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Monthly Archives: May 2012

The crisis is complicated by all kinds of competing theories. This is not just an economic crisis but rather a crisis in communication. With sound communication there wouldn’t likely be a crisis.

Consider the information overload: Newspapers every day, The Economist a new edition every week, Olli Rehn with a new report, Paul Krugman with a new book. Perhaps one in one hundred economists has a weblog that needs to be filled. (Quitting a blog is like admitting that you never should have started it.)

What to do about all these competing theories ? My advice is: the theory should explain the long run since 1900, otherwise it might be too fickle.

The second advice is to stay close to policy making (even when being creative). President Hollande is the standard bearer for investments and employment, against the hard wind of Germany austerity. Thus there is little need for newspapers and weblogs to argue for investments and employment, Hollande is already doing that job. In itself Germany sets the example of investments and employment too, rather more convincing.

Outsiders can give an argument that Hollande overlooks and that convinces Germany. This can be that Hollande might switch his gaze and look at what he can do in France itself. Some things can be very simple.

My own analysis fits these two criteria. The long run analysis shows that our democracies fail, with world war I and II and the long stagflation since 1970. Because politicians neglect advice from economic scientists. Now Olli Rehn must amend this from Brussels but it is wiser that each nation has its own Economic Supreme Court. For practical policy making, my analysis identifies the need for investment banks, readjustment of tax policies, and a new treaty on the euro.

Some people asked me what I think about the Modest Proposal by Yanis Varoufakis and Stuart Holland (2011). Well, I think that eurozone bonds are a bad solution for the long term. Hence No. Eurozone bonds however might be used in the short term for a moratorium to buy ten years of rest and stability to discuss the more fundamental changes. But that is it.

PM. Here is a discussion on Kantoos and Varoufakis’s reply. It shows that you can have long discussions especially when details are complex and easily misunderstood. Yet, it suffices to conclude that eurozone bonds are a bad solution for the long term, since they violate the no bail out condition. A better scheme is presented here.

It is frustrating, and sad for e.g. the people in Greece and his students, that professor Varoufakis does not get to study my analysis. Greece is in dire straits and people around the world are interested in hearing what the Greek themselves have to say on it. Professor Varoufakis travels around the world with much energy trying to explain that Modest Proposal. It is pity that the opportunity is lost and that the Greek academia do not present a convincing argument.

Robert Kuttner in As Goes Greece (Huffington Post May 28) suggests that Greece was on the right track and that other factors caused the present instability. He seems to offer some words of help but a close reading shows that he creates confusion.

The way to help is: (1) think straight, (2) give a solution that works. On the second: this weblog Boycott Holland outlines a new synthesis in economic theory plus an economic plan for Europe, see the About page. On the first, let us look at Kuttner’s case.

(a) Kuttner compares the weak EU governance structure with the strength in the USA: “It would not be an exaggeration to call the EU a failed state, except that it never quite rose to the status of a state.” However, the USA is in shambles as well, both economically and socially. In my analysis the Trias Politica structure in the Western concept of democracy is at fault, and we need an constitutional amendment for an Economic Supreme Court. See the About page again.

Also, the EU is a new kind of beast, a collaboration of sovereign states. There is no reason to call it a failed state if nobody intended it to be a state. There is no blueprint here. The USA had the Civil War and still suffers the consequences. The better approach is to call the EU an interesting project in diplomacy and an effort to co-operate while respecting national differences. Constitutional amendments with national Economics Supreme Courts will help a lot.

(b) Kuttner: “The ECB and national central banks might have intervened decisively on the side of Greek government bonds, and caused the speculators to take a financial bath. Instead, the European powers allowed speculators to rule.” Kuttner neglects the no-bail-out rule. Greece didn’t stick to the eurozone rules, it could not expect to be helped, it would be unwise to impose dictates from other countries, and the only way to get Greece to behave were the financial markets. The only reason why Greece finally tried to contain its budget was not “yes, we must stick to the rules, yes we respect the needs of other EU member states” but because of the exploding rates of interest.

