Those of you who have seen the film Fargo have the wood chipper scene indelibly seared into your memory. (If you have not seen Fargo please remedy this deficiency promptly.) I return to the scene at the end of this piece.
Walter Russell Mead, a recovering liberal, has crafted a crude ode to purported German national character and insult to purported French national character. The defective purported national character of the French is leavened with equally crude stereotypes of the purported superior religious character of Huguenots and Jews. It is all set within a broader, cruder attack on purported ethnic “Latin” character. Mead’s piece ran in opinion pages of the Wall Street Journal, which embraces these prejudices and considers them the height of intellect.
The virtuous Germans are beset with “bad news from Spain and Portugal, where despite the most-solemn promises to undertake the most-sweeping reforms, and the blessings of Brussels, the economies are somehow failing to grow. Add disappointing news on Italian bond yields, and Europe has resumed its grim slide.” “Somehow?” Understanding why Spain and Portugal are “failing to grow” is hardly a mystery. The ECB and IMF (paragons of northern values) have forced austerity and “labor reforms” designed to make it far easier to fire workers on Spain and Portugal. The goal of the “reforms” is to drive down their working class’ wages. The ECB and IMF are demanding similar actions in Greece and Ireland and the Irish government’s plan for responding to the crisis is to cut working class wages to make Ireland more competitive with Portugal. At UMKC, we call this race to the bottom dynamic the “Road to Bangladesh” strategy. Reducing wages and public spending during a serious recession are pro-cyclical policies that make the recession more severe. Private sector demand is severely deficient in nations suffering from the Great Recession. Reducing wages reduces income, which further reduces private sector demand. Reducing public sector spending makes total demand even more inadequate and increases unemployment (further reducing private sector demand). Modern nations have known for roughly 70 years that fiscal policies should be structured so that they function as “automatic stabilizers.” Austerity and aggressive efforts to cut wages function as self-inflicted destabilizers. These “northern” policies are so self-destructive that only economists who are total ideologues fail to oppose them.
But return to Mead’s ode to German values, and examine the content of those values and Mead’s multiple fictions about the causes of the euro crisis. Mead claims the French crisis was caused by:
Clueless European regulators … pushed many banks to invest in soon-to-be-worthless sovereign debt from soft euro countries like Spain, Italy and Greece. So French banks in particular are loaded to the gunwales with bonds that won’t float.
Worse, the French corporate elite decided in its sleek official way that this was the right time to go long on Italy, buying banks, companies, stocks and bonds….
I have already discussed one of the logical inconsistencies in Mead’s argument that arises from the juxtaposition of this passage and his ode to France’s “most successful business leaders” (because they are disproportionately Huguenots and Jews). The second logical inconsistency arises from two consecutive sentences. French banks are “loaded to the gunwales” with underwater bonds from “Italy” because French regulators “pushed many banks to invest in” Italian bonds. The French bankers were the unwilling victims of this regulatory “push[ing].” In the next sentence, however, Mead tells us that “the French corporate elite decided that this was the right time to go long on Italy, buying … bonds….” Are French bankers not part of “the French corporate elite? How exactly did France’s regulators (who had the most “northern” of anti-regulatory values) (a) decide to actually start regulating by pushing French banks to purchase Italy’s bonds, (b) how exactly did they “push” French banks to buy Italy’s bonds, and (c) and why, if they thought it was unwise, did French banks accede to such a “push?” Mead made it up. The officers that control French banks make their own bad investment decisions for the same reason other banks make bad investments – the officers love what the extra (nominal) yield does to their income in the near term.
