Sunday, October 19, 2014

Germany and the eurozone depression

"I woke up this morning/And none of the news was good" - Steve Earle, "Jerusalem"

The business press is paying more attention lately to the euro crisis. A report by Stefan Riecher and Simon Kennedy, The European Central Bank May Have to Defy Germany Bloomberg Businessweek 10/09/2014 provide an interesting example of reporting stuck in a narrow model - though not as narrow as German Chancellor Angela Merkel's "ordoliberalism." They seem to think that only central bank action counts as legitimate public stimulus:

The ECB boss [Mario Draghi] ended Europe’s sovereign debt crisis by promising in 2012 to do “whatever it takes” to save the euro. Investors ask if he’s willing to do the same to save the economy. That leaves Draghi under pressure to introduce a full-bore quantitative easing program, one that would make more money available for cheap lending by having the ECB buy government bonds held by the banks, companies, and others. [my emphasis]
What the ECB ended in the summer of 2012 was an acute phase in the euro debt crisis, not the whole thing. Greece, Portugal, Spain and probably Italy are likely to have to take debt haircuts, in the case of Greece about as certainly as such things can be, with the debt-to-GDP ratio up in the 170%-plus range.

They recognize that an economic solution for the eurozone depression would involve an increase in inflation. Duh! They're on the verge of deflation if not already into it. But Riecher and Kennedy seem to think only the mystical arts of the central bank can bring such needed inflation that would accompany economic growth:

An ECB program of government bond buying, by making even more cheap credit available, would promote spending, which in turn would nudge inflation upward. Because of the lower yields on sovereign debt, ECB bond purchases would encourage a weaker euro as investors seek higher returns elsewhere. A soft euro would make exports more competitive and increase the likelihood of inflation as imported commodities such as oil became pricier. It would also help improve the balance sheets of banks. Draghi may have to act soon: How many more back-to-back recessions can Europe take?
Of course, the main barrier to even that modest kind of effort is Merkel and her Herbert Hoover/Heinrich Brüning economics:

The stumbling block is Germany, which doesn’t want the ECB conducting bailouts in disguise. Buying sovereign bonds — as the U.S. Federal Reserve and a string of other central banks have done — is anathema to the Germans. The ECB, by buying sovereign debt from the member states of the European Monetary Union, would come very close to financing individual governments, something the founding treaty of the EMU bans. And if the ECB did buy that debt, it would also likely lessen the pressure on countries such as Greece and France to put their budgets in order and make their economies more productive. , president of Germany’s Bundesbank, has already spoken out against bond purchases and objected to some of the ECB’s recent stimulus steps. If Germany’s economic weakness worsens, the resistance to the program may diminish. The latest data from Germany show a severe contraction in its manufacturing sector. [my emphasis]
Jens Weidmann was an Angie-bot, but he now may be more hardline than Merkel, though not because Merkel has started acknowledging basic macroeconomics.

This is a Euronews report on Germany pressuring France to tighten austerity, EU finance ministers aim to defuse Paris, Berlin row 10/13/2014:

Interest rates on Greek bonds spiked last week, after the ruling New Democratic Party staged a confidence vote as a political stunt to boost their pitiful standing. Niels Kadritzke refers to polls showing that SYRIZA is showing more support right now than the two government parties combined. SYRIZA party leader Alexis Tsipras has made it clear that as head of government he would push for a relief from the draconian economic policies that Merkel has imposed on Greece via the shamelessly compliant EU.

Elaine Moore et al report for the Financial Times (Market turmoil casts further doubt over Europe revival 10/16/2014):

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For the first time this year, Greece’s benchmark bond yields rose above 9 per cent as mounting political instability raised doubts about Athens’ ability to sustain its heavy debt burden. European countries hit hardest by the eurozone debt crisis also saw their borrowing costs jump at rates not seen for a year. ...

Across wider Europe, global investors moved to reallocate their money away from debt issued by countries at the region’s periphery into German bonds, considered the safest and most liquid debt market.

The move sent the yield on 10-year German Bunds to 0.72 per cent during the day – a historic low. Yields on equivalent Italian, Spanish and Portuguese debt rose by about 30 basis points in the morning before falling back.
But Angie loves her some Hoover/Brüning economics, so she's demanding that the eurozone stay the course, as Old Man Bush and Shrub too liked to say when they were Presidents. Stefal Wagstyl and James Politi report (Financial Times 10/16/2014):

“All member states must accept in full the strengthened rules,” she told the German parliament.

As well as rebuffing French president François Hollande and Italian premier Matteo Renzi, who are demanding that Brussels allow them more budget flexibility, Ms Merkel seemed intent on calming the world’s financial markets, which saw some of their sharpest sell-offs of the week on Thursday, including a steep drop in Greek bonds. ...

Paris and Rome have argued that their embrace of structural reforms, such as a recent Italian move to overhaul a sclerotic labour market, should afford them some relief from the fiscal rules.

As the EU’s biggest economy, Berlin has always had the key say in that debate and has privately been urging the European Commission to take a tough line. Ms Merkel said the financial crisis in Europe was “not permanent” but neither had it been “sustainably overcome”.
Merkel is worried about fighting the bond vigilantes and further slam down the purchasing power of eurozone citizens to coax the Confidence Fairy into her long-delayed arrival.

Fighting the eurozone depression? Not so much.

That report gives the Italian debt-to-GDP ratio as 134%. Possibly sustainable with economic recovery, unsupportable in a continued depression.

Horand Knaup and Christian Reiermann write about pressure on Merkel in Out of Balance? Criticism of Germany Grows as Economy Stalls Spiegel International 10/14/2014:

[Finance Minister Wolfgang Schäuble:] "In Germany, we have shown in recent years that solid finances and better growth are not contradictory -- they are necessary complementary elements," he said on Monday in Luxembourg, where he was for a meeting of euro zone finance ministers. He added that calls for state spending were "old fashioned."

Criticism of Schäuble's position is also mounting in Germany. "The decision to balance the budget is a risky one," says Marcel Fratzscher, the head of the German Institute for Economic Research (DIW) in Berlin. "If the economy continues to weaken, that goal will no longer be sustainable."

If the government were to stick to its guns, he argues, it would have to implement budget cuts that would further hasten the crisis. Instead, he argues, the finance minister should take advantage of the "wiggle room" provided in the balanced budget amendment to Germany's constitution "to increase public investments." Under the law, which was approved by parliament in 2009 and goes into full effect in 2016, the federal government is permitted maximum annual borrowing of 0.35 percent of gross domestic product, the equivalent of about €10 billion next year. "That would send a strong message to the German business community and to Europe that Germany takes its responsibility seriously," Fratzscher says.

But Merkel's government seems set on achieving a balanced budget. Even worse, the current government made the very decisions that are now robbing it of the means it would need to counter a possible economic downturn. [my emphasis]

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