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Should Germany Be Forced Out of the European Union?

by ManfromMiddletown Tue Apr 10th, 2012 at 04:14:11 AM EST

Inside the European Union, there are neither exports nor imports.   If we are to believe the language of the European Commission, there are only dispatches and arrivals. Yet, this terminology obscures an important point. Intra-EU trade statistics show that Germans benefit from a persistent balance of trade surplus. (pgs. 184-187)

If you plot the data out on a map, a clear pattern emerges.  German trade is most balanced with those countries closest to it in the European core, while the further into the periphery one goes the greater the trade deficit these countries have with Germany. (See below.)

So, should Germany stay, or should it go? In the end, I think that there is a case for Germany in Europe, but there are serious, recurring, issues that need to be addressed before this option is viable.

front-paged by afew


It may seem odd to invert the typical proposition by which it is suggested that the countries of the periphery, headed by Greece, should be sent packing from the common European market. Yet, remember this, the institutions of the European Union, including the common market and currency, allow Germany to exploit her latent comparative advantage in a much broader field than the home market alone.  Ultimately, the question which needs to be asked is, "How do we overcome the gap between European core and periphery without handicapping German economic performance?"  

The answer comes in both taking measures now to accommodate the massive hardship in the periphery in the short term, while demanding in the long term that steps be taken to transplant the sources of German comparative advantage in other member states.

Plus ça change

Black Wednesday is no bank holiday, however it should not be an event lost to history.  On September 26, 1992 a group of speculators, most famously including George Soros, set about attacking the fundamentally unsustainability of the mechanism linking European currencies through an assault on the British pound sterling. A little more background here.

First, the collapse of the  Bretton Woods system of fixed exchange rates pegged to the US Dollar, and by proxy gold, presented the threat of competitive devaluation for intra-European trade.  The experience of the 1930s, in which countries attempted to decrease the cost of their products in foreign markets through currency devaluations, haunted the policymakers of that time.  Thus you get an attempt to restore  a system of fixed exchange for intra-European trade after the  loss of a global system provided as a public good by the US government.

Second, the snake in a tunnel makes it show. This was an attempt to peg several European currencies to a ±4.5% variation band against the dollar, i.e. the tunnel, and ±2.25% band against one another, i.e. the snake.  The first attempt ultimately collapse in the early 1970s.  So, round two was a bit more flexible. In the late 1970s, another go was made with the establishment of the Exchange Rate Mechanism (ERM I) which reinstated the snake while removing the tunnel. In practice, German monetary orthodoxy meant that this system pegged other European currencies to the Deutschmark. Thus, we arrive at the installation of the gnomes in Frankfurt as the managers of the European monetary system. I know that other here can point out the details of this all, but I hope to keep this brief and accessible.

This is the system which persists until the early 1990s. Most currencies float within  the   ±2.5% band, while the Italian Lira is allowed to hold to a ±6% band. Britain stands outside the system until 1990, at which point it makes the decision to enter the system. A short two years later, the UK is forced out, with the Italians on their heels, by the speculative attack which culminated in Black Wednesday.

I can't give a full rendering of what happened that day here, but suffice it to say that attempts stay in the snake with the Germans adhering to monetary orthodoxy led to inflation as banks hiked interest rates in order to draw buyers for the Pound.  Moreover, a strong currency put exports under pressure. The parallels to the present crisis should be fairly clear.  For many other EU countries, attempts to adhere to  monetary orthodoxy are broken by the social consequences that they create. Black Wednesday ultimately led European leaders to double down with the creation of the Euro hoping to create a system rigid enough to persist when under attack.  A single currency fit the bill, because it creates a high cost for member countries to opt for exit.

In the present crisis, the inability of the countries of the periphery to devalue means that the underlying issue of the strength of German comparative advantage grows relative to the periphery.   Greece, Portugal, and Spain suffer because the inability to devalue leaves them little ability to close the trade gap. (At least in the short term, the longer term case is more complex.) Simultaneously, the pricing of debt instruments in Euros precludes the resort to debt elimination through inflation.

In the short term, something has to be done to unleash the peripheral  economies from the chains which the gnomes of Frankfurt have bound them by. A "reset" of the rate of exchange between member states is needed.  As the history here has shown, this is by my count is the third time that the deficiency of monetary integration without compensating measures to integrate the economic institutions which underlie comparative advantage in the member states.   This brings us back to Germany.

