martedì 1 maggio 2012
Stiglitz contra Merkel
Stiglitz contra Merkel
profil (Austrian weekly): The debt brake advocated by Angela Merkel and Nicolas Sarkozy is the wrong way?
Stiglitz: Yes, absolutely.
So speaks Joseph Stiglitz, Nobel laureate and former economic advisor to Bill Clinton. The recipe is amazingly simple. If a patient is in danger of dying from hunger or thirst you will provide him with eating and drinking. Obviously we don’t need to be enlightened by a chief economist to find such an advice quite convincing.
Joseph Stiglitz takes his position with customary verve and he may count on many partisans. Greece's economy is strangled by drastic cost-cutting measures. In Italy, real estate taxes, VAT on everyday consumer goods, gasoline taxes etc. have increased dramatically. The working population is bled with increasing severity. Nevertheless, these measures proved to be largely ineffective: The “spread” – that is the higher interest premium on Italian government securities in comparison with German ones – has again risen. The government of Mario Monti, in the early days still celebrated as a great agent of reform, is now held by many Italians responsible for the strangulation of their country. Economic growth is simply not in sight. The Italian economy continues on its path of decline.
Even more dramatic is the economic decay of countries like Hungary, Spain and Portugal. The austerity measures as imposed by Merkel and Sarkozy drives these countries in leaps and bounds towards economic abyss. "With its austerity plan Europe heads towards suicide," says Stiglitz, "it’s the wrong sequence: First there must be growth and afterwards deficit reduction. Austerity will not work. There is no single instance where a large economy has been successful with savings programs."(1)
Does Angela Merkel, the German chancellor, lightheartedly direct Europe towards economic suicide, by forcing the southern periphery to enact a policy of radical austerity?
The beneficial effect of investments - a truism
The objections of Joseph Stiglitz seem quite obvious at first sight, because everybody knows that a hungry man needs food and a thirsty one needs water. A sick company may be rescued by good investment – and this is quite true for states as well. If these use the capital of savers in a judicious way they may produce growth that largely exceeds the invested amount. This is a basic fact of industrial economics as proved by the last two hundred years. As such it is known to laymen as well as to economic laureates.
The benefits of investment - a conditional truth
Like most too simple and too obvious truths, it needs qualification. It only applies to wise and proper investment. For fifty companies that are successful with their investments, you will find at least an equal number that squandered the money of investors. And for a single state investing loans advantageously you will get at least a dozen ones who fail because of over-indebtedness as they did not make forward-looking investments but only financed political gifts and social benefits. I guess it is more than just angry voices that since quite a time whisper that our European welfare state war built largely on borrowed money.
The countries of the South already had their chance
Unfortunately, Joseph Stiglitz when recommending generous investments in southern States (to be paid mostly by Germans) forgets that his therapy is by no means new. It was already largely practiced since the time when the Euro was introduced. As long as the Mediterranean countries still had their own currencies they had to pay high interests to get credit. This changed entirely once they got the common currency for then credits were lavishly showered on them at almost no cost. For several years they enjoyed exactly those conditions that Stiglitz now recommends to resolve the crisis. Cheap investment capital form the North flowed into the southern periphery.
At that time Stiglitz’ therapy was already refuted
The outcome is no secret. But it is not at all one hoped for by Joseph Stiglitz. This lavish flow of money and the debt caused by it are at the bottom of Europe’s malaise. For, obviously, funds were not invested wisely and properly. They failed to produce any growth. The crucial condition for the success of meaningful investment has been neglected.
Can we just put aside this failed experiment so that the North will for a second time bless the European South with the cornucopia of cheap credit? This is what Stiglitz demands. Or should, as others think preferable, the common European Central Bank ECB provide them with fresh money through Euro Bonds? (2)
It seems to me that Joseph Stiglitz did not really convincingly answer those questions though they are crucial issues for the future of Europe. Why does he assume that cheap money will be invested wisely and correctly this time? Previously the southern countries behaved like a bad company: They largely squandered the money entrusted to them. What reasons make Stiglitz believe that this time they will miraculously embark on the path of growth instead of merely accumulating bad loans?
