Tagged: finance

Vincent Dreher

Seven years in crisis: Some questions for the Eurozone

DER SPIEGEL 29 2015Recently, German media entered uncharted territory. While conservative newspapers have always identified the Greek government’s profligacy as root cause of the ongoing crisis, the liberal press had maintained more balanced positions. Yet on July 9, 2015, the weekly DIE ZEIT asked: ‘The Greek trap – the crisis-ridden country has a culture inimical to achievement. How can it be overcome?’ DER SPIEGEL proclaimed (in its July 11 issue) the necessity of ending the German romanticization of its arcadia in Attica. The title read: ‘Our Greeks – rapprochement with a strange people’.

Since when has culture advanced as main explanation for a country’s (economic) misery? How can shortcomings in a state bureaucracy be taken to explain an entire people’s failure of achieving prosperity and societal welfare?

In logical consequence of this narrative, the subsequent Eurozone-Greece agreement of July 13, 2015 figured as ‘the most intrusive economic supervision program ever mounted in the EU’ (FT). The drastic measures alongside the required ‘ownership’ of reforms revealed the deep mistrust in Greek institutions. The source of most, if not of all, failures was located in the Greek government’s incapacity, or reluctance, to accept conditionalities and implement reforms.

Unit labor costs and competitiveness in the Eurozone

This is yet another instance of misinterpreting the symptoms of a disease rooted in the fundamental misalignments within the Eurozone. There have been idiosyncratic issues in Greece (reporting failures, unsustainable debt since 2010), just as there have been home-grown issues in other crisis-hit member states contributing to the current escalation. However, these problems represent only the tip of the iceberg. It is not the misbehavior of individual governments, let alone cultures, which underlie the seven-year-old crisis. It is persistent failures in the economic governance of the Eurozone. Recent data from other Southern members are hailed as heralding the end of misery (EC, Reuters, FT, WSJ). The following discussion will demonstrate to the contrary: as long as the shortcomings in the institutional set-up of the Euro and the failures of member state coordination of fiscal policies persist, the crisis will continue. Greece today, who tomorrow?

Unit labor costs, the ratio of total labor costs to productivity, are interpreted as the best approximation of an economy’s competitiveness. Judged by these standards, today’s Germany is competitive. This is not merely due to its superior productivity though. German multinationals as well as the famed Mittelstand are very capable. But the great divergence of unit labor costs compared to Southern European economies was due to wage restraints and welfare cuts, beginning with Schröder’s Agenda 2010 in the early 2000s (Mickey Levy, Flassbeck, Spiecker, The Economist). Addressing ‘the sick man of the Euro’, the reforms (and other factors) put the German economy ahead. This was achieved, however, at the cost of society’s lower strata and its Euro partners, as evidenced by subsequent divergences in balance of payments across the Eurozone (Gavin Davies). Bound by the Euro, others could no longer devalue their national currencies to improve competitiveness. During the decade of the European boom, no one seemed to worry. Southern economies expanded strongly, while Northern capital was flowing in and financed investments and consumption. Consumption of Northern, of German goods for that matter. Apparently unnoticed, Eurozone’s North and South diverged.

Since the onset of adjustment programs across Europe, however, unit labor cost convergence has moved center stage. Yet this is not a joint effort – i.e. via wage restraint, reforms and export-orientation in the South combined with wage increases, fiscal expansion and domestic consumption in the North. Instead, the benchmark has been set by Germany and Northern Europe, and the others are asked to adjust. During the past years, Southern economies have undertaken enormous efforts. Greece, above all, is the star pupil (OECD, Economonitor). But to little avail. And even if the recent recovery across Europe (except Greece) proved sustainable – when every Eurozone member strives to become  ‘competitive’, who will act as counterpart? The German ‘Sparpolitik’ in the 2000s was offset by Southern expansion. Who is buying now, when everyone is saving?

The structure of the Eurozone and the European Central Bank

Divergences of unit labor costs, clouded by the boom, were further reinforced by the ECB’s single nominal interest rate. Paul de Grauwe and Notre Europe argue that increasing inflation in booming Southern economies lowered real interest rates, thereby rewarding further economic expansion. The reverse was true for the North, which still profited of huge export-gains. Additionally, due to increasing real exchange rate spreads the prices of comparable products across member states diverged, making Northern manufacturing more and more attractive (Vistesen, Dadush, Wyne). Hence economic dynamics pushed states further into imbalances, not merely the often denounced human fallacies. Where is the public discussion about these curious, and obviously significant, dynamics?

