Union Européenne: La crise de la démocratie européenne

This is an Op-Ed written by Dr. Amartya Sen for the NYTimes.  Dr. Sen is  Thomas W. Lamont University Professor, and Professor of Economics and Philosophy, at Harvard University and was until 2004 the Master of Trinity College, Cambridge. He is also Senior Fellow at the Harvard Society of Fellows. Earlier on, he was Professor of Economics at Jadavpur University Calcutta, the Delhi School of Economics, and the London School of Economics, and Drummond Professor of Political Economy at Oxford University. To top this already impressive resume, Dr. Sen Nobel was awarded the 1998 Nobel Prize in economic sciences for his work on welfare economics and social choice theory. Briefly stated, Dr. Sen is an authority in the field.

The Crisis of European Democracy

By AMARTYA SEN

May 22, 2012Cambridge, Mass.

IF proof were needed of the maxim that the road to hell is paved with good intentions, the economic crisis in Europe provides it. The worthy but narrow intentions of the European Union’s policy makers have been inadequate for a sound European economy and have produced instead a world of misery, chaos and confusion.

There are two reasons for this.

First, intentions can be respectable without being clearheaded, and the foundations of the current austerity policy, combined with the rigidities of Europe’s monetary union (in the absence of fiscal union), have hardly been a model of cogency and sagacity. Second, an intention that is fine on its own can conflict with a more urgent priority — in this case, the preservation of a democratic Europe that is concerned about societal well-being. These are values for which Europe has fought, over many decades.

Certainly, some European countries have long needed better economic accountability and more responsible economic management. However, timing is crucial; reform on a well-thought-out timetable must be distinguished from reform done in extreme haste. Greece, for all of its accountability problems, was not in an economic crisis before the global recession in 2008. (In fact, its economy grew by 4.6 percent in 2006 and 3 percent in 2007 before beginning its continuing shrinkage.)

The cause of reform, no matter how urgent, is not well served by the unilateral imposition of sudden and savage cuts in public services. Such indiscriminate cutting slashes demand — a counterproductive strategy, given huge unemployment and idle productive enterprises that have been decimated by the lack of market demand. In Greece, one of the countries left behind by productivity increases elsewhere, economic stimulation through monetary policy (currency devaluation) has been precluded by the existence of the European monetary union, while the fiscal package demanded by the Continent’s leaders is severely anti-growth. Economic output in the euro zone continued to decline in the fourth quarter of last year, and the outlook has been so grim that a recent report finding zero growth in the first quarter of this year was widely greeted as good news.

There is, in fact, plenty of historical evidence that the most effective way to cut deficits is to combine deficit reduction with rapid economic growth, which generates more revenue. The huge deficits after World War II largely disappeared with fast economic growth, and something similar happened during Bill Clinton’s presidency. The much praised reduction of the Swedish budget deficit from 1994 to 1998 occurred alongside fairly rapid growth. In contrast, European countries today are being asked to cut their deficits while remaining trapped in zero or negative economic growth.

There are surely lessons here from John Maynard Keynes, who understood that the state and the market are interdependent. But Keynes had little to say about social justice, including the political commitments with which Europe emerged after World War II. These led to the birth of the modern welfare state and national health services — not to support a market economy but to protect human well-being.

Though these social issues did not engage Keynes deeply, there is an old tradition in economics of combining efficient markets with the provision of public services that the market may not be able to deliver. As Adam Smith (often seen simplistically as the first guru of free-market economics) wrote in “The Wealth of Nations,” there are “two distinct objects” of an economy: “first, to provide a plentiful revenue or subsistence for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.”

Perhaps the most troubling aspect of Europe’s current malaise is the replacement of democratic commitments by financial dictates — from leaders of the European Union and the European Central Bank, and indirectly from credit-rating agencies, whose judgments have been notoriously unsound.

