Unknown Marble contest on Boston Common 1920
The world stock markets big see saw zig zags over the last few days seems to be a harbinger of more to come. Christine Lagarde has warned of a fresh pan-European recession and just this once she may actually have a point.
Not that the old continent ever left the ‘old’ crisis, but since so much time and money was inserted into the recovery hologram, and we’re in a generous mood, let’s pretend and play along: it’s a new recession! That or a triple dip. The terminology is not the main point here; it’s going to be too nasty to occupy ourselves with semantics.
As I was writing about the shame of putting millions of young Europeans into the dark hole of long-term unemployment yesterday in The Disgrace of Sacrificing a Generation, Europe’s leaders met to discuss that very theme. Only, they didn’t.
They went on and on again about wanting the freedom to spend more, either through support from Mario Draghi bond purchases or by simply violating EU budget limits. EU PM Renzi called those limits outdated: it’s new world out there!
What they did say about the jobs issue was that more money was not needed, since there’s an existing $82 billion fund for youth jobs, of which only 12% has been used … That crazy detail tells us two things: Brussels and the European capitals don’t care about their children, as the entire situation also makes clear enough.
It also tells us that they have no idea what to do. But that should never be an excuse. Go figure it out. Want to be a leader? That comes with responsibilities. Having 50% youth unemployment in Spain and Greece should have gotten you guys fired. Some things are simply not acceptable.
But of course all those young people can count on from now on is that they will be even more abandoned. Because the crisis is back. And Germany doesn’t think the party with the biggest debt wins the contest. So southern Europe will drop further into the hole. Until someone steps off the train and decides to have a go at it alone.
And if the next move down is not enough to make that happen then maybe they all deserve each other. Still, looking at Europe now, it should be crystal clear to everyone what a failure the EU has become.
Which is one of the reasons our dear Ambrose had me laugh again today. When Evans-Pritchard starts drawing conclusions from what he hears and reads, strange things happen. This time Germany has drawn his ire. Next week it’ll be someone else.
Ambrose thinks it’s a crime not to bury a country in debt, if you have the opportunity. And he thinks the Germans are a bunch of criminals for not allowing the entire continent to bury its head in the quicksand either.
The words he uses are great: ‘household fallacy’, ‘fiscal fetishism’, ‘the false god of fiscal balance’, ‘the corrosive psychology of ageing’, ‘lumpen-proletariat’, ‘contractionary vortex’.
The Kaiser Wilhelm Canal in Kiel is crumbling. Last year, the authorities had to close the 60-mile shortcut from the Baltic to the North Sea for two weeks, something that had never happened through two world wars. The locks had failed. [..]It has been a running saga of problems, the result of slashing investment to the bone, and cutting maintenance funds in 2012 from €60m (£47m) a year to €11m.
This is an odd way to treat the busiest waterway in the world, letting through 35,000 ships a year, so vital to the Port of Hamburg. It is odder still given that the German state can borrow funds for five years at an interest rate of 0.15%.
There you go. That’s what ultra-low rates to to people. It doesn’t just make them get into debt, it makes them believe it’s crazy not to.
Yet such is the economic policy of Germany, worshipping the false of god of fiscal balance. The Bundestag is waking up to the economic folly of this. It has approved €260m of funding to refurbish the canal over the next five years. Yet experts say it needs €1bn, one of countless projects crying out for money across the derelict infrastructure of a nation that has forgotten how to invest, sleepwalking into decline.
That is, a nation that has forgotten how to invest … with borrowed money.
France may look like the sick of man of Europe, but Germany’s woes run deeper, rooted in mercantilist dogma, the glorification of saving for its own sake, and the corrosive psychology of ageing.
“Germany considers itself the model for the world, but pride comes before the fall,” says Olaf Gersemann, Die Welt’s economics chief, in a new book, The Germany Bubble: the Last Hurrah of a Great Economic Nation. Mr Gersemann says the Second Wirtschaftswunder – or economic miracle – from 2005 onwards has “gone to Germany’s head”.[..]
Marcel Fratzscher, head of the German Institute for Economic Research (DIW), makes a parallel critique (more Keynesian in flavour) in his new book, Die Deutschland Illusion, no translation needed. It is a broadside against the fiscal fetishism of finance minister Wolfgang Schauble, now written into the constitution as a balanced budget law from 2016 onwards…
Balanced budgets are just so 20th century. It’s a new world out there. Ask the Italian PM. Ask Krugman. Ask Ambrose.
