Economic Wisdom in Germany

The negotiations between Greece and the rest of the Eurogroup were largely about how far, if at all, Germany could be pulled toward compromise.  German thinking about the economics of the currency zone is decisive: they set the boundaries and, to a large extent, the discourse.  The most prestigious group of economists in Germany is the Sachverständigenrat, the Council of Experts commonly referred to as the Five Wise Men.  (They currently have a single female member.)

This body released a statement about the Greek negotiations which you can read here.  Simon Wren-Lewis went after it here, but I want to say a bit more.  First, read the words of the Wise.

Now that you’re done, consider this.  Only once in this document is there even a passing reference to unemployment.  There is no mention of output gaps, nor of living standards.  Governments are seen strictly as borrowing and lending entities with no particular obligation other than paying their bills.  In other words, macroeconomics as the rest of the world understands it is essentially absent from beginning to end.  The message is: your government borrowed too much, we gave you some relief, and now you have to pay the rest.  There is nothing more to discuss.

The topic of reforms appears on occasion.  There isn't much discussion of their content other than that they are to be “market-oriented”.  Ireland, Portugal, Spain and Italy are held up as examples of the success of such reforms, although what success means in this context isn't specified.  (I think it means, the governments are continuing to pay on their debts.  Spain and Portugal in particular are no one’s idea of successful economies.)

Meanwhile, the document is studded with truly outlandish statements.  Try this one: “For an economy in the dismal Greek situation, it essentially made no difference that it remained a member of the Eurozone – in any case, adjustment was unavoidable, and it would be painful and accompanied by strong social tensions. The adjustment process of countries that experienced debt and currency crises follows a very similar pattern. This is irrespective of whether they successfully defended a fixed exchange rate or allowed their exchange rate to devalue in order to support external economic adjustment.”  This is followed by a pair of charts, the second of which compares Greece’s GDP growth (decline) to that of the Baltics, along with Korea and Thailand in the late 90s.  But: (1) The Baltics were defending a fixed exchange rate and they did, and are doing, terrible.  (2) The East Asian countries, which had scope for devaluation, were back in growth territory within two years, unlike Greece.  (3) It’s a selective list!  Where’s Argentina, for instance?  Or Iceland.  Oh, but right: “success” means paying your bills, and Argentina and Iceland didn't do this.

About debt relief: “A debt relief of public creditors could not substantially improve the comfortable state of the Greek government, let alone be justified easily vis-à-vis its lenders.”  Read that one over a few times to let it sink in.

The wrap-up: “Greece is suffering very hard times. But the real tragedy is that it elected a government that threatens to exacerbate the situation and spoil the looming economic recovery, on the basis of a thoroughly wrong assessment of its current bargaining situation and the policy alternatives available for achieving sustainable growth in Greece and the Eurozone.”  In short: we will be happy to see you leave the Eurozone, so we don’t have to give an inch.  And there is no alternative to the current policies which, as anyone can see, have been blazingly successful at restoring growth.

And these are the supreme experts.  Imagine what the reasoning must look like down in the second and third tiers.