The Monti moment?

Timothy Garton Ash may be on to something. 2010 was clearly a turning point, when the Eurozone decided to engage in generalized pro-cyclical austerity — whether they did this because of the dodgy ideas that were floating around at the time, or simply because conservative politicians were more adept at using the crisis to further their long term goals (in their case, to shrink the state) than Europe’s useless left is something historians can debate in the future.

Garton Ash suggests that 2012 may also have been a turning point, or rather a turning point that never was: with Hollande and Monti newly installed, there was a clear demand for a more symmetric adjustment policy from pro-European Southern leaders, and an opportunity for Germany to respond favourably– after all, Monti was their man. That response never came. All we got was a June summit declaration on banking union on which there has subsequently been much backtracking. There was nothing on making short run macroeconomic adjustment less asymmetric. And now the German government is busily making matters even worse on the fiscal front.

I don’t see any way that the Eurozone can avoid a major political crisis. If the current policy mix continues unabated for the foreseeable future, then the real economy in the southern periphery will continue to worsen — unless of course something miraculously turns up, which is a possibility which we can however safely discount. Since this situation will ultimately prove politically unsustainable, the ‘steady as she goes’ scenario implies an eventual political crisis that could be quite nasty, at some unknowable date in the future — a year, or two years, or even — God help us — five or ten years from now.

But can we envisage a shift in the short run macroeconomic policy mix — looser monetary policy, more debt restructuring, a countervailing core fiscal stimulus channelled either through Germany or some EU body like the EIB — and moves towards an appropriate Eurozone architecture — a real banking union, which will require at least some element of fiscal union, and ideally some other elements of fiscal union as well — which is brought about in the absence of crisis? We have all seen how OMT has bred complacency and allowed German politicians to wriggle off the hooks on which they had been impaled last June. 2012 was a pretty good year to force change from that point of view as well; another way in which the year was a turning point that never was.

The problem of course is that a political crisis serious enough to force major reform may also lead to the collapse of the Eurozone: otherwise it won’t succeed in forcing major reform. Germany’s leaders can prove me wrong, by heeding Garton Ash’s advice and seizing their second chance. But I am afraid that they will not do so.

20 replies on “The Monti moment?”

EIB projects are not going to help and Germany made clear on Wednesday that it’s not for turning:

On UK austerity at The Financial Times, Martin Wolfe, the chief economics commentator, and Chris Giles, the economics editor, take opposite positions on the strategy of the British government.

Giles says today: “For the opposition Labour party, for many commentators and for my colleague Martin Wolf, the government’s position is absurd because it condemns Britain to more stagnation. The evidence does not support this view but I still fear the chancellor is being too timid.”

Giles says most of the deficit will not heal itself, so gradual but painful austerity over many years is required. He argues that private consumption has held up and the main problem is export performance. “In real terms, the export shortfall is the difference between growth of 2.7% and the 0.3% achieved,” he says.

This debate is not going away and will not be resolved any time soon. The real question is to what extent events on the ground demonstrate which side is correct. The absence of comment on Ireland’s de facto return to the markets speaks volumes in this regard.

Euractiv has a very good commentary on the stand-off between the main opponents; essentially France and Germany.

Germany is not for turning on the fundamental assessment i.e. it is for individual nation states, whether they are in the euro or not, to get their economic and social houses in order. Investors in the markets clearly share this view.

However there is good chance Merkel’s CDU will not get +40% of the vote next Sept general elections – FDP might get -5% and therefore not get into Bundestag.

SPD has to get +30% of the total votes to defeat Merkel’s coalition.

What then?

SPD & Greens will form the next German Govt – if anti-Merkel (CDU) forces mount adequate propaganda against Euro (Proffs are their main intellectual leaders including grandson of Adenauer!).

The writer is of course blowing in the winds… usual.

Kevin O’Rourke: …the ’steady as she goes’ scenario implies an eventual political crisis that could be quite nasty, at some unknowable date in the future — a year, or two years, or even — God help us — five or ten years from now.

Might it not lead instead to a gradual deterioration in the European economy, with poor growth coming to be regarded as the norm? Maybe it ends not with a bang but a whimper?

I’d actually prefer a crisis as long as it didn’t reach anything like mid-20th century levels of nastiness, but what I actually expect is something more like John Healy’s lament for the West of Ireland, No One Shouted Stop, but on a continental scale, with the more enterprising young Europeans resignedly seeking their future in America or Australia. Or maybe the declining Ottoman Empire is a better parallel? You’re the economic historian so I’ll quit trying to find the right parallel. The thing is I think you should anticipate stagnation rather than crisis.

