Tuesday, January 7, 2014

More Eurogloom

The Times, too, takes a rather pessimistic view of the Eurozone. In regard to comments on the previous post, I agree with Jurnan that Frédéric's point regarding improved current account balances is to be treated cautiously, since the improvement mainly reflects decreased demand due to budgetary austerity and internal deflation rather than an actual rebalancing of competitiveness. To Siegfried I simply say that I do not believe economic nationalism is a solution for France or any other European country. Rather, it is a formula for steady decline. It is also likely to exacerbate internal political tensions within Europe. And, needless to say, I do not admire either of your two political options, the DLR or the FN.


Siegfried said...

"To Siegfried I simply say that I do not believe economic nationalism is a solution for France or any other European country. Rather, it is a formula for steady decline."

It's an opinion, but no more argumented (or even less) than the Le Pen speeches on economics. Do you know the last french Nobel prize in economics had pronounced himself against euro ? Have you read the recent books of Sapir ?

"It is also likely to exacerbate internal political tensions within Europe."

Because, in the last two decades, peace and mutual affection has grown between European nations ? The european elites may have merged happily in Bruxelles liberalism, but in the same time, they lost the confidence of most of the people (in France at least), sometimes by enforcing democratic processus (in France, at Versailles, beginning of 2008, on the European constitutionn... sorry the Lisbonne agreement).

If the "nationalist tensions" are exacerbated (and actually, you're right, French opinion is becoming more and more reactionnary - and I think it's a good thing for citizens to react), it's maybe because they have the true impression that we want them to disappear from the political decisions.

Vous savez, "Dieu se rit bien des gens qui déplorent les effets dont ils chérissent les causes".

Art Goldhammer said...

And you claim not to be a troll.

Siegfried said...

Why am I a troll ? I am really serious. I don't insult anybody, I don't use eextremist words, and don't want to offend anyone here. I'm just trying to understand why European Union is so blindly defended by economics intellectuals whereas it's more and more rejected in the opinion polls.

I just used the Bossuet quote to express what I am feeling about French elite : they deplore the exacerbation of extremism thoughts but do never want to shade their minds on the subject.

If you like the quotes, I would say, as Péguy, that they want to keep les mains pures, but ils n'ont pas de main, because they don't try to reconsider their vision of the real.

René said...

To Art,I simply say that Eurozone is a way for France for steady decline now. Saying that economic nationalism is a formula for steady decline is only a "pétition de principe" without any clue justifying this assessment. Steady decline within Eurozone is exactly what we are living now. It's not an
assumption. It's a fact.

bernard said...

I am not sure that this is really The Times taking a dim view: this is after all just a Reuters dispatch that they reproduce and in my experience, Reuters economics journalists have to produce volume at high speed to keep their jobs.

This said, the main reason to take a somewhat dim view of Euro prospects as opposed to the US and Japan in 2014 are the orientation of fiscal policy in Europe - austerity policies do produce austerity -, and ECB monetary policy which is, of course, substantially less "unconventional" (ie. expansionary) - interest rates do not tell the whole story there.

Now, 5 years of rising unemployment, stagnating or falling revenues in most eurozone countries do have potentially unsavoury political consequences. The European elections, where electors throughout Europe are asked to select a European parliament that they very well know is the definition of powerlessness, these elections then are a perfect occasion for a political storm ... in a teacup.

Mitch Guthman said...


Whether you like it or not, economic nationalism seems to be the order of the day. The only question is which nations will be the winners and which will be the losers. It seems to me that both Martin Wolf and the Times are acknowledging without directly saying that the EU’s continued commitment to austerity and internal devaluations as a way out of this depression actually represents the prioritization of the German economy over the economic and social needs of the other nations of Europe.

I also agree with Martin Wolf that the most likely consequence of these internal devaluations and austerity in the Eurozone's periphery (which now includes France) is certain to be the rise of the extreme right whose anti-EU agenda will be appealing to the vast majority of increasingly improvised Europeans who will bear the brunt of this austerity. Forced to make a “Sophie’s choice” between destitution for themselves and their families for generations to come or voting for the extreme-right’s anti-Europe policies, I fear that most people will quite reasonably hold their noses and choose survival.

What I don't understand is the passivity of the political leadership of the left when it is obvious that everything that has been achieved since the end of the Second World War is in jeopardy. At the start of the crisis, several parties of the left in Europe came into power as a result of the regulatory laxity and the way that the economic crash was intensified by the neoliberal economic policies of their predecessors. In every instance, each incoming “leftist” or “social democratic” government then promptly fell on its sword and continued the failed policies that had just been repudiated by the people. That’s just insane.