How is it that Germans have squared monetary orthodoxy with the social consequences this policy creates?

Austerity as Luxury

Repeat after me please.  German monetary orthodoxy is a luxury underwritten by the ability of private economic institutions to dissipate its social consequences. Ok.  What the hell does that mean?  This.

We've seen that monetary orthodoxy forecloses the road to competitive devaluation and stimulus through a program of reflation.  As a result, the social consequences of this hit hard, leading to unemployment, drops in tax revenue, and a whole other mess of other things.

The first point that I would like to make about the German economy, is that there is something to the argument made by the Austerians resentment in the periphery seeks to punish success. Germans are not racially superior, rather they are the beneficiaries of national economic institutions which allow them to compete more effectively in down markets and mitigate the social consequences of monetary orthodoxy.

The analysis that I'm going to offer here is rooted in the Varieties of Capitalism paradigm.  It all comes down to innovation and institutions.  German comparative advantage is rooted in incremental innovation, which means that rather than constantly inventing new types of products, the focus is on figuring out how to improve existing products and manufacture them more effectively. The German model is typically referred to as a coordinated market economy. (CME)  I'll get to more on that in a second.  Rather than falling prey to a destructive notion of creative destruction, CMEs rely upon a drive to creative accumulation.  Incremental improvement means investing in capital equipment/worker skills and cooperating with other producers in the field to lower the cost of inputs, increase the market for outputs, and building the stock of knowledge.

In practice, this is manifested in the role of associations in the German economy.  The system of collective skills training is under attack, but the truth of the matter is this system creates a broader pool of skilled labor which receives a lower wage premium over unskilled workers because the cost of training is borne by the firm, or rather the firms that form a sectoral association.  This system is most highly developed in the metalworking sector, but pops up elsewhere. Collective training regimes mean that a firm can invest in employee training in general skills without worrying that other firms will simply offer higher wages to poach trained employees.  The individual firm is able to lower the cost of training through cooperation within the association.  At the same time, the system allows workers to gain skills at no direct cost to themselves.  In terms of knowledge, collective R&D increases the level of general knowledge in an industrial sector, allowing individual firms to adapt this to their production.  This all is the source of German comparative advantage.

The flip-side is that liberal market economies (LMEs) like Britain forgo this process of creative accumulation in exchange for limiting the ability of established players to get in the way of creative destruction. Sure the Germans may make a better mouse trap, the argument goes, but the British will be able to create genetically engineered viruses placed in bait that will eliminate the need to catch mice one at a time by killing them all in one fell swoop.  Of course this means that those British workers who manufacture mouse traps will be made redundant.  Yes, that poor bastard may find that he now makes a little over 6 quid an hour instead of the fat ten he used to pull down, but hey progress gentlemen.

LMEs embrace creative destruction, in all socially devastating glory.  CMEs dissipate it through a reliance on incremental innovation with the institutions to match. LMEs ride the product cycle, creating the appearance of prosperity for all as new products, only to crash as the product market matures, because they don't do incremental innovation. Spain, Greece, Portugal, all exist in a sort of categorical purgatory  because the economic institutions that they have fit neither mode well meaning that they can't compete against either.  This is the long term issue for those economies.  They have to embrace one model or the other.

The attraction of the German model is that focus on incremental innovation, flattening the impact of the product cycle, is that it mitigates the social consequences of economic downturns, allowing the luxury of monetary orthodoxy.  CME institutions create consistent comparative advantage, on the one hand, and allow the private sector to mitigate the social impact of downturns on the other.   If you've invested money in training a guy how to do complex welding, you want to figure a way to keep him on the job.  If you let him go in a downturn, you have to train someone new to do the same job when the economy perks up. So you try short time work to spread out a limited number of worker hours over a broader number of employees, rather than having the same amount of work done by the number of workers it creates full time employment for. Workers, and the state, benefit, because the cost of adjustment is shared with the firm rather than being placed on the state through the dole, or the worker where no safety net exists.

