Posted by: Dirk | May 19, 2014

Barroso’s former principal advisor (2011-14) turns against austerity

Philippe Legrain has been the advisor to José Manuel Barroso from February 2011 to February 2014, according to Wikipedia. German daily tageszeitung (taz) features an interview with him in today’s paper. In April, he gave an interview to The Independent. Here is an extract:

Then the financial crisis and the panic in the eurozone threw a spanner in the works and the escalator went into reverse. The long slump and governments’ subsequent budget cuts have exposed the chasm between the fortunate – and sometimes undeserving – few who continue to thrive and the majority who are struggling. Many people have fallen far – not least the 26 million Europeans who are out of work, many of them for a long time. In Britain, real wages have fallen by nearly a tenth. A typical British household is no richer than a decade ago. Even the much-vaunted German escalator has stalled. The average German earns fractionally less than 15 years ago.

It is very interesting that someone with a first hand experience in European decision making gives an account like this. In the interview with taz, Legrain says that he told the European Commission it would be facing a banking crisis, that Greece was an exception. He suggested to cut down Greek sovereign debt and start an investment programme. Apparently, Barroso decided to reject this approach and follow the German government. The whole affair – the European banking crisis – seems to have been very emotional, as the Financial Times reports:

To the astonishment of almost everyone in the room, Angela Merkel began to cry.

Das ist nicht fair.” That is not fair, the German chancellor said angrily, tears welling in her eyes. “Ich bringe mich nicht selbst um.” I am not going to commit suicide.

For those who witnessed the breakdown in a small conference room in the French seaside resort of Cannes, it was shocking enough to watch Europe’s most powerful and emotionally controlled leader brought to tears.

The whole episode shows that there has been a divergence in views and, based on this divergence, different expectations. Apparently, the Germans persuaded themselves that they did nothing wrong and that the other eurozone members were to blame for the crisis. What they did not understand was that Spanish and Irish banks were borrowing tens of billions of euros from German banks, which means that the debt tango that went wrong had a German partner. Also, the wage setting in Germany was too low for the euro area, giving German industry an additional cost advantage and leaving German consumers unable to consume their own production.

It seems that there are two explanations for the botched job of crisis management at the European level. One is political economy, with interests of the groups (creditors, industry, etc.) in Germany put above everybody else. However, an increase in government spending in Germany (or tax cuts) would have helped both European periphery and Germany. Hence, I believe that the other explanation would be an intellectual failure to understand what was going on and how reality could be shaped. A mixture of these two explanations probably comes closest to reality, but that is a job for an economic historian.

Philippe Legrain has just published a new book named European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right. I will follow up by writing a short book review soon.



  1. I don’t believe for a minute that the Germans “did not understand was that Spanish and Irish banks were borrowing tens of billions of euros from German banks, which means that the debt tango that went wrong had a German partner”, especially not as late as 2010, let alone 2011. This is what Spiegel was writing as early as December 2008:

    I believe the German public’s appetite for bank baillouts was exhausted by 2009, the German establishment knew it, and they decided to squeeze the periphery debtors in order to shift blame for the rescue of the German banks, which is what the “rescue” of the peripheral governments has actually been about.

  2. In April 2008, Deutsche Bank president famously held his birthday party in the Bundeskanzleramt, the office of the chancellor in Berlin. I also don’t think that the German government was not informed about the involvement of German banks in the periphery’s bank. It is more a problem of politics than of economics. The losses are outside your political jurisdiction, the gains inside. Ignorance of economics looks better than ignoraning the welfare of fellow Europeans.

  3. Legrain’s timing is impeccable. After all the horses are gone, he’s now thinking of closing the barn door.

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