But I repeat, I’d prefer crisis.

Timothy Garton Ash writes:

“Not from any Keynesian dogma, not from idealism, not from sentimentality towards fellow Europeans, but in its own enlightened national interest, Germany needs to do more.”

There must be something particularly galling and patronising to the educated German reader about this smug second-guessing, we-know-what’s-best-for-you line of argumentation. Elsewhere in the article TGA refers to the ‘duty’ of politicians to face the ‘facts’ and “not to string voters along with waffle and false promises”. From the context this can only mean that in TGA’s view only slow learners are opposed to Germany’s policy of remaining within the Eurogroup and subsidizing other members ad secula seculorum.

This is not the case, and the indisputable fact that many advocates of a German exit are not particularly bright and have advanced bad arguments does not mean that there are no smart advocates who have put forward good arguments.

It is just a few days ago (on 11 March) that a new anti-Euro party held its ‘pre-founding’ convention in Germany — the ‘Alternative for Germany’. Its leading members include some stellar German economists, such as Wilhelm Hankel and Karl Schachtdchneider — stellar, at least, if you belong to the Eurosceptic school. But even their opponents would acknowledge that they are no fools.

TGA does not even mention the existence of real ‘cons’ as well as real ‘pros’. He simply does not engage with the other side, whose core argument is that while leaving the Eurozone will be costly for Germany, remaining within will be even more so.

One can debate this question until the cows come home — but at least one should debate it, not imply that it is a matter of the anointed versus those who ‘know no better’, and are incapable of recognising their own self-interest.

No wonder so many Germans blow a fuse when they are instructed that ‘Germany has more to lose than any other country from a collapse of the eurozone’.

Footnote to the above:
I’ve just come across an article in the (right of centre) Frankfurter Allgemeine Zeitung on the founding of the ‘Alternative for Germany’ party. The article (“A civil society grass roots movement afainst the Euro”) is dated 12 March, and what’s particularly interesting is that in two-three days there have been a total of 490 comments — AFAIK a record for that newspaper. The average number of comments even on hot topics is probably in the vicinity of 50.

Needless to say most of the commenters (in the sample I’ve read) welcome the new party, though many are sceptical as whether it will do more than ‘bear witness’.

My point is that Timothy Garton Ash will have his work cut out for him in trying to convince the German public that he knows better what’s best for them than they themselves.

@ MH
“Germany made clear on Wednesday that it’s not for turning”

Some Wall St wallah observed last year at the height of one of the panics “you can rely on the Europeans to go to edge of the cliff and then do what is necessary”

@Carolus Galviensis

It is not just Germans who do not like Timothy Garton-Ash’s style of pompous Euroliberal hawkishness (“Who will tell the poor voters my truth? Who?”) but the man has a connection with the European would-be-elite’s Zeitgeist and he is an instinctive neoliberal (“Keynesian dogma” for gods sake). Under normal circumstances he would be parroting the sound money line, blathering about “painful but necessary” internal devaluation and structural reforms.

However policy failure has its costs and by the time TGA is saying something it is the accepted centre right narrative. Not all of the current elite want to go down with the EMU + austerity ship.

The Germans are afraid of war. They can see threats ahead. The French have inhaled the socialist

The camels seldom see their own humps and I have often referred to Ireland’s facilitation of massive tax avoidance in Europe by American companies.

Do not confuse that with corporate tax rates.

It is perceived as a gain ( even though it isn’t) in Ireland and Eamonn Moran is among the few who has commented on it. The Netherlands and Luxembourg are in he same boat.

Wonder why the issue of the CAP welfare system ranging from 70 to mid-90’s% of average farm income is never queried in Ireland? It may not be conducive to reaching optimum use of agriculture but who cares, others are seen as paying for it.

So we want the Germans to have wisdom in seeing the best course for Europe while we act as cute hoors ourselves!

On a more positive note, I’m just back from the Irish embassy’s St Patrick’s Day event, where a local group did impressive renditions of the Irish and Malaysian national anthems.

@ KO’R
Good post. “But can we envisage a shift in the short run macroeconomic policy mix — looser monetary policy, more debt restructuring, a countervailing core fiscal stimulus channelled either through Germany or some EU body like the EIB — and moves towards an appropriate Eurozone architecture…”.