Assume for purposes of discussion that Mead is correct about the condition of French banks: “The French bottom line is that Germany must help raise the carcass of the French banking system from the dead.” If that is true, then France’s banking regulators retain their “northern” anti-regulatory ideologies for they are failing to act against the failed banks. It also means that the euro is dead and that France and the EU desperately need aggressive monetary and fiscal policies. I’m quite willing to believe that French banks are “carcass[es],” but what about German banks? German banks took the lead in making most of the foreign bank loans to the EU periphery (I call it “German banks gone wild”). It is Germany that is demanding a ten year phase-in to the increased bank capital requirements proposed in Basel III because it believes its banks are so grossly deficient in capital that it will take a decade of subsidies, bailouts, and accounting gimmicks to bring them into nominal compliance with the new rules. German banks are among the largest beneficiaries of the Irish and Greek “bailouts.” It was “northern” banks’ values that drove the global financial crisis. Banks with “northern” values (U.S., German, Irish, and Icelandic) were the most notoriously fraudulent and imprudent lenders in the Western world. What all these failed banking systems mean is that there is an urgent need to remove the (“northern”) theoclassical policies that create the criminogenic environments that produce our recurrent, intensifying financial crises. “Northern” values and policies are the problem, not the solution in finance in the U.S. and the EU.
Mead ignores Germany’s banking crisis, but he is also blind to the fact that it is Germany’s policies that have turned an EU financial crisis into a combined economic and political crisis that has exposed the sham of European unity and revealed the euro and ECB’s fatal design flaws. Indeed, Mead celebrates those design flaws and Germany’s perverse EU policies that are spreading ruin throughout much of Europe.
[T]he Germans are supposed to capitulate, authorize the European Central Bank (ECB) either directly or indirectly to print masses of money, and the proceeds will go to save the French banking system and national elite—without anything so humiliating as a bailout ever being mentioned.
Means accurately reflects the manner in which Prime Minister Merkel frames the policy choices. What Means fails to consider is that the Germans could be wrong. Germany controlled the design of the euro, the ECB, and the Stability and Growth Pact. Germany insisted that the ECB have no mission to ensure full employment and no lender of last resort function. Germany insisted that the Stability and Growth Pact be designed as a double oxymoron that produces instability and destroys growth when there is a severe recession. It is Germany that has demanded that the ECB follow a generally restrictive monetary policy.
Because Germany insisted on defective designs of institutions related to the euro, the EU periphery nations have been left with no effective means of escaping the Great Recession. They cannot devalue their currency or adopt appropriately expansionary fiscal and monetary policies. They are left with one option, a hydra-headed monster – slash social services, slash working class wages, and suffer severe unemployment. The “national elite” of the periphery are not the issue in this context. German policies devastate EU working class citizens. The “national elite” of Greece and Italy still largely evade their taxes and have exceptional wealth despite the EU bailout “reforms.” Merkel has not taken any effective steps against any foreign or domestic “national elite” and has never made doing so a priority. Germany’s austerity demands are aimed at the “Latin” working class and poor and they are the victims of the German demands.
The ECB could save the euro and produce the expansionary policies that would help, instead of hinder, EU recovery from the Great Recession. (This would also aid the U.S. recovery.) Means, however, heaps scorn on this (supposedly) Gallic idea. Of course, Trichet was head of the ECB when it implemented its destructive policies that Merkel so strongly supported. Trichet is French and he is as theoclassical as any economist (Trichet is not an economist). He is infamous for claiming the ECB performed brilliantly by maintaining price stability – which we can all agree is a Herculean task during a Great Recession. The fact that the EU has gone to financial hell on his watch must be ignored because his only mission was to prevent inflation. Except that his real mission was to warn the EU that it had an urgent need to expand the ECB’s mission and change the EU’s anti-stability and anti-growth pact.
Means channels Merkel’s phobias that prevent the changes in the ECB’s missions and policies and the stability and growth pact that are essential to save the euro, end the crisis, and assist the EU to achieve a strong, broad financial recovery. The specter is hyper-inflation. The EU should be so lucky as to have modest inflation. Creating over 20 percent unemployment in Spain to prevent the non-existent risk of hyper-inflation in the EU is an insane policy. It is also self-defeating. The high unemployment reduces governmental income and increases the deficit, which leads to rating downgrades, which raises the interest rate on sovereign debt, which increases the budget deficit. Merkel thinks that policies that are certain to drive this destructive cycle makes sense. Thinking that insanity is sane is one of the symptoms of insanity.