It is the self-deception of a country “resting on its laurels”, prisoner of the “household fallacy” that economies are like family budgets, and falsely reassured by the misplaced flattery of foreigners who rarely look under the bonnet at the German engine below.
The German economy has already stalled. [..] Prof Fratzscher accuses Germany’s elites of losing the plot in every important respect. Investment has fallen from 23% to 17% of GDP since the early 1990s. Net public investment has been negative for 12 years. Growth has averaged 1.1% since the beginning of the decade, placing Germany 13th out of 18 in the eurozone (or 156th out of 166 countries worldwide over the past 20 years).
I like that last bit, but I don’t believe it for a second. Besides, I don’t get how a 1.1% growth level since the beginning of the decade – which is 4 years – places you anywhere over the past 20 years. Sounds like apples and passion fruit to me.
Data from the OECD show that German productivity growth slumped to 0.3% a year in the period from 2007 to 2012, compared with 0.5% in Denmark, 0.7% in Austria, 0.9% in Japan, 1.3% in Australia, 1.5% in the US and 3.2% in Korea. Britain has been negative, of course, but that is no benchmark.
Prof Fratzscher says the chief effect was to let companies compress wages through labour arbitrage. Real pay has fallen back to the levels of the late 1990s. The legacy of Hartz IV is a lumpen-proletariat of 7.4m people on “mini-jobs”, part-time work that is tax-free up to €450.
That’s not great, but just about all countries hide a lot of unemployment that way. Nothing specifically German about it.
A fifth of German children are raised in poverty.
That’s horrible, but again there’s nothing specifically German about it. France, UK, US, you name them, the numbers will be similar.
Capital flows within EMU have been a form of vendor financing for buyers of German exports, but it should be obvious that such a structure must reach breaking point – for Germany as well as EMU – if France and Italy buckle to demands and follow Greece, Spain, Portugal and Ireland into wage deflation.
There’s no such thing as ‘wage deflation’, but it’s clear that wages in France and Italy will come under increased pressure (in Germany too). And it’s clear that Germany has used the EU as its own backyard market. And the structure will indeed break.
Europe is already sliding slowly into a contractionary vortex, replicating the errors of the Gold Standard in the 1930s. Doubling down would be calamitous. Germany must move with great care. As Mr Gersemann argues in his book, it is enjoying the last days of a particularly powerful demographic dividend, soon to reverse with a vengeance.
The European Commission’s Ageing Report (2012) said Germany’s workforce will shrink by 200,000 a year this decade. The old age dependency ratio will jump from 31% in 2010, to 36% in 2020, 41% in 2025, 48% in 2030 and 57% in 2045, tantamount to national suicide.
Once more, nothing specifically German about it. Try Japan, China, most of northwest Europe, Italy. Whether every ageing society, every country with falling population numbers, is committing suicide, I don’t know. They will change, and hugely, that’s for sure.
This is a grave failure of public policy over decades. Tax policies and social structures have encouraged the collapse of the fertility rate. Lack of investment has compounded the error.
Wow, Ambrose. Really? Decades of tax policies have made people have less children? You just figured out what has puzzled scientists for all these years! You mean that if the Germans and Japanese and Chinese and Italians had only borrowed more money, and invested it in crumbling canals, we could have had 8 billion people on the planet instead of the measly 7 billion we have now? And our workforces wouldn’t have shrunk, and we could have filled all the jobs we don’t have?
Within five years it will surely become obvious to everybody that Germany is in deep trouble, and a balanced budget will not prove any defence.
The whole rich world in is deep trouble, not just Germany. You know why? Because they’re drowning in debt. And you know who seem to be about the only people left who understand that? The Germans. A balanced budget won’t check all problems at the door, but it’s a lot better than having debt of 200% or 400% of your – rapidly shrinking – GDP. Which is what many nations face.
Within 10 years, France will be the dominant power of continental Europe.
And pigs will fly to Mars. And Marine Le Pen will be crowned Empress. And proudly parade all those fair-skinned but not blond babies down the Champs d’Élysées.
What all these countries will need to figure out is what to do when their economies have stopped growing. When they are shrinking instead. What to do with the huge debtloads piled up on top of them when everyone was still trying to borrow their way into growth. And how to divide what remains in such a way that they can keep themselves from blowing up in unrest and fighting and revolutions.
You really think Germany will do all that bad under those conditions? Worse than all the others?