Even Italy is about to collapse
Such a miracle seems rather doubtful. After all, even a "technical" government composed of economic experts like that of Mario Monti proved quite incapable of liberalizing the Italian economy in order to lay a foundation for greater competitiveness. This inability to reform raises serious questions. If even Italy, economically by far the strongest state of the southern periphery, and, what is more, even an expert government is unable to achieve a breakthrough, how do we dare hope that countries such as Spain and Portugal will flourish as soon as Germany again looses the strings of its purse? This hope is based on wishful thinking, which is no more convincing by the fact of being upheld by a Nobel laureate.
Either cheap money or dire austerity?
However, those who doubt that Stiglitz’ recipe of the redemptive power of money will produce a turn in European affairs do not necessarily approve the politics of austerity as demanded by Germany and international creditors. "Anglo-Saxons simply reject this policy as sheer madness. This procedure has been adopted because of German pressure," writes the Handelsblatt. (3). If not A, then B - that is the logic of short-sightedness. As far as I look, I do not see any economists advocating anything else besides these two alternatives. Either harsh methods of austerity are required, "in order to appease the markets" (so that investors get their money back) or fresh money is hailed as the real solution. This money should come directly from German taxpayers or from the ECB’s printing press (where again Germans shoulder the heaviest burdens as in the course of time their savings will be devalued).
Or rather cheap money plus austerity?
Of course you may also combine the two. The elites of Europe, led by the European Commission in Brussels, favor a mix of both therapies. They have obviously realized that borrowed money does not produce growth unless invested wisely and correctly. So they look at that part of the Union, where investments are apparently the most successful: They look at Germany. There, the two approaches were used, on the one hand German industries opted for growth-enhancing investments, that’s what bestowed innovative strength on the leading industries of the country. On the other hand, the so-called Agenda 2010 initiated by German Chancellor Gerhard Schröder, forced austerity on Germans. Had Germany not thus reacted to competitive pressures exerted by the emerging Asian countries, it would still be the "sick man" of Europe. Only because and after Gerhard Schroeder imposed this drastic cure on the German economy did the "sick man" turn again into a successful exporter. Austerity combined with fruitful investment was the tandem, to which Germany owed its amazing recovery.
Should and can the German model be imposed on the rest of Europe?
Austerity and wise investments - that seems to be the policy to drag Europe out of its present quagmire. But how do we ensure that southern countries when enjoying a second round of cheap money, will act much more responsible than before? In other words, how do we solve the main problem of right and good investment? Germany being the main source of money, will it send its commissioners not only to Greece, as it does at present, but will they swarm out to Italy, Spain and Portugal as well in order to make sure that German money is used according to German wishes? The response to such paternalism will not be long in coming. In Greece Angela Merkel is already depicted with a Prussian type spiked helmet. Hatred is cooking up against the German taskmasters. If we want to destroy Europe, the surest way to do this is certainly to make it obey German demands - no matter how well intentioned the latter may be.
Problems for which there is no (conventional) solution
Mathematicians long know about certain equations for which there is no solution by any existing method. Economists should finally realize that this is also true for the field of economy. There are problems which resist all ready made solutions of previous economic wisdom. Rigid austerity may kill an entire economy leaving it a shamble for years. However, in a majority of historical cases cheap money is just as dangerous. Instead of producing growth it burdens a nation with ever growing indebtedness which in its turn makes creditors call for rigid austerity. And this dilemma applies to a mix of the two cures as well. For economic science has all but overlooked a fundamental truth: In specific situations, wise and good investment will simply be impossible!
No future for southern states under present conditions
This case is far from theoretical; in Europe we are just now confronted with such an emergency. In the southern periphery the potential for wise and proper investment is virtually exhausted. Or should investors got to Greece or Italy and dump their money in traditional or low-tech industries like the textile sector? Certainly not. These branches already died quite a time ago as a result of competition from Asia (I don’t count the competition from Eastern Europe as it doesn’t make Europe as a whole any poorer, but only contributes to a more even distribution of wealth distribution within Europe). Portugal enjoyed a viable textile production, but it was almost completely destroyed because of the liberal economic policies of the European Union. The large-scale destruction of traditional, low-tech industries applies to the whole of Europe, and for a simple reason. Germany may not sell her high-tech products to Asia, especially to China, unless she accepts payment in low-technology goods for China cannot pay with raw materials (apart from a few exceptions such as rare earths). It is therefore no exaggeration to assert that the destruction of traditional industries in southern Europe is a direct and inevitable effect of German industrial policy.
