Wednesday, January 29, 2014

Jamie Galbraith schools four Europeans on the euro crisis

The February 2014 Harper's has a dramatic if unimaginative cover this week highlighting the outsized clout of Germany in the EU and the eurozone and the dubious ways in which it has exercised that clout during the current depression that began in 2007-8 for Europe.

It features a discussion among five participants: the American Jamie Galbraith of UT-Austin, one of my favorite economists; from Germany, Ulrike Guérot of the Open Society Initiative for Europe and Christiane Lemke of New York University; the Brit John Gray from the London School of Economics, considered a leading Western political philosopher; and, the French historian and political scientist Emmanuel Todd of the National Institute of Demographic Studies in Paris. ("How Germany Reconquered Europe: The euro and its discontents")

The piece is well worth reading for Galbraith's parts alone. He not only understands the euro crisis and has been engaging with it actively for years. He has a very good ability to make complex economic ideas reasonably accessible to a general audience without dumbing them down.

I'll say more about his contribution in a moment. But the other four were, to put it mildly, disappointing. Gray isn't exactly known for being Mr. Cheerful. In a review of one of his books, the philosopher Terry Eagleton wrote, "Gray, the gloom-ridden guru, is just the free-marketeer fallen on hard times. The iron determinism of this book is the flipside of its author's previous love affair with freedom." (Humanity and other animals The Guardian 09/22/2002)

He has attracted some favorable attention from critics of the neoliberal model for some of the criticism he has made of it. Jonathan Derbyshire gives a sketch of his evolution in The NS Profile: John Gray New Statesman 04/16/2009. And this essay of Gray's about John Maynard Keynes from the London Review of Books, We simply do not know! 11/19/2009 shows that he is not entirely unversed in economics.

All the more surprising then that he comes across in Harper's for all the world like a guy who shows up for a job interview totally unprepared. It's hard to call his contributions to the discussions phoning it in; it's more like groaning it in:

In a sense, European projects come up against, it seems to me, the dominant forces in the past hundred years.
In practically every European country, including some like my own that are outside the euro and will remain outside the euro, the central wound of democratic politics is immigration and antiimmigrant movements.
The basic lesson of the past ten, twenty years - even of the past hundred years - is that the upper limit, not only of democracy but of political legitimacy, is the nation-state.
There are many possibilities. It's like debates I used to have with communists about the Soviet Union. They said, "Well, if you don't have this, what do you have? Just chaos!" It's utter nonsense.
The risk, though, is the glacial pace of events in Europe. There is a very dynamic global geopolitical situation at the moment, which includes as a central element a rapid relative improvement in the position of Russia.
Short version of Gray's two cents: I don't know or care much about the politics of the euro, so I'll pretend that I'm Niall Ferguson and sit here and make pronouncements about the Grand Sweep Of History for the rest of this boring gig.

The other can be summarized more quickly. Emmanuel Todd seemed to be striking a Bernard-Henri Lévy-type pose of the opinionated and eccentric French intellectual impressing the American audience with his very French Frenchness, barely making any sense in the process. At one point he makes this airhead prouncement:

What would happen if the euro zone broke up? In France we would have some economic problems, adjustment problems, but being together as Frenchmen, doing things together, being, as we say in French, "in the same shit," would be great! It would be the beginning of a new age, you see? There's nothing terrifying about this.
Galbraith seemed to get irritated at this point by Todd's total lack of seriousness and his display of zero knowledge on the subject and schooled him a bit:

On the question of what happens if the euro zone should break up: There are two major possibilities. One is that it breaks up a la Yugoslavia, it breaks into pieces, in which case the integrated production and trade networks will collapse. ... How much was the reduction of total output in Yugoslavia, or for that matter in the Soviet Union, when those entities broke up? On the order of 40 percent. It is something not to be taken lightly, it seems to me.

The second possibility, which is marginally easier but not very attractive, would be for the Germans to exit while the euro stays for the south. Then the debts would still be denominated in euros, which would depreciate, and that would make it much easier to ticket, and you could perhaps have a Mediterranean euro zone, headquartered in Paris.
Evidently flummoxed that anyone might have expected him to come to this discussion with more than drunken rambling about la France and how all the problems of Europe in the past had been because Germany sucked, Todd's immediate response was, "No, no, no. No, no, no." Yes, dude, you were acting like a flake. Yes, yes, yes.

The two Germans, Guérot and Lemke, were also pretty much phoning it in, mostly repeating platitudes that were getting pretty stale 10 years ago. Guérot at one point even goes into Tommy Friedman mode and says, "but if you ask any given taxi driver in Paris or in Marseille ..." The most notable thing about Guérot's and Lemke's interventions was the way they kept trying to divert the conversation from the problems of the eurozone to the diplomatic achievements of the European Union.

Even the moderator Jeff Madrick couldn't seem to keep his focus on that distinction, inserting at one point, "The last line of defense for the euro seems to be that it has brought peace to a region with a historical propensity for war." But he does introduce the discussion with the observation that there "is extreme deprivation across the south of Europe, where unemployment remains extremely high and GOP is well below pre-crisis levels."