Participatory public discussion — the “government by discussion” expounded by democratic theorists like John Stuart Mill and Walter Bagehot — could have identified appropriate reforms over a reasonable span of time, without threatening the foundations of Europe’s system of social justice. In contrast, drastic cuts in public services with very little general discussion of their necessity, efficacy or balance have been revolting to a large section of the European population and have played into the hands of extremists on both ends of the political spectrum.

Europe cannot revive itself without addressing two areas of political legitimacy. First, Europe cannot hand itself over to the unilateral views — or good intentions — of experts without public reasoning and informed consent of its citizens. Given the transparent disdain for the public, it is no surprise that in election after election the public has shown its dissatisfaction by voting out incumbents.

Second, both democracy and the chance of creating good policy are undermined when ineffective and blatantly unjust policies are dictated by leaders. The obvious failure of the austerity mandates imposed so far has undermined not only public participation — a value in itself — but also the possibility of arriving at a sensible, and sensibly timed, solution.

This is a surely a far cry from the “united democratic Europe” that the pioneers of European unity sought.

Union Européenne: Non, l’euro ne survivra pas la sortie de la Grèce

No Mr. Wolfgang Schäuble, the euro won’t survive Greece’s exit

The German minister of Finance, Wolfgang Schäuble, stated in an interview with the “Rheinische Post” on 11 May 2012 that Europe has the capacities to cope with a Greek euro area exit. He went on to say that Germany and its partners have learned a lot during the last two years and have put in place several protection mechanisms. Basically, this is a strong signal from one of the highest German officials stating that the euro can survive without Greece.  Let me say this upfront: No, the euro—and probably the whole European Union project–cannot survive Greece’s exit from the Eurozone. Schäuble’s statement could have been correct if it was given 2 years ago. But now, his statement is tantamount to a Eurozone suicide. And this is why.

However, before we get to why Greece’s exit from the Eurozone would lead to the total collapse of the euro as a currency and probably to the collapse of the European Union as an ambitious yet salutary political project, we need to briefly remember how we got to this point.

The project of the European Union started or was imagined as a purely political project by its founding fathers.  On the ruins of the disastrous and destructive second World War, Robert Shumann, Jean Monet, Alcide De Gasperi, Paul Henri Spaak and Konrad Adenauer (two Frenchmen, an Italian, a Belgium, and a German respectively) began imagining a political project that would knit together the different European countries and make the prospect of another destructive war between European countries an impossible endeavor. Of course, this started with a closer economic cooperation limited to a certain number of goods and services and just between a small numbers of countries, which would later on represent the core countries of the European Union. This limited economic cooperation created a spillover effect, and over time, more goods and services were included and more countries wished to join. Long story short, this economic cooperation spilled over into a political cooperation and led to the necessity of creating a common currency—i.e., the euro.

After the Maastricht Treaty (also know as the Treaty on the European Union) was adopted and ratified by most of the countries, the euro was introduced.  It was first introduced to the financial markets as an accounting currency in 1999 (it replaced the old ECU) and then introduced in circulation in 17 of the 27 EU member states replacing their national currencies in 2002.  The introduction of the euro caused a certain euphoria in the financial markets. Suddenly, countries that were deemed risky for investment saw a drastic influx of cheap capital—i.e., loans. Basically, cheap money started pouring in southern European countries like Greece, Italy, Spain, and even in Ireland and Austria. Belonging to the Eurozone made these countries safe places, though some of them had deep structural flaws (as we came to discover that later on). This influx of cheap capital financed huge housing boom-like bubbles and increased trade deficits.  And then, the 2007-2008 financial crisis hit. It started in the U.S., but soon migrated to the European continent. The influx of cheap money dried up. This caused severe economic slowdowns and downturns in almost all of the Eurozone.