Let Greece or Portugal invest in advanced technologies!
Under the prevailing conditions of international competition traditional industries once destroyed have certainly no chance at all to be reborn in Southern Europe. Even in Germany itself, they largely disappeared. All attempts to use cheap money in order to revive non-competitive branches would only cause further bad investments and lead to still higher debt. They would not alleviate the plight of Europe, but make it even more intractable. But what about the alternative to low-tech industries? Will low-interest loans from the north of Europe or cheap money from the ECB be considered a good and wise investment if they are used to found high-tech enterprises in places like Greece, Portugal or Hungary?
The innovative backwardness of the South
I think one should first stress an important fact. Even Germany has to undergo utmost efforts in order to stand up to international competition. Her industries will remain competitive only if they have a clear innovative edge. Cars, airplanes, machine tools, chemicals and pharmaceutical products have long since been produced in Asia as well and they are sold in world markets. With her own offer and assortment Germany will be successful only if and only as long as she offers either better quality or equal quality at lower prices. The outlook is rather doubtful if we look into the future. Given the increasingly rapid imitation of existing products which are subsequently dumped into markets by low-cost providers with access to a nearly unlimited workforce, it seems unlikely that Germany will retain its current advance for more than a quite limited time. If this is true for Germany, how much hope is there for countries like Greece, Portugal or Spain to catch up in terms of high-tech industries?
Conditions for innovation
And there is still another crucial factor to be reckoned with. In order to produce highest quality, a country needs an army of well trained engineers and researchers who have gone through a highly developed education system, which has grown over the decades. Now, the quality of such men and of such an educational system may at least approximately be gauged by the number of patents submitted. In 2009, Germany produced 209 patents per one million inhabitants, Switzerland as many as 492. Italy only achieved one-tenth of this value, namely 45, while France occupies a rather modest position with 118 patents. Greece, Portugal and Spain produced 3, 2 and 8 patents respectively. In terms of innovative strength they are virtually non-existent. But with 233 patents to its credit Japan already overtook Germany in innovative force. And China, which in all respects moves in the footsteps of its Asian neighbor, has already secured for itself an enviable place as number six on the global scale of patent output.
In light of such figures it is hard to agree with economist Joseph Stiglitz that investments - even in advanced technologies - will in any way improve the situation of the southern countries within the next few years. Of course, there always is a fundamental difference in behavior between people and physical bodies. The future of individuals and nations will never be predictable in the long run. No one can rule out the possibility that one hundred years from now Germany will be reduced to an agricultural country while Greece will be the most innovative state on earth. However, one thing may be said with a probability verging on absolute certainty. Within the next decade that is during the very lapse of time when the European Union may be destroyed by the current crisis, this will certainly not happen!
The recipe prescribed by Stiglitz will bring no relief to the patient
The preceding considerations are equally devastating for an approach à la Merkel and Sarkozy as for a recipe according to Joseph Stiglitz. As far as the southern periphery is concerned, we may not expect right and good investments, leading to growth, either in traditional or in advanced industries. Nay, under present conditions they do not even seem to be possible. This means that a second cornucopia of cheap money poured by the states of the North over the southern countries – for instance in the form of a “Marshall Plan” – will only produce more indebtedness and thus lead to a further worsening of the crisis. Since the main burden of providing the extra money will remain with Germany, the only lasting effect of such a misdirected policy will be bad loans and a much higher debt for Germany herself which threatens to ruin her own economy.
