Economic crisis

Caroline de Gruyter is the NRC Handelsblad correspondent in Brussels. Here is her bio at Presseurop where she gazes dreamily into a far distance. Her acute and informative diagnosis though of last April at Cargenie Europe has the apt title The Dutch Are Trapped In Europe.

“Since the Second World War, the Dutch have wanted to be part of a transatlantic community based on the principles of liberalism and free trade. But instead they have become embedded in a continental and deeply political European community. They would like to live in a British Europe but find themselves in a German one.”

“There are no signs that the tension between the transatlantic dream and the European reality will ease soon. The Hague will probably continue to react in its traditional, irresolute way to all things European that cross its path.”

“There are two obvious developments the Netherlands can hope for, apart from economic recovery. The first is that the UK finds a contructive way to stay in the EU and that it stops holding up initiatives in Brussels. The second is that the EU manages to successfully negotiate a free trade agreement with the United States in a year or two. That would give the Dutch a morale boost, vindicating their stubborn dream of a transatlantic community.”

“Both developments would, however, reconfirm that Dutch well-being in Europe is shaped mostly by events outside of Dutch control.”

Caroline crafts a very British understatement here: “that the UK finds a constructive way to stay in the EU”. Given the reports in The Economist about David Cameron’s problems with UKIP and his referendum, it is more likely that the EU has to find a constructive way to handle the UK – including Scottish independence. A EU & USA free trade agreement is less likely when the EU is locked up in recession for the North and depression for the South. Hence I don’t quite agree with Caroline’s otherwise acute analysis. It is very much in Dutch control to lift its censorship of science so that this continent can end its visit to Hades.

In NRC Handelsblad last weekend, May 25th, Caroline also wrote about Thomas Wieser and Hans Vijlbrief (a text in Dutch).

Thomas Wieser looks a bit like the Ben Bernanke of Europe. The most informative article about him seems to be by Tim Jones in the, 2009. He now holds the chair of the EU Economic and Financial Committee, say the key policy making committee of the issues discussed in this weblog. Thomas Wieser happens to be born in 1954, like me, Angela Merkel, Franςois Hollande and, not to be forgotten, Alex Salmond of Scottish independence.

Caroline compares the diplomatic and effective teamwork of Jean-Claude Juncker and Thomas Wieser with the undiplomatic and increasingly ineffective non-teamwork of Jeroen Dijsselbloem and his treasurer and assistant Hans Vijlbrief.

“They seem to confirm the old cliché that the Dutch ‘speak too long and tell others how things must be’. Treasurer-general Hans Vijlbrief, who also worked for De Jager, apparently speaks a lot. Many call him competent, some see him as a jovial burgundian – but also a somewhat crude burgundian. Strict pronouncements by Vijlbrief about Greece and other Southern countries in the past, are still recalled with resentment by some delegations – and not only the Southern ones. “Vijlbrief acts sometimes as if Holland pays the whole bill for Greece, Portugal, Ireland and Cyprus,” says a national diplomat. “But Malta pays relatively more than Germany. This annoys people.” (…) A diplomat confirms: “Perhaps we see this wrongly, but this is not a team by which Dijsselbloem can gain our hearts and minds.”

Caroline explains that this is an element in the reasoning that caused Franςois Hollande on May 16 to propose that there will be a permanent Eurozone government, with its own President – and no longer a parttime appointment from a Member State. This is the report from France24 and this is from Reuters. In itself it makes sense. In standard economic analysis, the Eurozone needs integration for the euro to function properly, and then one needs a government with an Executive, Legislative and Judiciary to maintain democracy. The French economy is in dire straits and could very well benefit from such a Eurozone government that starts taxing Germany and subsidizing France. Of course, the UK would be an onlooker only, fall apart, and perhaps be reduced to something like Great Denmark.

The situation still causes a small surprise, that however might not be a real surprise since there is a system in the madness.

I happened to hear about Hans Vijlbrief for the first time when he wrote a fax in 1995 to the reporters of MUG in Amsterdam. MUG is a monthly magazine for welfare recipients that reports about how to find a job, how to apply for benefits if you don’t succeed, and how to save expenses when on benefit. It is quite popular with a quite large circulation in the Amsterdam region. The name MUG incidently derives from an abbreviation of Dutch Maandblad Uitkerings Gerechtigden, say “Welfare Recipients Monthly”, and should not be confused with the English word mugging, though some readers may of course wonder whether lazy welfare recipients aren’t mugging the welfare state on a grand scale. The actual Dutch pun in its name is that “mug” also means mosquito. At that time MUG received subsidies from the Amsterdam local council and many of its articles carried the stinging message that benefits were too low for a decent living. This is its 2013 website.

