Will the Real Enrico Letta Please Stand Up?

The new Italian prime minister must be a schizophreniac: The one self calls for the end of austerity politics and for a joint growth policy, the other self confirms Italy’s determination to stick to the prescribed consolidation path of the public budget. Which self is stronger, which one dominates – or what is going on here?

Italy’s dismal facts are well known: it has accumulated one of the highest debt ratios in the world (127% of GDP), it had (and still has) massive political problems, unemployment is high and rising, especially for youths, and economic growth Italians know only from looking beyond their borders. The latter is partly due to low productivity, held back by one of the lowest expenditures on R&D, but also to a large extent the result of Italy’s readiness to follow the EU’s prescribed austerity policy. Between 2010 and 2012 Italy has reduced its budget deficit ratio by 3 ½% of GDP, a massive contraction. Its cyclically adjusted (“structural”) deficit is close to zero in this and next year. But the Fiscal Compact forces Italy to reduce its debt ratio further by annually 2% of GDP for the next years and decades. This will require massive – contractionary – primary surpluses (after interest on government debt). It is nearly universal (???) knowledge that this feat is impossible without strong growth. But: further massive cuts in public expenditures or increases in (statutory) tax rates will impede growth, will increase unemployment further, will take any perspective for a better life away from young people. All this will only increase the popular support for the “simplificateurs terribles”, the right-wing populists who promise simple solutions. This will tear the society apart, with all the dismal political and social upheavels this entails.

Letta is in an economic double bind (in addition to his political problems with his coalition “partner” Berlusconi who threatens to leave the coalition and call for new elections any time he does not like what Letta proposes). One the one hand he needs to show the financial markets (which he still needs) and the EU that he is willing to follow their prescriptions (Austerity) and that he will attempt to avoid an EU bail-out at (nearly) all cost. On the other hand, he demands what most sensible economists have been calling for (a growth strategy) as a result of the failure of recent austerity, which has depressed growth and increased unemployment throughout the EU and the Eurozone. Austerity has not even been successful in reaching its intended objective, i.e. a lowering of the very high debt ratios. Letta’s good compliance with the wishes of the financial markets has recently been rewarded by very low interest rates for government bonds.

Letta knows, however, that Italy alone cannot pursue a growth strategy in a sea of austerity-minded EU countries, that for that he needs a joint European growth effort. In this he puts his finger on one of the festering sores of European economic policy: the lack of a truly “European” economic policy, instead of the pursued country-by-country approach. In European economic policy thinking, let along implementation, Europe does not exist as the objective of policy. It is the result of country-by-country prescriptions. Ask any European policy maker whether she knows the fiscal position of the EU or the Eurozone. While he can most likely tell you that of most EU countries, that of the whole Union he will not know. But, how then can the optimal policy mix of fiscal and monetary policy be decided? Right now, all the EU finance ministers’ hopes for growth lie with the European Central Bank, while they themselves are busily running down their deficits (even if recently at slightly slower pace than previously agreed. The upcoming “Pact for Competitiveness” will once more force “structural reforms” on countries, in order to increase their competitiveness vis-à-vis the outside world. But: given an export share of the EU of only 15% of GDP, would it not be advisable to promote and increase the domestic demand, which, after all, accounts for 85% of GDP? It is an illusion to think that the EU (and Eurozone) can “export their way out of the recession”, especially given the slowdown in growth all over the world. We all know that because of high debt levels of households and private enterprise (“Balance sheet recession”) private demand in Europe is stagnating: consumers are not spending, entrepreneurs not investing. In this situation, and given the impossibility for the largest trading block in the world to export its way out of the recession, the only macroeconomically sound policy prescription would be for government to supplement total effective demand, i.e. for governments increasing their deficits, and not cutting them. This is very basic macroeconomics, pursued by Europeans in 2008/09, but now again forgotten and abandoned – in the hope that lower debt levels and “structural reforms” will somehow be “rewarded” with growth. Growth is supposed to fall like manna from heaven, thus economic policy making is being turned into a new religious sect.

Given all this, my initial (amateur) diagnosis of Enrico Letta’s psychiatric illness is wrong. Letta is no schizo, but attempts to serve both his “masters”: the financial markets cum European Commission, as well as his economic conscience. Forza Letta!

