Wolfgang Schäuble: Why austerity is only cure for the eurozone

You read the FT op-ed here.

44 replies on “Wolfgang Schäuble: Why austerity is only cure for the eurozone”

Grade: D minus.

” … cut expenditures, increase revenues and remove the structural hindrances in their economies, however politically painful.”

Political cuckoo-land stuff.

“An increase in consumer and investor confidence and a shortening of unemployment lines will in the medium term cancel out any short-term dip in consumption. ”

No Wolfie! We need to go back to making stuff that folks need and are willing to buy, so we can have a ‘surplus’. Gov incomes (hence their ability to spend) only come from taxes levied on the folk. Folk have to have an income to levy tax on. Have I missed anything. Nope? Oh! Hold on! I forgot about this little printer I tucked away … …! Free at last!

Brian Snr.

The markets don’t buy it. Or the bonds.

s=primary surplus
r=real interest rate and
g =real GDP growth rate.

They seem to have problems with the effect of austerity on the growth rate

Whatever role the markets may have played in catalysing the sovereign debt crisis in the eurozone, it is an undisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare.

Really? Is it any wonder the Eurozone is spiraling deeper into this mess.

I for one found Schauble’s piece a perfectly reasonable re-statement of important principles that are regularly ignored or forgotten. But it won’t be long before the intellectual titans on here decide that the Finance Minister of the eurozone’s largest economy knows nothing.

Austerity leads to defaults on private debt contracts – its that simple.

I would be in favour of consumption austerity to build more energy efficient structures via fiscal spending and this building would provide the money to pay down private debt but this man must be calling for a different monetory structure.
Otherwise it simply does not make sense – unless he wants the money to flow into Gold………………..
Maybe a critical mass of the Euro leadership are Gold holders ?

Meanwhile, diligent students can cast their eyes to today’s FT comment article by Wolfgang Munchau, where he describes the europe as being beleaguered by “contagious austerity“. That’s one contagion we can all agree will finish the patient.

Where do the “savings” flow to – you cannot save up debt – it is not a commodity.
The above policey would only make sense if you want to default on private deposits.
I did not catch that in the above ramble down the austerity lane.

Like Ninap and Jesper, I don’t see much that is controversial in what Herr Schauble is saying.

Fair enough – you are calling for a full scale economic collapse , thats a rational view given the credit malinvestment.
But are you prepared for such a outcome ?

Schäuble, it is an “undisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare.”

The prognosis is correct, it is the medicine that is controversial and one has the feeling that the German’s are rather smug, safe in the knowledge that, in the worst case scenario (and maybe they want the worst case scenario) they will be leaving all those indebted countries behind.

The Club Med countries need a fiscal contraction: granted.

However he is sticking his head in sand over:
1) Whether default is now needed as well, especially in Greece(with either the bondholders or states taking the hit)
2) If Euro area banks are adequately capitalized
3) Global financial stability: Germany and other healthy countries need to consider stimulus

That is even before long term reforms are considered

I’m with Ninap, Jesper and Hogan. It’s all very well and succinctly put. Risk-taking divorced from liability and governments with excessive pro-cyclical spending being forced to pick up the tab. Countries with diverging fiscal profiles and competitiveness borrowing at benchmark rates. It’s probably as close as you’ll get to an official admission that the Euro was badly designed and its financial system ill-regulated.

And the remedies are sound: strong regulation of markets; fiscal continence; removal of structural hindrances (FODAR please note); increased fiscal co-ordination with a strong democratic mandate; and a possible financial transactions tax to boot.

I would be surprised if Herr Steinbruck were to have many difficulties with this.

Wait for the chorus of dissent here from the FODAR’s shills.

Does this opinion of CDU/MF reflect the views of the coalition govt in Berlin?
Not by a long shot, me thinks.

In fact, it’s clear now that only FT.de and Schauble/MF are arguing about a fiscal union at centre – while rest of German political opinion makers are resisting core policy issues affecting Euro intergration.

Ireland and its economists on this blog would find the last para of MF just too much to stomach – given what they’ve gone thru since 2008.

This is leverage crisis , not a debt crisis – Fiscal spending in this monetory system is merely reducing leverage.
If they don’t sustain fiscal spending the money will merely transfer to private money thus reducing leverage anyway.
A reduction in fiscal spending and no reduction / transfer in credit deposits will merely give another credit opium opportunity to the banks.
I say enough.