In 1995 I had good news for MUG’s reporters: there was a new approach in economics that would allow full employment again, provided that the censorship at CPB was resolved. At that time, Vijlbrief worked at the Dutch Ministry of Economic Affairs that supervises CPB. His fax to the reporters explained that CPB functioned fine, that the Ministry also looked at employment, and that they followed a different policy than mine precisely because their approach was better for employment. The final published MUG article can be found here, with my comments in brackets (all in Dutch). My main comment was that I was surprised that Vijlbrief already knew my analysis even though it was being censored. The man must be brilliant, to already know what isn’t available yet. We can observe that Dutch employment policy before and after 1995 is a mess, with a beggar thy neighbour policy of exporting unemployment by means of low wages. It must be with the same ‘burgundian’ optimism and clair voyance that Hans Vijlbrief now conducts the Eurozone policy, managing employment policy that he doesn’t understand, and with a similar command of monetary policy. I am quite tempted to apologize to Thomas Wieser for his incompetence and behaviour.


Dear Mr Salmond and Mr Miles,

I react to the idea, mentioned in The Economist, that an independent Scotland might wish a currency union with the remaining UK.

If you indeed would want to investigate this option, I advise you my paper
Money as gold versus money as water

That paper discusses the eurozone, but the mechanism would apply to any currency area. I am proposing a new theory – though untested yet – that countries with an Economic Supreme Court could have a currency union without greater political union. Perhaps you would not want to wait till the eurozone gives the working example. A definition of an Economic Supreme Court is in an appendix in my book DRGTPE, see the paper references.

It is useful to also refer to the paper by David Miles cs. on Optimal Bank Capital, now published in the Economic Journal but also available at the BOE:

The link is that optimal bank capital can be easily attained, if money / capital is created by the Central Bank and directly neutralised by capital requirements. Again, this would help the eurozone, but perhaps the UK can set the example.

I happened to see Mr Salmond’s cv and that he was born in 1954. It happens that I was too, like Angela Merkel and Francois Hollande as well. I suggest to take advantage of the common experience of history. It is important to refer to the censorship of science since 1990 in Holland and my advice to boycott Holland till that censorship is lifted. Perhaps your best point to start reading is this weblog entry where I observe that Spain might block EU membership of Scotland for fear of a precedence on Catalunya. But Spain might be grateful if you help solve the EU crisis by boycotting Holland till the censorship of economic science is lifted.

Sincerely yours,

Thomas Cool / Thomas Colignatus
Econometrician and teacher of mathematics
Scheveningen, Holland

PM. Link in The Economist

Subject: Your visit to Holland on June 19 for the session “Who holds the key ?”

Dear professor Krugman,

You will visit Holland on June 19 for a commercially funded conference “Who holds the key ?”, Of course, this relates to your column about “ernstig” people and your defence of Coen Teulings, who recently departed as director of the Dutch Central Planning Bureau (CPB).

I live a few blocks from the conference center, more towards the Scheveningen beach close to the Kurhaus hotel, and allow me to invite you to come over for a discussion with me too. I copy to Olivier Blanchard, Peter Bofinger, Martin Wolf, James Galbraith, Mark Thoma, and Robert Skidelsky, and perhaps some of them will support the idea that we finally get to talk.

I wrote this paper in 1997 with many compliments for your work but also some points of criticism. The paper apparently was included in the Unofficial PK website:

It is included in DRGTPE, and the PDF will read better, see page 219+:

See DRGTPE for the general analysis anyway.

Key points are:

(1) You apparently do not see the impact of the tax void and the dynamic marginal tax rate.

The tax void is the tax wedge at the minimum wage. This location causes a special effect. Your proposals for quantitative easing will not work much for the unemployed who are locked up in the tax void. The tax void for the USA is here, see the appendix:

The dynamic marginal tax rate is the total-differential over time, rather than the mere partial differential. This affects discussions about the optimal tax rates. According to my analysis VAT can best be 1%.

See DRGTPE p140-145.

Both tax issues affect the shift of the Phillipscurve.

(2) A modern economy needs an Economic Supreme Court (ESC), rather than failing CPB’s or CEA’s.

The definition of an ESC is in DRGTPE page 279+

See DRGTPE, CSBH and my weblog:

(Perhaps you should ask the conference organisers to send you the two books DRGTPE and CSBH.)

(3) For the Euro, my new theory for the “optimal currency area” is that democracies with an ESC would not need to transfer power to the Brussels burocracy. See my paper “Money as gold versus money as water”:

(4) I advise the world to boycott Holland till the censorship of science by the directorate of the CPB since 1990 is resolved:

(4a) You defended Coen Teulings, but as CPB-director for the last 7 years, he continued the censorship of science, and he did not check that the economic crisis 2007+ confirms my analysis.