Joseph Stiglitz: We are in the midst of crisis
Both strategies – rigid austerity as well as easy money – will lead Europe to nowhere or, to put it more concretely, they will tear the Union into pieces and conjure social turmoil. Europe, however, cannot afford anymore futile and harmful policies, as it is currently in the midst of a second "Great Depression". Even if there are always moments of hope, the accuracy of this statement remains beyond doubt. "The period from 1929 until the Second World War was called by historians ‘Great Depression’ only after the fact,” Stiglitz notes. "But even during the Great Depression, there were always ups and downs. Now we are in the same situation. In 30 years, historians will speak of a great depression in 2008. And they will say that time and again green shoots were sprouting, which afterwards turned brown. Perhaps we see just now such a green shoot. But the probability that all is already over, equals zero." (4)
Beyond conventional wisdom
The above analysis demonstrates the ineffectiveness and even harmfulness of both traditional recipes. We must be ready to admit that under certain conditions governments just have no chance to resort to correct and good investment. (5) That is why even a Nobel laureate like Joseph Stiglitz has no viable solution to offer for getting out of the present European predicament. In order to find such a solution we must look beyond conventional wisdom.
For beyond those therapies prescribed by Merkel or Stiglitz which in substance are taken from current economical textbooks, there certainly is a cure for the European disease. We are moving toward a real solution, if we are ready to admit that the pressure exerted by the world market on southern countries – a pressure making good and proper investment all but impossible – is no fatality even if many people believe it to be just that and even if economists are perhaps more inclined to this misconception than anybody else. The ravages of globalization, where "mankind is caught up in a deadly struggle against itself” as Konrad Lorenz once aptly remarked, are even less fateful. A strong and united Europe may very well get rid of that pressure.
In order to overcome the crisis, the continent just needs to reflect on its inherent strength. Just as Europe need not access the world market for a sufficient supply in food, it could be quite as independent from imports with regard to its industrial needs. Once Europe has managed the transition to renewable energy, it will no longer depend on imports of crude oil, natural gas or uranium. With its impending independence of nuclear energy supply Germany has assumed the role of an ecological model. The next step can not be that Germany bleeds to death by keeping southern states artificially alive with transfer payments – payments to no effect because the world market just doesn’t need non-competitive industrial goods from these countries.
Instead Germany should take a quite different path. It should put an end to an industrial policy so destructive to the rest of Europe. Certainly, this renouncement will at first cost Germans power and prestige. Leading German industries would forgo a third of their markets and Germany as a whole would initially suffer a loss of wealth. But its markets in Europe would be permanently secured, and combined European prosperity would no longer be threatened. It would, on the contrary, take an enormous upsurge.
For under such conditions good and proper investments are again possible. Traditional industries in Greece, Spain, Hungary and Portugal will be revived and gradually evolve to higher levels. All products supplied by these countries would immediately achieve much higher prices as they no longer compete against the rest of the world. Is it too much to ask Germans to gradually renounce their non-European exports in order to prevent the disintegration of Europe? Germany should understand that the alternative may be much harder. Once Europe dissolves again into national states, Germany will shrink to insignificance. (5)
1 See interview with J. Stiglitz at: http://www.profil.at/articles/1217/560/326259/joseph-stiglitz-joseph-stiglitz-die-euro-krise.
2 The various rescue packages are no help to the cause of growth, because they mainly serve to satisfy the claims of creditors. This also applies to indirect government funding by the ECB.
3 "The revolving door effect of debt crisis,"Handelsblatt, 13.04.2012.
4 See the above interview with J. Stiglitz.
5 These conditions may consist in a general lack of interest in science and technology, as characteristic of many so called traditional societies. It is, of course, expressed in their education systems up to most recent times. Just as difficult to cope with are external conditions such as a significant global overproduction in key export sectors, or unbeatable low-cost production from emerging economies. The blindness of orthodox Economics for the predictable collapse of national economies under similar conditions is quite surprising. After all they do quite well understand that meaningful investments may at times be quite impossible in private companies. A company goes bankrupt if it lacks productive ideas or if its competitors simply have more or better ideas. No investors will then provide it with additional capital. In the private sector this is a fact of everyday life.
6 My latest book “Von der Krise ins Chaos” (From Crisis To Chaos) develops these ideas in much greater detail.