Posts Tagged ‘Eurozone’

The View from 2008 – Exploiting Europe’s Strong Potential

I just read an interesting paper from 2008 about the Euro’s tenth birthday approaching but with the Euro debt crisis not yet omnipresent. Apart from a few – in retrospective – amusing nuggets:

“The attractions of the euro should be actively promoted in the non-participating member states. This task is becoming easier as it becomes ever more clearly a pole of stability in the global system.”
“Ten years [after the introduction of EMU] later we can rejoice in the success of the euro and can comfortably predict that it is here to stay.”

The paper is insightful and holds up quite well in part of its analysis. Two aspects especially struck me as interesting:

First, the authors point to an inherent trade-off between attempts to raise productivity: “The sequencing of policy implementation must be right. The unemployment rate in the eurozone, albeit diminishing, ist sill relatively high at around 7%. This needs to be fixed before any measure to boost productivity is undertaken. Indeed, the process of job creation reduces productivity, so there is no point in trying to achieve two conflicting targets at once.” In Spain, productivity has actually risen at exactly the cost laid out above though, an unemployment rate of 7% would be good news in most of Southern Europe in fact. Yet, productivity – considering continued low inflation in the core and accordingly the limited impact of nominal wage changes for  relative unit labor costs in the South – clearly is one of the most important channels through which a sustainable current/capital account rebalancing could occur (one that is not predominately based on the disappearance of domestic demand that is: see here). It is not clear how this circle could be squared then.


There is clear evidence pointing to the rising divergence in real exchange rates in EMU. At the root of this divergence are differences in the growth of national price levels. These are not only a function of cyclical positions but are also determined by the shape of national institutions, and of labour markets above all. Yet, labour markets do not operate in a vacuum. Their functioning is often conditioned by the fiscal and monetary policy regime under which they operate. In particular, the monetary policy regime change that came about with the inception of EMU has altered national unions’ incentive structures. As an example of this, coordinated labour markets in large countries are under a stronger incentive to restrain wage growth than their equivalents in small countries. This is because domestic inflation in large countries affects average eurozone inflation and therefore the ECB’s conduct of monetary policy. Germany for instance, has been pursuing a wage restraint policy in recent years, which has resulted into a significantly below-average wage growth and impressive real exchange rate depreciation.”
This is a really interesting argument as it – if one follows through with it – means that even the creation of German-style collective wage negotiations in the South would not remove incentives for small country unions to ask for higher wage increases than in bigger countries, simply because without them having an impact on the overall Eurozone inflation they raise, exemplary, Portuguese workers’ relative (and absolute) purchasing power. It is not just the make-up of different national wage-setting mechanisms that gives rise – or contributes – to macroeconomic imbalances within the Eurozone but the very existence of – still predominately – national economies.
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Lessons from Latvia Joining the Eurozone

The Instytut Obywatelski has publised the Polish translation of my analysis on the lessons to be learned from Latvia joining the Eurozone. Here is the original English text I had written:

Latvia, just like Poland, is one of the eight countries obliged under the European Treaties to join the Euro. Only last week, its government officially requested entry to the Eurozone, presumably putting an end to a debate that is very much still alive in Poland.

The former Soviet republic paid a heavy economic price for its steadfast pursuit of adherence to the Maastricht criteria during the course of the financial crisis, namely for its strict adherence to the Lat’s peg to the Euro and radically bringing down inflation rates in 2009. Olli Rehn, Commissioner for Economic and Monetary Affairs and the Euro praised Latvia as a „success story“ (link) in his immediate response to the request, an assessment that will strike as ironic those familiar with the still difficult economic situation of the country.

The economic suffering of Latia, induced by this – politically and to some extent – self-imposed stringent adherence to the Maastricht criteria and paltry reaction to it, has been nothing but astonishing. Following a boom in the lead-up to the financial crisis marked by very strong growth figures, the government’s dedication to bring down inflation rates, which had been at 15% in 2008, contributed to a harsh recession peaking at negative 17.5% growth rates in 2009. In parallel, Latvia significantly reduced its annual budget deficit from -9.8% in 2009 to a measly -1.2% in 2012. It also adhered to its peg to the Euro at all times – even if it required a temporary EU-IMF bailout, it has since paid back, from 2008 to 2011 to achieve this.

