Spiegel Online is running a piece by Henrik Müller on the increasingly obvious intersecting crises of the European Union in Kontinent der Krisen: Was passiert, wenn Europa scheitert 24.01.2016.

Europa habe sechs bis acht Wochen, um die Flüchtlingskrise in den Griff zu bekommen, mahnt der niederländische Regierungschef Mark Rutte. Und falls das misslingt? Müssten wieder Grenzkontrollen eingeführt werden; das Schengen-Abkommen für grenzenlose Bewegungsfreiheit in Europa sei dann hinfällig.

Jean-Claude Juncker, der Präsident der EU-Kommission, formulierte kürzlich eine Art europäische Dominotheorie: Scheitert Schengen, gibt es keine Freizügigkeit mehr für Arbeitnehmer, der Binnemarkt wäre in Gefahr. Ohne offen Grenzen aber macht der Euro keinen Sinn. So ähnlich sieht das auch Frankreichs Premier Manuel Valls: Er sieht das gesamte europäische Projekt in ernster Gefahr.

Die lange Eurokrise, in der Risse zwischen den Mitgliedstaaten sichtbar wurden, war offenkundig nur das Präludium. Nun werden aus Rissen tiefe Gräben.

[Europe has six to eight weeks to get a handle on the refugee crisis, cautions the Dutch head of government Mark Rutte. And if that doesn't happen? Border controls would have to be opposed again; the Schengen Agreement for borderless freedom of movement in Europe would then be nugatory.

Jean-Claude Juncker, President of the EU Commission, recently formulated a kind of European domino theory: If Schengen fails, there will be no more free movement for employees, the {EU} internal market would be in danger. But without open border, the euro would make no sense. France's Premier Manuel Valls sees is similarly: he sees the whole European project in serious danger.

The long euro crisis, in which the divisions between the member state became visible, was clearly only the prelude. Now the divisions are becoming deep trenches.]

This is probably in part scare talk to try to get EU members to agree to Merkel's demands on accepting refugees.

But it's also a realistic description of the current situation.

The construction of the EU was faulty, and all the participants knew it. The design of the euro even more so, though that probably wasn't as clearly realized by the EU publics. But up until Angela Merkels Chancellorship and the beginning of the euro crisis in 2009, the EU confidently assumed that the desire for political unity would force the member states to fix the design problems in the eurozone and the EU.

Officially - and largely in reality - the measures of economic union were primarily intended to promote political union. The European Coal and Steel Community (ECSC) established in 1952 is a major example of that approach. The ECSC is generally considered to be the first formal agreement that stands as a direct predecessor to today's European Union.

As Yanis Varoufakis et al write in Modern Political Economics (2011):

European leaders, such as Robert Schuman (a leading light in the ECSC's creation), stressed the importance of this coming-together from the (pertinent) perspective of averting another European war and forging a modicum of political union. Creating a shared heavy industry across, primarily, France and Germany would, Schuman believed (quite rightly), both remove the causes of conflict and deprive the two countries of the means by which to persecute it. (p. 312)

But with the onset of the euro crisis and Angela Merkel's successful determination to handle it according to her unrealistic, truly reactionary doctrine of ordoliberalism, the economic unity of the euro became a force that drove the EU nations apart rather than pulling them together.

Europe Day this May 9 may be more an occasion for mourning than for celebration.

The real existing EU: Germany and Greece under the Compassionate Pastor's Daughter

The fight of Alexis Tsipras' government earlier this year against the harsh austerity measures imposed by the German government of the Mitfühlende Pastorentochter Angela Merkel via the Troika of the EU, the ECB and the IMF has highlighted for the world Greece's need for debt structuring.

So it's not at all surprising to see that need articulated by Richard Portes, who "argues that Greece is fundamentally insolvent and that the EU and its attendant institutions should recognize that fact and work immediately toward some form of sovereign debt restructuring." (Fiscal Austerity & Greece New Economic Thinking 09/26/2015)

He has the following to say about those famous "structural reforms" we hear so much about from the advocates of neoliberalism:

Portes also suggests that Greece is a special case, a country that does not lend itself readily to easy reform. There is an ongoing banking crisis, unsustainable debt levels ..., and institutions by and large remain malfunctioning. So whilst Portes agrees with much of the prevailing sentiment that further fiscal austerity will be counterproductive, he also argues that Greece must relent as well: it must signal its commitment to deep structural reform, particularly in regard to the endemic corruption in public administration, tax evasion, and the complex oligarchic system that links political parties to the media and administration. For Portes, no further fiscal austerity makes sense, but he suggests that Greece could aid its cause by reforming product markets and services that are still oligopolistic, with numerous barriers to entry and, hence competition. A second priority is to modernize the legal framework of property rights, investor protection and corporate governance, as well as a massive reorganization and restructuring of the public administration. These, rather than further wage cuts, are the only way to raise the competitiveness of the Greek economy. [my emphasis]

This is one way that the Greek fight this year has helped turn neoliberal rhetoric against itself.

