Posted by: Dirk | July 17, 2015

Three main wrong beliefs of German economics professors

There is a very nice article on the German economists written by Jacob Soll and published in the NY Times. It describes the disconnect between German economists and basically the rest of the world. Here is one main passage:

Clemens Fuest, of the Center for European Economic Research, who has advised Mr. Schäuble, kept reciting numbers about Greek debt and growth, and said the Greeks had failed at every level over the past several years to manage their debt. He believed they should simply be thrown out of the eurozone. Henrik Enderlein, of the pro-European Jacques Delors Institute, said that Greece should stay in the eurozone, but only if it applied more austerity and better management. Daniel Gros, director of the Center for European Policy Studies, theorized that Greek debt and economic woes could be countered only with better export numbers.

As the author points out, nobody sees Germany as being responsible. Not for creating the euro zone institutions in the first place, not for imposing austerity policies that killed the Greek economy. These policies were not part of the euro zone treaties, they were imposed because some “experts” thought that they would be helpful. When people argue against the “Germany as the victim”-economics put forward by the above mentioned professors, they are seen as left-wing, Keynesian pro-Russia/anti-German idiots. This is a group, which my experience from reading their stuff tells me, is ideological to the core.

Here are the main wrong beliefs of the typical German economist as I see them:

  1. Economics is a morality play
  2. demand does not matter (forgotten lesson: spending creates incomes and not spending destroys income)
  3. the market “works” (full employment independent from macroeconomic policy)

Having successfully erased other schools of economic thought from German universities, “die Herren Professoren” are very self-assured and haven’t taken critique seriously for decades. Without any intellectual competition, the outcome had to be expected. The author of the NYT article writes: “When I mentioned that many saw austerity as a new version of the 1919 Versailles Treaty that would bring in a future “chaotic and unreliable” government in Greece — the very kind that Mr. Enderlein warned about in an essay in The Guardian — they countered that they were furious about being compared to Nazis and terrorists.” Let me just add that this does not surprise me. (With this bunch, it is hyperinflation that scares them.)

It is an unpleasant coincidence that when macroeconomic crisis hits the euro zone the largest country does not have a functioning discipline to rely on. Greece had about 25% unemployment in March 2015, with youth unemployment at 49.5%. What “Europe” will stand for in Greece and other countries will be completely different from the generations before. Europe will have to reinvent itself based on her traditional values or risk a return to the Middle Ages. The NYT article ends with the author pointing out that countries that see themselves as victims – like Germany – make no good leaders. I would like to add that countries are not the actors, but politicians are. Political change could change this assessment very quickly.


Responses

  1. I am quite surprised this piece of garbage you call a blogpost made the frontpage of /r/economy. Maybe because of your scandalous accusations that have no evidence behind them? This piece disgusts me to the point I want to throw up. The amount of prejudiced beliefs that you put forward claiming to have unlimited insight into all of the German economists is just absurd. Your opinion has a right to exist just like every other, and some actions of German political decision makers may prompt a feeling like you describe, but it does not give you the right to label EVERY German Economist as a modern terrorist driven by self interest! The eurozone is a political Union designed to prevent disasters like WW2 and not to ensure a perfect economic environment for everyone and everything to thrive. I suggest you cool down, think about it over a long night of sleep and then reevaluate your statements in this “post”. Have a good one

    • I have long thought whether to allow this comment and finally decided to publish it. It perfectly shows you the climate of “discussion” in the discipline of economics in Germany. I do not know whether the author is an German economist, but if not – why is he so angry? The accusations are astonishing, given what I have written. “[I]t does not give you the right to label EVERY German Economist as a modern terrorist driven by self interest!”, the author writes. Where I did I write that? The author makes up false claims, building a straw man which he then attacks. I would never label EVERY German economist a modern terrorist driven by self interest, and the phrase “terrorist” is not contained in my article at all. I spoke of the “typical” German economist. There are exceptions, which is very well, but they are few, I believe.

      “The eurozone is a political Union designed to prevent disasters like WW2”. Actually, no. That would be the European Union. The eurozone is a monetary union. It was created mainly because the fixed exchange rate regime was deemed to be unworkable, though not in the way to put in danger European peace. Even if the eurozone would be designed to prevent disasters like WW2 – does this justify anything? Does this mean that the euro will do the job? The road to hell is paved with good intentions, it is said. More than once a reform of a social system has led to unintended consequences that led to a (partial) collapse. Look at Argentina’s currency board of the 1990s and its collapse, for instance.