Means embraces Merkel’s policy delusions and adds this conspiracy theory: “France wants to stick the Germans with a Latin currency and Latin rules for running it.” In context, Means appears to be saying that the French believe the euro is overvalued relative to trade competitors such as China, Japan, and the United States. This makes it more difficult for EU nations to export, which can increase unemployment throughout the EU. Means appears to believe that a highly valued currency is virtuous. It is unclear whether he believes that China, Japan, Switzerland, Brazil, and the United States (each nation has intervened to drive down the value of its currency) are “Latin” nations or why he thinks “Latin currency” is deplorable. It gives him no pause that every major currency in the world, except the euro, is “Latin” under his rather bizarre dichotomy.
Means describes the German policy for dealing with the crisis that is causing immense human misery throughout the EU:
Germany, on the other hand, wants the Latin countries to live by northern rules: Keep the currency sound, the budgets balanced and let the chips fall where they may. There is zero, repeat, zero consensus in Germany to go Latin and give the euro into the hands of slick French and Italian politicians. Technocrats bound by rules, the Germans can accept: That is why an Italian technocrat is following a Frenchman at the head of the ECB. But that is also why the Germans are being such sticklers about ECB rules against bailouts and unlimited ECB purchases of sovereign bonds.
Non-Germans can run the ECB as long as they are theoclassical economics devotees who have no power to take any of the actions essential to respond effectively to the crisis because they are bound by German rules. Means calls these people “technocrats,” which is how most media refer to them, but it is vital to understand that the term is a misnomer. Trichet, Draghi, and the new leaders of Greece and Italy are theoclassical devotees. They are the opposite of real technocrats. They are intensely ideological and ignore the consistent failures their policies cause. Merkel supports only the most fervent neoclassical ideologues.
Means makes no bones about his view that “northern rules” are the only desirable rules and that Germany is correct to insist on three policies: a “sound” currency, a “balanced” budget, and “let the chips fall where they may.” I have already explained why the first phrase is misleading rhetoric. Means cannot seriously be claiming that Switzerland, China, Brazil, Japan, and the U.S. lack a “sound” currency because they have sought to expand exports by reducing the price of their currency relative to the EU. Means’ rhetoric is empty. Germany’s insistence on keeping the euro overpriced relative to other currencies harms the EU’s recovery from the Great Recession. Currency exchange rates are a practical issue of trade and employment policy, not a moral issue.
Similarly, I have explained why insisting on a “balanced” budget, i.e., a deliberately pro-cyclical policy that makes it far harder to recover from a Great Recession harms the EU and the U.S. Means again relies on empty rhetoric. He seems to think that a “balanced” national budget self-evidently represents superior morality. National budgets, however, are pragmatic, not moral, issues. Nations like Ireland, Iceland, and Spain ran budget surpluses during the run up to their crises. Anyone with even a passing understanding of U.S. history will find that our episodic efforts to dramatically reduce federal budget deficits have repeatedly ended in depressions. The United States became the reserve currency for the world not despite running budget deficits for the vast majority of our existence, but because we ran deficits.
I end on the lead I’ve deliberately buried. Germany’s policy is to cause exceptionally high levels of unemployment, slash public services, and slash working class wages in the periphery nations. None of this is necessary or desirable. (Merkel’s mantra is TINA: There is No Alternative, but there are far better alternatives if one escapes the theoclassical prison.) Germany’s policies cause extraordinary human suffering in many EU nations. Means captures Merkel’s response to that suffering: “let the chips fall where they may.” Like Means, Merkel cannot be bothered to offer even a formulaic expression of sympathy for the plight of the “Latins.” Means’ metaphor is accurate. Germany’s policies are putting much of the EU through a wood chipper, but people are not wood chips. The idea that their suffering should be tossed off with the line “let the chips fall where they may” indicates the inhumanity that is one of the hallmarks of theoclassical economics. If this callousness represents “northern” “culture” then it is high time for “Latin” culture to save the EU in general and Germany in particular from the kind of depraved kultur that runs people through a wood chipper and ignores or even mocks their suffering.