In the long term, the countries of the periphery must converge on one of these two models.  The German, or CME, model relies on a strong society, or rather sectoral associations, placing the management of the consequences if downturns in the private sector.  The Anglo-Saxon, or LME, model relies upon a strong, either to feed them when they are hungry, or beat them when they are mad. I prefer the German model, because it offers the prospect of equity without reliance upon the state.  The problem with the state as economic manager is that those at the top may opt for the stick as much as the carrot.

What is to be done?

We've identified both a short term and long term issue with the maintenance of monetary orthodoxy while there is a trade gap between European core and periphery.  We can do something about this.

First, there has to be a "reset" to bring the value of the currency into line with change in relative national price levels.

Remember, before the Euro was introduced, the rate of exchange between all users was set.

As a reminder:

A "reset" would essentially serve the same purpose as the many earlier attempts to square the desire to create exchange rate certainty with the reality that national price levels fluctuate too much for this to be stable in the long term.  Long term convergence requires recognition of short term divergence in order to maintain the European project.

Many of the stories surrounding a return to the drachma focus on the hassle of exchanging bills and coins, but the truth of the matter is that the portion of the money supply which has a physical existence is minimal.  I know the graphic is ancient, but the point remains, currency is a small part of the total money supply. What I'm proposing is a bank holiday during which the rate of exchange given in the prior graphic is "reset" to reflect contemporary reality.

For example, consider this example. A product costs one euro prior to the reset.  During the bank holiday, the national rates of exchange are change, first by conversion to the old national currency, then by reconversion at the new rate to euros.  In Germany, that euro is changed back into DM, yielding 1.96 DM.  The rate of exchange is reset so that the DM appreciates to 1.5 DM per euro.  The DM amount is converted back to 1.3 euro.  Meanwhile in Spain, a similar process is unfolding.  Our euro is converted to 166.4 peseta.  The rate of exchange is reset to 200 peseta per euro.  The peseta amount is converted back to 0.83 euro.  Currency in circulation is unaffected, but bank accounts, debt instruments, and prices in the economy are.

So now lets talk impact.  The same 10 euro/hr wage in Germany and Spain has now been changed.  In Germany, the new wage rate is 13 euro/hr, while in Spain it is 8.3 euro/hr.  This has two effects.  First, the increase in German buying power means that workers now have an incentive to increase consumption. Second, the decrease in Spanish wages means that cost dependent work moves to Spain. Operations that had been shed to Turkey or North Africa return to Spain, supplying the European market with cheap exports of consumer goods.

Now bank accounts and debt.  First, if we adhere to a rule of country of residence, this means that the flow of cash from accounts in the periphery to the core is pointless.  If Spaniards moving their money to a German account have their balance converted to peseta, not DM, it doesn't matter where their money is the effect is the same.  Now debt.  If debt is converted in the country in which the underlying asset is located, you essentially create a haircut for holders of peripheral debt in the core.  One euro of debt comes 0.83 euro of debt through the reset.

The point of having a reset is to achieve the ends of leaving the Euro within the system of the Euro so that currency uncertainty is limited It also encourages labor and capital to flow accordingly. The German economy has an underlying comparative advantage that still means that there will be demand for foreign workers, while at the margin work outsourced to extra-EU countries is repatriated to the EU periphery.

This is a short term measure to avoid total collapse, while preparing for long term change.  We talked about skilled Spanish and Portuguese workers migrating to Germany.  This helps to take workers out of the pool of unemployed in one country while filling demand in another. National unemployment programs in the periphery could act  as employment agencies for skilled workers, charging an agency fee per hour above and beyond the wage rate.  Educating those workers cost money, and creating an agency fee allow the peripheral states to pay of the debt created training them.You expedite the process of immigration, but you force the recruiting country to pick up the tab for training.

In the long term, the answer lies in either replicating the economic institutions that underlie German comparative advantage, or compelling member states that adopt the LME model to have the state resources to allow public management of the ups and downs created by it.  It's been the inability to replicate German institutions, and he drift towards the LME model which has really screwed Portugal and Spain over. An EU program to aid in the creation of the economic institutions that facilitate incremental innovation, producing consistent economic performance with a minimum of social hardship would act to converge  the periphery to the model at the core.  This would lessen the need for future "resets."