Since the European Union is an unfinished economic integration project topped by an even more unfinished political integration, countries like Greece, Spain, and Italy were literally up the creek without a paddle.  The economic crisis of 2008 led to a huge fiscal crisis in these countries since they had no control over their monetary policies, and they were obliged to keep their budgetary spending within the 3% allowed by the EU agreements.  However, in a time of severe economic crisis, one needs to engage in fiscal deficit spending in order to get out of the hole. The last thing a country needs is drastic cut in public spending. Why? Because drastic cuts in public spending lowers consumption, which lowers demand, which leads to less investments, which leads to less revenues.  And the more austerity measure a given country adopts, the more it reinforces this infernal downward spiral. But what did the EU leaders do? They did exactly what they should not have done.

Germany and France (Sarkozy’s France) forced most of the EU members to engage in drastic public spending cuts hoping that fiscal discipline would calm financial markets and stop speculations. However, these EU leaders misread completely the message that most financial markets have been sending. They were not looking for strict fiscal discipline, though some discipline doesn’t hurt. They were looking for serious economic growth prospects.  Since spending cuts depress economic growth (just look at the economic growth in the Eurozone countries in the last 2 years and you notice that cuts caused economic stagnation and recession in France, Spain, the UK, Italy, Greece, and so forth), investors and bond markets lost confidence in the Eurozone, and that led to higher interest rates on short term borrowing. Not only are these countries killing their economic growth with all those drastic cuts, but also they can’t even find cheap capital to fund short-term operations. Consequence: 3 European countries—Greece, Spain, and Italy—are on the verge of total economic collapse and serious political turmoil.

So, what if we let Greece out of the Eurozone like Wolfgang Schäuble wants? What would happen to the rest of the Eurozone?

Let us game this scenario for a second.

As we speak, Greece is under a slow-moving financial blitzkrieg.  There is a slow moving bank-run on the Greek banks (or what the bankers call a bank-jog). What does that mean? It means that depositors are pulling out their capital to anticipate a possible Greek default or an exit from the Eurozone.  This bank-jog has been going on at a very low rate for the last 2 or 3 months, but it has accelerated since the last legislative elections.  However, the ECB is backstopping, or for the lack of a better word, financing this bank-jog through lending to Greek banks the necessary capital. More accurately, the Greek banks are using the emergency liquidity assistance until the EFSF (European Financial Stability Facility) agrees to release its bonds, so they can use them as collateral.

However, when the ECB decides to stop financing Greek banks (and that’s what the German minister of Finance, Wolfgang Schäuble, means), Greece would effectively be forced to leave the Eurozone and abandon the euro as a currency, and revert to issuing again its own national currency, the drachma.

The first fallout of such a move is that financial markets would lose total confidence in every Eurozone countries. Greece leaving the Eurozone means that the euro is reversible, and any country could decide to abandon it.  Do you remember that bank-jog we just talked about in the previous paragraph? Well, that bank-job would turn into a bank-run on Spanish, Italian, Irish, and possibly French banks. All investors and all financial markets would pull out all of their money at once. Ladies and gentlemen, no bank in the world and in the history of banking has had enough cash or securities in its vaults to face a cataclysmic event like this one. This means that most banks in Spain and Italy would collapse overnight.  A large numbers of banks in France, Germany, Austria, Netherlands, and Belgium would also collapse. This would trigger a worldwide chain reaction and some U.S, Japanese, and Russian banks exposed to Eurozone debts would also be severally affected.

What we would be looking at is a total blow-up of the European Union and a severe global depression.

This is what it means to let Greece leave the Eurozone now. On top of the financial and economic global calamity, we would also have a political one. The rise of extreme right and left political parties in Europe and elsewhere would surely be the most likely political outcome. Mainstream parties would be blamed for the catastrophe and would be completely discredited in the eyes of most voters, which would directly benefit the extreme right and extreme left political leaders.

What to do then to avoid such a calamity? Not only must Greece stay in the Eurozone, but also a more encompassing political economy must be devised. First, the mutualization of the debt must be organized. Second, the ECB must be restructured to issue euro-bonds so member states can directly borrow from the ECB at low rate instead of borrowing from banks. Third, a serious economic growth agenda must be considered so countries like Spain, Italy and others could trigger decent economic growth rates and emerge from the infernal cycle of austerity and depression.