“The members of the eurozone have and will continue to collectively provide conditional financial assistance to those countries that find themselves cut off from capital markets, buying them time to put their public finances on a sustainable footing and to improve their competitiveness. There are risks to this strategy. Yet the alternative, by allowing the crisis to infect the eurozone as a whole and threaten the euro, would be riskier still.”

Strange he doesn’t see that the Eurozone is infected.

Also, we are well into the annual budgeting cycle for most corporates – they will view this continuing uncertainty with dismay – and contract/postpone investment decisions accordingly.

We’ve already seen how consumer confidence has fallen, thus we are on the precipice of an ugly spiral down.

Losses already taken need to be acknowledged, for example converting say 50% of Greece’s debt to some super junior instrument.

Hoping for Greece, Berlusconi et al to reform is nice…but balance sheets can’t bank ‘hope’.

Paul Hunt, Ninap, Jesper and Hogan all have it right. The cure will be harsh, but only purge the rottenness out of the system and in the long run our economy and society will emerge healthier.

The only real question is whether our coddled electorates have the stomach for the full course of antibiotics required. Take it from me, four years may not be enough…

Incorrect analysis and worse ‘solution’

“….it is an undisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare. ”

Euro Area government consumption rose annually by 1.7% in real terms between 1992 and 2006, ie before the recession began for all countries. Real GDP rose by 2.0%. In effect, govt spending declined relative to GDP -Eurostat data.

Gross general govt debt was 69% of GDP in 2003 and 69.9% in 2008. Where then is the ‘excessive stae spending that has led to unsustainable debt and deficits? In aggregate the increased level of debt and deficits is a function of collapsing taxation revenues.

But the policy prescription is worse. He argues that there is an immediate crisis, but suggests a solution that will make matters immediately worse,

“An increase in consumer and investor confidence and a shortening of unemployment lines will in the medium term cancel out any short-term dip in consumption.’

Ladies and gentlemen, we’ve steered onto the rocks. I don’t propose to starting bailing. Instead, I offer passengers a lecture in the ballroom on the need for prudence and pay cuts for crew.

Stocks and bonds are both showing what they think of the policy mix to date.

The Eurozone aggregates and ratios work wonderfully well if all members had the same ratios. All countries would then have the average set of ratios. It’s like saying, my head is in a 200 C oven, my legs are in the freezer; on average my temperature is normal.

The eurozone aggregates are chiefly private bank credit aggregates – I don’t consider BoI Ireland but apparently some on this site do.

As has been pointed out before, it doesn’t help the German understanding of the problem when the ministers and handlers from the supplicant countries pull up the entrance to these crisis summits in their Mercs and BMWs. Are they any Skodas left for the relevant ministers to use? Even Seanie and Drumm knew not to show up at Farmleigh in a limo.

‘One central lesson of the financial crisis was that markets could only function properly if risk-taking were not divorced from liability. The loosening of this bond was a central factor of the crisis’

Schauble knows that the prime offenders in this regard were the banks and the financial sector more generally. This is, first and foremost, a crisis of the private sector.

‘Likewise, the eurozone crisis unfolded after a decade during which economies with markedly different and, indeed, diverging fiscal profiles and competitiveness were all able to borrow at close to benchmark rates’

He also knows that borrowing is carried out by private and public entities, not by ‘economies’. While some sovereigns and regions have messed up their fiscal balances, it is the bailing out of the financial sector which is by far the bigger problem.

‘The truth is that governments need the disciplining forces of markets’

Lieber Wolfgang. You have been captured. The primary disciplining force on governments is the working of the democratic system. All else is tyranny, of which plutocacy is the current manifestation.

@paul quigley

‘The truth is that governments need the disciplining forces of markets’

Lieber Wolfgang. You have been captured. The primary disciplining force on governments is the working of the democratic system. All else is tyranny, of which plutocacy is the current manifestation.


The disciplining forces of the markets just crashed the global economy and Schäuble’s conservative whine could be dismissed as the output from some crackpot right wing think thank if he were not the finance minister of Europes largest economy.

Also, Michael Burke’s figures seem to rather put the lie to the ministers main point.