Welcher ist der richtige Enrico Letta?

Der neue italienische Regierungschef muß schizophren sein. Das eine Ich verkündet das Ende der Austeritätspolitik und ruft nach europäischer Wachstumspolitik, das andere Ich bestätigt, daß sich Italien brav an die vorgegebenen Defizitziele halten wird. Welches Ich ist stärker, was geht hier vor?

Theory-based Economic Policy Making?

These days, international newspapers and magazines are full with the detection that one of the internationally most influential threshold numbers of the last year, Reinhard’s and Rogoff’s finding that a government debt ratio of more than 90% of GDP will slow down growth significantly (below zero), as based on a faulty handling of the data. Not only the British government, but EU Commissioner Rehn, plus a plethora of international policy makers had cited this 2010 finding as their basic argument that austerity policies were necessary to escape from the 5-year-long depression. And, Reinhard and Rogoff are not just anybody. Both renowned Harvard professors, Rogoff for several years the chief economist of the IMF and policy adviser to many US presidents. So, once again, a “magic number” has been debunked as basis for sound economic policy making.

Schilda in London

Das Zentrum des Vereinigten Königreiches, England und Wales, befindet sich derzeit in einer eigenartigen, selbst verschuldeten Doppelmühle. Einerseits macht Regierungschef Cameron Töne, die einer weiteren Integration in die Europäische Union mehr als skeptisch gegenüberstehen und die vielleicht nach der nächsten Wahl 2014 zu einem Referendum führen, das den Austritt aus der EU beschliesst.

Was’s wiegt, das hat’s: Wiegt 1Liter Wasser noch immer 1 Kilo?

Oder Ist weniger Staat mehr?

Die ideologische und betriebswirtschaftliche Logik hinter der EU-Wasserdebatte

1. Markt ist gut, der Staat ist ein schlechter Unternehmer: dies ist der ideologisch-politische Hintergrund hinter der langjährigen Privatisierungs-Debatte, die jetzt wieder durch die EU-Konzessionsrichtlinie in Österreich neue Nahrung bekommen hat. Die Idee dahinter: Kommunale Betriebe wirtschaften ineffizient, schanzen Aufträge Parteifreunden zu, beschäftigen viel zu viele Menschen (Klientelpolitik), verlangen keine kostendeckende Preise für die angebotenen Dienstleistungen, quersubventionieren über mehrere Bereiche hinweg – und als Monopolisten verlangen zu hohe Preise.
   Diese Argumente, die zT auf Erfahrungen basieren, haben einiges für sich. Als gelernte Österreicher kennen wir viele einschlägige Erfahrungen, die dies bestätigen, allerdings gibt es auch eine Reihe exzellent und transparent wirtschaftender Kommunalunternehmen.

And yet they (the Central Banks) move!

On Dec. 12, Ben Bernanke, President of the Federal Reserve Board (FED) of the USA extended the Fed’s catalogue of objectives by a significant step: as long as the unemployment rate does not fall below 6.5%, the Fed will do anything to stimulate growth, keep the interest at zero and pump around 85 bill $ a month into the economy. During that period, the (former) inflation target of 2.5% my be breached – wow!

On Dec. 13, Mark Carney, the Canadian Central Bank governor and designated Bank of England Governor, lectured that in the future central banks might go away from inflation targeting and orient their policy on nominal GDP (which is the product of GDP at fixed prices and the price deflator). Again, a significant step forward towards growth stimulation and relativization of the inflation target.

Nothing similar has been heard from Mario Draghi, governor of the European Central Bank, who will (at least nominally) stick to its sole inflation target. But, of course, the ECB under Draghi has done a lot to stimulate the EU/EZ economy, especially since he stated that ECB would do anything to prevent a recession. But Draghi on 13.12. also asked for an extension of ECB’s competency, in order to be able to wind down insolvent European banks.