(4b) Sweder van Wijnbergen was Secretary General of the Ministry of Economic Affairs in 1997-1999, and did not do anything about the censorship. He clashed with the minister on other subjects and had to resign. But he was a bureaucrat and had to be silent. While my position was that of a scientist, and I have to speak up.

Van Wijnbergen also maltreats the crititism of Alfred Kleinknecht on the Dutch export surplus. But part of the criticism on that export surplus is on target, see:

For unclear reasons the organisers see Van Wijnbergen as a better specialist on the crisis but he did not warn ahead of the crisis and maltreats the analysis by Kleinkecht, while Kleinknecht warned ahead of the crisis and has some useful things to say about the Dutch export surplus. It may be noted that the Dutch Ministry of Economic Affairs stopped funding Kleinknechts research so that he had to move from VU to TU Delft to continue it.

(4c) Bas Jacobs has not spoken up against the censorship of science. He does not check whether the crisis confirms my analysis.

Jacobs has investigated tax theory, along the lines of Mirrlees. However, my analysis on the tax void and the dynamic marginal tax rate are important qualifications for that line of research.

I have informed Jacobs and his two Ph.D. thesis students Floris Zoutman and Aart Gerritsen about my amendment to common tax theory. But they neglect it. E.g. in Dutch ESB 95 (4586) may 28 2010, Jacobs & Zoutman say that 52% top rate reduces tax receipts, where they refer to Emmanuel Saez, while the estimate ought to be improved, and they ought to have referred to my analysis.

(4d) According to the plan, you, Van Wijnbergen and Jacobs will be interviewed by Sandra Phlippen, chief editor of the Dutch economics magazine ESB. However, ESB has refused to publish my protest against the censorship since 1990. Dr Philppen is new to the editorial team and has said that she will consider the issue with an open mind. Two papers of mine are under review there since March 12, now for almost eight weeks while four would be the norm. I am still hoping for the best. One paper is a Dutch summary of “Money as gold versus money as water”, the other is an explanation in Dutch of the tax void. Both are quite easy to understand, so the real difficulty lies in my protest against the censorship of science by the directorate of the Dutch CPB. But perhaps dr Phlippen thinks differently.

Please note that I do not tend to write for the economic journals. My base line is that the censorship should be resolved at CPB, and thereafter I would be a free scientist again. I did submit a few papers at some occasions, but apparently those got rejected with nonsensical arguments. Apparently few editors have an overview of the various subjects that are involved for the proper analysis, like taxation, labour market, Phillipscurve, monetary policy, econometric methodology, institutional analysis, history of political economy, and such.

To be sure: I will not be present at that commercial conference or its VIP dinner. We once met when you gave your Tinbergen Lecture for KVS in Amsterdam, but you were severely challenged by lack of sleep, and you just managed to give your speech and shake hands. Even when this present occasion would be more suitable, you are still surrounded by professors who generate wrong analyses, who don’t listen to criticism, and who don’t speak up against censorship of science, so I better stick to my suggestion that we meet separately.

Sincerely yours,

Thomas Cool / Thomas Colignatus
Econometrician (Groningen 1982) and teacher of mathematics (Leiden 2008)
Scientific co-worker CPB 1982-1991
(links relocated to here)

Date: Sun, 05 May 2013
Cc: whitebirdbv, Olivier Blanchard, Martin Wolf, Peter Bofinger, James Galbraith, Robert Skidelsky, Mark Thoma, Sandra Phlippen, Charles Groenhuisen, Sweder van Wijnbergen, Bas Jacobs, Alfred Kleinknecht

Mark Thoma saw a growing gap between the academia and the economy itself – The Great Disconnect – and hopes that weblogging will help close the gap (November 2011):

Modern communications technology is forging new connections between academic economists, the public, policymakers, the press, economists outside of academia, and other academic disciplines in ways that were not possible in the past, and there is little doubt that these connections have increased in recent years. The Great Disconnect is, hopefully, coming to an end.

We are still working out how blogs fit into academic economics, what professional mores ought to apply to blogging, how blogging relates to the academic mission of teaching, research, and service (including serving the public mission), how it should be viewed in tenure and promotion decisions, and so on. But this is a new endeavor for economists, and such questions are expected. We will get these things worked out over time. For now, however, there is plenty of room for optimism that new forms of communication will continue to enhance the public presence of economics in ways that provide mutual benefits to the profession and the public sphere.

I tend to share that optimism, but still think that national Economic Supreme Courts (ESC) are required to really bridge the gap. We cannot leave it to government bureaucracies and the political process to select sense from nonsense. That approach failed before in more civilized times and will surely fail in the present kakophonia.

