Reprinted from the New Economic Perspectives blog at the University of Missouri-Kansas City
Editor’s Note: William K. Black, author of “The Best Way to Rob a Bank is to Own One,” is Associate Professor of Law and Economics at the University of Missouri-Kansas City, where — according to James Galbraith — “the best economics is now being done.”
In the latest example of the New York Times’ reporters’ inability to read Paul Krugman, we have an article claiming that the “Growing Imbalance Between Germany and France Strains Their Relationship.” The article begins with Merkel’s major myth accepted as if it were unquestionable reality.
“It was a clear illustration of the dysfunction of the French-German partnership, the axis that for decades kept Europe on a united and dynamic track.
In Berlin this month, Chancellor Angela Merkel, riding high after nine years in power, delivered a strident defense in Parliament of austerity, which she has been pushing on Europe ever since a debt crisis broke out in 2009.”
No, not true on multiple grounds. First, the so-called “debt crisis” was a symptom rather than a cause. The reader will note that the year 2008, when the Great Recession became terrifying, has somehow been removed from the narrative because it would expose the misapprehension in Merkel’s myth. Prior to 2008, only Greece had debt levels given its abandonment of a sovereign currency that posed a material risk. The EU nations had unusually low budgetary deficits leading into the Great Recession. Indeed, that along with the extremely low budgetary deficits of the Clinton administration (the budget went into surplus near the end of his term) is likely one of the triggers for the Great Recession.
The Great Recession caused sharp increases in deficits – as we have long known will happen as part of the “automatic stabilizers.” This is normal and speeds recovery. The eurozone and the U.S. began to come out of the Great Recession in 2009. The U.S. recovery accelerated with the addition of stimulus. In the eurozone, however, the abandonment of sovereign currencies and adoption of the euro exposed the periphery to recurrent attacks by the “bond vigilantes.” The ECB could have stopped these attacks at any time, but it was very late intervening – largely because of German resistance. Instead, Merkel used the leverage provided by the bond vigilantes and the refusal of the ECB to act to end their attacks to force increasing austerity upon the eurozone and demands for severe cuts in workers’ wages in the periphery.
Merkel’s actions in forcing austerity and efforts to force sharp drops in workers’ wages in the periphery were not required to stop any “debt crisis.” The ECB had the ability to end the bond vigilantes’ attacks and reestablish the ability of the periphery to borrow at low cost, as it demonstrated. Merkel’s austerity demands and demands that (largely) left governments in the periphery slash workers’ wages promptly threw the entire Eurozone back into a second Great Recession – and much of the periphery into a Second Great Depression. It had the desired purpose of discrediting the governing parties of the left, particularly in Spain, Portugal, and Greece; that gave in to Merkel’s mandates that they adopt masochistic macroeconomic policies.
It is also false that Merkel began demanding that eurozone inflict austerity only in 2009. Merkel wanted to inflict austerity and her war on the workers and the parties they primarily supported long before 2009. What changed in 2009 was that the ECB, the Great Recession, and the bond vigilantes gave her the leverage to successfully extort the members of the eurozone who opposed austerity and her war on workers and the parties of the left.
But it is what is left out of the quoted passage above that is most amazing. The fact that Merkel’s orders that the eurozone leaders bleed their economies through austerity and the war on workers’ wages led to a gratuitous Second Great Recession in the eurozone – and Great Depression levels of unemployment in much of the periphery disappears. The fact that inflicting austerity and wage cuts in response to a Great Recession is economically illiterate and cruel disappears. The fact that the overall eurozone – six years after the financial crisis of 2008 and eight years after the financial bubbles popped in 2006 – has stagnated and caused tens of trillions of dollars in lost GDP and well over 10 million lost jobs is treated by the NYT article as if it were unrelated to Merkel’s infliction of austerity.
“But the French economy has grown stagnant, with unemployment stubbornly stuck near 11 percent and an unpopular government pledging to cut tens of billions in taxes on business, which many French fear will unravel their prized welfare state.”
No, the eurozone economy “has grown stagnant” and produced a Second Great Depression in much of the periphery. If France had a sovereign currency or if the EU were to make the euro and into a true sovereign currency France could simultaneously “cut tens of billions in taxes on business” while preserving the social safety net and speeding the recovery. The same is true of the rest of the eurozone – including Germany where Merkel’s policies have made the wealthy far wealthier and deepened the economic crisis in other eurozone nations by cutting German worker’s wages. The NYT article is disingenuous about both aspects of the German economy, noting only that “the German economy has shown signs of slowing down.” German growth was actually negative in the last quarter and the treatment of its workers weakens the German and overall eurozone recovery.