I've heard many times, in fact it's become rote conventional wisdom in the EU, that the European Union and the general process of unification has been a huge factor for peace. And it happens to be true. But although the currency union has been a part of that process, I really don't recall ever hearing any European officials or political leaders asserting that the euro specifically has been a major contributor to peace.

Galbraith is scarcely a reciter of conventional wisdom on a regular day. But in this discussion, he has to jar the conversation back to reality at several places. One relates to the lazy conventional assumption that war is certainly not something Europe has to worry about as a consequence of a euro breakup:

Upheaval can happen without war. For example, you have a situation in which half the population of Catalonia originates from elsewhere in Spain, especially Andalusia, and the unity of the country, if it's to be enforced in this situation, would have to be enforced by the Spanish army.
And he frames the current situation in an excellent way:

Will the euro zone continue with its full complement of present members under the current policy regime indefinitely? And the answer I would offer is somewhere between "very unlikely" and "absolutely not." Right now we are witnessing the destruction of some of the smaller countries of the European south. It's very plain in Greece-a country that has never had strong public social institutions. Those it does have-the health system, the education system, the system of infrastructure, and the maintenance of basic public services-are being demolished. You can't make a country attractive to foreign investment in a manner that will produce economic recovery if these social underpinnings are destroyed. Portugal, Ireland, Spain, and Italy are not as far down the road as Greece, but they are on the same general path.

So what will happen? One of two things. There may be a coherent political rebellion against the current direction of European policy. At the moment, I think the most promising source of such a rebellion is Syriza, the radical-left coalition in Greece, but there are other candidates. That rebellion would place the leadership of Europe in the position of having to decide whether they wished to continue the euro zone in its present form. If they did, policy would have to change.
The second possibility he describes is for Germany to change course and start pursuing stimulative policies. This certainly seems unlikely without the southern countries forcing it in a political confrontation. But Galbraith observes, perceptively I think, "one has to respect the fact that Germany has a chancellor who has proved herself a very successful political figure and therefore has created for herself the possibility of exercising real leadership in this matter."

Galbraith is coming from a viewpoint of trying to save the eurozone with sane stimulative economic policies replacing the current Herbert Hoover/Heinrich Brüning policies that Merkel is pursuing. He alludes in the Harper's discussion to his A Modest Proposal for Resolving the Eurozone Crisis, co-authored with Yanis Varoufakis and Stuart Holland which aims at just such an outcome. He warns against the facile assumption that the eurozone could achieve an orderly unwinding of the common currency. He doesn't think it's possible, as his response to Todd quoted above illustrates.

I was also fascinated by his discussion of the current position of the US economy in comparison to Europe and especially his expectations of how a euro crisis would likely affect the US. He compares the US position favorably to that of the eurozone around three major aspects. One is that the automatic stabilizers function more efficiently as a countercyclical influence in the US. "In Europe, the automatic stabilizers work very well in Germany, they work quite well in France, they worked in northern Europe. They don't work at all in Spain, Portugal, and the periphery, in Greece and Italy."

The second is that US debt problems are more about private debt than public debt. And the third is that what public debt problems there are involve states and localities. Galbraith explains at some length in The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (2008) his heterodox position on how very little the US federal government has to worry about how much debt it takes on.

He also thinks that the United States would benefit comparatively from a euro crackup!

... let me offer a radically contrarian view: I'm looking forward to it. I'm absolutely looking forward to it, in all seriousness. In 2008, we suffered a collapse of the banking system in the United States - a banking system that had been entirely corrupted by massive waves of fraudulent mortgages that had been securitized to, among others, European customers - and the result of that was an enormous retreat from domestic consumption. Is this going to happen again to the American economy as a result of a crisis in Europe? Absolutely not. The commitment to European financial instruments is no longer there. So what will happen is that American authorities, fortified to a certain extent by political experience and Dodd-Frank, will be obliged to take the opportunity they missed when President Obama took office and appointed Timothy Geithner Treasury secretary and reappointed Ben Bernanke. That is to say, instead of bailing out these zombie institutions, with which we have been afflicted for the past five years, they will have an opportunity to resolve them. And that is a huge undertaking, but one that I believe to be absolutely in the interest of a more stable and fa ir economy in the United States. The effect on business? I bet Germany will continue to ship BMWs to the United States. [my emphasis]
And with a euro collapse, the dollar will benefit by becoming even more attractive as a safe haven:

The dollar will rise. We h ad a crisis of American finance that produced a rising dollar in 2009 as the whole world fled to United States Treasury bills and bonds. The euro's position as a reserve currency would collapse. Of course it's not going to be replaced immediately by the drachma, or even the French franc, and the American household
will be able to travel in Europe with an ease not seen since the Fifties. Might even be
able to ski in Switzerland!
With those responses, I'm guessing he's probably trying to goad his European fellow panelists with the realization of how a eurozone collapse and the resultant weakening if not destruction of the European Union would permanently weaken Europe's relative influence in the world.

I'm guessing he would have some concern in practice about a big rise in the dollar in the midst of the current lingering depression conditions, since a weak dollar would presumably boost the US economy by stimulating exports.

This is a really informative discussion. Thanks almost exclusively to Galbraith. His hapless fellow panelists mostly provide foils for him to elaborate his ideas. Although I'm pretty sure that's not how Harper's hoped it would come across.

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