Brad DeLong wrote on the shift of the Phillipscurve 2013 but see also my analysis in DRGTPE. Also, he wrote a surprising text that referred to … Holland !  The full title of his lecture is Europe Fails to Learn the Lessons of History: Notes on Political Union for Barry Eichengreen’s “Future of the Euro” Conference, as Delivered. The article suffers a bit from a too academic and ivory tower approach to the severe Depression in Southern Europe. He also mentions that Jan de Vries is in the room during his talk, but he and Jan do not mention the censorship of science in Holland since 1990. Otherwise it is a nice review how Europe got into its mess. Still, there are long comments by readers, and now Mark Thoma has show his optimism again that it will be sorted out.

The Palgrave reports that this weblog has been included as number 509. One must be an optimist indeed to join in this fray.

Professor Bernd Lucke from Hamburg has started a new political party Alternative für Deutschland (Alternatives for Germany) with the objective to return to stable currency areas and possibly the return to the DM. Taking a leave from his job and turning from an academic into a politician, he doesn’t mind some power politics: Germany might refuse a contribution to the ESM to get its DM back. A few weblogs ago we could see him in the Maybrit Illner show on the European clown problem.

Taking a closer look at the AfD webpage I have been impressed by the people supporting the initiative. Their cv’s give a sample of quality citizenship, a fine selection of what Germany has to offer. When we concentrate on the professors, we see mostly professors of economics (“wirtschaft”), and we can understand that they, with their knowledge of the subject, are deeply troubled.

Since these professors have the civil courage of taking a stand in the public debate, I have taken the liberty to respond to the challenge, and have sent them the email below. First there is the list of professors, secondly there is the text of my email.

My analysis would allow the Eurozone to keep the euro without the austerity that is causing havoc in the EU, and my email thus runs counter to the AfD program. But it is good to see that people take a stand and let us see what the reaction will be. 

(1) To

Prof. Dr. Hans–Günter Appel, Beiratsvorsitzender Nationale Anti–EEG–Bewegung.
Prof. Dr. Ronald Asch, Geschichtswissenschaften, Freiburg.
Prof. Dr. Charles Blankart, Volkswirtschaftslehre, Berlin.
Prof. Dr. Ulrich Blum, Präsident des Instituts für Wirtschaftsforschung Halle a. D.
Prof. Dr. Ludwig Cromme, Mathematiker, Mitbegründer der Brandenburgischen Technischen Universität Cottbus und dort Universitätsprofessor.
Prof. Dr.–Ing. Thomas Albert Fechter, Maschinenbau, Wiesbaden.
Prof. Dr. Herbert Frohnhofen, Systematische Theologie, Mainz.
Prof. Dr. Andrea Gubitz, Volkswirtschaftslehre, Frankfurt.
Prof. Dr. Gernot Gutmann, Volkswirtschaftslehre, Rektor Universität zu Köln a. D.
Prof. Dr. Wilhelm Hankel, Präsident der Hessischen Landesbank a. D., Königswinter.
Prof. Dr. Burkhard Heer, Volkswirtschaftslehre, Universität Augsburg.
Prof. Dr. Ing. E.h. Hans–Olaf Henkel, Praesident der IBM Europa, des Bundesverbandes der Deutschen Industrie (BDI) und der Leibniz–Gemeinschaft a.D.
Prof. Dr. Carsten Herrmann–Pillath, Volkswirtschaftslehre, Frankfurt.
Prof. Dr. Stefan Homburg, Volkswirtschaftslehre, Hannover.
Prof. Dr. Jörn Kruse, Volkswirtschaftslehre, Hamburg.
Prof. Dr. Bernd Lucke, Hochschullehrer, Universität Hamburg.
Prof. Dr. Helga Luckenbach, Volkswirtschaftslehre, Gießen.
Prof. Dr. Lothar Maier, Verbraucherschutz, Stuttgart.
Prof. Dr. Dirk Meyer, Volkswirtschaftslehre, Hamburg.
Prof. Dr. Manfred Philipp, City University of New York.
Prof. Dr. Hayo Reimers, Wirtschaftswissenschaften, Gießen.
Prof. Dr. Christian Rennert, Betriebswirtschaftslehre, Köln.
Prof. Dr. Karl Albrecht Schachtschneider, Öffentliches Recht, Hamburg.
Prof. Dr. Peter Schneider, Erziehungswissenschaft, Paderborn.
Prof. Dr. Wolfgang Schöhl, Wirtschaftsjournalismus, Darmstadt.
Prof. Dr. Wolfgang Seeger, Neurochirurgie, Freiburg.
Prof. Dr. Michael Stahl, Geschichtswissenschaften, Darmstadt/Berlin
Prof. Dr. Joachim Starbatty, Volkswirtschaftslehre, Tübingen.
Prof. Dr. Roland Vaubel, Volkswirtschaftslehre, Mannheim.
Prof. Dr. Adolf Wagner, Volkswirtschaftslehre und empirische Wirtschaftsforschung, Universität Leipzig.
Prof. Dr. Heiner Willenberg, Didaktik der deutschen Sprache und Literatur, Hamburg.