Finally, the ECB must increase the Eurozone inflation rate to at least 4%. Why?  In a recession, you expect average wages to adjust to a lower level. As the unemployment rate increases, workers are willing to accept lower wages, and as wages decrease, employers become more willing to hire more workers. If this does not occur, the recessionary cycle deepens and becomes persistent.  There are several ways to fix this problem, but let us concentrate on the one most suited for the Eurozone. One of the problems in Spain, Italy, Greece and most of Europe is that their workers have become increasingly uncompetitive over the past decade—higher wages, high unemployment rates, and low investments leading to a highly uncompetitive Eurozone worker. One way to correct this is by devaluing the currency, which would effectively reduce wages in a country compared to the rest of Europe. But this solution is not available to most Eurozone member states because they do not have control over their monetary policies. The Eurozone monetary policy is dictated by the ECB.  So how do you reduce wages in those countries when you can’t manipulate your currency? Well keep wages constant, but allow a higher inflation rate. If the ECB allows the inflation rate to run at a 4% level, you effectively get no wage increase, but an effective drop by 4%. This would increase the competitive edge of the European worker.

This is the only way out. But to reach these set of solutions, the ECB and the Germans need to get over their obsession about spending, inflation, price stability, and moral hazard. If Angela Merkel keeps on doing what she has been doing and keeps on bullying the rest of the Eurozone member states into these suicidal austerity programs, she would literally cause the collapse of the European Union. Lastly, the ECB needs to embrace its function as an independent central bank facing drastic economic crisis with a possible political and economic collapse of the whole area. The ECB needs to get over its rigid ideology of price stability and face  reality. Otherwise, there will not be an ECB in a couple of years.

France: Les résultats du deuxième tour dès 18h30 heure françaises et 12h30 heure EST

Comme nous l’avons fait pour le premier tour, Nous allons aussi publier les résultats du premier du deuxième tour des élections présidentielles françaises le 6 Mai à 18:30 heure françaises et 12:30 heure Americaine.

Dès que les résultats (ou résultats partiels) seront disponibles, nous les publierons et les posterons sur ce blog.

Alors restez à l’écoute et venez sur le blog le 6 Mai autour de 18h30 pour avoir les deuxième résultats du tour avant tout le monde.

We did it for the first round, and we were successful in getting the results and publishing there before almost everyone. Well, we are doing it again for the second around. We will be publishing the results of the second round of the French presidential elections at 18:30 or as soon as we have them.  We are not bound by the French law banning the publication of partial results before 20:00, and therefore there is no justification for us to hold on to the results until 20:00 (or 14:00 EST).

So as soon as we have partial results (and we expect to have them at 18:30 French time and 12:30 EST), we will post them right the way on this blog.

So, stay tuned and check our blog on Mai 6 at 18:30 (if you live in France) and at 12:30 American EST.

Message de Paul Krugman aux “Français” et…les autres

If you read some of my previous posts on the economy and the crisis of the eurozone, you would know already my opinion about the stupidity of fiscal austerity during recessionary cycle. Well, i hate to say it, but i have been right all along. This past week, however, more and more European policymakers have been softly whispering another tune and getting themselves ready to leave the sinking austerity policy ship to board the demand-side one.  It warms my heart that they have finally seen the light.

Of course, i wasn’t the only person highly critical of fiscal austerity. Paul Krugman, one of the most brilliant economists out there, has been arguing the same point since the beginning of the crisis.

Those of you who do not know Dr. Paul Krugman, well he is Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and winner of the  Nobel Prize in Economics (aka Sveriges Riksbank Prize in Economic Sciences) for his work on New Trade Theory and New Economic Geography. Since the beginning of the crisis, Dr. Krugman has been writing a series of articles in the New Times explaining the origin(s) of the crisis and advocating for the soundest way of getting out of it. Needless to say that Dr. Krugman has been right on almost everything he has said.

Here is his latest article that he could’ve titled it, “I told you So!”