All this is quite remarkable. It means that Central Banks increasingly and more openly see themselves as part of the total economic policy instrument kit. And, it is true, that during the recent crisis the ECB has been the only EU institution fully functioning and taking decisions when necessary. But it seems that now Central Banks also come out into the open with what they have been practicing more or less clandestinely during the past years. To extend their policy objectives to growth, or even more daring, to unemployment reduction, is a significant step – and very welcome. Of course, we know that in Europe there is a long way to go. The German Constitutional Court in Karlsruhe has been very restrictive in its interpretation of such and similar steps and will continue to do so. Mario Draghi is called upon to continue his surreptitious attempts to overcome the Eurozone economic and banking crisis.

 

Und sie (die Zentralbanken) bewegen sich doch!

 Am 12. Dezember hat Ben Bernanke, Chef der Federal Reserve Bank der USA, eine signifikante Erweiterung seines Zielkatalogs vorgenommen: solange die USA-Arbeitslosenrate nicht unter 6.5% liegt, wird die FED alles tun, um Wachstum zu stimulieren, und zwar zuerst einmal monatlich 85 Mrd $ an Cash in die Wirtschaft pumpen und die Zinsen bei Null halten. Das Inflationsziel von 2.5% wird in dieser Zeit nicht mehr bindend sein – wow!

Am 13. Dezember hat (Zufall?) Mark Carney, der kanadische Notenbankchef und designierte Chef der britischen Bank of England, geäußert, daß in Zukunft Notenbanken vom starren Inflationsziel abweichen könnten/sollten (=inflation targeting), und statt dessen sich am nominellen BIP orientieren könnten: dieses setzt sich bekanntlich aus dem realen BIP (also der preisbereinigten Summe der Güter und Dienstleistungen einer Volkswirtschaft) und dem Preisdeflator des BIP zusammen.

Nichts dergleichen war von EZB-Chef Draghi zu hören, der weiterhin zumindest auf dem Papier, am alleinigen Inflationsziel der EZB hängenbleibt, auch wenn seine Behörde massiv zugunsten von Wirtschaftswachstum in den letzten Monaten interveniert und zugesagt hat, alles zu tun, um die Krise zu überwinden. Er hat allerdings auch am 13.12. eine weitere Kompetenzausweitung der EBRD verlangt, um Durchgriffsrechte auf bankrotte Banken zu bekommen und sie abwickeln zu können.

All dies ist bemerkenswert. Einerseits sehen sich die Zentralbanken zunehmend als integraler Bestandteil der Wirtschaftspolitik; in Europa war die EZB sicherlich der einzig funktionierende Akteur, der bislang eine noch tiefere Rezession verhindert hat. Aber inhaltlich wird jetzt offenbar auch konzeptuell nachgeholt, was bereits praktiziert wurde, zumindest in den USA (wo die FED auch ein Wachstumsziel hat) und offenbar auch im künftigen England. Die quantitative Festlegung der FED auf ein Arbeitslosenziel  ist jedoch auch eine veritable und hoch willkommene Neuerung. In Europa wird dies noch dauern, da vor allem das deutsche Bundesgericht in Karlsruhe dies als verfassungswidrig ansieht und die Bundesbank bisher alle „offenen“ Schritte der EZB in diese Richtung blockiert hat.

Mario Draghi wird weiterhin klandestin daran arbeiten müssen, die europäische Wirtschaft zu retten.

Eurozone Future Fiscal Policy Options: a Political and Economic Dilemma

 This note deals exclusively with the fiscal policy set-up and the debt problem, both in the past and the future, but not with the wider economic policy question, whether the predominance of fiscal policy instruments is appropriate or adequate. I have argued frequently that other than budget balance objectives must also be contained in the umbrella of a future successive Eurozone governance.

The Eurozone is faced by a dual problem: how to deal with the crisis and how to prevent similar constellations causing future crises. The first is the “legacy problem”, caused by insufficient fiscal discipline in the run-up to the crisis when the fiscal rules (budget deficit of no more than 3% of GDP, debt levels below 60% of GDP) were continuously violated, and were deepened during the crisis. The “crisis countries”, Greece, Portugal and Ireland all increased their budget deficits and debt levels as a result of stimulus programs and bank bailout programs, but also because they encountered falling GDP levels which by definition drive the debt ratio up. The other Eurozone countries encountered similar patterns, if at a significantly lower level. Most recently, budget balances have been reversed in nearly all Eurozone countries, in the crisis countries as a result of the austerity conditionality conditions imposed by the “donor” countries and the IMF.