The standard neoliberal recipe for "structural reforms" includes those obvious-sounding elements he mentions: fight corruption, crack down on tax evasion, even reduce the power of "oligarchy." Oligarchy in the neoliberal vocabulary refers to the capitalist class in countries considered in disfavor by whoever is using the term. In favored countries, they are economic elites ("job creators" for US Republicans) who are eager to show their public spirit by engaging in business-government cooperation and public-private partnerships, aka, PPP for the Kool Kids. In disfavored countries, they are oligarchs practicing crony capitalism.

In the Europe of the Mitfühlende Pastorentochter, Greece is the model of a corrupt, oligarchical, inefficient southern European country full of lazy and irresponsible people, needing the tutelage of a superior country with honest business practices and a good work ethic, i.e., Germany.

The dishonest and lawless practices of a great German company like Volkswagen are certainly no sign of deficiency in the superior economic and moral standards of Germany and the EU operating under the direction of the Mitfühlende Pastorentochter! Oh, no, that was just a couple of bad apples, or something. Why, it would be frivolous to even suggest that this was a symptom of a corrupt, oligarchical political system practicing crony capitalism. (Timeline: Is Volkswagen’s ‘Bug’ an EU Feature? Emptywheel 09/25/2015)

Brendan Greeley writing for the well-known radical-left Bloomberg Businessweek (note for Republicans: that's supposed to be obvious irony) asks, Did Privilege Enable Volkswagen’s Diesel Deception? 09/24/2015:

In Italy, the privilege is called potere speciale; in France, action spécifique; in the U.K., it’s a “golden share.” Those are all different names for an ownership stake that gives a government — be it national or local — special powers above any other shareholder. That makes a crucial difference in running a business. Governments, for example, have good reason to prevent jobs from moving to more competitive labor markets. A golden share can help with that.

But for countries practicing the neoliberal dogma in ways other than the ones discussed here so far, this is not crony capitalism or corruption, you see. Not at all. It's responsible gubment support for the Job Creators through public-private partnership. Or something.

In Europe, most golden shares are held in utilities and telecoms, companies that were state monopolies before being privatized. For more than a decade, the European Union, as it expanded and liberalized its common open market, has been trying to undo the persistence of state control. But there is one golden share that has endured, a German law so breathtakingly exceptional it can only be called what it is in fact called—“das VW-Gesetz,” the Volkswagen Law. It is explicitly designed for a single company. Germany has managed to defend its golden share against the EU because VW had built a reputation as a force for good: responsible corporate citizen, pioneer in environmental progess [sic]. [my emphasis]

Fortunately for the EU, Germany staunchly defends the rules for everybody. Well, with the occasional exception:

[Germany's "Volkswagen Law"] eventually brought Germany into conflict with the EU. In 2000 the European Commission — the EU’s executive body—began enforcement actions against the golden shares that remained in the newly privatized utilities in several countries. It acted against Italy for its shares in Eni, the former state oil company; against France, for its holdings in Elf Aquitaine, another oil company; and against the U.K. and its British Airports Authority. Several countries responded by defining their golden shares more narrowly, exercised only to defend a compelling national interest.

“The case of Volkswagen is peculiar because we are not dealing with public services,” says Daniele Gallo of Luiss Guido Carli University in Rome. “We are dealing with a company that sells cars.” In 2007 the commission won a judgment in the European Court of Justice against the Volkswagen Law. Germany, which usually follows the court’s judgments, responded instead with improvisation and duct tape: It struck some of the law’s provisions, which Volkswagen immediately added to its own bylaws. Lower Saxony retained its de facto veto over major decisions. The EC challenged, but the Court of Justice upheld the rejiggered law in 2013.