Death of a Fairy Tale

By PAUL KRUGMAN

This was the month the confidence fairy died.

For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.

Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.

The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.

So, about that doctrine: appeals to the wonders of confidence are something Herbert Hoover would have found completely familiar — and faith in the confidence fairy has worked out about as well for modern Europe as it did for Hoover’s America. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment; the confidence fairy is nowhere to be seen, not even in Britain, whose turn to austerity two years ago was greeted with loud hosannas by policy elites on both sides of the Atlantic.

None of this should come as news, since the failure of austerity policies to deliver as promised has long been obvious. Yet European leaders spent years in denial, insisting that their policies would start working any day now, and celebrating supposed triumphs on the flimsiest of evidence. Notably, the long-suffering (literally) Irish have been hailed as a success story not once but twice, in early 2010 and again in the fall of 2011. Each time the supposed success turned out to be a mirage; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.

However, something has changed in the past few weeks. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.

The question now is what they’re going to do about it. And the answer, I fear, is: not much.

For one thing, while the austerians seem to have given up on hope, they haven’t given up on fear — that is, on the claim that if we don’t slash spending, even in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs.

Now, claims that only austerity can pacify bond markets have proved every bit as wrong as claims that the confidence fairy will bring prosperity. Almost three years have passed since The Wall Street Journal breathlessly warned that the attack of the bond vigilantes on U.S. debt had begun; not only have borrowing costs remained low, they’ve actually fallen by half. Japan has faced dire warnings about its debt for more than a decade; as of this week, it could borrow long term at an interest rate of less than 1 percent.

And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.

But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.

So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.

France: Nous publierons les résultats du premier tour à 18:30 heure françaises et 12:30 heure Americaine EST.

Nous avons décidé de publier les résultats du premier tour des élections présidentielles françaises le 22 Avril à 18:30 heure françaises et 12:30 heure Americaine.

Dès que les résultats (ou résultats partiels) sont disponibles, nous les publierons et les posterons sur ce blog.

Alors restez à l’écoute et venez sur le blog le 22 Avril autour de 18h30 pour avoir les résultats du premier tour avant tout le monde.

We have decided to publish the results of the first round of the French presidential elections at 18:30 or as soon as we have them.  We are not bound by the French law banning the publication of partial results before 20:00, and therefore there is no justification for us to hold on to the results until 20:00 (or 14:00 EST).

So as soon as we have partial results (and we expect to have them at 18:30 French time and 12:30 EST), we will post them right the way on this blog.

So, stay tuned and check our blog on April 22 18:30 (if you live in France) and 12:30 American EST.

Jean Luc Melenchon: Humour de campagne et les affiches de Sarko, Hollande & Melenchon

One thing has be said about Jean Luc Melenchon: without him, the French presidential would be boring to death. Not only does he infuse a super dose of enthusiasm in the campaign with his speeches, demeanor, and charisma, but his supporters are also uber fervent and active on the net. And they have a very wicked sense of humor. Look at what they did with the official posters of almost all other candidates. Just sit back, watch and laugh.

La controverse qui entoure mon dernier post intitulé “Mohammed Merah, La Victime de la République”

Controversy surrounding my last post titled “Mohammed Merah, la victime de la République”

Apparently, my last post on Mohammed Merah has caused some controversies. Some people are shocked by the use of the word victim and Merah in the same sentence. I am told that at the dailykos, i have earned the status of an apologist for Merah’s actions, and have been accused of trying to explain away his horrible acts and justify them. Of course, i am not doing that and anyone who has 2 fully functioning neurons had already understood that. Well, i do not have the time right now to write a proper reply in my own defense, though i really don’t need any nor do i feel the need to justify myself to people who have no idea what i am talking about, but i would like to say that the day we stop trying to understand our actions, and we stop trying to understand and explain horrible events–no matter how horrible they are–is the day we lose our humanity. And if we reach that day, we might as well load a gun and shoot ourselves in the head and get it over with.