Latvia thus refused itself the export-growth-inducing and debt-reducing benefits of higher inflation rates and a cheaper valued currency that, say, the United Kingdom currently engages in. It did so essentially exclusively in order to be able to apply for Euro membership as soon as possible.

The costs of this macroeconomics course, this „success story“, were harsh. Not only does GDP per capita still stand below its pre-crisis peak of 2007, unemployment also remains stubbornly high at 14% – even if it is admittedly down from its high point of 21% in 2009-2010. Latvia’s persistent population loss due to the emigration of its educated and young in the pre-crisis years also increased dramatically starting in 2009. While this brain-drain helps to reduce the unemployment rate, it also leaves the country with a formidable demographic problem, at the same time that those who do leave are the ones that could arguably contribute the most in high-productivity sectors.

Apart from this heavy past economic cost exacted on the country, Latvia’s expected strong, catching-up induced, GDP growth will in all likelihood make the ECB’s jointly-set Eurozone interest rate inadequate in the future. This had been a problem in the pre-crisis years due the Lat’s peg already, it is expected to become a problem once again in the near future, especially in light of the sclerotic growth rates elsewhere in Europe. Another potential danger for Latia is that the Baltic state with its asymmetrically high growth rates will be a prime-target for the development of „Spanish“ macroeconomic imbalances, a danger only amplified by developments in Cyprus and the accompanying flows of Russian moneys away from the island and into Latvia.

One may be tempted to wonder why the large majority of Latvia’s political leadership strongly supported – and supports – EMU membership then. Even societally there was limited backlash only against harsh austerity measures even when support for membership admittedly stands at a mere 33% of the population today and has been decreasing steadily. The answer to this question arguably lies with the peculiar economic and political situation of Latvia.

The country, first of all, is in fact a small, open economy mostly interconnected with EU member states – relatively – little affected by the Euro crisis, most notably it has virtually no trade exposure to any of the – Southern and Western – periphery states. In addition and quite ironically, its drastic loss of 24% of GDP in 2008-2009 could actually have been attenuated if the country had been a member of the Euro at the time, as that recession was to a large extent based on a sudden liquidity freeze that the ECB could have helped the country overcome. Latvia on its own could have only addressed it via a massive injection of liquidity – monetary expansion thus – that would have effectively ended its peg to the euro. Joining the Euro will then not result in the same austere economic difficulties parts of Southern Europe are being forced to go through currently. The Latvian budget is stable and sound, its general government debt at 42% is comfortably below the Maastricht criterium, and of course the country is back on the growth track ever since 2011.

Another peculiarty of Latvia is its limited size and emigration-prone young population. The country has in fact had a negative net migration rate throughout the 21st century. This moderate outflow which had edged upwards during the boom years exploded once the crisis really hit. At least some of the – relative – labor market successes must thus be put into the context of Latvians simply packing things up and leaving. This kind of adjustment is hardly feasible for bigger countries of course.

Finally, politically Latvia is dominated by a stark linguistic divide between Latvian and Russian native speakers as well as historic fears of Russia. The majority – Russian-speaker – party in parliament is thus shunned by a coalition of Latvian-speaker parties even with the Prime Minister Valdis Dombrovskis’ party having been trounced in elections in 2011. Deeper integration into the EU is as much a political question as an economic one for Latvia then.

It is questionable then to what extent lessons for Poland may be drawn from the seemingly rather peculiar outlier that Latvia is. Not only does Poland call a far bigger economy its own, it also barely suffered during the 2008 financial crisis and its aftermath even while its unemployment moderately has been rising since.

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Why the Alternative für Deutschland Simply Not Matters

There is some buzz in the English-language media (Reuters, EU Observer, Bloomberg, Spiegel English) about reports of a new anti-euro party having been founded in Germany. This, in combination with the fact that “one in four Germans would back anti-euro party” (Reuters), is seen as spelling trouble for Merkel (see the Telegraph). Observers – especially Anglo-Saxon ones – tend to over-interpretate euro- or integration-sceptic voices, here is why they are wrong.

Most obvious is the misleadingly titled Reuters article above, a proper summary of the cited survey should instead read “one in four Germans could imagine voting for an anti-euro party.” In reality a huge majority of these seemingly eurosceptic voters will line up behind their usual mainstream party of choice in September.