But this is consistent with the actual priorities of the neoliberal agenda and the actual application of it under the leadership of the Mitfühlende Pastorentochter. Germany gets to angle narrow nationalistic advantages out the EU and especially eurozone structures and processes. And those reforms emphasized by Portes - enforcing tax laws, reducing corruption, limiting the power of the oligarchy - are not the highest priorities.

Portes also notes "that the German government in particular (which consistently insists on 'following the rules') has been a serial violator of the Stability and Growth Pact, and conveniently forgets its own history when it comes to issues of debt forgiveness." The hardline "ordoliberalism" to which the Mitfühlende Pastorentochter adheres does seems to take deficits seriously, though exceptions can be made for the convenience of model country Germany, of course.

The "structural reforms" on which the Troika under the direction of the Mitfühlende Pastorentochter has been very intent on enforcing, most cruelly in Greece's case, are those calling for privatization of public property, deregulation of private business, elimination of capital controls, weakening of labor unions, reductions of wages and salaries and protective legislation for workers (aka, "liberalization of labor markets"), reductions of social services, raising the retirement age and reducing old-age pensions.

Alexis Tsipras' government shows every sign of being serious about improving tax collection and fighting corruption. His former Finance Minister Yanis Varoufakis expects that in his new government, Tsipras is "going to make a big deal out of how uniquely positioned he is to take on the oligarchy and tax evaders because Syriza has no strings attached." (Quoted in David Patrikarakos, Varoufakis told you so Politico EU 09/23/15)

But the Troika has actually impeded them in those efforts in various ways. As Varoufakis puts it, the Troika "is in cahoots with the oligarchs. Since 2010 the oligarchs have been the greatest supporters of the Troika and the Troika has been sheltering them." And presumably will continue to do so. As long as the Mitfühlende Pastorentochter has her way. As Varoufakis says, the July MOU the Troika imposed on Greece has deprived the country of "all the instruments the state has to fight a war against them."

Varoufakis refers to some of the ways in which the Troika, in cooperation with the Greek oligarchy, is impeding one of the very reforms, combating tax evasion, that Portes considers most urgent and emphasizing others (The lenders are the real winners in Greece – Alexis Tsipras has been set up to fail The Guardian 09/21/2015):

Tsipras must now implement a fiscal consolidation and reform programme that was designed to fail. Illiquid small businesses, with no access to capital markets, have to now pre-pay next year’s tax on their projected 2016 profits. Households will need to fork out outrageous property taxes on non-performing apartments and shops, which they can’t even sell. VAT [value-added taxes] rate hikes will boost VAT evasion. Week in week out, the troika will be demanding more recessionary, antisocial policies: pension cuts, lower child benefits, more foreclosures. [my emphasis]

And it's always important to remember the cost to Europe's fundamental democratic system from the midconduct of the Troika and the Mitfühlende Pastorentochter. Varoufakis in The Guardian: "Of course, to get to this point Greek democracy has had to be deeply wounded (1.6 million Greeks who voted in the July referendum did not bother to turn up at the polling stations on Sunday) – no great loss to bureaucrats in Brussels, Frankfurt and Washington DC for whom democracy appears, in any case, to be a nuisance."

The is the real existing EU, currently under management of the Mitfühlende Pastorentochter.

Angie-nomics versus arithmetic

"The idea that Germany is a useful role model depends on Ordoarithmetic — the view that what we need is for everyone to run enormous trade surpluses at the same time." - Paul Krugman, German Weakness 10/12/2014

Everyone running trade surpluses is a great idea. Or would be if those annoying laws of arithmetic didn't get in the way!

"Ordoarithmetic" is Krugman's mocking phrase about Merkel's hard-right "ordoliberalism," which I typically refer to as Herbert Hoover/Heinrich Brüning economics, because that's basically what it is in practice.

I discussed ordoliberalism here in Angela Merkel and "ordoliberalism" 12/06/2011.

