Wednesday, February 26, 2014

Jörg Bibow — On German Public Opinion and Illusory ECB Power

But that overlooks the real hurdle in all this: German public opinion. Not only is the constitutional court one of the two holy institutions in Germany, the other being, of course, the Bundesbank. German public opinion is firmly imprisoned by the failure of Germany’s political leadership to explain to the German public that Germany itself has played a key role in causing the unresolved euro crisis. Germans firmly believe that their country is the ‘Musterknabe’ of the euro and that all would be well in the land of the euro if only everyone else became just like Germany – when nothing could be further from the truth.
Germany’s apparent success under the euro depended on others behaving differently. Forcing everyone to behave just like Germany is making matters worse today. Alas, this is not an appealing insight in a country of citizens sharing the belief that all countries of the world can become more competitive at the same time, with “competitiveness in stability” being the German holy grail; just as having all countries simultaneously run persistent current account surpluses is held possible, according to German math and accounting rules.
Nor has anyone enlightened the German public about the catastrophic consequences for Germany itself in case of euro breakup. As a result, Germans may be easily fooled by the fantasy of a “Gexit without pain” – which appears to be the promise held out by Germany’s growing anti-euro brotherhood.
For a start, then, try to educate the German public that quantitative easing is not a synonym for hyperinflation and euro bonds not a transfer union in disguise.
Multiplier Effect
On German Public Opinion and Illusory ECB Power
Jörg Bibow

Someone should also explain to the German public why "the German solution" has depended on wage suppression for decades in order to run an export economy without wage inflation.


Ralph Musgrave said...

What exactly are the “catastrophic consequences for Germany itself in case of euro breakup”? Granted there’d initially be some dislocation. But Europe was a wealthy place prior to the formation of the Euro. It could go back to that set up.

Even better might be for excessively competitive Germany to leave the EZ, while the “uncompetitive” other EZ countries remained in a currency union.

Peter Pan said...

Doesn't China have a small role in Germany's success?

Calgacus said...

I agree, Ralph. What catastrophic consequences? Marshall Auerback wrote articles a couple years back about how a German exit would be the best immediate, likely thing for both Germany and a rump Eurozone. Let's hope "the anti-euro brotherhood" grows and grows.
The ECB's powers are not at all illusory, as the markets, but not Bibow discerns.

Tom Hickey said...

I've recommended Germany's withdrawal from the euro as probably the best way to save a failing system at least temporarily by doing the least damage. But Germany would not escape pain either, since a return to the DM would see Germany with a much stronger currency than under the euro and this would adversely affect is export-driven economy. I don't see it being catastrophic though. Germany could even withdraw temporarily and resume the euro later when things are worked out. But it's difficult to work things out now, since Germany in particular has a veto on what would help everyone else but might not appear to be in Germany's interest. What we see in the EZ is the blue states in the US having a veto on fiscal transfers to the red states. Germany is not alone in this in the EZ but it is the biggest obstacle in integrating core and periphery. One problem with this, though, is that a political objective of the EZ was to integrate Germany rather than opposite, given Germany's history. So this is an issue with many levels, and no clear solution that is optimal, or perhaps even workable in the long run. So maybe the best thing to do is look at more temporary fixes.

What would be catastrophic is a failure of the euro in which German banks take a bit hit as primary creditors. What I think is happening is a game of chicken with the neoliberal eurocrats seeing just how far they can push their program. Experience shows that when they feel a limit has been reached they retrench a bit. However, I don't think that this is sustainable politically over the long run. There will be more crises, since that is of the nature of capitalism, and the EZ will be going into the next one in a weakened position.

Something's gotta give, and I just don't see how the neoliberal eurocrats can game this forever. Some changes are going to have to be made, either going forward toward fiscal hence political union, or else backtracking on neoliberalism and relaxing austerity.

This could be patched up with some tweaks — in principle. The devil is in the details politically as well as economically. But perhaps a game plan with temporary iterations could be worked out. I can see Germany withdrawing for awhile as an option.