Ambrose Evans-Pritchard in the Telegraph cites Hans-Olaf Henkel as an inspiration for the newly-founded Alternative für Deutschland and then mentions only one of the astounding amount of professors of economics that can be found on the new party’s supporters’ list: Bernd Lucke. Now, the first of these, Henkel, is a common feature on the German TV-talk circuit who holds little political credibility, the other hardly anyone has heard of before. There is little threat of a Grillo-style populist success based on this line-up of old, conservative intellectuals far removed from the public at large. Maybe a Thilo Sarrazin could change that, I doubt even that personally.

What else then? The Pirates of course in a number of Länder and the Free Voters in Bavaria had impressive showings in regional elections that would pose a significant problem to Merkel if it were repeated by a party chipping away at CDU/CSU votes nationally. How realistic is that in the case of the Alternative though? The fundamental problem for this top-down party is that successful protest parties – and this includes Beppo Grillo also, or the American Tea Party – are built bottom-up. Without a broad grassroots net of supporters willing to go out – online arguably in the case of the Pirates – and campaign, no significant electoral support can be achieved. Evans-Pritchard even admits this himself when he cites “Michael Wohlgemuth from Open Europe” in saying that the new party “lack[s] the organization for a quick break-through.”

A few more general remarks then, Merkel is not “already in trouble,” “the Left is [not] slightly ahead” and she is thus not “on course to lose office.” This simply as the SPD, especially under its principal candidate Peer Steinbrück, is very unlikely to look to govern in a SPD-Left-Green coalition making the most likely outcome of the elections either a Grand Coalition or a groundbreaking CDU/CSU-Green one.

Finally, if the history of anti-euro German parties is any indication, the Alternative will face an uphill battle. The Initiative Pro D-Mark, during the decade (1998-2007) it survived more than it flourished, had its biggest success on a regional scale with a measly 2.1% in Saxony in 1999. Note that the domestic economic conditions were much harsher than the situation in Germany today and thus in theory much more conducive to the emergence of radical opposition parties – and indeed the Left arose during exactly this period.

Much ado about nothing then.

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German Inflation Preferences

It has become a commonplace assesment in public debate to blame the German aversion to inflationary tendencies on the country’s hyperinflation of the 1920s, which in turn are believed to have led to the rise to power of Hitler. Even economists have taken to advancing this simplistic essentially cultural theory of historical continuity based on an intergenerational common memory. Yet, not only is this argument inherently flawed, it also replaces sound economic logic with an arbitrarily chosen historical event.

It’s not just that the historical memory argument is inherently faulty though, it also fails to address similar inflationary preferences in, say, Finland and the Netherlands, neither of which went through a comparable period of hyperinflation.

Germany effectively suffered through a period of high inflation beginning in 1914 as the government financed its war effort through a combination of inflationary and debt-based mechanisms. This debt, coupled with the reparations demanded in the Treaty of Versailles and the financial help promised by the government to the strikers in the Ruhr protesting against the Franco-Belgian occupation, enticed the Reichsbank to follow a permissive monetary expansionary course, which led to the 1922/1923 hyperinflation period.

The problem is that it is extremely difficult to find the link between this period and the Nazi Party’s popularity surge and Hitler’s rise to power, which really only set in with the 1930s. As late as 1928, the NSDAP won only 2.6% in national parliamentary elections. The party’s electoral success instead coincided with the contractionary fiscal and monetary policies pursued by German authorities in the face of the Great Depression and of course the resulting exploding unemployment figures (link). If monetary policy is to be blamed for Hitler’s rise to power it should be deflation not the hyperinflation that had occurred ten years earlier.

This especially as the country over the course of its history since has repeatedly allowed for higher inflation rates for political means. The labor market successes of the mid-30s of course were essentially built on an inflationary Ponzi Scheme (link). But the preeminence of political goals over a supposedly inherent and insurmountable inflation aversion may also be seen reflected in the Bundesbank’s attempts to prop up the Dollar at the US government’s pressing in the early 1970s. More recently, the inflationary spike caused by the politically-imposed conditions of the reunified Germanies’ monetary union provides another example.