A second issue identified by de Grauwe is the lack of a lender of last resort. Since the late 19th century, any central bank’s mandate has included the provision of unlimited liquidity in times of financial panic; not so in the Eurozone. When the financial crisis hit Europe, each member had to clean its own doorstep. Capital fled to presumably safer Northern countries and Southerners dried up. The lack of affordable refinancing forced spending cuts, thereby inducing immediate austerity programs. The cuts diminished GDP, which made servicing debt even harder. And only then the European austerity programs were devised and implemented. The question arises: were state budgets ultimately unsustainable and Southerners righteously punished for profligacy? Or did they simply look weaker relative to Northern neighbors, which were favored by investors in times of uncertainty? Evidence points to the latter. Nevertheless, these are the discussions we Europeans should hold.

The Eurozone is not ready for the challenges ahead

Despite improvements in financial governance, such as the banking union or the ECB’s perennial setting of precedents, the economic structure of the Eurozone has seen little of the desperately needed changes (e.g. Hans Tietmeyer, Euractiv). As long as there is not some kind of fiscal union, as long as there are not some kind of common Eurozone debt instruments, the inherent fragilities persist. Furthermore, the majority of European policymakers remain bound to their national constituencies – why should they care for the whole of Europe, when their electoral mandate stems from a fraction of the people?

We need a European debate. A debate about the flawed narrative that the Greek government’s profligacy is said to have caused the economic and political crises; a debate concerning the interpretation of the crisis as a mere lack of competitiveness (what about the European welfare state by the way?); and a debate with regard to the absurd claims about “cultural” limits to economic growth.

Vincent Dreher is a PhD student at the Berlin Graduate School for Transnational Studies. He works on the Political Economy of International Money and Finance, with a focus on international institutions.

Mathis Lohaus

Links: New Blogs, New Crises, NSA Reform, Ethics in Academia

global-matters

Our colleagues from the Center for Global Politics (CGP) at Freie Universität Berlin have set up a blog called “Global Matters”. The idea is promising:

every two weeks the CGP posts a question related to an important topic in current affairs – and presents short but profound comments from distinguished International Relations experts and practitioners from all over the world

Good luck and have fun! The current post is on conflict in South-East Asia. (Also, there seems to be a tendency at our university to pretty grandiose names for blogging projects…)

Speaking of new blogs: Dan Nexon, of Duck of Minerva fame, now runs a personal blog called Hylaean Flow. Much of it will probably deal with insights from his role as editor for ISQ and the publishing process in general (via the Duck, where they also posted the new Game of Thrones trailer, just in case you missed it)

Tyler Cowen presents opinions from different people on “Which countries will have the next financial crisis?” If you’re a citizen, resident or investor in one of the following, now might be the time to worry: Denmark, Sweden or Norway (high private household debt), Singapore (a lot of loans), Malaysia or the Philippines (economic bubble), Ukraine (although Russia helped), Canada (real estate bubble), Thailand, Turkey, Greece, India or Indonesia (Tyler’s picks).

One key question is the relative worry weights you assign to private debt vs. bad institutions.

What about the rest of the world?  The eurozone is seeing ongoing credit contraction and perhaps deflation too.  Japan just announced a surprisingly large and apparently persistent current account deficit.  And the United States?  Things look pretty good, but in fact by the standards of historical timing we are soon due for another recession.

I’ll put my money on Turkey.

On cyber security and surveillance: Bruce Schneier has an excellent piece on how the NSA and other agencies threaten national (U.S.) security. The text is a commentary on the reform debate in the United States; let’s wait and see what President Obama will announce on Friday. Meanwhile, the tone in Germany gets angrier. As the “no spy” treaty seems to be canceled, now some people make the case for retaliation through the TTIP and other transatlantic negotiations.

PS. At the Monkey Cage, there’s a short interview with Peter Singer, whose book on cyber security and cyber war looks very interesting.

Last but not least, two items reflecting on academic practice. First, Megan MacKenzie has written on the ethics of adjunct professors and other “casual” posts in (U.S.) departments. She presents four reasons to be careful about taking these jobs and four ways for permanent staff to improve the situation. A lot of this probably also holds for the European context.

Second, Burcu Bayram on how to tell MA students that pursuing a PhD might not be the best option for them: Should you be the blunt “dream-crusher” or try a more empathetic approach?

Mathis Lohaus

Links: Mandela and Great Leaders; WTO deal in Bali; How Money Works

Frederik de Klerk with Nelson Mandela - World Economic Forum 1992
Frederik de Klerk and Nelson Mandela in Davos, 1992. (CC) World Economic Forum

On December 5, Nelson Mandela passed away. For political scientists, discussing  Mandela’s legacy is of course connected to questions about the role that great leaders can play in world politics. Or, more generally: how to analytically deal with individuals.