Europe: Le terrible échec de la politique d’austérité économique

For months, I have been arguing that economic austerity in time of severe economic downturn is highly counter-productive. The last thing the economy of a country needs when a country is going through a recessionary cycle (or experiencing a contraction of its economic activities like in many European countries) is a drastic reduction of public spending. The reason for that is very simple: when the economy is in a recessionary cycle, an influx of spending (even deficit spending) is a must to boost and trigger economic growth, consumption, create jobs, and restart the economic engines against. Once those economic engines are restarted, then an increase in taxes (on the highest brackets) and progressive cuts in spending (spending in non-economic growth sectors) can be established again. Cutting spending when spending is needed the most is like depriving a patient of a blood transfusion when that patient is heavily hemorrhaging from every orifice, which would ultimately lead to the death of the patient.

Well, European countries of the eurozone such as France, Ireland, Spain, Italy, Portugal, and i add to them the U.K (I am not even going to talk about Greece in this post. My position on Greece has been clearly stated in previous posts here and specially here) have been engaged in drastic  reductions of their public spending since the beginning of this crisis. These are the infamous austerity policy packages that most eurozone countries (and the U.K) have put in place to calm down financial markets. The result is an economic growth close to zero in almost all the eurozone (and the U.K). The economic forecast for 2013 and 2014 if the same policies are followed is even worse–i.e., an economic growth around 0% leading to a long lasting recession, high unemployment, and even higher public deficits. These countries fundamentally misunderstood the demands of the financial markets. What markets (across the globe) have demanded since the beginning of the euroze crisis is not an immediate and a drastic reduction of public deficits, but credible plans and policies for generating positive economic growth again. Most markets have already factored in and digested the fact that the eurozone countries have high deficits and those deficits won’t be reduced anytime soon, and the debt won’t be repaid in the foreseeable future. There is nothing that can be done about that in the short-term, and worrying about balancing budgets and cutting spending during a recession is an economic suicide.

This fundamental misunderstanding of the crisis led most European political leaders (best example of this misguided strategy is David Cameron and Nicolas Sarkozy) to engage in crafting crazy austerity packages to reduce the yield on government bonds and securities (which means in everyday language, borrowing money at a lower interest rate). And in doing so, these political leaders sacrificed long-term economic growth for short-term financial gain and an ephemeral stability. At the end, they pretty much got nothing (most eurozone countries lost their triple-A rating–except Germany–and most eurozone banks are in a bad financial situation). This strategy would only lead to the deepening of the economic downturn on the short-term, and turning it into a long-term economic stagnation.

This is what has been happening in the eurozone countries (and England), and the data recently released by the IMF, OECD, and the Government Growth & Development Center illustrate  that clearly. Countries engaged in cutting spending (what i call slash-and-burn-economics) and austerity policies are performing worse than countries that did not. In fact, the data show that countries that adopted austerity packages have worsened their economic situation.

For a better understanding of this, i yield the floor to Dr. Paul Krugman, Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and winner of the  Nobel Prize in Economics (aka Sveriges Riksbank Prize in Economic Sciences) for his work on New Trade Theory and New Economic Geography. Since the beginning of the crisis, Dr. Krugman has been writing a series of articles in the New Times explaining the origin(s) of the crisis and advocating for the soundest way of getting out of it. Needless to say that Dr. Krugman has been right on almost everything he has said.

January 22, 2012

Is Our Economy Healing?

By PAUL KRUGMAN

How goes the state of the union? Well, the state of the economy remains terrible. Three years after President Obama’s inauguration and two and a half years since the official end of the recession, unemployment remains painfully high.

But there are reasons to think that we’re finally on the (slow) road to better times. And we wouldn’t be on that road if Mr. Obama had given in to Republican demands that he slash spending, or the Federal Reserve had given in to Republican demands that it tighten money.

Why am I letting a bit of optimism break through the clouds? Recent economic data have been a bit better, but we’ve already had several false dawns on that front. More important, there’s evidence that the two great problems at the root of our slump — the housing bust and excessive private debt — are finally easing.

