Mr Weidmann of the German Bundesbank exhibits narrow-mindedness in his visions for European economic integration.
Bundesbank President Jens Weidmann recently visited Sciences Po in Paris to give a lecture entitled “At the Crossroads: The Euro Area between Sovereignty and Solidarity”. Five years into an economic crisis that stubbornly will not end, and with the continued rise of Eurosceptic parties across the continent, his speech was a perfect opportunity to present an innovative plan for addressing the long-standing problems in the Eurozone.
Weidmann could, for instance, have proposed a mechanism for sharing the costs of economic adjustment across creditor and debtor countries, put forward ideas to stimulate economies producing well under their output potential, or considered proposals to create more powerful state/market synergies.
Instead, the Buba president — who holds a PhD in monetary economics and has passed time both at the IMF and as adviser to the German government — promoted a one-size-fits all policy model that presented any discussion of fiscal transfers to or debt relief for debtor countries as encouraging irresponsibility; he effectively placed all of the burden of economic adjustment on countries in the Eurozone’s south. Weidmann’s speech was like a textbook lecture on supply-side economics, austerity, and structural reform that even its staunchest advocates have pulled away from.
The Bundesbank head’s main concern was moral hazard: the “reckless behaviour” that results from providing taxpayer deposit-insurance to banks; the incentives for loose spending that stems from the “sovereign/bank nexus”; transferring resources between countries would most likely be wasteful; and the need for penalty interest rates “for countries that pursue unsustainable policies“. And he thought the best way forward was to strengthen rules-based fiscal policy decided by an independent board – like central banks in setting monetary policy.
But, while moral hazard can be a serious problem, it is far from the only concern when designing economic policy. A country can eliminate moral hazard and implement deep supply-side reforms, but still produce well under its output potential if there is insufficient demand. This is exactly what we have witnessed in Spain and Greece, where structural reforms have long been implemented, but where robust economic growth has not returned.
Yet, despite this obvious reality, Weidmann appeared unwilling to consider proposals that would push any of the burden of adjustment onto the North or ameliorate economies suffering from a lack of demand in the short and medium term. Instead, he kept returning to simplistic family budget analogies: suggesting incorrectly that there was no difference between a nation-state using deficit spending to manage economic cycles and a teenager who uses his mother’s credit card to pay for nights out on the town. But, unlike households, governments can make pie-expanding investments, and are therefore justified to pursue deficits during economic recessions.
Given that creditor countries have benefited from the asymmetry of the Eurozone through lower borrowing costs and an effectively lower exchange value for Northern exports and that unemployment rates in Greece and Spain have barely budged in five years, demand-side proposals should be taken more seriously.
During the Q&A, the Bundesbank chief called this year’s 3% rise in real wages in Germany an opportunity to improve the relative competitiveness of the EZ periphery and said that the new EU banking union should cushion local economic shocks.
But he said not a word about the crisis in the South maintaining the German export boom and providing the demand stimulus in the North that would otherwise have had to be driven by state activity. Nor did he consider that the German economy itself – and arguably contributing to its relative success these years – is one of the least liberal in Europe, with many credit institutions protected from outside competition; strong labour, consumer and environmental protection laws; and a coordinated model of capitalism that seeks to actively shape the German role in the world economy.
If five years into the crisis, the most influential central bank President in Europe cannot make any suggestion other than more of the same austerity medicine, reducing state economic activity and relying on markets to counter imbalances and asymmetries in the Eurozone, then how can Europe hope to deal with its myriad of related challenges: from refugee integration via ageing populations to persistently high unemployment?
True European leadership would involve considering a range of interests and options to address Europe’s deep economic problems. For a start, it would mean taking Keynesian policy seriously once again — not because counter-cyclical demand management is a panacea, but because — in combination with the supply side structural reforms Weidmann champions — more spending could give the European periphery the economic boost it so desperately needs.