  • Alex de Waal argues that “[t]he way he has become idolized and idealized tells us more about the world’s need for such a figure, than about Nelson Mandela himself.”
  • Joshua Tucker writes that waiting for great persons to come along and single-handedly push democratization “has the potential to lead to dramatic lost opportunities”.
  • Also at the Monkey Cage, Stephen Dyson replies: “A worthy goal of science is to provide systematic, rigorous knowledge about issues of social importance. But science should also engage with the moral and empathetic possibilities that come from taking leaders seriously.”

Dan Drezner comments on the WTO: “Why the Trade Deal in Bali Was A Game Changer”. Drezner happily points out that positive news on the WTO are in line with his forthcoming book, which argues that post-Lehman financial governance has worked quite well:

Of course, not everyone shares this view, and there has been no shortage of arguments that say the opposite.  One of the strongest data points in their empirical quiver has been the failure of the Doha round of WTO talks to be completed.  Indeed, for the past five years, “Doha” has been wonk shorthand for “dysfunctional global governance that accomplishes nothing but gridlock.”

It shouldn’t come as a surprise that other observers (#1, #2) are not too excited about the outlook for future WTO negotiations.

From the WTO, we move on to finance – and somewhat away from political science. Forgive me, but you will thank me as soon as one of your relatives brings up “the financial system” and/or Bitcoin at the next family reunion. I highly recommended reading the next three items in preparation:

Mathis Lohaus

Links: Big Topics in IR; International Currencies; The Middle Class Is Not What It Used to Be

braumoeller

Phil Arena recommends Bear Braumoeller’s new book Great Powers and the International System. Not just because it’s good, but as a role model for grad students in IR:

[This book] offers a great example of a dissertation (or a project that began its life as one, at any rate) that speaks to questions lying at the center of the field. Yes, you can write Bad Pun: The Thing That’s Happening Now and How None of The Big Names Have Anything to Say About It, 1990–2008. But you could also think a little bigger.

 

Dan Drezner wonders if the recent almost-shutdown of the U.S. government will trigger financial counter-balancing, as IPE realists have been predicting for quite some time:

The question is whether it’s worth being dependent on a growing economy that’s so politically unreliable.  So now we’re gonna see whether incipient U.S. rivals will start making the necessary down payments to act on their increasingly justified complaints.

As Benjamin J. Cohen suggested in a talk here at Freie Universität a couple of months ago, what keeps the dollar strong might be the lack of alternatives (rather than the inherent qualities of the global key currency #1). Drezner says we’ll see soon enough which side is right, but I have the feeling that in the absence of clear predictions or thresholds (how do we know “the end of the dollar” when we see it?), this dicussion will drag on for decades.

 

Speaking of money, and considering that this is a blog written by relatively young people, allow me to point to a non-IR topic: “We’ll never have it so good again.”

Well, in August 2011, [my parents’] former home was placed on the market. The asking price was £2,475,000. So a house that had once been affordable by a young, middle-class couple was now being aimed at buyers who were, by any normal standards, very rich indeed. (…) A similar process of exclusion has taken place in education. (…) So my father went to Eton. I went to Eton. And my son goes to Bishop Luffa Church of England comprehensive.

Of cource, these are still nice problems to have compared to most people, and many aspects of social life are certainly better than a couple of decades ago. Yet the overall trends regarding income and wealth in the rich parts of the world, which I’ve covered here earlier, look worrisome basically for everyone below of the very top of the pyramid.

Mathis Lohaus

“The Euro will never succeed, and it will never fail.”

"Please find me the most generic euro image you can think of!" Source: Wikimedia
“Please find me the most generic euro image you can think of!” Source: Wikimedia

On Friday, Benjamin J. Cohen gave a talk at FU Berlin. Cohen, who is a professor of International Political Economy at UC Santa Barbara, is probably most famous for his work on the Geography of Money. He was invited by the KFG and the International Research Training Group “Between Spaces” to talk about the future of the euro as an international currency.

As the somewhat pessimistic title of the lecture – “The Euro Today: Is There A Tomorrow?” – suggests, this was not meant to be a pep talk for worried Europeans. In fact, Cohen’s short answer to his own question is: No, the euro will not bounce back from its current crisis, but instead face a “long, lingering slide into marginality”.

First, some preliminaries: Cohen was not talking about the future of the currency as such, but specifically about the euro’s role as an international currency: To what extent will it be used by non-members of the eurozone – not as a substitute domestic currency (“dollarization“), but for international purposes? More technically, the question is about the use of a currency as a unit of account, store of value, and/or medium of exchange.

To put it short, the argument here is that the euro is nowhere close to the dollar both in scope (which functions it fulfills) and in domain (where / by whom it is used).

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