Saturday, February 21, 2015

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.


Sandwichman said...

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

I would imagine the reasoning gets BETTER as we move down from the "supreme experts". Hubris is a powerful drug. said...

Well, they do claim to support the Syriza effort to collect taxes from the rich, which they claim predates Syriza coming to power.

Bruce Wilder said...

The moralizing cargo-cult economics on display is certainly familiar enough -- they even have the uncertainty demon frightening away the all-important foreign investors. I'm not sure Simon "prolong-the-pain" Wren-Lewis is much of an alternative, but be that as it may.
The thing that stuck out for me in the Wise Men manifesto was that they deny any Troika responsibility for the "details" of the adjustment policy reforms, insisting only on the "overall" adjustment programme.
The Five insist, "What particular kind of reforms would be implemented and who would bear the cost of adjustment was entirely determined by the Greek government. . . . The implementation plans devised by the Greek government were to be supervised by the creditors, aka the Troika, but not dictated in detail."
When they juxtapose the demands of democracy with institution of the Eurozone, they use denial to aid the threading of the needle: "Europe and the Eurozone are built on contracts concluded between and ratified by democratic countries that cannot be changed unilaterally by any future government. However, as Europe is a union of sovereign states, each country always has the option to abandon these contracts, which in the current context means exiting the Eurozone and the EU. Any meaningful change to the adjustment programme in the sense that the overall adjustment path is altered – again, the concern is not the domestic policy mix – would not only sti[m]ulate demands from other crisis countries. More importantly, it may severely question and harm the credibility of the newly created or reformed institutions, . . ."
They actually spoil their peroration threatening Greece "things could actually become much worse than they are now" to insist "The Troika has helped install an effective system of tax collection, which had not existed before and is still in the making. In that sense, it has supported the Greek authorities in collecting taxes from wealthy Greek[?!] citizens, as planned by Syriza, rather than preventing it."
So, our way or the highway, but, really, we take no responsibility for where the highway leads -- you drive there on your own responsibility, or you walk alone. Not our fault. We were only giving the orders, in the most general terms.

Peter Dorman said...

I agree that the politics are reprehensible, but what is really striking to me is the "economics". This is the most august body of economists in Germany, and it carries great weight in public and elite opinion alike. There is no equivalent in the US. Yet, purely in economic terms, their analysis is horrible -- incompetent even, the sort of thing you would expect to see on the op-ed page of the WSJ on a bad day. The embarrassment is not simply theirs; one must wonder at the state of economics in the country as a whole that this can be regarded as a show of high-level expertise.

Sandwichman said...

By what exalted criteria of "good economics" are finding these wise guys "reprehensible"?

Peter Dorman said...

Read the post. By omission (the standard concepts of macroeconomics) and commission (for instance the absurdly wrong take on the role of exchange rate flexibility). I know you reject all of econ as a pile of BS, but that's not my view. I view economics as a rich manure, in which BS is combined with a host of other additions.

Myrtle Blackwood said...

From Wikipedia on the Greek debt crisis:
On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on compliance with the following three key points:
"Implementation of austerity measures, to restore the fiscal balance.
Privatization of government assets worth €50bn by the end of 2015, to keep the debt pile sustainable.
Implementation of outlined structural reforms, to improve competitiveness and growth prospects.

Wasn't the whole idea of having an international monetary system, to avoid precisely what is panning out today in nations like Greece??

CORPORATIONS (not nations!) are competing economic entities, that privatise their assets and have a prerogative to grow and grow and grow their economies.

Should we, as citizens in a democratic country, be impelled to collectively act like a global business entity. Should we be at the mercy outside entities (bureaucrats and international global businesses) to define the quality and very nature of our existence. Perhaps this has happened because of the encouragement to drop home grown forms of production and sustenance??