      One of the problems that we actually have is that the eurozone is NOT the “political Union” that you stated. This seems to be one of the main problems, as most non-German economists recognize now and did so during the debates in the 1990s about optimum currency areas. (See http://www.project-syndicate.org/commentary/why-the-greek-deal-will-work-by-anatole-kaletsky-2015-07 for an optimistic view.) The obsession with the dangers of inflation and fiscal spending led to the eurozone being a deflationary system. Paul Krugman has written about this for years, I do not want to repeat the arguments here. The eurozone basically lacks an institution that fights lack of demand, which is the true problem of the eurozone.

      To address the last substantial point, you wrote that the eurozone was “not to ensure a perfect economic environment for everyone and everything to thrive.” I never claimed it would. I agree with that statement. However, Greece is very far away from a “perfect economic environment” because of bad policies on the European level. Austerity had driven the Greek economy into the ground, reducing public demand when it was badly needed. The idea of returning to a public budget surplus without choking the whole economy hit a wall in reality, never mind the talk of ‘expansionary austerity’ (former ECB president Trichet).

      To sum up, I do not reevaluate my statements. Perhaps you want to reevaluate yours?

      • Alright I understand you want to defend your opinion, and that’s your absolute right. I did say label wich was wrong, but the tone of the article provoked my inner beast, so to speak. You did not use the term terrorist but from your wording it felt like you wanted to, but didn’t because it would be incorrect.

        Still the term typical German economist is very, VERY broad and can be interpreted as “almost all” (mathematically speaking all besides finite few). It implies a general common opinion on the topic, which is not true at all. In fact, the party with the highest percentage of economists among their members is the AfD, a party famous for being against the monetary Union and aid for Greece. So I hope you will adjust your beliefs accordingly, as you obviously based them on very few examples.

        I like that you bring up Argentina, which is a completely different economy and in no way comparable to Greece. The most common argument against this claim of social reforms leading to a collapse of economic structures would be Ireland, but again you can’t compare that country to Greece either. Basically there is no universally correct aproach to heal a country’s economy from the outside, as they are all so very different.

        European politicians probably decided this way, because it (Ireland) is the only example we have on foreign intervention in economics in the close past.

        Europe is neither a purely political union, nor is it purely economic. Just the original drive to create an economic Union like the EEC was to prevent war, as WW2 was still so present in the minds of leading politicians back in the day.

        Paul Krugman is widely respected, but I don’t think one man’s opinion, even though well researched, is enough to determine the measures as false. So far, the Euro has benefited the European community in many ways, most profoundly by staying a relevant market compared to bigger economies like the USA, China etc. Also, it made trade within the Eurozone more profitable by increasing the demand for European products within Europe. (contrary to you stating that no institution for that matter exists. The Euro IS that institution). Use figure 1 of this article (http://econ.economicshelp.org/2007/03/benefits-of-european-union.html) as a little statistical evidence of the positive sides.

        Lets keep in mind that Greece partially faked it’s economic performance to join the monetary union. Even before the introduction of the Euro Greece’s economy struggled compared to other European states.

        If we look at Greece’s poor macroeconomic performance in th late 20th century (1991 almost triple the EU average of debt to GDP and almost 5 times EU average of inflation), so before the Euro, we can definetely tell that Greece faced other problems besides the monetary union and fiscal policies.

        Now for my closing remarks I would like to bring your attention as to why German economists are so sensitive on this topic. I am not sure on how far it made international news, but the amount of abuse towards Germans by the Greece was outrageously high. Protestors caricatured Merkel, Schäuble and other leading political figures in Germany as the new Hitler. Just look at the many entertaining quotes from former Greek finance minister Yanis Varoufakis. Labeling the EU fiscal measures as “waterboarding” is only one of the gems.

        Why does this matter? Well, it created a very negative mood amongst Germans, regardless of profession. Most importantly it made an “iron” stance towards Greece an attractive position for politicians as this was met with broad approval.

        I have to finish here because I would like to use my freetime in a different way, this topic is making me feel generally upset and that is not a mood I want to have for extended periods of time. Maybe, if you look at all the facts, you might change your quite drastic view here, maybe it strenghtens your own beliefs as I am “only another German with economic background trying to justify his countries actions”. Take it as you want, and have a nice weekend. Just as a tip in the end, it surely helps to have a collection of strong words that set the tone of your article (imposing, pro Russian anti German idiots, “experts” (very loaded) ideological to the core to name a few) to generate clicks, but it also pulls the attention away from your factual statements and towards the emotional side of what you write. Which is a bad idea in general when discussing economics (that’s what the comment section is for)


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