Posted by: Dirk | January 18, 2013

Can Germans become Greeks?

in 2011, Thomas Friedman wrote an article titled Can Greeks become Germans? Here is the core of his argument:

That’s why this story is not just about interest rates. It’s about values. Germans are now telling Greeks: “We’ll loan you more money, provided that you behave like Germans in how you save, how many hours a week you work, how long a vacation you take, and how consistently you pay your taxes.”

In 2013, it seems like something is not working in the euro zone. As the European Tribune reports, Germany has reached nirvana by balancing its budget, but it seems like the reward does not materialize:

Suddeutsche Zeitung has an article on the latest fiscal data from Germany, which showed a zero deficit for 2012. The paper quoted Wolfgang Schauble as saying that Germany had already fulfilled the main requirement under its self-imposed debt ceiling four years ahead of schedule. [...]

The bad news is the extent of the economic slowdown. The latest provisional data from the German statistics office show a contraction of 0.5% in Q4, as a result of which overall growth for 2012 came in at 0.7%, after 3% in 2011. The German government has reduced its 2013 growth forecast from 1% to 0.4%. The picture is the same as it always has been. The consumer sector, which had shown some signs of life in the early part of last year, now constitutes the biggest drag on growth.

So, let us turn the clock back to July 2010 and listen to Jean-Claude Trichet, then president of the European Central Bank:

In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. My understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances.

This is exactly why I stress that the euro zone crisis is based on an intellectual failure. The ECB as well as other policy makers and politicians do not understand economics. They think that a simple recipe like “decrease government spending, export more” is enough to solve the euro zone crisis. The increase in government debt is a symptom of the crisis, not a cause. The cause of rising government debt was negative economic growth and bank bail-outs. These are the two problems which must be tackled. They are intertwined, so solutions should address both. Households cannot pay their mortgages in Spain and Ireland at the existing unemployment levels, and that is due to a lack of demand as households consume less and save more. This downward spiral must be stopped and turned around, since at negative growth rates even a government debt of €1 is too high.

It seems that instead of Greeks becoming Germans now the German are becoming Greeks. That means that without government spending Germany will not have positive growth rates. While this will come as a surprise to many, it shouldn’t be. The intellectual case for expansionary austerity was weak from the beginning, and the macroeconomics textbooks say the same thing: don’t cut government spending when a lack of demand is your problem. Pluralism for economics? I’m all for it! (And by the way: many students agree – here is a list of student initiatives for pluralist economics in Germany.)

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