If we really expect a common European market to persist, complete with the monetary orthodoxy desired by the countries at the core, then the social consequences of this policy must be mitigated.  Unspoken in the current debate is the ability of the German economy to accomplish this through the private sector, which only serves to confuse the underlying issues.  Recognition of this aspect of the discussion around monetary orthodoxy would help the German public realize the disadvantage the Greeks and others find themselves at, while forcing the peripheral countries to address their underlying inability to compete.  And to manage the consequences downturns privately so as to avoid public deficits.

Display:
Is it worth distinguishing between effects caused by the Euro and those caused by the Single Market?

(Forcing Germany out of the Euro vs out of the EU)

by Metatone (metatone [a|t] gmail (dot) com) on Mon Apr 9th, 2012 at 07:24:33 AM EST
I think, in that connection, this paragraph is important:
First, the collapse of the  Bretton Woods system of fixed exchange rates pegged to the US Dollar, and by proxy gold, presented the threat of competitive devaluation for intra-European trade.  The experience of the 1930s, in which countries attempted to decrease the cost of their products in foreign markets through currency devaluations, haunted the policymakers of that time.  Thus you get an attempt to restore  a system of fixed exchange for intra-European trade after the  loss of a global system provided as a public good by the US government.
In other words, it's the fact that EEC "partners" didn't trust each other not to engage in an exchange-rate race to the bottom... and they still don't, to this day.

Where there is no trust, how can you have a monetary union, let alone a political union?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Apr 9th, 2012 at 08:37:38 AM EST
[ Parent ]
Except, of course, that an exchange rate race will not be "to the bottom." All it does is create a spurt of inflation while the competitive devaluation shakes out and the participants discover the exchange rates that can be sustained without challenge. As long as you do it continuously rather than in one big, messy chunk, it doesn't terribly hurt anybody except bondholders. And fuck them.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 10:03:27 AM EST
[ Parent ]
If countries commit to defending their currencies against appreciation only, it's impossible to engage in a race to the bottom. Suppose that Greece wants to game the system and its central bank buys lots of German securities with new fiat Drachma. If the Bundesbank had an obligation to defend the Mark against excessive appreciation, they could just buy off all those drachma with new fiat DM. The net result would be an increase in DM holdings by the Greek Central Bank and Drackma holdings by the Bundesbank. But there need not be any upwards pressure on DM asset prices or indeed on the exchange rate or on German inflation. And the Bundesbank is much bigger than the Bank of Greece.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 04:31:48 AM EST
[ Parent ]
If the Greek CB wanted to put downward pressure on the D-Mark/Drachma exchange rate, they would sell into the open market, not bilaterally to the BuBa. And if the BuBa defended against it, the spread between the Greek attack bid and the BuBa defense bid would go to some arbitrageur, who would accumulate some combination of D-Mark and Drachma, which he would then either spend on goods (giving him a free lunch at the expense of the Greek and German citizens), or (more likely) exchange for other currencies in the open market, putting downward pressure on the D-Mark/Drachma couple.

Eventually one of the principal participants would bow out, the other would set whatever discount it wanted relative to the rate at which the former stopped defending its discount. You would have discovered the exchange rate which neither central bank could feasibly attack (and since the central banks, collectively, have greater pricing power than any speculator, by inference also from speculative attack).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 10th, 2012 at 04:59:38 AM EST
[ Parent ]
But a Germany outside of the Euro is at far less threat of competitive devaluation than a Germany in an EU of a large number of sovereign currencies.

Which suggest that perhaps Germany stepping outside the Euro causes less risk of an outbreak of competitive devaluation than forcing the peripheral countries out one by one.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Apr 11th, 2012 at 06:32:38 PM EST
[ Parent ]
Yes, that is an extremely relevant distinction. A common market with fixed exchange rates will end up with the countries who are least willing to accept inflation as structural surplus countries, while a a common market with floating exchange rates will end up with balanced foreign accounts or, at worst, the countries most willing to accept inflation as structural surplus countries.

In the European picture, the latter is a much healthier construction, because the pro-inflation states lack the political power - both individually and collectively - to collect on such surpluses. And if the diary's central thesis (that anti-inflation inanity is a luxury made possible by political and industrial power) is correct, then this result will generalise.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 10:09:28 AM EST
[ Parent ]
Yup. But the ill will caused by the failure of the single currency will probably render the survival of the common market politically difficult in the short to medium term.