@Paul Hunt

“The Eurozone aggregates and ratios work wonderfully well if all members had the same ratios. All countries would then have the average set of ratios. It’s like saying, my head is in a 200 C oven, my legs are in the freezer; on average my temperature is normal.”

You are right as usual on your substantive point but your analogy only works if your normal temp is close to boiling point …. these days that might be so of course!

Eurointelligence has this to say:

Wolfgang Schäuble has a revealing article in the Financial Times, in which he expresses the view that the eurozone needs austerity now, and should pay the pay the price of lower growth in the short run to achieve higher growth in the long run. He also dismisses any notion of a eurobond, saying this went against the grain of European integration, which did not proceed in leaps, but in small steps. H is bottomline is that some progress has been achieved, but more needed to be done.

(His comment certainly reflects the prevailing view in Berlin, and is indicative of Germany’s increasingly certain rejection of eurobonds – even under a scenario of extreme distress. The pro-cyclical nature of his economic prescriptions plus the rejection of joint and several liability is not consistent with the survival of the eurozone in its current form. The only conclusion we draw from this article that Schäuble finally see a good moment to implement his “core Europe” ideas from the 1990s.)

It’s a shame that no economists or economic historians are willing to contribute to this thread. If they were, they might point to the consequences of mass austerity. I think 1937 is going to be a good model.

@simpleton: I was going to link to this article but Philip beat me to it. Policy makers should be listening to the other Wolfgang (Munchau) but I guess they won’t. It is too depressing for words, since several people said in 2010 that the mass turn towards generalised austerity was going to be catastrophic.

The question now, this autumn, is whether the euro will survive. Isn’t it extraordinary that it has come to this, that one could even ask such a question with a straight face? I actually don’t see how it will survive if the current policy mix remains unchanged.

Simpleton, several commenters have made it clear that they don’t want no education. But I’m glad to see that Kevin O’Rourke is letting them have it anyway.

@Kevin O’Rourke
You are quite right. The euro will not survive the current policy mix. I don’t know which is more likely, policy change or euro break-up. The sheer economic illiteracy of mass austerity is only slightly more breathtaking than the support such policies attract. And that’s just in the realm of fiscal policy. Milton Friedman would look at today’s ultra low interest rates and condemn the ultra tight monetary policies that have produced them. Again, it seems we have forgotten the basic, often counter intuitive, insights of elementary monetary economics. What on earth has happened to economics?

I just read this article in the FT print edition today. It took me 20 mins and a coffee to recover. This is the most important politician in Europe. His ideas and political preferences will condition the evolution of Europe over the next couple of years (where most crucial decisions affecting generations will be taken). The only thing I can say is – be afraid, be very afraid.

The notion that excessive state spending has led to unsustainable levels of debt and deficits is so far off the mark when it comes to Ireland, it would make you wonder whether Irish politicians/central bankers/civil servants are being ignored in Europe, remaining silent or just buying into this consensus. Ireland’s problem began with the reckless behaviour of private actors in private markets. The socialisation of bad debt by the taxpayer has saved Wolfgang Schaubles political career. It means he does not have to go to the German electorate and ask them to pay the bad debts of Deutsche bank. Thus, he should be thanking the Irish taxpayer.

Schauble is taking the Greece case and applying it to all 17 member states of the EMU. The problem in Greece is fiscal and it definitively related to state borrowing. This is not the case for Ireland, Spain, Portugal and Italy. The domestic policy choice that has Ireland in a mess (in addition to the perverse incentives created by the exogenous factor of joining EMU) is a reckless low tax regime based on pro-cyclical taxes. This low marginal tax regime, minimal regulation in finance and labour markets was the problem but central to the policies he encourages at home in Germany to adopt.

The article implicitly assumes and advocates that all member states should adopt the German political economy. This is totally ridiculous and logically impossible (someone has to buy those BMWs). The fiscal, welfare and industrial relations policies and institutional configuration of the 17 countries in the Euro will not converge on the German model. Ireland entered the Euro as a developing economy. It never benefitted from the Marshall plan after the war. Its capital investment programme began when Germany was engaged in a century of permanent austerity and wage restraint. Why – to ensure the convergence of living standards between east and west after German unification.