On housing: as everyone now knows (but oh, the abuse heaped on anyone pointing it out while it was happening!), we had a monstrous housing bubble between 2000 and 2006. Home prices soared, and there was clearly a lot of overbuilding. When the bubble burst, construction — which had been the economy’s main driver during the alleged “Bush boom” — plunged.

But the bubble began deflating almost six years ago; house prices are back to 2003 levels. And after a protracted slump in housing starts, America now looks seriously underprovided with houses, at least by historical standards.

So why aren’t people going out and buying? Because the depressed state of the economy leaves many people who would normally be buying homes either unable to afford them or too worried about job prospects to take the risk.

But the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.

Furthermore, the chances for a virtuous circle have been rising, because we’ve made significant progress on the debt front.

That’s not what you hear in public debate, of course, where all the focus is on rising government debt. But anyone who has looked seriously at how we got into this slump knows that private debt, especially household debt, was the real culprit: it was the explosion of household debt during the Bush years that set the stage for the crisis. And the good news is that this private debt has declined in dollar terms, and declined substantially as a percentage of G.D.P., since the end of 2008.

There are, of course, still big risks — above all, the risk that trouble in Europe could derail our own incipient recovery. And thereby hangs a tale — a tale told by a recent report from the McKinsey Global Institute.

The report tracks progress on “deleveraging,” the process of bringing down excessive debt levels. It documents substantial progress in the United States, which it contrasts with failure to make progress in Europe. And while the report doesn’t say this explicitly, it’s pretty clear why Europe is doing worse than we are: it’s because European policy makers have been afraid of the wrong things.

In particular, the European Central Bank has been worrying about inflation — even raising interest rates during 2011, only to reverse course later in the year — rather than worrying about how to sustain economic recovery. And fiscal austerity, which is supposed to limit the increase in government debt, has depressed the economy, making it impossible to achieve urgently needed reductions in private debt. The end result is that for all their moralizing about the evils of borrowing, the Europeans aren’t making any progress against excessive debt — whereas we are.

Back to the U.S. situation: my guarded optimism should not be taken as a statement that all is well. We have already suffered enormous, unnecessary damage because of an inadequate response to the slump. We have failed to provide significant mortgage relief, which could have moved us much more quickly to lower debt. And even if my hoped-for virtuous circle is getting under way, it will be years before we get to anything resembling full employment.

But things could have been worse; they would have been worse if we had followed the policies demanded by Mr. Obama’s opponents. For as I said at the beginning, Republicans have been demanding that the Fed stop trying to bring down interest rates and that federal spending be slashed immediately — which amounts to demanding that we emulate Europe’s failure.

And if this year’s election brings the wrong ideology to power, America’s nascent recovery might well be snuffed out.

January 26, 2012, 11:04 am

The Greater Depression

One thing everyone always says is that while this Lesser Depression may be bad, it’s nothing like the Great Depression.

But this is in part an America-centered view: we had a very bad Great Depression, and have done better than many other countries this time around. As Jonathan Portes at Not the Treasury View points out, the ongoing slump in Britain is now longer and deeper than the slump in the 1930s (the figure shows how far real GDP was below its previous peak in various British recessions; the red line is 1930-34, the black line the current slump):

I believe that when I began criticizing the Cameron government’s push for austerity, some right-leaning British papers demanded that I shut up. But the original critique of austerity is holding up pretty well, if you ask me.

January 28, 2012, 1:47 pm

The Worse-than Club

Further thoughts on the observation that the current British slump has now gone on longer than the slump of the 1930s. Is Britain unique?

No, it isn’t.

The NIESR has developed a monthly GDP series for Britain, which lets it use real-time data for the comparison. I can’t replicate that, but I can use the Maddison historical data and IMF data — including projections for 2012 and 2013 — to do some comparisons. When you do this for the UK, the worse-than pops right out (I use annual data; year zero is 1929 or 2007, and real GDP is expressed as a percentage of the pre-crisis peak in each case):

France and Germany are doing much better than in the early 1930s — but then France and Germany had terrible, deflationist policies in the early 1930s. (It was the Brüning deflation, not the Weimar inflation, that brought you-know-who to power).