(c) Kuttner: “The third problem is the high-handedness of German Chancellor Angela Merkel.” He compares with the German subsidies for East Germany: “You think the East Germans kept accurate books?” This is an extremely silly remark. (c1) East Germany came from communist dictatorship, not from 35 years of democracy since dictator Papadopoulos, and all those years of support from the EU, (c2) there were close historical ties, (c3) Germany is sovereign for the whole region, (c4) even under the dictatorship East Germany had shown some industrial power (though weakening in the end because of technological progress in the West).

“Mrs. Merkel’s government has been the prime source of the austerity demands.” It is a matter of semantics of what is “prime”. The Dutch and Fins were strong too. Perhaps Germany is more powerful but that does not mean that other voices can be neglected. It seems that in particular the Dutch were the main cause of the “private sector involvement” (PSI) that wreaked so much havoc. But the whole eurozone confirmed the budget rules, and if that is wrong, please blame them all.

(d) Kuttner: “Still, isn’t all this, in some respects, Greece’s own fault?” A stupid question gets a stupid answer. Is it Greece’s fault that the EU is not a sovereign nation with the ability to tax the North to invest in the South ? Yes, Alexander the Great should have gone to the West rather than to the East. Of course it is Greece’s fault that it borrowed more than it could handle. Of course it is the fault of Germany and Holland that they pursue an export policy that out-competes the rest of Europe, so that they are the creditor nations that lend on too easy terms.

“If the EU were serious about helping Greece to reform, it would have combined technical assistance and debt relief conditioned on a reform program with a reasonable time period, rather than adopting a purely punitive approach.” Well, this is what the EU actually did. But note: (d1) first the budget rules needed confirmation, (d2) Yes, the PSI was an error because that fueled problems in the banking sector, (d3) there is still tax evasion in Greece, with plush jobs and corruption, and the way how Samaras and other politicians tried & still try to evade the hot potato did & does not impress the rest of Europe as very trustworthy.

Kuttner seems to suggest that the problem was only Greece, and not also Italy, Spain, Portugal and Ireland. Isn’t there some involvement of the USA with Alan Greenspan and the US banking system ? Why doesn’t the USA make some amends to the rest of the world ?

(e) Kuttner: “Historians will look back on the spring of 2012 as moment when Europe’s institutions and leaders either failed to contain a deepening crisis — or as a time when leadership grasped the common stakes and rose to the occasion.”

Kuttner doesn’t specify what that solution would be. Supposedly anything that works ? Or just plain old integration into a United States of Europe ? Apparently The Economist newspaper seems to think the latter (May 26). But these anglo-saxon plush-job-corrupted commentators forget that Europeans do not want a United States of Europe. Historians will judge that Kuttner did not get it.

Just to be sure: the economic plan for Europe presented in this weblog contains EUR 100 bn for relief in Greece, no tax and social premiums on the minimum wage, a VAT of 1% plus international investment zones. Thus Greece has a sunny future. The political leaders must accept that this crisis has both monetary and budgetary aspects. The emphasis curently falls on the budgetary aspects but the monetary element should not be forgotten: a reform of the euro and ECB.

People in Germany, Holland and Finland have little knowledge about the economic hardship in Italy, Spain, Portugal and Greece. The North tends to use abstract arguments about economic soundness but with little knowledge of local conditions and consequences in the South. Conversely, there seems to be insufficient understanding in the South about the North. Also the newsmedia still focus on the own nations with only occasional mentioning of the other member states.

Earlier I presented a rather abstract Economic Plan for Europe (part 1 and part 2) but it are contacts at the personal level that are in demand just as well. There already are “twin towns” and “sister cities” but we can stimulate this much more. The table gives an example how countries might be teamed up. For example Holland and Greece. Holland has a national debt of 65% in 2011 and Greece 165% (before the PSI) but jointly the debt is 92% of their joint GDP. The idea is not that Holland adopts part of Greek debt but that the two countries start working together much more intensively, and the Debt-to-GDP ratio may monitor the advancement.

Why team up ? Well, when there are personal contacts between Dutch & Greek government, Dutch & Greek mayors, Dutch & Greek companies, Dutch & Greek schools and universities, then it is easier to co-operate and clarify what are the possibilities for co-operation, than when some spaceship from Brussels sends out coded messages of “austerity, austerity, austerity” that translate as “unemployment, unemployment, unemployment”.