It continues to be obvious that it is a condition of employment for NYT reporters covering the eurozone’s economic policies that they never read Paul Krugman (or most any other American economist). Consider this claim in the article:
“[Prime Minister Manuel Valls] and Mr. Hollande have alienated many members of the Socialist Party by taking a more centrist approach to economic policy, stoking suspicions that the government is favoring business at the expense of the welfare state.”
I will take this part very slow. By my count Krugman has written at least six columns in the NYT explaining that there actually is a powerful consensus among economists. The “centrist approach” is that austerity in response to a Great Recession is self-destructive. We have known this for at least 75 years. Modern Republicans, when they hold the presidency, always respond to a recession with a stimulus package. Valls and Hollande are moving away from a “centrist approach to economic policy.” They are doing so despite observing first-hand the self-destructive nature of austerity (and proclaiming that it is self-destructive). They do so despite the demonstrated success of stimulus in responding to the financial crisis. They do so despite the fact that the results of the faux left parties adopting these economically illiterate neo-liberal economic policies is the destruction of the parties that betray their principles and the workers. Valls and Hollande are spectacularly unpopular in France because of these betrayals. It is clear why Valls and Hollande wish to avoid reading Krugman’s critique of their betrayals, but theNYT reporters have no excuse.
The reporters do not simply ignore the insanity of austerity and the plight of the eurozone’s workers – they assert that it is obvious that Merkel is correct and that the French reluctance to slash workers’ wages is obviously economically illiterate.
“Just over a decade ago, as Ms. Merkel is fond of noting, Germany was Europe’s sick economy. It recovered partly because of changes to labor laws and social welfare. Mr. Hollande now faces a similar task in an era of low or no growth.”
No. These two sentences propound multiple Merkel myths and assume (1) that France’s (and the rest of the eurozone’s) problems are the same as Germany’s issues “just over a decade ago,” (2) that Germany “recovered” due to slashing workers’ wages and social programs, and (3) that the German “solutions” would work for the eurozone as a whole.
Germany’s “reforms,” which included increasing financial deregulation, have proven disastrous. German banks finished third in the regulatory “race to the bottom” (“behind” Wall Street and the worst of the worst – the City of London). The officers that controlled Deutsche Bank and various state-owned German banks were among the leading causes of the financial crisis. German workers had lost ground even before the financial crisis and have lost even more ground since the crisis began. Inequality has also become increasingly more extreme in Germany.
The current problem in the eurozone is a critical shortage of demand exacerbated by the insanity of austerity and Merkel’s war on workers’ wages. The word “demand” and the concept, the centerpiece of the macroeconomics of recession, never appear in the article. An individual nation in which the wealthy have the political power to lower workers’ wages can increase its exports and employ more of its citizens. This obviously does not prove that the workers were overpaid. Merkel and the NYT ignore the “fallacy of composition,” which is particularly embarrassing because they are neo-mercantilists pushing the universal goal of being a net exporter. As Adam Smith emphasized, we can’t all be net exporters. A strategy that can work (for the elites) of one nation cannot logically be assumed to work for large numbers of nations.
The last thing a society should want in a recession is rapidly falling wages and prices that can create deflation (another word expunged from the NYT article because it would refute their ode to Merkel, austerity, and her war on the worker). If France were to slash workers’ wages to try to take exports from Ireland while Ireland slashed workers’ wages to try to take exports from Spain, which did the same to take exports from Italy the result would be deflation, a massive increase in inequality, the political destruction of any (allegedly) progressive political party that joined in the war on the worker, and a “race to Bangladesh” dynamic.
Germany’s “success” in being a very large net exporter makes it far more difficult – not easier – for any other eurozone nation to copy its export strategy successfully. As a group, the strategy cannot work for the eurozone. The strategy has, of course, not simply “not succeeded.” It has failed catastrophically. Merkel’s eurozone policies have caused trillions of dollars in extra losses in productivity, the gratuitous loss of over 10 million jobs, increased inequality, and the loss through emigration of many of the best educated young citizens of the periphery.
Hollande does not face “a similar task” to Merkel. He faces different problems and Merkel’s “solutions” are the chief causes of France’s economic stagnation rather than the answers to France’s problems.
I repeat my twin suggestions to the NYT reporters that cover the eurozone’s economy. The paper’s management should host a seminar in which Krugman educates his colleagues. Alternatively, come to UMKC and we’ll provide that seminar without charge. None of us can afford the cost of the reporters’ continuing willful ignorance of economics and their indifference to the victims of austerity and Merkel’s war on workers.