I quoted there from an article on the original incarnation of ordoliberalism, also known as the Freiburg School, by Carl Friedrich, "The Political Thought of Neo-Liberalism" The American Political Science Review 49/2 (Jun. 1955). Discussing the book Ortsbestimmung der Gegenwart by one of a leading ordoliberal of the day, Alexander Ristow, Friedrich commented on the anti-democratic bias of the theory:

There is a good deal of elitist thinking among these neo-liberals, with little appreciation of the role of the common man. Many of them - although not Ristow - confuse the common man with the mass man, in the manner of Ortega y Gasset. Although their idea of the constitution as the creative act of instituting the free market economy requires an elaboration of their image of man along democratic lines, showing that he is capable of much "common sense," they do not see democracy in this perspective. There is a general tendency to confuse constitutional democracy with the anarchic majoritarian democracy that the Jacobins read into Rousseau, and to see totalitarian dictatorship as its inescapable fruit. [my emphasis]

Krugman cites Wolfgang Münchau's Germany’s weak point is its reliance on exports Financial Times 10/12/2014. Short version of Münchau's piece: Angela Merkel and her SPD toadies luu-uuve them some Lesser Depression. And that plan to keep it going as long as Heinrich Brüning would have. For Brüning, other political events intervened.

Also from the Shrill One: "We are by no means out of the Lesser Depression." (Krugman, 1937 10/15/2014)

Euro divisions: waiting for the perfect storm?

Sonia Alonso looks at the prospect of a "perfect storm" for the euro crisis in La fractura democrática en la UE: ¿encaminados hacia la tormenta perfecta? El Diario 21.07.2013, appearing in English as The growing economic and ideological breach between Northern and Southern EU countries is pushing Europe towards a perfect storm EUROPPO Blog 07/22/2013.

French jobless hits fresh record - economy Euronews 07/24/2013

She provides charts illustrating the political polarization between the EU "south" and the wealthier northern nations. She is looking at the EU as a whole, not just the eurozone countries:

In Northern EU countries, political trust has remained above its 2002 levels since Lehman brothers filed for bankruptcy in September 2008 (with similar values for the countries inside and outside the euro). Both trust in government and in political parties peaked between September 2008 and February 2009, when European governments and governmental parties were united in implementing anti-cyclical reforms, and when European politicians were talking about the need to re-invent capitalism and to increase the levels of regulation of financial markets, while simultaneously blaming the US and its "free-market-above-all attitude" for what had happened. After this peak in trust, levels went down in 2010 and 2011, the years of the Southern European bailouts, but grew again in 2012, particularly trust in political parties, which jumped from 25 per cent in November 2011 to nearly 35 per cent in June 2012, at a time when austerity policies were well entrenched among EU institutions and Northern European chancelleries. Satisfaction with democracy in Northern EU countries has evolved in a similar way. It is less "bumpy" than political trust, for it is less dependent on contextual factors, but the upward tendency is clear even if modest ...

In Southern Europe, by contrast, trust in governments and parties has consistently declined since February 2009: a drop of 27 points for governments and 15 points for parties in just four years. In June 2012 only one in ten Southern European respondents trusted its government and its political parties. If we look at the last ten years, the gap in political trust between the North and the South of the EU has grown from 9 per cent to 32 per cent for governments, and from 6 per cent to 25 per cent for political parties. Satisfaction with democracy has also dropped quite dramatically. The gap in the last ten years has grown from 21 per cent (already a quite remarkable gap) to 46 per cent. This is what I call the "democratic breach".

The main purpose of the common currency in the official public consensus supporting it was to promote the progress of political union. Now, the problems of the common currency are having the opposite effect. Alonso writes:

This is a classic example of overlapping territorial and economic cleavages. Creditors are in the North, debtors in the South, and the interests of creditors and debtors are totally at odds with each other. A process of internal colonialism seems to be emerging inside the EU. This process is compounded by the "ideological divorce" between North and South mentioned at the beginning. Historically, such overlaps between territory, economy and ideology have seldom been conducive to moderation in the settlement of political and economic conflicts. On the contrary, they reinforce each other in polarised directions. We seem to be heading towards a perfect storm.

Alonso borrows the "ideological divorce" phrase from Lluís Orriols, El divorcio ideológico de Europa El Diario 21.07.2013. Orriols looks at the policies emphasized by the political parties in the EU (not just in the eurozone). It's an inherently subjective approach involving considerable judgment by the analyst, but it provides a useful data point. Orriols work confirms continued general support for the EU, but with more weakening in the countries under the austerity hammer; he includes Greece, Ireland, Italy, Portugal and Spain, also known by the not-exactly-cheerful anagram PIIGS, as the troubled countries, though Cyprus should also be in the list.

He shows support for "free market" and austerity policies declining in the crisis countries and increasing in the rest. It's hard to tell what that means. But it's probably a good guess that the crisis countries want to see the markets restrained more urgently than those in the richer countries, which have promoted a judgmental attitude toward the crisis countries. It's easier to support austerity that is falling on a different country than one's own.

