it does, but there's very little clear evidence to support that confidence. Does anyone really know that [French President François] Hollande's policies will mean growth that is x.x percent — or more likely, 0.x percent — slower than it would be if Olli Rehn were put in control? No.I assume by welfare state he also means government regulations on business to protect consumers and workers, not just the programs commonly known as the social safety net.
So, again, where is this coming from?
I’m sorry, but I think that when S&P complains about lack of reform, it’s actually complaining that Hollande is raising, not cutting taxes on the wealthy, and in general isn’t free-market enough to satisfy the Davos set. Remember that a couple of months ago Olli Rehn dismissed France’s fiscal restraint — which has actually been exemplary — because the French, unacceptably, are raising taxes rather than slashing the safety net.
So just as the austerity drive isn’t really about fiscal responsibility, the push for “structural reform” isn’t really about growth; in both cases, it’s mainly about dismantling the welfare state.
France's reducing the deficit at this point in time is not in itself a good idea. But if you're going to do it, taxing the wealthy more than cutting government spending that generates jobs is definitely the preferred way to go. Preferred for the health of the French and eurozone economies, that is, not preferred by the advocates for the One Percent.
Krugman also explains in Non-Crisis France 11/09/2013 that France doesn't have the kinds of problems the eurozone periphery countries like Spain have, because France did have the same kind of massive influx of capital that created the kind of real estate bubble and subsequent banking crisis that Spain experienced. That doesn't mean France isn't endangered by Angie-nomics. It just means its problems aren't the same as the current crisis countries.
France also isn't getting the currency advantage that Germany is from the euro, which for Germany is far lower than a separate German currency would be, which facilitates their exports. Krugman writes, "The first decade of the euro left Spain very overvalued, Germany very undervalued. France was in between, so there was no big news either way. To use the jargon, the euro area suffered from very large asymmetric shocks — but France, which roughly tracked the euro average, wasn't subject to these shocks." Germany, in those terms, had a beneficial shock. Which the German political leaders now forming a new Grand Coalition government don't want to emphasize, much less construct their eurozone economic policies around its implications. Instead, they intend to keep riding the tiger of an unsustainable currency advantage for Germany's national economy.
Krugman also describes the eurozone problem this way in Europe’s Macro Muddle (Wonkish) 11/11/2013:
Fiscal contraction is not offset by monetary expansion. This has several implications, none of them good. The slump in the south is deeper than it should be, because of the absence of any offset. Meanwhile, there is no expansionary effect in Germany, and hence no upward pressure on inflation there (and downward pressure on inflation in the EZ as a whole.) With little or no inflationary pressure in Germany, the whole burden of adjustment within Europe falls on deflation in the periphery, which is hugely costly and worsens the debt problem.Krugman has developed an unusual skill for expressing complex economic ideas in accessible terms. Simon Wren-Lewis isn't quite aiming for the same level of popular accessibility, but his The view from Germany Mainly Macro 11/10/2103 also gives a good basic description of Germany's current situation:
The point, which I guess we should all have been making more clearly, is that all the various things we talk about here — the extreme slump in Southern Europe, Germany’s failure to narrow its current account surplus, and the slide of the eurozone as a whole toward deflation — are really aspects of the same story. We have huge forced fiscal contraction in part of Europe, not at all offset by either overall monetary policy or fiscal expansion elsewhere.
One last point: the Germans are very proud of their own adjustment between the late 1990s and 2007, during which they emerged from economic doldrums and became very competitive. But that adjustment, from a European point of view, looked like my first figure: German belt-tightening was accompanied by what amounted to a highly expansionary monetary policy, which led to fairly high inflation in Southern Europe. So when Germany asks why other countries can't do what it did, it isn’t just forgetting that we can’t all run trade surpluses; it’s also insisting that other countries replicate its success while denying them the kind of external environment that made its success possible.
Much of the Spiegel article [Economic Doghouse: Complaints about German Exports Unfounded 11/05/2013] is about the pointlessness of blaming Germany for its success in exporting. This of course completely misses the point, but if outside criticism focuses on Germany’s current account rather than its inflation rate it is perhaps not a surprising reaction. The German current account surplus is a symptom of the underlying problem, which is a tight fiscal and monetary policy in the EZ. Whether the tight monetary policy (bringing EZ inflation below 1%) is an unforced or forced error (because interest rates are near zero) is not crucial here, except to the extent that German pressure is behind any reluctance until recently to cut interest rates. [my emphasis]Wren-Lewis also warns against making economics into a morality play:
At one point, however, the article does note that criticism of Germany “holds that the Germans live and consume below their means, which is detrimental to foreign companies because there is less demand for their products in Germany.” But its response is to say that this is the fault of “countries like Greece, Italy and Spain, [who] have only themselves to blame for their troubles because they spent years living beyond their means and at the expense of their own competitiveness.” In other words, why should Germany suffer above 2% inflation because the rest of the EZ allowed themselves to become uncompetitive.Tags: angela merkel, austerity economics, eu, euro, european union, france, françois hollande
Mapping macroeconomics into a morality play is almost always a mistake. So let’s just stick to the rules of how the EZ is supposed to work. The ECB is supposed to have a (‘just below’) 2% inflation target. If it was able to meet that target, Germany would have to suffer 3%+ inflation for a number of years. Now you might respond that the ECB is within its mandate if it targets 1% inflation to allow Germany to only have 2% inflation, because below 2% inflation is allowed. I think that would be stretching the mandate rather a lot (see Andrew Watt here), but even so, if that were true, why didn’t the ECB target 1% inflation from 2000 to 2007 to avoid inflation outside Germany exceeding 2%?
A more reasonable interpretation would be that Germany is either putting pressure on the ECB so that its policies are favourable to the German national interest, or that it is taking advantage of the inability of the ECB to target inflation in a liquidity trap to force inflation below target through a restrictive fiscal policy. It is either trying to circumvent the rules, or take advantage while the referee's whistle is broken. (italics in original)