What low inflation preference countries such as Germany, Finland, or the Netherlands have in common are higher savings and less debt in the private sector. This can indicatively be seen reflected in their international investment positions amongst others.


Now, evidently, higher inflation rates deteriorate savings and benefit debtors at the cost of creditors. In other words Finnish, Dutch, and German – whether household or commercial – investments will lose some of its value if the ECB were to follow a more expansionary monetary policy. Creditors in Southern countries such as Spain or Greece in turn would see their debt load ease to some extent.

There really is no need for ghosts from Germany’s difficult past to explain an inherently quite sensible – if egoistical, if you may – national position.

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Costs of Euro Adoption

Funny how harshly time deals with economics textbooks sometimes.

From: Artis and Nixson, Eds, The Economics of the European Union. 2007.

Gains from Euro adoption come at the expense of relinquishing monetary policy as a stabilization tool. […] One early […] study for the fourt large EU-15 countries found that, in comparison with a free float, EMU would reduce […] output variability.

GDP per capita:



all data from Eurostat

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Bangemachen … heißt das Spiel

Uwe Jean Heuser schreibt in der Zeit (finde keine Onlineversion des Artikel) über die Eurokrise. “Bangemachen … heißt das Spiel [für ihn]. Aber Berlin sollte sich keine Angst einjagen lassen.”

“Sind die Deutschen so blöd, oder tun sie nur so? In kaum verhohlener Form wird die Frage fast täglich gestellt. … Martin Wolf … Paul Krugman … auch von Rom über Madrid bis Paris wird so getan, als seien die Deutschen bloß zu stur, um zu kapieren, dass die krisengeschüttelte Europa mit Geld versorgen müssen.”

Heuser mokiert sich natürlich nicht vollkommen zu unrecht, dass die Politiker anderer europäischer Länder gerne auf deutsche Hilfe zurückgreifen und zum Beispiel Eurobondsvorschläge vor allem bestimmten, südlichen Ländern zum Vorteil gereichen würden. Er argumentiert aber gleichzeitig solcherart einseitig und stupide, dass er seine rhetorische Frage nach der Blödheit der Deutschen (bzw ihrer politikökonomischen Debatte) fast augenblicklich wieder in de Fokus rückt.

Rund eine Billion Euro riskieren die Staaten schon für Rettungsschirme” behauptet Heuser. Eine interessante Rechnung, welche leider nur wenig Bezug zur Realität enthält. Der EFSF wird durch Garantien der teilnehmenden EU Mitgliedsstaaten in Höhe von 780 Milliarde € getragen, welche es ihm wiederum ermöglichen bis zu einem Betrag von 440 Milliarden € Kredite zu verleihen. Da Griechenland (12.387,70 €), Irland  (7.002,40 €) und Portugal (11.035,38 €) bereits Notkredite erhalten, fallen ihre Garantien aus dieser Gesamtrechnung heraus und es bleiben etwas weniger als 410 Milliarden € an möglichen Krediten übrig. Der ESM, welcher übrigens mangels Ratifizierung in einer genügenden Anzahl von Mitgliedsstaaten noch nicht aktiv ist, wird über eine maximale verleihbare Summe von 500 Milliarden € verfügen.

Da könnte man jetzt natürlich großzügig behaupten, dass dies eine Gesamtsumme von 910 Milliarden € ergibt und Heusers Billion deswegen fast in Greifweite sei – was sind schon 90 Milliarden € unter Freunden? Leider werden aber der EFSF und ESM gemeinsam, selbst während sie parallel laufen, nicht mehr als 500 Milliarden € verleihen dürfen. Desweiteren sind diese Zahlen von welchen wir hier sprechen ja nur die maximal verfügbaren Werte, die tatsächlich bereits zugesprochenen (370 Milliarden € + seit gestern maximal 100 Milliarden € für Spanien) und noch mehr die bisher wirklich ausgezahlten Gelder (ca 210 Milliarden €) sind noch mal um einiges niedriger (ich habe jetzt nicht die Muße diese hier neu auszurechnen, alle Zahlen vom Dezember 2011).

Wo ist denn Ihre Billion Herr Heuser?