Interestingly, anyone who has followed the links you've provided on this blog would know that there is a vast, powerful body of analysis by extremely well qualified, highly respected economic and political thinkers covering the entire spectrum of largely leftish political and economic thought that has railed tirelessly against austerity. Time and time again economists like Paul Krugman have explained what must be done to end this depression. Yet all of this work is ignored and even denigrated by the governments who are supposedly of the center-left.

It is this quiescence on the left (which we've discussed here many times) that is allowing the right’s co-optation of the work of leading leftist economists. If you listen to MLP, for example, you hear her talking about many points that leftists have been making ever since the crisis began. MLP’s economic rhetoric is starting to very subtly feature some of the traditional solutions of the center-left as she reaches out to the traditional constituencies of the left such as workers and the middle class even as Hollande clings to the failed and massively unpopular economic policies of the Sarkozy government.

As it stands now, the next several electoral cycles throughout everyplace in Western Europe that isn't Germany are likely to be dominated by an extreme right whose economic agenda offers the only hope for the victims of austerity. The docile acceptance of the status quo by the left is insane. It is suicidal.

In the context of France, if Hollande would begin to listen to the thinkers on his own side instead of the enemies of French prosperity, he might be able to reclaim a lot of the ground with workers and the middle class that is now being conquered by the FN.

FrédéricLN said...

Hi everybody including trolls :-)

W/regard to the post, I agree that the trade balance is not the only signal to watch.

It imports are reduced just because people became poor, that is no success.

But high exportations are a rather good indication that what the country makes is considered interesting by the rest of the world (noteworthy, when the currency did not change! it's too easy to devaluate and boost the nominal value of exports).

And I don't think the wages have been reduced significantly in exporting industries of Spain or Italy.

BTW, I would certainly not approve the economic and social policies that were carried out in these countries. For example, regarding Greece, I fully approve Syriza insofar bankruptcy would have been a far safer and sustainable solution, that the sequence of 12 last-chance plans who leave Greece with a non-realistic debt.

But, as well as "austerity" is no quality label for a policy, targeting balanced accounts is also not stupid by itself.

In France, this ambition has been one of the keys of success or recovery, in 1958-59, 1976-79, 1983-84, or 1995-97. The main choice, in French politics, is between irresponsible parties that basically want to buy good approval rates in the short term and "après nous le déluge", and what we call in French "des hommes d'Etat", like De Gaulle, Barre, Delors or Juppé.

But I'm a Democrat, and one who knows that voters almost never vote for "les hommes d'Etat". Gotta find another way… ;-)

Mitch Guthman said...


A couple of responses:

First, Like Art, I wouldn’t have too much faith in short term fluctuations. Everything eventually wears out and needs to be replaced. The child outgrows his or her clothes or needs new shoes. When people can, they replace what they must; but only what they must. If there’s no money in the bank, people do without.

Then, too, eventually we’ll hit bottom. Liquidationism may be inhumane and, ultimately, economically counterproductive but it’s true that eventually we will hit bottom. Eventually labor will be liquidated, stocks will be liquidated, the farmers will be liquidated, and real estate will be liquidated. Eventually, just about everything and everyone will be liquidated. Then, as Melon said: “Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” Millions will suffer horrible poverty and deprivation, entire generations will be lost, and the common heritage of Europe will be privatized but there will be bargains galore for the bankers and the politically well connected.

On the other hand, the growth that will come once we hit bottom will be weak and fragile. It may be an improvement over the worst years of the current depression. It may even be an improvement over the year before. Nevertheless, if we wait until we hit bottom before trying to improve the economic situation, it will likely take generations for the economies of most European countries to recover to their pre-crash levels, if they ever do. And, of course, the toll of easily avoidable human suffering will be immense.

Second, I fear that you have unwisely become fixated on a particular way of approaching economic questions that has lead you to error. Generally, you are right that balanced accounts are desirable. But not always. There are times when it is necessary for government to assume a counter-cyclical role to stimulate the economy (as only it can) such as when there has been a collapse in demand. In short, stimulus is the only hope when we are looking at the present economic situation.