If we do not throw out the water soon, the baby will go with it.

by cagatacos on Mon Apr 9th, 2012 at 10:25:07 AM EST
[ Parent ]
Given that the historically dominant failure mode of gold standard economics is fascism, I guess I can live with losing the single market if that is all we lose.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 10:28:21 AM EST
[ Parent ]
I doubt that the single market is all that is lost.  Remember that the European project began as an economic solution to a political problem.  The integration of European coal and steel markets was to make war unthinkable between European states.

Moreover, intra-EU trade is as often in components as in finished products.  Supply chains cross national boundaries.  Restablish border controls and tarriffs and you wreak havoc on the whole economy built upon the assumption of open borders.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Apr 9th, 2012 at 02:23:30 PM EST
[ Parent ]
The integration of European coal and steel markets was to make war unthinkable between European states.

True, and from a German perspective the current arrangements make war, already see as wasteful, now totally unnecessary. They have preferential access to and economic dominance over the bulk of the continent and they have a de facto veto over any political challenges from other countries as their second line of defense, the first line of defense being the intellectual capture which includes the vast preponderance of the elites of the member states of the EMU. And few can see any fingerprints indicating how this came to be.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 9th, 2012 at 04:10:53 PM EST
[ Parent ]
The question is whether the rollback would be chronological or not. One could roll back to the Single European Act plus Schengen and then what would be lost would be the layer of political integration since 1990, and none of the economic integration.
With hindsight, everything since the Single European Act was a bridge too far, politically. The Common Foreign and Security Policy and Cooperation in Criminal Justice never quite took off, the Euro is imploding under the weight of unrestrained internal trade imbalances, and Schengen is in the process of being rolled back.
(September 21, 2011)

Alternatively, the political layer could be retained and the economic union jettisoned. This would keep the useless Common Foreign and Security Policy, the Cooperation in Criminal Justice (including the European Arrest Warrant), the undermining of "the Community method" in favour of the "Intergovernmental Method"... But this is highly unlikely because the economic integration is deeper.

None of this will happen, the most likely scenario is the creation of a new layer of Kommissars (ECB President, EuroGroup Chairman, Council President, EFSF/ESM Chairman, Trichet's award-winning budget-dog-in-the-manger czar...) to the detriment of the "Community Method", a disempowerment of the European Parliament, more police cooperation to clamp down on popular discontent, a beefed-up Bolkestein directive to usher in an EU-wide labour race to the bottom, and the general penury that Merkel has promised us "for decades". I even foresee Merkel being Chancellor for 16 years (until at least 2020).

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 04:53:40 AM EST
[ Parent ]
In the immortal words of Jean Claude Juncker: "the Euro will outlast us all".

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Apr 9th, 2012 at 10:29:00 AM EST
[ Parent ]
There is, however the question that I would ask is why the decision to start dismantling things would end at the euro. European integration is a project carried forward by momentum, e.g. Monnet's bicycle. Unless you keep moving forward, you fall off. Moreover, forcing Germany out of the euro does nothing to solve the underlying divergence between the core and periphery.  It simply provides a mechanism to close the gap which is not without cost.  Devaluation forces up the cost of imported goods.  This is equally true of inputs, fuel and other natural resources, as well as finished products.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Apr 9th, 2012 at 02:18:32 PM EST
[ Parent ]
Well, currently "industrial policy" inside the EU is largely against EU law. At least if the EU is dismantled, the periphery could try to rebuild their economies. Without that they are sunk.

So I guess I agree, the European Union is a dead man walking.

More interesting is the realisation that there's no reason to believe that Chinese and Indian economic growth will not start to bite into the low end of Core country manufacturing.

And without the captive market of the periphery, it's hard to see how they prosper. They'll be on the sharp end of trying to out-mercantile China, but with much reduced influence at the WTO.

I'm not normally a purveyor of doom, but I don't see how things get better without some realisation that what will be needed is a rebalancing of world trade and Europe can only be part of influencing that if they stand together...

by Metatone (metatone [a|t] gmail (dot) com) on Mon Apr 9th, 2012 at 03:16:05 PM EST
[ Parent ]
Well, currently "industrial policy" inside the EU is largely against EU law. At least if the EU is dismantled, the periphery could try to rebuild their economies. Without that they are sunk.