He also finds that the trend in the crisis countries is more toward parties of the left, while the conservative/right parties are gaining support in the less-affected EU countries.

Päivi Leino-Sandberg and Janne Salminen in Should the Economic and Monetary Union Be Democratic After All? Some Reflections on the Current Crisis 12/17/2012 14 German Law Journal 14/2013 give some more detailed background on how this division has developed:

In 1997 the EU Member States complemented the formal EMU structures by concluding the Stability and Growth Pact, an agreement aiming at maintaining the stability of the EMU and consisting of fiscal monitoring by the Commission and the Council, and the Issuing of a yearly recommendation for policy actions to ensure a full compliance with the Pact also in the medium-term. The idea was to make sure that Member States adopting the euro not only met the Maastricht convergence criteria when joining the euro, but continued to comply with the fiscal requirements. An Excessive Deficit Procedure could be launched against a Member State breaching against the maximum limit for government deficit and debt, and if unsuccessful, the Member State could ultimately be placed under economic sanctions.

The deficit and debt limits set under the Maastricht and the Stability and Growth Pact were artificial, economically mostly senseless and poorly enforced. They were largely a reflection of the German One Percent's obsession with "hard money" and the related fear of inflation.

But the weaknesses of the euro currency zone didn't become the occasion for a real currency crisis until the North Atlantic Depression hit Europe in 2008 and the Greek debt problems became public in 2009:

Almost twenty years after the entry into force of the Treaty of Maastricht, it is evident that many of the EMU [European Monetary Unit, i.e., the euro] solutions have proved unsustainable. While the Monetary Union initially provided a number of fat years in the form of stability and a strong currency, the Economic Union did not encourage to a satisfactory level of convergence that would have been needed for the prosperous years to continue. There are many reasons for this outcome: Member States and their financiers operated for a long time in an unexpected way, and more recently the markets have reacted likewise. Some blame the crisis on an 'asymmetric symbiosis between states and banks' [quote cited to Mattias Kumm]. The situation of Greece has been considered partially self-inflicted as regards fraud and corruption, but was made much worse by the global financial crisis. The other Member States were slow in coming to the rescue, and soon after they did, the Greek government debt turned out to be of a size practically untenable for the country [in the neoliberal consensus view], followed by concerns relating to some of the larger Member States. The fundamental problem has been this: the EU has had no appropriate tools that would solve the current crisis, and there is disagreement on what measures would be needed, and whether these should be adopted. Therefore, the crisis itself is caused by the justified suspicion that the EU is not capable of solving the crisis that it is trying to tackle.

To avoid this outcome, a number of quick fixes have been made to save certain Member States and, ultimately, Europe's common currency, from sinking. In handling the sovereign debt crisis various instruments have been used, by the Union and the Member States along the Union in an intergovernmental setting. This has resulted in a web of various mechanisms and parallel processes. There are measures aiming at assisting individual Member States and, subsequently, at stabilizing the whole euro area, on the one hand, and measures aiming at improved economic governance, on the other.

However, these measures were taken in practice largely on the insistence of Germany under Chancellor Angela Merkel, based on her stone-conservative economic doctrine of "ordoliberalism." And they were taken with much regard for democratic niceties, especially in the countries put under the austerity hammer. Merkel effectively deposed the elected heads of government in both Greece and Italy during the course of imposing the austerity requirements, though both are now operating under normally elected parliamentary prime ministers.

Those measures included the inevitable initialed agencies and agreements, notably the EFSF (European Financial Stability Facility) and the ESM (European Stability Mechanism). It also includes the Fiscal Compact of 2012 (Treaty on Stability, Coordination and Governance in the EMU), which I call the Fiscal Suicide Pact because it effectively bans stimulative Keynesian counter-cyclical fiscal policies during recessions and depressions. Which is nuts. They note, "The problem is that, while few of these measures have helped to cure the problems of credibility in any more permanent manner, they have also done little to contribute to the legitimacy of the existing arrangements."

I love that euphemism, "asymmetric symbiosis between states and banks" as a way of saying the banks had the governments under their thumbs.