(2) The email text [… a bit editted here …]

Dear professors on the list of Alternative fuer Deutschland,

I am an econometrician (Groningen 1982) and teacher of mathematics (Leiden 2008).

I worked at the Dutch Central Planning Bureau (CPB) in 1982-1991. In [1989] the Berlin Wall fell, and this caused me to develop a new analysis on unemployment, where various pieces of the puzzle came together that I had been working on before. A key point in that analysis is that Holland had been running an export surplus, and thus been exporting unemployment. For Eastern Europe it would be important that they got export opportunities, whence Western Europe would need to adapt itself too, and Holland included. The analysis back then is also relevant for the EU now, as the surplus of the North is the deficit of the South.

The fundamental analysis concerns stagflation since 1970 and the failure of the Trias Politica government structure to deal with insights from economic science. The solution would be that each democratic nation takes an Economic Supreme Court. The notion of Buchanan of a balanced budget or Schuldenbremse is interesting but inefficient, since if the information is not sound then the budget is not sound anyway, and if the information is correct then there may be periods when the budget better not be balanced. In the present time we would need strong investment in Europe.

Unfortunately, the CPB directorate censored the analysis, and dismissed me with falsehoods. I have been protesting the censorship of science since then, now for 23 years. In 2004 I decided that my best advice to the world would be to boycott Holland till the censorship is resolved. The economic crisis since 2007 caused me to write some additions to the analysis.

It has been quite interesting to look up your cv’s and email addresses. I am quite impressed by your backgrounds. Perhaps, with your critical thinking about the euro, you will also be open to the idea that you are disinformed about key elements in the analysis from Holland, and that censorship of science should not be tolerated. Please note that I do not publish in scientific economic journals, partly for practical reasons such like that the analysis is somewhat complex and that editors from the academia apparently do not understand a protest against censorship, partly for the reason that the censorship better be lifted first before I take other steps.

I hope that some of you will have the time and interest to contact me, and discuss what can be done […]. I have contacted some German journalists in Holland (Schweighoefer and Birschel) and who are supposed to report to the German media about events in Holland. Apparently they do not consider censorship of science so important. Apparently “Greek statistics” has made it into the newspapers but “Dutch economics” not yet. […] censorship in modern bureaucracies is different from censorship in earlier brutal times, but I do hope that the European respect for science is still present, and can give an “acte de presence”.

Below are some key links.

Sincerely yours,

Thomas Cool / Thomas Colignatus
Econometrician and teacher of mathematics.



(3) New article: Money as gold versus money as water:

(4) My sequel to Keynes’s “General Theory”:

(5) The link to the fall of the Berlin Wall:

(6) Mathematician prof. Ludwig Cromme might want to consider this paper:

In the former weblog we considered the election results in Italy, accompanied by sensational Greek singers. There is no lack of beauty and talent in Europe, for in Germany we find Maybrit Illner and her excellent ZDF talkshow. There is no lack of attention for Italy either, for Maybrit puts it center stage too. Let us watch her show of Thusday March 7: Chaos, Clowns und Euro-Krise. Zieht uns Italien in den Abgrund (Will Italy pull us into the abyss ?)

In terms of European integration, we immediately learn some lessons. The first is that the German word for clown is ‘clown’ too. The French can also speak about harlequin and Pierrot though that is a specific kind of clown. A Dutch word is paljas but this appears to derive from the French paillasse – a bag of straw – which again derives from the Italian pagliaccio, indeed a clown or straw man, from the Latin palea = straw. We also must beware of humour on German television after the Angelen took the sense of understatement and left for England (what is in a name ?).

A second lesson is that it isn’t so diplomatic to say that the Italian politicians are ‘clowns’. Admittedly Beppe Grillo has a professional background in cabaret, and Silvio Berlusconi started out as an entertainer on a cruise ship, but the film A Clockwork Orange should have clarified that one shouldn’t mistake the funny masks for the reality behind them. One of Maybrit’s guests is Jean Asselborn, the minister of Foreign Affairs of Luxemburg, who deferentially calls her ‘madame’, to which she blushes and objects, for unclarified reasons that become ever more intruiguing the more you think about it. Nevertheless, the point is that one should not call people what they don’t want to be called, except when you are in the position of a judge who has the authority and duty to convict someone to some kind of label.