I disagree. I think that you are thinking of industrial policy in terms of protectionism, or more innoccously, trade policy, which is most often thought of as a zero-sum game.

Another way of thinking of industrial policy is considering how to create the institutional conditions that allow firms to compete more effectively. The EU does this in spades, what else is the purpose of cohesion and structural funds?  Moreover, the point of a broadened market is to allow an increased division of labor. Specialization matters.

Prior to the arrival of the NICs on the scene in the 1970s, the content of trade, where the volume was highest between developed countries, lay in intra-industry exchange. Rather than exchanging carrots for cars, trade was in things like catalytic converters for chasses. I would say the question is how to build a better chassis or catalytic converter rather than how to market than how to protect a domestic market for them.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Apr 9th, 2012 at 11:35:26 PM EST
[ Parent ]
One requires the other. In order to develop the institutions and technology, you need a production infrastructure. If your current comparative advantage is vacation homes, hotels and tropical fruit, such production will not be possible unless protectionist measures are part of your industrial policy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 10th, 2012 at 04:17:33 AM EST
[ Parent ]
What you need is import substitution. The periphery's dependence on imported hydrocarbons is going to weigh on the economy like a stone. And manufacturing is not the biggest culprit here, but the dependence on road transport.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 04:21:06 AM EST
[ Parent ]
Yet another case of neo-lib malaise.

In Portugal, as a "cost saving" measure public transport is being dismantled. Trains, but also buses.

The collectivist thing of public transport... it not modern, it is not individual. Trains are seen as an "expensive" anachronism from the past. The future, you see, is cars, cars cars.

Despair

by cagatacos on Tue Apr 10th, 2012 at 06:52:03 AM EST
[ Parent ]
And putting luxury taxes on fancy cars is not allowed.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Tue Apr 10th, 2012 at 07:05:16 AM EST
[ Parent ]
Of course not, that's against the single market.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 07:10:23 AM EST
[ Parent ]
  1. Show me a nation (not a region) who has grown their industrial base without either mineral wealth or protectionism - then we can discuss if the periphery can take up that route.

  2. Right now EU law prevents individual companies subsidising companies beyond a certain level of tax breaks.

As such, the chances of say Greece, developing an indigenous solar industry (which the desperately need and they have the climate for) are low...

When you have a low industrial base, the only meaningful way to grow it is either from some advantage (e.g. low labour costs, convenient transport links, etc.) or by subsidy measures that help some portion of the supply chain of companies get off the ground to the point where you have a cluster.

That's the unmentioned part of your "institutional conditions" which I know you're very well aware of. The auto industry is a classic example, which you've talked about before.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Apr 10th, 2012 at 08:55:12 AM EST
[ Parent ]
We keep running circles around the elephant in the room, which is that the EU needs to fund accumulation of productive capital in the periphery in ways that imply net fiscal transfer from the core, or "surplus recycling", or "repatriation of surplus".

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 09:04:10 AM EST
[ Parent ]
Well, yes. That is what solidarity implies.

But in my first post I was trying to make the point (about Europe standing together) why solidarity is good for the core as well as the periphery.

Sadly, I don't think anyone from the core countries would believe it.

And that's why Europe is a dead man walking.

Finally though, I'd make the plea that we don't forget that at some level this current crisis is artificial. There are structural problems and they are what we've been talking about (fiscal transfer, solidarity, etc.) but the crisis of the moment is pretty simply the failure of the ECB to act as the lender of last resort. As such the markets are attacking countries one by one, simply because they can...

by Metatone (metatone [a|t] gmail (dot) com) on Tue Apr 10th, 2012 at 12:01:21 PM EST
[ Parent ]
Well, yes. That is what solidarity implies.

Instead, what's being proposed is that structural funds be used to pay down debt to the core countries. That's the extent of solidarity in Europe.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 12:25:12 PM EST
[ Parent ]
Finally though, I'd make the plea that we don't forget that at some level this current crisis is artificial. There are structural problems and they are what we've been talking about (fiscal transfer, solidarity, etc.) but the crisis of the moment is pretty simply the failure of the ECB to act as the lender of last resort. As such the markets are attacking countries one by one, simply because they can...
If you wanted to attribute nefarious intent rather than just ideological blindness, the Shock Doctrine narrative would fit like a glove.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 12:27:55 PM EST
[ Parent ]
Ah, the old stupidity vs evil question.