The paper's synopsis sums it up this way:

As a consequence, a number of 'quick fixes' with little democratic elegance and largely dictated by the markets have been adopted in swift succession to save certain Member States, and ultimately the Euro, from sinking. This has resulted both in a web of mechanisms and parallel processes, but also in serious constitutional challenges that remain largely unaddressed. The European Council’s contribution has been limited to general references to the reforms brought by the Treaty of Lisbon, which have proved to be of a limited use in tackling the current crisis. At the same time, it seems to forget that the said Treaty allocates democratic responsibilities to the European Council, as well, which it fundamentally fails to respond to.

Tags: angela merkel, austerity economics, eu, euro, european union, france, françois hollande, italy, greece, ordoliberalism

EU Commission reportedly rejecting Angie's Greek Post-Democracy 2.0 plan

Die Zeit is reporting that the European Commission is rejecting Angie's proposal to put Greece's budget under direct EU (i.e., German) control, with sovereign debt interest payments given first priority and Greece given no option to threaten default no matter the cost to the Greek people. (Griechenland soll souverän bleiben 28.01.2012)

Athens News reports the same opposition in Germany wants Greece to give up budget control - sources 28.01.2012. But it's not exactly a resounding rejection:

On Saturday, a European Commission representative, called on to comment on press reports referring to a document distributed at the Eurogroup, proposing that a senior eurozone official assumes control of the implementation of Greece's budget, told AMNA that "the executorial task must remain in the full jurisdiction of the Greek government, that is accountable to the country's citizens and bodies. This responsibility lies on the shoulders of the Greek government and must remain so".

This is the "ordo" in Angie "ordoliberal" doctrine. Corporations should be allowed to operate with maximum freedom from government restraint. But when their risks get them in trouble, as the European banks are now with sovereign debt, it's the job of a strong state to step in as the enforcer for the corporations for which the "free market" is failing to meet their expectations. For ordinary workers, not so much. Or not at all.

Tags: angela merkel, eu, european union, ordoliberalism, post-democracy

What makes Angela Merkel tick? (2 of 6): Merkel and Greenspan

In the first post in this series, we saw Angie in 2004 expressing her great admiration for Ayn Rand discipline and then-chairman of the US Federal Reserve. She classified him among the "leading thinkers" of the US.

Alan Greenspan, the Maestro of neoliberalism/deregulation/the Washington Consensus

Uncle Alan was regarded as something like a demigod by the Very Serious People in the US. And obviously by Angie, as well. Bob Woodward wrote a book on him titled Maestro. Even after the tech bubble burst in 2000 and shook confidence in the awesomeness of the stock market, the idolization of Uncle Alan continued. The one time I heard popular financial adviser Susie Orman speak live and in person, she advised her listeners that Uncle Alan as head of the Fed determined what would happen with inflation.

This adulation is partially because of a well-established habit of largely magical thinking about the arcane powers of the Federal Reserve. The late John Kenneth Galbraith was sharply critical of this attitude toward the Fed and its director. In his last book published during his lifetime, The Economics of Innocent Fraud (2004) he explained, "The false and favorable reputation of the Federal Reserve has a strong foundation: There is the power and prestige of banks and bankers and the magic accorded to money. These stand behind and support the Federal Reserve and its member - that is, belonging - banks." Galbraith regarded this high opinion of the Fed and its chairman of any given moment as "our most implausible and most cherished escape from reality" in economics.

Angie has shown a sometimes ruthless pragmatism in her political career in making allies and dumping them, even sticking in the metaphorical shiv when she thought it was to her advantage. I doubt she would express such admiration for Uncle Alan now that events and lack of the Fed Chairman's title have reduced his image to something a little close to that of the dogmatic hack he always was.

But her actions in the euro crisis, and the European banking crisis that always was and still is the core problem behind the euro crisis, show that she maintains her faith in the arcane magic of which Uncle Alan was the High Priest in the United States in 2004.