If it were not a tragedy, if would be a farce!

The reactions of the EU heads of state, after the negotiations to the budgetary framework 2014-2010 had collapsed on Friday at 16.30 were rather sanguine. Whether the reasons for this unpleasant result are due to the fact that they were happy with being able to start their weekends early, or that some of them see themselves as (temporary) victors in the battle of distribution, is unclear. EU citizens, however, should be greatly aggrieved and upset with their politicians, for several reasons:

Ine, Ane, U – drauss bist Du: Schlittert Großbritannien in einen EU-Austritt?

William Hague, der britische Außenminister, hat Berlin für seine erste EU-Rede als Außenminister gewählt. Er wird ankündigen, daß sein Ministerium einen tiefgehenden Überblick über sechs Bereiche bezüglich des Nutzens der EU-Mitgliedschaft bis Ende Juli 2013 durchführen wird: Binnenmarkt, Steuerpolitik, Gesundheitspolitik, Außenpolitik, Entwicklungszusammenarbeit und Tierschutz und Nahrungsmittelsicherheit. Dies sollen analytische Studien und keine Policy Papers werden, also “ergebnisoffen”.

In or Out? How Much? The UK’s dangerous slide out of the EU

So, William Hague, the foreign secretary of the UK has chosen Berlin to make his first EU-related speech as a foreign minister. He will announce that his department will conduct a very broad review of UK-EU relations on six areas: the single market; tax policy; health policy; foreign policy; international development and animal welfare and food safety. Supposedly, these will be analytical reports, not policy papers, detailing how in these areas EU policy affects UK interests.

Why have we not (yet?) solved the Financial Crisis?

For several months we have been bombarded with new EU and ECB proposals and decisions on reforming one or the other fragment of the EU and Eurozone economy. But still, growth is anaemic, unemployment rising, the double-dip recession deepening, the Greek crisis spinning out of control, social cohesion in Spain, Portugal, Italy and other EU countries disintegrating.

Why, ask many EU policymakers, are our efforts not successful? Have we not done some very innovative and radical things, have we not thrown many of the self-imposed rules and regulations overboard, in order to overcome the crisis? EU citizens also want an answer to these questions, urgently.

I see three major flaws in the EU/Eurozone crisis strategy: one is process-related, two are substantial.

Mario’s Plural Rationality Moment

International gremia have a hard time making decisions. When they finally arrive at a decision, it is invariably a compromise, that is, it is not the “functionally best” decision. Of course, in economics, there are no “functionally best” decisions, because the individual arguments entering into it come from different people/nations, representing different viewpoints or views of the world or of what they deem to be “reality”. These differences may be reinforced by ideologies

Neue (?) Vorschläge zur Bekämfpung der Eurokrise

Am 23. Juli haben 17 prominente europäische Ökonomen (inklusive drei Frauen) im Namen des Institute for New Economic Thinking einen weiteren Beitrag zur Eurokrise geliefert. Neu und wichtig daran ist, daß sie zwischen Sofortmaßnahmen und längerfristig notwendigen Maßnahmen trennen. Erstere sollen so gewählt werden, daß letztere darauf aufbauen können.

Die Straße nach Absurdistan: ein europäisches Politikdilemma

 Die EU hat ja einiges an Krisenbewältigung versucht. Vor einigen Tagen gaben die Eurozone-Finanzminister grünes Licht für ein 100 Mrd €-Paket an Spanien, damit die Regierung ihre Banken retten kann. Als Vorleistung an die EU, die EZB und den IMF hatte Spaniens Regierungschef kurz zuvor ein weiteres 65 Mrd € betragendes „Sparpaket“ gegen die wütenden Proteste der betroffenen Bevölkerung durchgedrückt. Zur selben Zeit reduzierte die spanische Regierung ihre Wachstumsvorhersage für 2013 von ohnedies mageren 0.4% auf minus -0.5%, und bekam als Dank ihre Rechnung von den Finanzmärkten präsentiert: weiteres downgrading und eine Steigerung des geforderten Zinssatzes für Staatsschuld von 7.2%, weder leistbar, schon gar nicht „tragfähig“!