Very hard to resolve that one - especially given the neuroscience of recent years about facts, changing opinions etc.

Although of course, one might question if there's a bias there as well, isn't it to the advantage of conservatives to suggest that it's hard to get people to progress? Doesn't that elevate their attitude to "state of nature"?

by Metatone (metatone [a|t] gmail (dot) com) on Tue Apr 10th, 2012 at 04:18:27 PM EST
[ Parent ]
It is amazing how difficult it can be for smart people to understand simple things that go against their interests or undermine their self image.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 11th, 2012 at 12:26:25 AM EST
[ Parent ]
We keep running circles around the elephant in the room, which is that the EU needs to fund accumulation of productive capital in the periphery in ways that imply net fiscal transfer from the core, or "surplus recycling", or "repatriation of surplus".

You can give a man a fishing pole, but unless you teach him how to fish..... ?

BTW, isn't what you are suggesting basically an enhanced version of structural and cohesion funds?

The problem that I see is that there is an underlying issue of ability to compete that is going to require either massive emigration from the periphery, or the development of a domestic ability to compete in those countries.  The dilemma is not entirely unlike what happened as the US market was integrated in the 20th century.  The South couldn't compete, so there was massive emigration to the North. Finally, the development of a strong federal government allowed the redistribution of wealth from the North to the South.

But that sort of redistribution required a strong federal government, which the EU does not currently have.........

Let's be honest, the development of that sort of capacity in Europe was basically mean the end of the sovereignty of the nation-state in Europe.

Do we really believe that the Czechs and other euroskeptics will allow that?  

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Tue Apr 10th, 2012 at 07:25:41 PM EST
[ Parent ]
Well, let's destroy the economies of the Mediterranean, the Baltics, and whoever else...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 07:28:37 PM EST
[ Parent ]
Monetary union means the loss of sovereignty, because the state is no longer definitionally solvent and can thus not engage in a number of tasks conventionally considered a requirement for sovereignty (such as domestic macroeconomic planning).

The only viable options are to dismantle the monetary union or create the federal institutions necessary to perform those tasks. If the latter is politically unpalatable, the former will happen - voluntarily or messily, but it will happen. Because there are quite good reasons for sovereigns to exist, and those reasons don't go away just because you legislate neoliberal fantasies that assume away all the reasons for sovereigns to exist.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 10th, 2012 at 09:48:25 PM EST
[ Parent ]
Monetary union means the loss of sovereignty, because the state is no longer definitionally solvent and can thus not engage in a number of tasks conventionally considered a requirement for sovereignty (such as domestic macroeconomic planning).
As well as

  • deposit insurance for banks
  • granting limited liability to businesses
  • disaster relief
  • access to health care
  • access to education
  • access to legal redress
  • public safety
In other words, monetary union leads to failed states. Greece, for instance, wasn't one three years ago and may well be one a year from now.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Apr 11th, 2012 at 02:03:05 AM EST
[ Parent ]
companiesstates subsidising companies

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 09:05:10 AM EST
[ Parent ]
Oops. Thanks.
by Metatone (metatone [a|t] gmail (dot) com) on Tue Apr 10th, 2012 at 11:53:11 AM EST
[ Parent ]
Well, currently "industrial policy" inside the EU is largely against EU law.

As long as it's not export "vendor finance" followed by government bailouts of the private providers of said finance.

The whole thing is a sick joke.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 04:19:13 AM EST
[ Parent ]
There is, however the question that I would ask is why the decision to start dismantling things would end at the euro.

It won't. You'll see a rollback at least to Maastrict, if not to Rome. Possibly with the partial exception of Schengen, because people have gotten used to being able to travel hassle-free throughout Europe. But the Rome institutions have enough institutional depth and a long enough history that they will probably survive.

European integration is a project carried forward by momentum, e.g. Monnet's bicycle. Unless you keep moving forward, you fall off.

That was true a generation ago. It is not obvious that it remains true today.

Moreover, forcing Germany out of the euro does nothing to solve the underlying divergence between the core and periphery.

Nobody's billing it as a solution to the lack of industrial policy. It's a solution to the current account imbalances, not the industrial underdevelopment.