Austerity is not the cure for the Eurozone. It is the cure for the German Christian Democratic electoral manifesto when they seek re-election in 2013.

@Kevin O’Rourke,

Is the problem the austerity, or the debt excesses which made austerity necessary?

@ Aidan R

“It never benefitted from the Marshall plan after the war.”

Oh, there you go mentioning the war…I was wondering who would be the first… ; – )

You make some good points and clearly a European solution is required to overcome the fiscal crisis, but still the simple truth that countries should only spend what they earn is not wrong. This isn’t just a German model. It is a model for my household, yours as well (I hope!) and the households of every stable democracy in the world.

Ireland’s problem is (unfortunately) also fiscal. This is why it cannot play the bad debt differently.

Also, while Germany was negligent in terms of controls over its banks’ lending, Ireland was certainly more negligent in terms of not knowing what its banks were doing.

It doesn’t matter how we got here. If mass austerity produces a depression and euro collapse, do you think you will still be arguing “hit me one more time”?

Is the problem the austerity, or the debt excesses which made austerity necessary?

Indeed. If a man gets blind drunk and walks in front of a bus, what doctor would bother attending to his broken bones? Clearly the root of the problem is his devotion to drink.

@ Ludwig

I could not agree more. Ireland adopted a fiscal policy that was completely inappropiate to the conditions of EMU. But, Irelands poster boy liberal-orthodox approach to low marginal taxes, liberal finance and labour markets was held up to the Greeks, Portugese and Spanish as an example to follow by the IMF, OECD and EU commission. So, I am not one for dawning the Green jersey.

The general point is the Schauble is wrong in his diagnosis of the problem and his prescription will drive the Euro into the abyss. Ireland does not have a fiscal crisis because of reckless borrowing and spending. Its expenditure as a percent of GNP and GDP (before the crisis and bailout of the banks – Ireland biggest welfare recipient) was well below the EU avergae.

Irelands political economy cannot be expected to converge with Germany as it is historically and institutionally different. The point about the Marshall plan is quite important. Irelands infrastructure totally lagged behind Europe – hence its massive capital programme from 1990 when Germany was engaged in permanent austerity. The reckless expenditure was in private real estate. Cheap money has to come from somewhere.

Michael Burke above gives the finer empirical details as to why Schauble is wrong. The fact that the most powerful finance minister can trot out a policy analysis that that has no truth should be worrying to all democrats in Europe. Decisions are being taken on technical market assumptions with huge real life effects. The process through which these decisions are being taken are completely outside democratic control – as argued by Jurgen Habermas this week in the social Europe journal.

There is only so long before people will tolerate this. Riots in the street will eventually become the mechanism for democratic voices to he heard.

Too many countries entered the crisis with a pro-cyclical fiscal stance, with totally inadequate bank supervision and financial regulation (at the national or EU level) and they lacked effective bank resolution procedures (again at the national or EU-level). Herr Schäuble has both highlighted and conceded this. The bond market discipline is required to prevent (or if governments remain pig-headed to punish) excessive pro-cyclical fiscal stances. But equally, which Herr Schäuble also emphasises, financial markets must also be subject to effective regulatory control.

And in the context of the traditional EU pillars of ‘competition, co-operation and solidarity’, Herr Schäuble is also correct to emphasis the requirement for a solid democratic mandate. From the beginning the entire German politcial effort has been based on seeking to restore democratic control of financial markets than had gotten out of control. But it has been hampered by an understandable reluctance to concede to German voters that, with the Euro, previous politicians had sold them a pup – which has now grown into a hungry mongrel.

It is brutal and unfair that Irish citizens have been required to contribute to keep core EZ banks from going under water – simply because core EZ politicians fear revealing the policy cock-ups of their predecessors and spelling out the remedial contributions required from their voters. And this op-ed by Herr Schäuble is a further step in explaining the reality to core EZ voters.

But, while the fiscally incontinent and pathologically misgoverned PIIGS might be aching for a bail-out, Herr Schäuble is quite right to emphasise that any fiscal co-ordination and solidarity must have a solid democratic mandate and be matched by better governance, fiscal continence and structural reforms in the PIIGS.

Ireland is seeking to tick the first two boxes (even if the former is a bit of an optical illusion) to distance itself from the Club Med players. But the FODAR are determined to scupper the structural reforms. The Government is gambling that the Troika might be Meatloaf fans and that ‘two out of three ain’t bad’.