Greenspan's irresponsible service to the one-percenters, more specifically to financial institutions hawking mortgages, had real consequences for real people:

Galbraith the Younger, Jamie Galbraith, wrote in The Predator State (2008):

Lenders knew, as borrowers did not, that in the wake of 9/11 [2001], short-term rates were unprecedentedly low, and these conditions would not endure. They therefore deliberately substituted adjustable-rate mortgages for fixed-rate mortgages - with the endorsement of then Federal Reserve chairman Alan Greenspan, to reassure the naive public that the exercise was sound. Interest rates then rose, the mortgages started to reset, and hundred of thousands of homeowners found themselves unable to meet the required payments. Moreover, they had no prospect of rapidly increasing their incomes in order to meet their rapidly rising bills. By the late summer of 2007, new foreclosure mortgages were approaching the total number of persons permanently displaced from New Orleans by Hurricane Katrina every month. [my emphasis]

William Black takes a look at the destructive legacy of Uncle Alan in The continuing saga of bank self-regulation and other fairy tales featuring Alan Greenspan Credit Writedowns 01/12/2012. He reminds us of some of the highlights of the Maestro's financial statesmanship:

He supported the repeal of the Glass-Steagall Act despite the conflict of interest inherent in combining commercial and investment banking. He supported the passage of the Commodities Futures Modernization Act of 2000 despite agency conflicts between managers and owners of firms purchasing and selling credit default swaps (CDS).

He opposed using the Fed’s unique statutory authority under HOEPA (1994) to regulate ban fraudulent liar’s loans by entities not regulated by the Federal government. He opposed efforts to clean up outside auditors’ conflict of interest in serving as auditor and consultant to clients. He opposed efforts to clean up the acute agency conflicts of interest caused by modern executive compensation. He opposed taking an effective response to the large banks acting on their perverse conflicts of interest to aid and abet Enron’s SPV frauds.

Black also unpacks a example of the typical pretzel logic of Ayn Rand enthusiasts. Though Uncle Alan formulated it in a less accessible fashion than more credulous disciples, in his argument about how unregulated cutthroat competition produces honesty among business executives. Black boils Uncle Alan's argument down to its ridiculous essentials: "Markets force CEOs to act as if they were honest because a good reputation is essential to the CEO."

He also reminds us of this biographical detail from the glorious Reagan years: "Greenspan was Charles Keating’s principal economic expert and had seen him loot Lincoln Savings in the late 1980s."

The most fatuous part of Angie's 2004 praise for Uncle Alan is her admiration at how he had learned from the tech bubble of the 90s and would therefore prevent such a thing from happening again. Uncle Alan believed that the need for a CEO to have a good reputation was vital to his company's ability to borrow money in the bond market, and therefore the need to borrow would act as an antidote to the temptation to commit accounting fraud. As Black explains:

In any analogous context we would consider Greenspan’s “antidote” claim to be facially insane. If the head of the public health service announced proudly that the service had triumphed because, while one million Americans had died of an epidemic of cholera, the death rate had been so severe and rapid that the epidemic had burned out, we would consider him to be delusional and heartless. The death of the pathogen’s host (us) does not constitute a triumph over cholera. It also does not leave the survivors who were not exposed to the pathogen with additional antibodies that will prevent future epidemics.

Angie may not be running around citing her admiration of Uncle Alan these days. But she's following his example in pursuing a clearly disastrous course.

If we look at the real consequences for the 99% in countries currently suffering from Angie's EU-imposed austerity policies in Ireland, Greece, Portugal and Spain, we can see that Angie is a worthy disciple of that Leading Thinker and Very Serious Person Alan Greenspan, the maestro, the financial demigod.

In practice, it matters little whether Angie really believes the vapid ideology and magical thinking behind her "ordoliberal" economics or whether it's cynical service to the one-percenters. I would guess that there's actually a lot of the first at work, though it's also clear that she knows her policies are directed at comforting the most comfortable. Her words in 2004 on economic policy are consistent with her later policies, up to and including her current EU austerity drive.

Sources on Angie's life and career:

• Gerd Langguth, Angela Merkel.Aufstieg zur Macht - Biographie(DTV; München) 2007 edition
• Michael Lümann, Der Osten im Westen - oder: Wie viel DDR steckt in Angela Merkel, Matthias Platzeck und Wolfgang Thierse? Versuch einer Kollektivbiographie (ibidem-Verlag; Stuttgart) 2010
• Angela Merkel, Mein Weg.Angela Merkel im Gespräch mit Hug Müller-Vogg (Hoffmann und Campe; Hamburg) 2004
• Volker Resing, Angela Merkel.Die Protestantin - Ein Portrait (St. Benno-Verlag; Leipzig) 2009

Tags: alan greenspan, angela merkel, austerity economics, james galbraith, john kenneth galbraith, ordoliberalism

Angela Merkel and "ordoliberalism"

Bloomberg Business Week has a decent article on the euro crisis by Peter Coy, Will Angela Merkel Act, or Won't She? 11/30/2011.