Folgend auf diesen Anfängerfehler dann wieder diese furchtbare, seit langem diskreditierte Argumentation, dass die “Schuldenbremse,” die “Bedingungen des Rettungsschirms,” das – liberale vermute ich – “Reformieren,” dass die “Länder künftig alles tun, damit sie nicht noch einmal in die Schuldenfalle krachen. Die Krise darf sich nicht wiederholen.

Die hohen Staatsschulden in Irland und Spanien haben also diese Krise verursacht? Lesen Sie Krugman doch bitte wenigstens bevor Sie sich über ihn mokieren! Die spanischen Staatsschulden sind immer noch niedriger als die deutschen, die irischen waren es vor der Finanzkrise auch. Sowohl Spanien als auch Irland als auch Portugal (!) verschuldeten sich weniger als Deutschland von 1999 bis 2007, Spanien und Irland verzeichneten sogar einen Haushaltüberschuss. Die Iren galten natürlich zusätzlich als wirtschaftspolitischer Musterschüler.

Fakten scheinen leider die Polemik der deutschen wirtschaftspolitischen Kommentatoren nur begrenzt zu beeinflussen. Die Krise darf sich natürlich nicht wiederholen, aber was ist denn die wahre Krise? Die Staatsschulden, welche erwiesenermaßen nicht den Ursprung der Finanzkrise bildeten, sondern durch diese größtenteils entstanden sind, oder die unglaubliche Arbeitslosigkeit im Süden Europas, die verlorene Generation der unter 30jährigen, welche Herr Heuser seiner Schuldenmanie opfern will? Ganz zu schweigen vom Wegbruch der deutschen Exportmärkte.

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ECB Subsidizing Banks’ Profits = Free Market Monetary Policy at Work?

Heiner Flassbeck in the FTD reminded me of a development that Sarkozy had hinted at – or hoped for really – back in December already (am not finding that quote). Namely,  that banks are using the ECB’s new liquidity providing rules in order to pull in a healthy profit on European governments’ debt. Thus at a time when those governments could very well use those profits themselves the ECB effectively is subsidizing commercial banks’ net gains at an – indirect – cost to taxpayers. Why are they doing? Mostly for – German – ideological reasons it seems.

Let’s expound. The ECB announced last December that it would give out unlimited long-term – up to three years now – loans to commercial banks at a refinancing rate of 1% and while accepting as collateral virtually anything tradeable – de iure not de facto – on the markets. In other words if I own a Greek government bond currently trading at somewhere around 30%, I may use it as collateral to receive a loan from the ECB of 100% – Disclaimer: I am not sure about this part. Please let me have it if you know any better – of its value at an interest rate of 1%. Now, if I were to invest that money in, say, Italian government bonds currently yielding at somewhere around 6% it’s easy to see, that I will be able to pull in a healthy profit on this transaction. This especially as this operation really functions as a sort of financial perpetuum mobile as I can now use my newly acquired Italian bonds as collateral with the ECB in order to acquire a new loan.

There is a risk involved of course, namely that Italy (or whichever country is involved in any particular scenario) will default or that the Eurozone will fail. If we’re abstracting from Greece though, how likely is that really? And seeing as lots of European commercial banks will go bankrupt anyway, wouldn’t it be worth it to double down and potentially significantly expanding on their profits, while not fundamentally changing their position in a default scenario?

Why is this a problem then? After all this sort of subsidized speculation attenuates the Eurozone crisis by increasing demand for periphery debt on secondary markets. Check Italy, Portugal, Ireland, or Spain bond yields. Think those improved numbers are due to the Fiscal Pact Treaty being discussed? Didn’t think so either. While this effect of the ECB’s increased lending – close to 500 billion € in the first week alone – seems to be rather limited according to Barclay’s, it is the best case scenario that I have laid out here.

To sum up then, the ECB has initiated a long-term, low-interest lending program that a) doesn’t really work and b) lower yields for governments bonds to some extent when it does function properly while creating a subsidized profit to commercial banks. Now let’s say the ECB were instead to spend most of that money on buying up sovereign debt itself. Not only would yields go down far more than they have but the profits accrued on these operations – assuming the Eurozone holds and Italy (or whoever else) does not default – would benefit the ECB itself, which in turn means the European national central banks of course and finally European governments and indirectly their taxpayers.

But then why should one do what makes sense when – German and other – ideology opposes this kind of monetary policy. After all ideological purity is more important than obtaining results. Right?

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