The start of the current economic crisis was exactly the moment to be “irresponsible” for a whole host of excellent reasons. As many economists predicted, the imposition of austerity instead of stimulus in the midst of an economic downturn was folly of the first order. The economic consequences were perfectly predictable: Deeply depressed economies with escalating need for public assistance and social services as more and more people lost jobs and slipped into poverty or near-poverty. Coupled with, paradoxically, an increase in government debt and declining tax revenues due to declining economic activity. Countries that did stimulus have consistently done better in this crisis than the ones that imposed austerity.

Also, I would ask you to rethink your position on devaluation. Yes, it can be done irresponsibly but that wouldn't be true in the face of our current situation.

If Cyprus stays in the euro (which it can't devalue), then it is well and truly screwed. The consequence of austerity and internal devaluations will be horrific. But if Cyprus leaves the euro, it can be saved from the worst that lies ahead. The devalued currency would make Cypriot honey cheaper and more attractive to Germans paying in euros, just as it would make the country more attractive as a holiday destination to foreigners with high value currencies. Equally as important, the pain of devaluation is spread more widely throughout the society and is shared by everyone when it is the currency that is devalued. I discuss why Cyprus should leave the euro here: http://tinyurl.com/lga5zvf

For similar reasons, I have often urged that France should leave the euro because, as we are seeing, a country that does not have its own currency has nothing.

FrédéricLN said...

@ Mitch Guthman: I agree on many points in your comments, but on two important ones:

"In short, stimulus is the only hope when we are looking at the present economic situation. " -> I just think stimulus does not work in the *European* situation (as opposed to the situation of the USA), because this is not a short term crisis, it's about a revolution (globalization, technologies) that most of Europe avoided to face, preferring short-term speculation on real estate (Spain, France), or tax dumping (UK, Austria, Ireland, add Iceland…), or on endless borrowing (Greece, Portugal). The way out is, stop waiting, and make this revolution - at least, it's my point in http://www.xerficanal.com/ensavoirplus/Frederic-Lefebvre-Nare_Une-politique-de-renaissance-numerique_i560.html

I agree that stimulus is relevant indeed in order to avoid the loss of productive assets (factories) or social crash. It should have been more considered in Southern Europe, I think, esp. in the first months of the crisis. The Sarkozy administration did quite the right thing under this respect, as far as I remember (delaying taxes for companies, for example).

I also believe in the power of state-run investment if it is understood how this investment will prepare further production / wealth / social cohesion / … . So I believe in the relevance of such investment in the USA, because infrastructures are obsolete or missing (including roads, hi-speed access to the Internet, and so on), which is not the case in Europe.

I don't think coming back to national currencies would be a path to success — neither for Greece or France, nor for Illinois or California, also not for Ivory Coast or Senegal. THe long-term stability of currencies is very attractive for public, private, households' investment.

I agree that the euro is at a too high level, compared to our competitiveness. It's because of our assets (real estate, social peace and democracy, universities and holiday resorts…) that attract a good part of the world's wealth. The inflation on assets implies a rise of the currency.

That's a real and deep issue for our productive economy — but not one coming back to the Franc or the drachma would solve in the medium or long term.

FrédéricLN said...

I wrote above "I don't think the wages have been reduced significantly in exporting industries of Spain or Italy". This would deserve a second thought.

On one hand, average income has been reduced by 7% in Spain between 2008 and 2012 (in $, World Bank figures seen in journaldunet.com/business/salaire/espagne/pays-esp , while stable (+1%) in Europe as a whole.

On the other hand, this includes cuts in the government staff, the impact of unemployment, and so on; the effect on export prices is perhaps not so direct. I did not find clear information on that point so far.

Anyway, if the increase of spanish exportations is mostly caused by lower wages for "exporting workers", this increase would not be good news by itself, I would have been wrong in writing that above.

FrédéricLN said...

Thanks to a friend who can read Eurostat website :-) and understands economy better than I do, here is fresh information:

1- Yes, the reduction of production costs are the most important factor that pushed spanish exportations: in 2009, they were 2 to 10% higher than in France, Italy or Germany, and they are now 0 to 10% lower.

2- Unit labor costs are not the major cause.

Unit labor costs have been reduced in nominal terms in the public-run sector in Spain, by 3-4% between the beginning of 2010 and mid-2013 (3 1/2 years).

Unit labor costs increased in all private-run sectors, in nominal terms, but very slowly. In "industry" (manufacturing), or in building, by 5-6%. Inflation was around 9%. So, real labor costs were reduced by 3-4% (1%/year).

3- The most important cause for reduced production costs is an increased productivity, itself caused (at least in a very large part) by the reduction of the number of jobs.

So, I would not be very optimistic. That looks like Thatchernomics.