Europe is a continent and a political process, not a nation. When Brussels says that we need austerity then people will also think that Brussels is far away. When the North says that we need austerity then this may also cause resentment rather than understanding of the macro-economic argument. But when the message is communicated by friends who are helping to look for investment opportunities and employment as well, then this is a world of difference.

Country Debt / GDP %
Netherlands 65
Greece 165
NL + EL 92
Germany 81
Italy 120
DE + IT 96
France 86
Spain 69
FR + ES 80
Finland 49
Portugal 108
FI + PT 77

The new president of France has an apt first name but for my present purposes a somewhat awkward last name. Some people might think that my purpose would be to boycott the president but this is not the case. (Yet.) Nevertheless, come to think of it, there is a good argument that the wrong person got elected. If voters for Sarkozy had Bayrou in second place and voters for Hollande had Bayrou in second place too, then Bayrou likely would be a Borda Fixed Point choice, and thus a superior winner. I already discussed this mechanism for the past elections with Sarkozy and Royal, see In a democracy, Bayrou would have won. It is also dubious that president and parliament have different electoral mandates. If the upcoming parliamentary elections in June fail to support Hollande then France and Europe fall victim to a wrong system of democracy, like we also see in the USA with a Democratic president and a Republican Congress. There is also an argument that Hollande did not present his full agenda out of fear that realism would drive away voters. Perhaps he can keep up the show till after the June elections but perhaps Angela Merkel and events in Southern Europe will not allow so, and then he indeed could lose support in parliament. If the democratic structure isn’t sound then the economy will suffer.

The situation in Greece brings Papandreou’s referendum into mind. Sarkozy and Merkel were furious about that proposal but the Greek leader had a better understanding of his compatriots than the foreigners. Papandreou could have defended the European deals and he could now still be in stable government. Instead, a half year has been lost and Greece moves towards second elections without a strong leader to defend the European deals. A Greek exit from the eurozone would not be the disaster for the rest of Europe that it would have been a half year ago but it still would be rather disastrous for the Greek themselves. For jobs and foreign investments it would be better to keep Greece in the euro, see my Economic Plan for Europe (September 2011).

Remember the political process as seen in Angela Merkel’s mind or shoes: She needed to impose budget discipline on the other Europeans. The 2011 average of 83% Debt / GDP is too high, and Italy with 120% is unsound. To spend money in order to grow could have destroyed the polical pressure for budget discipline. Merkel’s only tool were the markets. The rising rates of interest forced countries to surrender some souveignty to Brussels. Now that some mechanisms are in place there is scope to discuss growth and employment. These topics are already on the agenda for the EU heads of state and government in June. Now Hollande and Greece argue for that growth agenda but it was already planned. Surprisingly, Sarkozy did not benefit from those plans.

I am not convinced that this was the only conceivable process. It is not unlikely that a growth agenda like in my Economic Plan could have been combined with more austerity. But I am not in elected position so perhaps I speak from whimsical luxury. Nevertheless, a growth agenda is not formulated easily either, see that Economic Plan. For me it seems that Hollande and Greece are whimsical in being vague about their ideas for environmentally sustainable growth and employment.

NRC-Handelsblad today has an interview with Elio di Rupo, prime minister of Belgium. He correctly states that the funds for the stability funds could be found so that this should not be impossible for investments for growth and employment. With Hollande he doesn’t feel alone any more. Yet Belgium has a debt / GDP ratio of about 100% and if Belgium could find those investments funds, why wait for Europe ? Di Rupo doesn’t seem to understand that there is a need for national investment banks that attract funds by generating profitable venues.

Hollande will meet with some opposition from Holland. The fear will again be that funds will be squandered in France and Southern Europe instead of invested wisely. Holland also censors science. Perhaps Di Rupo can help his friends Hollande and Holland. There is now a new book in Dutch Democratie & Staathuishoudkunde (“Democracy & Political Economy”). Those who can read Dutch like Belgians can check again why it is wise to boycott Holland till the censorship of science is lifted.