“Ireland entered the Euro as a developing economy. It never benefitted from the Marshall plan after the war.”

On the contrary – Bernadette Whelan, among others, has documented how Ireland was included in the Marshall Plan:

“Dollars were not offered without strings attached. Not only did each government have to deal with an ECA mission but data on production, trade, consumption, balance of payments, investment and financial policy had to be provided on a quarterly and annual basis to officials in ECA Paris, the State Department in Washington and the

Organisation for European Economic Co-operation (OEEC, the participant countries’ organisation) in Paris. In addition, an annual report and a four-year long-term recovery programme were required. Consequently, an ERP administrative structure was created within the Irish bureaucracy.
Ireland’s long-term recovery programme, submitted to the OEEC in July 1948, outlined how a reasonable level of economic activity would be attained when ERP aid ended. ”


Historians are handy.

@ Kevin,

Indeed. If a man gets blind drunk and walks in front of a bus, what doctor would bother attending to his broken bones? Clearly the root of the problem is his devotion to drink.

Well, I think your twisting the analogy a bit. It’s more like a drunk man walks into a bus, gets taken to hospital, and the triage doctor on duty in the A&E, Dr. Keynes, diagnoses a case of broken bones, gives him a fresh bottle of vodka to kill the pain and sends him home again.

@ Aidan R

Right, I am not denying the complexity of the problem – particularly in Ireland’s case. Simply cutting public spending is not enough. But in fairness, I don’t think Schäuble was saying that either.

What I think all fair-minded people would agree on is that a country cannot go on overspending indefinitely and expect everything to be ok. Moreover, convincing the German public to take the necessary steps to address some of the underlying structural flaws in the eurozone will be a lot easier if evidence can be shown that the fiscal largesse is under control in some of these target countries.

Frankly, Ireland has done a good job of demonstrating this since 2009. Italy is really a tale of two countries, and much of the public debt is private savings. But the consonants are more of a problem.<


I beg to differ. It matters greatly how we got here. Those who do not learn from history being doomed to repeat it, and all that.

As for mass austerity provoking economic meltdown, I am sceptical that this is a likely result. Much greater is the fear that sovereigns will collapse, and not because of austerity, but because of a lack of it.

Recession of 1921 came out of inflationary pressures of WWI, US came out of it in 18months, because they didn’t spend money they didn’t have, let business and people go bankrupt, return to market equilibrium. 1929, turned into a depression because of policies of FED, FDR, Hoover, and WWII didn’t solve the depression. Only in 1947 did economic growth return after markets were opened up and gov spending decreased relatively.
Now we have so called economists who can’t see truth staring them in the face. Gov spending causes depressions, they don’t solve them. It’s like Plato’s cave around here and in TASC. The people who see the light for what it is are stoned, as is the German Finance Minister. We need gov spending to go back down below 30% of GDP, like in late 1990’s when we had real economic growth and all the good stuff that went with it.

We don’t have a Gold standard system – we have a system of freefloating currency pairs ,and thats it really.
Your prescriptions of reducing goverment spending is obsolete unless they change the monetory system.

@ Brendan Quinn

To bring government spending down below 30 percent in a modern European economy would require controlling (if not slashing) the price of what government spend money on (health, education etc). I assume you dont think it a good idea for governments to start controlling prices?

Government spending does not lead to recession (I assume you are referring back to the conditions of 1970’s?). What matters is the debt-GDP ratio. Higher debt in this ratio leads to slower growth. Hence, slow or stagnant growth leads to recession not government spending (a total oxymoron).

Before 2008 the net and gross debt as a proportion of Irish GDP was below 30 percent. If memory serves me correctly this was one of, if not the lowest in the Eurozone.

What led to recession and the increasing fiscal deficit was the socialisation of private bank debt (privatised Keynesianism) and a collapse in tax revenue (premised on our low marginal tax regime).

Orthodox liberal-market economic policies and a reckless tax regime created the mess we are in not government spending.

Ninap, Jesper, Hogan, Paul Hunt and andrew mellon are correct in their assessment of what Schäuble’s interview states.

I think Schäuble speaks a lot of sense in this instance.

Comments are closed.