Coy uses a 1914 analogy which seems appropriate to me, because pigheadedness, arrogance and just plain stupidity seem to be playing outsizes roles in the current failure of European leadership in the crisis around the euro which is very likely to take down the EU in the near future. He adds a fire metaphor for good measure:

There is a whiff of August 1914 in the air. That was the month when Europe's leaders stumbled into World War I through arrogance, nationalism, entangling alliances, and myopia. The operating assumption is that Merkel will bend before the onset of a financial conflagration, but there's no assurance of that. In calling for treaty revisions, the Chancellor referred to "construction weaknesses in the euro zone" that need fixing. She perceives herself as a builder, not a firefighter. The question is whether, by the time Merkel has perfected the blueprints for the high-class renovation of Europe she and her supporters crave, the building will have burned down.

I was particularly interested in Coy's reporting on Angie's adherence to an obscure, reactionary economic dogma called "ordoliberalism":

Modern German politics continues to be influenced by a philosophy that originated at the University of Freiburg in the 1930s: ordoliberalism, a conceptual blend of free markets and strong government. It says rigorous regulation is necessary, but only to help the free market achieve its full potential.

Ordoliberals detest stimulative Keynesian policies. Jürgen Stark, a Merkel ally who has tendered his resignation from the European Central Bank's executive board in protest against its easy-money policies [!!!], once said that ordoliberalism theoretician Walter Eucken (who died in 1950) "has been a constant source of inspiration throughout my career." In a speech in Freiburg last February, Merkel said: "Unfortunately there aren't Euckens in all the countries of the world."

Sound money is the polestar of the ordoliberal tradition. [my emphasis]

"Sound money" translates for Angie and her supporters into austerity economics.

Although my trusty 2006 digital edition of the Encyclopædia Britannica seems to be innocent of the concept of ordoliberalism, in its article on "money", the author, Milton Friedman himself, includes Walter Eucken's This Unsuccessful Age (1952) as the first of his brief list of "[u]seful readings in monetary theory". My 2007 German Microsoft Encarta Standard does have a brief piece on Walter Eucken (1891-1950) by Karl Bürgel which describes him as the "Hauptvertreter des Ordoliberalismus" ("chief representative of ordoliberalism"). He even got his picture on a German stamp in 1991.

Friedrich August von Hayek, one of the "Austrian economists" of which self-described libertarians claim to be so fond, served as the chairman of the Walter Eucken Institut. The Institut's website claims Eucken and Franz Böhm as the founders of the "Freiburg School" of economics. It also refers to their trend of thought as "Ordnungsökonomik" (economics of order), which sounds even creepier than "ordoliberalism". Eucken and Böhm edited the journal Ordo: Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft beginning in 1948.

In the post-Second World War era, ordoliberalism actually was a significant influence on the conservative concept of the "social market economy," a phrase identified with Ludwig Erhard, the first Economics Minister of the Federal Republic of Germany (West Germany) who also was a founder of the Walter Eucken Institut. Erhard was part of Merkel's Christian Democratic Union (CDU) party.

Ordoliberalism was also called "neoliberalism" in the postwar period. But today's neoliberalism, and the kind of present-day ordoliberalism with which Merkel identifies, seems to be considerably less concerned with any "social" element of the "social market economy" than most CDU leaders have been. The CDU still has a significant Catholic labor-union wing.

Carl Friedrich discussed the the ordoliberals in "The Political Thought of Neo-Liberalism" The American Political Science Review 49/2 (Jun. 1955). Referring in particular to a work by one of their leading German figures, Alexander Ristow, Ortsbestimmung der Gegenwart, Friedrich wrote:

There is a good deal of elitist thinking among these neo-liberals, with little appreciation of the role of the common man. Many of them - although not Ristow - confuse the common man with the mass man, in the manner of Ortega y Gasset. Although their idea of the constitution as the creative act of instituting the free market economy requires an elaboration of their image of man along democratic lines, showing that he is capable of much "common sense," they do not see democracy in this perspective. There is a general tendency to confuse constitutional democracy with the anarchic majoritarian democracy that the Jacobins read into Rousseau, and to see totalitarian dictatorship as its inescapable fruit. [my emphasis]

Now that sounds more like Angie's approach to democracy in Europe during this crisis!

Tags: angela merkel, austerity economics, freiburg school, ordoliberalism