Seems to be happening in parts, without players changing the rhetoric (saving face):-

… quite a few of them on the blog as well. Such is life!


Sad to relate, cutehoorizm is alive, well, and thriving. Upper_echelon gougers playing a blinder on protecting their interests; governance is as was; and the serfs are earninig/borrowing 30 billion, paying it to themselves, and then burning it – the greatest con in Irish history … and carried out by its .. er .. own. Concepts such as sovereignty and democracy have become pointless – the vast majority are serfs .. whether is is realised or not. I detest both the purveyors of and apologists for such needless misery.

It was surely obvious to strategic thinkers that what had happened to Japan since 1989, was going to happen to the USA and Europe. That is assuming it was not deliberately planned….

Thus the eventual solution will be presented, only when the populations are ready to accept that.

WRT tax avoidance, Ireland’s role and the lack of retaliation from Washington, Frankfurt and Paris. Business friendly governments know on which side their bread is buttered (and you thought they were a bunch of amadans). Sarkozy has been replaced by the Socialist Hollande, Obama is feeling the anti bankster heat, Merkel’s problems grow every week this week manifested by strikes at airports. Her chances of winning the next election are quite poor. The writing for Ireland’s one trick tax pony is on the wall in capitals.

Jean-Claude Juncker’s (P.M. of Luxembourg) comments on increasing tensions caused by youth unemployment and the need to take action by creating jobs, training opportunities and so on are timely. The EZ game changer will come from people with nothing to lose and not the ones over 65 who have only their vote. Action contemplated seems to fall short of ILO estimates by 75%. Deja vu all over again. Like a broken record stuck in the groove of too little, too late.

One does not know whether to laugh or cry.

@Michael Hennigan

Agree. From your site:

“Bruton appears to be running a permanent publicity campaign with much time each week engaged in announcements but what is the net result?
In 2012, according to the household survey [pdf], when 1,200 jobs were added in the economy — the first annual rise since 2008 – – full-time employment fell by 12,800 (-0.9%) over the year and this decrease was offset by an increase in part-time employment of 14,000. Self-employment, counted as a job, rose by 12,000 last year, more than the total number of jobs created and part-time underemployment increased marginally over the year, up 200 or +0.2% to 145,800 – – so in addition to the 295,000 that were officially unemployed at December 31, 2012, there were 145,800 seeking longer hours and 34,000 had emigrated in the year to April 2012.”

One of the worst performers in government. I still remember his promise that ‘members of all state boards would be requested to resign within 6 months of this admin taking office’ – nothing happened in the sphere of governance with Reilly and Hogan outperforming Fianna Fail in their crony appointments. Minister Bruton has also seriously damaged certain apprenticeship trades by downgrading their pay scales to a buck above minimum wage – why bother with a 4 yr apprenticeship? The ‘giggler’ is seriously floundering and his understanding of labour economics must be questioned.

European Council:
Why change a losing formula?

15 March 2013 Presseurop Il Sole-24 Ore, Ziarul Financiar, Les Echos

The heads of state and government met in Brussels to discuss growth but have failed to reach any decision that might give a boost to a Europe exhausted by the crisis and by austerity, laments the European press.

[…] ”Europe is doomed to continue on the path of austerity, opened up by Berlin to lead the European Union out of the crisis” adds Ziarul Financiar. “It was clear from the moment Germany posted an exemplary budget model that promises the lowest deficit in the last 40 years” adds the Romanian newspaper, that –

The price to be paid is going to hurt the entire EU: youth unemployment just about everywhere, crippling recessions in all the countries hit hardest by the crisis… And, what’s more, Berlin is following down the same path in demanding that the term “fiscal consolidation”, i.e. austerity-oriented growth, be mentioned no less than four times in the summit’s conclusions.

Comment unnecessary … optimism not a realistic option.

European Union:
The problem with Germany
15 March 2013 Presseurop New Statesman, The Daily Mail

“A spectre is once again haunting Europe – the spectre of German power,” writes historian Brendan Simms in The New Statesman’s cover story, dedicated to “The German problem”. The weekly outlines how the last five years have witnessed a “remarkable increase” in German influence, while Berlin has simultaneously fared well during the economic crisis and stopped the European Central Bank (ECB) from embarking –

on the bond-buying spree that the countries of the bankrupt European periphery so crave, prescribing for them a diet of unpalatable fiscal ‘rules’ instead. […] It is not surprising, therefore, that this period has also witnessed a surge of political and popular Germanophobia across the continent.

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