A third lesson is that Europe would benefit from undertitles. My German is fair and I can understand what Maybrit and her guests were talking about, partly because I understand the subject. But if the peoples of Europe are to understand each other better, it would help when (specific) national programs can be followed with English undertitles. Question Time at the BBC is a great program that pays to watch on occasion, but even here it would help when some cockney dialect or whatever would be undertitled, since unfortunately few of the British comprehend that Oxford English is so nice to listen to. There is the legendary story that a Japanese company didn’t invest in England since they couldn’t understand the English that people were speaking. The bureaucrats in Brussels have ample experience in translation, and it would be wonderful if they got out of their translation boxes and started to apply it where it matters for the average citizen: our television sets.

While the former weblog concentrated on the role of mathematicians, Maybrit concentrates on the euro. Her table is laced with guests heavily set against the euro. If Angela Merkel has been watching, which is not unlikely, we might expect a surprise announcement next week that Germany returns to the DM.

Below, we will discuss some of the main arguments of Maybrit’s guests. Before doing so, let us first consider this table about the relevance of Greece for the euro. Normally the impact of Greece is compared to the Eurozone as a whole but this table considers the impact with respect to Germany by itself. It appears that Germany could absorb the problematic part of Greece’s debt without much of a problem. The conclusion is that there isn’t much of an economic problem, and the whole issue is one of politics, of psychology, of theatre, or, even, of a circus indeed.

GDP and Debt in billion euro’s – 2011 (Eurostat)

If BRD takes part of EL debt

































(Earlier I teamed up countries in Europe in a different way: Germany with Italy, and Holland with Greece. This present combination is a useful illustration of the argument. The 2013 data will be different but it is useful to link up to the earlier exposition that used the 2011 data too. )

The table clarifies what many already have been saying. Europe is a victim of its ghosts from the past. The Krach of 1929 and hyperinflation in Germany. Protestant doom and gloom versus catholic live and let live. The fear for free-riders. The industrious ant and the carefree cricket. Nothing to fear but fear itself.

The European sovereign debt crisis started at the end of 2009. We are now 3 years further, with many bankruptcies and much unemployment. Europe would have saved itself much misery if it had bitten the bullet head on. President Herman van Rompuy recently launched various proposals to transfer sovereignty to the bureaucracy in Brussels. Flaws in the design of the euro are mended only slowly. Compare it to this: A ship sets out sailing into a fog, but no matter since its captain is blind anyway. It hits the rocks and is shipwrecked. Many passengers fall out and drown. Dead bodies and even live people are used to close the holes in the ship’s body. In the captain’s cabin the ship medic tries to restore the captain’s eyesight. The fight for survival (of the captain) already lasts three years, but he encourages his crew: In some years we shall prevail.

How to bite the bullet ? See this Economic plan for Europe and see this paper on how the euro-system might be redesigned. Both are collected in the book Common Sense: Boycott Holland. Cut up the banks into retail and business. The retail banks can all be franchises of the Central Bank, and we would not need a European system of deposit insurance since the Central Bank has always money. Invest, invest, and invest. Do not rely on business banks to generate the required investments but set up a back-up system for investments when there is a recession (like now). And this advice comes from a careful economist.

These are the fundamentals. Let us now consider the discussion under Maybrit’s elegant guidance.

Oskar Lafontaine makes a surprising re-entry on the German national floor. The Napoleon of the Saar has established a reputation of some opportunism, but at this table he rightly points out that Europe has been saving the banks rather than the people (though people need banks). He calls Angela Merkel the courtisane of the rich, which proves again that when it comes to love the world likes to use French words. Lafontaine also mentions, later in the discussion, that Germany partakes in wage dumping. This is indeed part of the analysis. The current policy is to seduce companies to invest for exports but countries should deliberately set up investments in the home economy.

Professor Bernd Lucke of Hamburg University is creating a new political party Alternative für Deutschland to move Germany out of the euro. He agrees with Lafontaine on the banks. Lucke explains that wages in Greece and Italy have to be lowered by 30% to make them competitive. He doesn’t see this happening without a return to exchange rates. This isn’t quite true. When you abolish exchange rates then you can create an explicit mechanism that produces the same effect. Tax exports from surplus countries (exchange rate appreciation) and subsidize exports from deficit countries (depreciation). Also, countries should rather invest in their home economies rather than for exports. Reorganisation of the banks and abolition of the tax void for the labour markets will cause a world boom. The situation can be handled without a return to the DM.

