Monday, February 10, 2014

State of the eurozone

Reuters is sponsoring a summit on eurozone issues this week. (Reuters Euro Zone Summit Reuters 02/06/2014) Mike Peacock provides some background in Europe faces electoral, policy crossroads Reuters 02/09/2014: "The threat of deflation is stalking the currency area and increasing pressure on the European Central bank to act."

But as Paul Krugman points out in The Low-inflationary Trap 01/31/2014, it hardly matters at this point from a policy view whether we say they're in deflation or deflation is threatening:

... there are three reasons low inflation is bad for the euro area. First, the euro area as a whole remains depressed, with core interest rates near zero; falling inflation raises real rates, and deepens the slump. Second, many players in Europe, private and public, are burdened by an overhang of debt; inflation makes it easier to work down this debt, so low inflation makes things harder. Finally, Europe still needs large adjustments in relative wages, with wages in Club Med [southern Europe] falling relative to wages in Germany; it’s much easier to do this via rising German wages than falling Club Med wages, so low inflation makes this much harder.

And yes, Europe is very much in a trap. Inflation is falling because the economy is weak, and the economy is being weakened in part by falling inflation. That’s the Japan syndrome. It leads eventually to actual deflation, but to the extent that there’s a red line (or more accurately, an event horizon), it's crossed when monetary policy starts being limited by the zero lower bound, which happened years ago.
Peackock also reports:

Euro zone leaders are still struggling to generate solid economic growth that can eat away at unemployment rates running at 25 percent and more in the hardest hit countries, and efforts to create a banking union to prevent a future financial crisis are widely viewed as having fallen short.

The bloc will also try to get Portugal and Greece back on their feet after Ireland successfully exited its EU/IMF bailout. Athens is likely to need more help to do so.

Italy remains a potential flashpoint. Efforts to reform its electoral law to allow for a more stable government in future, one that can push through much-needed economic reforms, will be critical for it and the euro zone this year.

French President Francois Hollande's ability to push through his own labour and pension reforms in the face of rock-bottom popularity ratings is also a focus.
As so often in the financial press, "labour and pension reforms" as Peacock uses the phrase means lowering wages, reducing labor protections and cutting pensions. That's what neoliberal-speak means by "reforms." Austerity policies, in other words. The opposite of what the eurozone needs.

In the official eurozone view, which Peacock echoes here, "Ireland successfully exited its EU/IMF bailout" and is therefore considered a success story for austerity and neoliberal reforms. Since 2009, Ireland has periodically been touted by defenders of austerity as a success story. And this time like the others it's hot air. Ireland's economy is still facing bad conditions and growth prospects are questionable, at best. They are out of the EU/IMF bailout but not out of the eurozone depression. (Fall in lending ‘hinders recovery’ Irish Examiner 02/01/2014)

Fantasy is running wild in many quarters about the effectiveness of Herbert Hoover/Heinrich Brüning austerity policies, despite the accumulating contemporary evidence since 2008 of how they hamper recovery, which in itself is hardly a new discovery. Henrik Müller writes in Crisis Management: Europe Eyes Anglo-Saxon Model with Envy Spiegel International 01/06/2014:

In Spain, on the other hand, harsh austerity is having an effect. To be sure, the country is still afflicted with a horrific unemployment rate of more than 25 percent. But reforms and belt-tightening measures have significantly improved Spain's competitiveness. Exports are on the rise and the country has a positive trade balance.

Spain should be able to reap the benefits of their exertions -- if the country's financial situation ultimately improves.
It would be comical if the real-world effects weren't so awful: Spain will benefit from austerity if they can ever recover from the depression that continued austerity makes it impossible to recover from.

I thought that was spaced-out until I saw a piece that makes Müller's comments seem also sensible and sober: Alexander Jung, Sowing Fear: World War I and the Seeds of Hyperinflation Spiegel International 02/07/2014.

Some zombie ideas survive in their undead state even longer than Keith Richards is likely to. The opening line of that article says, "The current debt crisis in Europe evokes painful memories of the German hyperinflation." For whom? People who know absolutely nothing about the German hyperinflation of 1923-4? For people who have decided every day for years that today was the wrong day to stop sniffing glue? Did France just re-occupy the Ruhr area over the weekend and Germany started promoting a resistance movement to drive them out? (Which was the biggest part of the story in the 1923 hyperinflation.)

Apparently some editor was awake enough to take out the Hyperinflation! Hitler!!! section that I bet was in there. Which is part of the undead zombie German hyperinflation story. Did something that happened in 1923 give the Nazis (National Socialists on this table from historian Peter Gay) a big surge in popularity? Or was it more likely something that happened around, oh, 1929-30, like a massive depression and DEflation? Gosh, it's so hard to tell from these numbers!

Source: Peter Gay, The Dilemma of Democratic Socialism (1952)

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