It simply provides a mechanism to close the gap which is not without cost.  Devaluation forces up the cost of imported goods.  This is equally true of inputs, fuel and other natural resources, as well as finished products.

Yes, they will have to pay full price for imports. That sucks, and you can argue that it's unfair. But getting a discount on your imports by maintaining an overvalued currency gives the countries who support your currency political leverage over you. And as it happens, in contemporary European politics, that's a bad trade.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 04:29:10 PM EST
[ Parent ]
Brilliant socio-economic analysis but I don't find your solution of a monetary "reset" convincing. The precedent of one reset will create continuing speculation about the next with all sorts of destructive behaviours designed to profit from, and avoid, the consequences of it. We will simply have recurring internal devaluation crises. Monetary "reform" doesn't address structural issues.

You are right to focus on the comparative economic advantages of the core relative to the periphery but a solution of that problem at the level of trade associations (the German model) or entrepreneurial innovation (the Anglo model) will not be sufficient. There are economies of scale and benefits of social cohesion, tradition, ideology and accumulated capital which will be almost impossible to overcome.

The larger problem is that we have a fractured political system (at the national level) seeking to managed and increasingly globalism and integrated economic system. The German polity will manage in the German interest, and not necessarily in the best interests of the EU as a while. Appeals to German dependency on the welfare of the periphery will only get you so far.  They are just that: appeals to altruism or a larger vision - when national policy is unavoidably dominated by short term and self interested considerations.

There is currently no effective way in which the collective interests of the EU periphery - or even the rest of the EU versus Germany -  can be articulated through the EU political system. The Commission, Parliament and other EU institutions are simply too weak for that, and have, in any case, been effectively sidelined by a German dominated Council.

A threat to isolate Germany by excluding it from the EU/Eurozone may help to highlight to imbalance of benefits which Member states currently obtain from the Euro/Single market, but there is currently no political will to do so.  Everyone (including Sarkozy) is currying favour from (and seeking to emulate) the German model. Ireland, with a positive balance of trade, may eventually actually succeed and thus create a myth that it is possible for everyone to be like Germany.

I don't see any short cut solutions (such as internal devaluations) happening whatever their theoretical attractions. The only solution is a much stronger European demos and set of institutions capable of governing in the best interests of all, and not just in the interests of Germany and a few stronger members. But at the moment our EPP Governments are leading us in the opposite direction. We are talking 20 year cycles here, and it may take that long for a historic reassertion of the European Ideal after every other solution has been tried and failed.

At the moment there is zero common cause being made by (say) Spain, Ireland, Latvia, Greece. Until an alternative non-German dominated vision of the EU can gain the ascendency we will continue to see the austerity and non-creative social destruction we see now.


Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 9th, 2012 at 08:00:16 AM EST
The Prisoner's Dilemma raises its ugly head once again...

Now where are we going and what's with the handbasket?
by budr on Mon Apr 9th, 2012 at 01:20:59 PM EST
[ Parent ]
I'll echo Frank's skepticism of the practicality of a currency "reset" compared to simply dismantling the Euro (which is not the same as dismantling the EU!). Absent a Eurobancor or (what comes to the same thing) unlimited ECB defense of the new exchange rate, such a reset will be prima facie incredible. For all the same reasons that a devaluation within a fixed-rate system is incredible. Whereas with a Eurobancor or unlimited ECB defense of the new exchange rate, the immediate problem would be solved without the need for a currency reset.

This sort of periodic exchange rate adjustments could work under the Bretton Woods system, because the Bretton Woods system had limited convertibility. There were explicit controls on your ability to exchange currency, which prevents the sort of wholesale speculative attack Soros pulled off in '92/3.

The Scandinavian experience with devaluation in the 1970s is instructive in this regard, in no small part for the contrast it provides: Denmark devalued repeatedly without exiting the exchange rate mechanism, while Sweden exited their exchange rate peg and let their currency depreciate. I can look up the relevant macroeconomic indicators for the period if there is an interest in this, but the overall picture is that Denmark spent a lot of effort and economic dislocation attempting to defend each successive (and successively less credible) peg, while the cost to Sweden was merely a period of moderate inflation.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 10:23:40 AM EST


guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Mon Apr 23rd, 2012 at 09:00:47 AM EST


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