Dirk Müller is also known as “Mr. DAX” (the German stock exchange) and teams up with professor Lucke. The euro was not required to get peace. The years with the DM had peace. The euro was introduced with the fallacy that it would contribute to peace but it is now that we see fighting in the streets of Europe. A section of Athens reminds of a third world country. The crisis is still not under control. Berlusconi is not a clown but a danger. The main worry however is France. No words of love now. Return to the DM.

Italian journalist Flaminia Bussotti (ANSA) tries to be an objective journalist and to defend the honour of her country. Unemployment of 11% and for the youth 38%. Monti’s cutbacks have been severe, and Maybrit shows us the images of the Italian minister Elsa Fornero who burst out in tears when announcing the ‘sacrifices’. Bussotti has the good point that Italy doesn’t quite ‘profit’ from an interest rate higher than 6%.

Luxemburg’s foreign minister Jean Asselborn rightly explains that we should not just care about the sentiments of the financial markets but also about people and the public trust. He misses his chance to burst out in tears however, it would have made him instantly famous. He also explains that he doesn’t know the technical details, which seems to be part of the problem, i.e. EU political leaders trying to win trust without knowing what they are talking about. He advances the argument that Germany should be grateful to the Southern Europeans that they have been borrowing money to buy BMWs, though he seems to forget that paying off loans is a good idea too. He holds that the euro is a project of ‘give and take’, but he doesn’t go into details indeed: who gives and who takes. Also, the euro is a project for peace. It is unlikely that Maybrit will invite him again, not only because he calls her ‘madame’ but also since he doesn’t explain that Europe is bleeding also to save the banks in Luxemburg. Apparently Luxemburg also uses a different clown costume than the rest of Europe.

The final guest is Rainer Brüderle, the leader of the parliamentarian fraction of the FDP , the minority government party. He takes the hard line. If Italy wants to, it can step out of the euro.

Maybrit is shocked: And the banks, aren’t they too big to fail ? Dirk Müller holds that they may go bankrupt and then be nationalised. Government debt should no longer be without risk. Let those people suffer who have been dumb enough to invest their money in government paper. Back to the DM.

Brüderle mentions Holland on minute 24 as an example of a good country that has been following a low wage policy. Thus he doesn’t see that this is wage dumping and contributes to the problem. When Brüderle starts to explain that Greece has been following a wrong policy for years, and now has to suffer the consequences, he finds strong opposition from Lucke. It had been promised that the euro would have no bailout, but the ESM provides this, and so slow that Greece and Italy will need many years to do something about the 30% lack of competitiveness. Brüderle suggests that Lucke talks as a professor and that what he says has no relevance for the real world. Problem solved, no questions asked in the German parliament about wage dumping.

In the discussion there are some tentative references to world war two and the H-word. At the end of the program the instability of the Weimar republic is recalled. The current policy of Europe would be like that of Heinrich Brüning which led to the rise of the nazi’s and the H-word himself. This kind of policy puts the French-German friendship at risk. Yet, Brüderle reminds all, Germany cannot do it all by itself. Let Italy leave, he also said. How does his mind combine these two conflicting thoughts ?

Somewhat halfway in the program, minute 36, Maybrit presents the results of an opinion poll. EU-antagonism has risen starkly in Germany.

32 % personal disadvantages because of the EU
65 % a worsening by the euro
65 % expects an improvement from a return to the DM
49 % expects improvement without the EU

Maybrit manages to close the program with a big smile. The audience gives a big round of applause. The guests shake hands or look a bit bewildered. And we see each other again next week.

It is all very informative and entertaining. My problem however is that the question hasn’t been answered whether Italy will pull us into the abyss or not. If we keep on talking or talk-showing like this, dear charming Maybrit, we will not make much progress.

Perhaps a talkshow about the boycott of Holland is too much to ask. Can I propose a talkshow around the play Lysistrata by Aristophanes of 411 BC ? In which the women of Greece refuse to sleep with their husbands until the war is stopped ? In this case: let the women of Germany stop sleeping with their husbands (or sleep at all) till the country accepts that a major bailout of Greece is required to make a new start. Carmen Reinhart from Harvard University can tell you why a bailout is needed.

Addendum: April 18 2013: These researchers (PERI) identified errors in the Reinhart & Rogoff calculations. The latter state that they used median values instead of averages. Overall, my conclusion was that a bailout was needed, and not that austerity for the indebted countries was needed. This conclusion was also an experience with other highly indebted countries in the past. Overall, it is also a matter of logic. With deficit spending and debt rising, the proceeds generate growth. Eventually there can be a ‘Minsky moment’.

The current crisis is a phase in the Great Stagflation since 1970. Let us first understand this cause before we consider the cure.

The term stagflation was coined by MP Iain Macleod in a speech in the UK parliament in 1965. The inability of economists and governments to solve the problem right then and there allows us to choose the rounder year of 1970 as the moment when a simple affliction turned into what we now can call the Great Stagflation.

In the period 1965-1980 the world tried a vulgar Keynesian stimulus of the ‘demand side’. Accelerating inflation caused a switch to monetarism and the ‘supply side’. Since the presidency of Reagan in 1981 governments tend to follow a policy that also is called ‘neoliberal’ because of deregulation and the encouragement of the free market. The deregulation also implied a massive demand stimulus, because the deregulation of financial markets released vast sums to search for investment opportunities. Eventually that deregulation caused massive leveraging, so that finally there came the ‘Minsky moment’ with the collapse of Bear Stearns in August 2007. That moment is taken by many as the official beginning of the current crisis, though it is only a new phase in the longer problem history.

Now that we are reregulating again, stagflation rears its ugly head again in high unemployment and stagnating investments for growth, while there is also the threat that inflation is going to be used again to reduce government debt.

The events since 2007 cause economists and governments to focus on the financial sector, monetary policy and national debt. This is reasonable to a large extent since the mess must be cleaned up and the sector needs regulation again. There are limits to what can be achieved here however. It is also necessary to look at fiscal policy, investments and labour. In these areas the tendency exists to look back only a couple of decades, say to the period of president Clinton 1993-2001 when the world economy seemed to do well. We must look deeper into the past however, because the periode 1950-1970 contributed to the Great Staflation that we are in.

One might hold that the current problems are aggravated by the imbalances in Europe because of the euro, and the imbalance between the US and China on trade and debt. In an alternate history a managed float in Europe (instead of the common euro) might have caused havoc as well. The relationship between the US and China is quite special anyway. Thus these issues deserve attention but are not the main ones. The key aspects of the Great Stagflation are internal to each nation in the OECD and cannot be resolved by exchange rates.

What, then, are those key aspects, and what is the cure of the Great Stagflation ?

First of all, taxes and social security premiums neglect the need for an adequate exemption for subsistence. The policy that is co-ordinated in the OECD is to adjust for inflation but it should be for the rise in the general welfare, i.e. both inflation and real growth. The levies at the minimum wage raise those labour costs, with subsequent unemployment. When labour demand shifts to higher productive workers, these workers can demand a higher wage, which contributes to inflation. The higher unemployment and inflation are depicted in an unfavourable shift of the Phillipscurve.

A second point is that economists who study taxation and the labour market concentrate on partial derivatives and neglect the total differential. In lay terms this is the difference between static and dynamic marginal tax rates. The static rate can be found in the tax statute. The dynamic rate arises over time when rates are adjusted. Official policy has been to reduce exemption and static rates, and to switch from income tax to VAT (that has no exemption at all). This contrasts with the optimal policy, which is to maintain high exemption, while VAT could be one percent.

The third point is the failure of economic co-ordination. One cannot look back at the period since 1950 with the various crises without concluding that there is something seriously amiss in the co-ordination of economic policy. The advice is to extend the checks and balances of the Trias Politica into a Tessera Politica with the addition of an Economic Supreme Court (ESC). A draft constitutional amendment can be found in my book DRGTPE.

The economy has had crises but there have been similar crises in economic theory itself. In that respect it might be silly to have an Economic Supreme Court (ESC), with its members in similar disarray as politicians or the stock markets. However, consider what we see now. A problem caused by failure in taxation has been approached subsequently by vulgar keynesians then monetarists then neoliberals and now reregulators, each trying to solve the errors of the predecessor. The current system allows each solver to take a rather narrow view. The ESC will be grounded both in science and society so that such a narrow view is much less likely. For comparison, we have an independent Judiciary that will surely not be perfect, but it is better to discuss its faults under the regime of such an independent court rather than under a regime like we now have in economics.

It may be observed that I have been explaining the core of this analysis since 1990 and that it met with censorship by the directorate of the Dutch Central Planning Bureau (CPB) over the whole period since then. This proves that the information has been available and could have been used if there had been a scientifically based ESC. The current arrangements in Europe apparently allow such censorship of science, which surely seems suboptimal. In this difficult situation, my best advice is to boycott Holland till the issue is resolved.

Thomas Colignatus is an econometrician and teacher of mathematics in Scheveningen, Holland. He worked at the Dutch Central Planning Bureau in 1982-1991. See


Colignatus (2011), Definition & Reality in the General Theory of Political Economy, (DRGTPE) 3rd edition, Thomas Cool Consultancy & Econometrics,

Colignatus (2012), Common Sense: Boycott Holland,