With two of Europe’s big four economies doing worse than they did in the Great Depression, at least in terms of GDP — and that’s three of five if you count Spain — do you think the austerity advocates might consider that maybe, possibly, they’re on the wrong track?

January 29, 2012

The Austerity Debacle

By PAUL KRUGMAN

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.

Even so, surpassing the track record of the 1930s shouldn’t be a tough challenge. Haven’t we learned a lot about economic management over the last 80 years? Yes, we have — but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

February 19, 2012

Pain Without Gain

By PAUL KRUGMAN

Last week the European Commission confirmed what everyone suspected: the economies it surveys are shrinking, not growing. It’s not an official recession yet, but the only real question is how deep the downturn will be.

And this downturn is hitting nations that have never recovered from the last recession. For all America’s troubles, its gross domestic product has finally surpassed its pre-crisis peak; Europe’s has not. And some nations are suffering Great Depression-level pain: Greece and Ireland have had double-digit declines in output, Spain has 23 percent unemployment, Britain’s slump has now gone on longer than its slump in the 1930s.

Worse yet, European leaders — and quite a few influential players here — are still wedded to the economic doctrine responsible for this disaster.

For things didn’t have to be this bad. Greece would have been in deep trouble no matter what policy decisions were taken, and the same is true, to a lesser extent, of other nations around Europe’s periphery. But matters were made far worse than necessary by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons of history.

Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.

Now the results are in — and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.

Furthermore, bond markets keep refusing to cooperate. Even austerity’s star pupils, countries that, like Portugal and Ireland, have done everything that was demanded of them, still face sky-high borrowing costs. Why? Because spending cuts have deeply depressed their economies, undermining their tax bases to such an extent that the ratio of debt to G.D.P., the standard indicator of fiscal progress, is getting worse rather than better.

Meanwhile, countries that didn’t jump on the austerity train — most notably, Japan and the United States — continue to have very low borrowing costs, defying the dire predictions of fiscal hawks.

Now, not everything has gone wrong. Late last year Spanish and Italian borrowing costs shot up, threatening a general financial meltdown. Those costs have now subsided, amid general sighs of relief. But this good news was actually a triumph of anti-austerity: Mario Draghi, the new president of the European Central Bank, brushed aside the inflation-worriers and engineered a large expansion of credit, which was just what the doctor ordered.

So what will it take to convince the Pain Caucus, the people on both sides of the Atlantic who insist that we can cut our way to prosperity, that they are wrong?

After all, the usual suspects were quick to pronounce the idea of fiscal stimulus dead for all time after President Obama’s efforts failed to produce a quick fall in unemployment — even though many economists warned in advance that the stimulus was too small. Yet as far as I can tell, austerity is still considered responsible and necessary despite its catastrophic failure in practice.

The point is that we could actually do a lot to help our economies simply by reversing the destructive austerity of the last two years. That’s true even in America, which has avoided full-fledged austerity at the federal level but has seen big spending and employment cuts at the state and local level. Remember all the fuss about whether there were enough “shovel ready” projects to make large-scale stimulus feasible? Well, never mind: all the federal government needs to do to give the economy a big boost is provide aid to lower-level governments, allowing these governments to rehire the hundreds of thousands of schoolteachers they have laid off and restart the building and maintenance projects they have canceled.

Look, I understand why influential people are reluctant to admit that policy ideas they thought reflected deep wisdom actually amounted to utter, destructive folly. But it’s time to put delusional beliefs about the virtues of austerity in a depressed economy behind us.

Sarkozy: “Le brave capitaine du navire dans une violente tempête.” Je l’ai prédit il ya de cela quatre mois

In October 27, 2011, about 4 months ago, i argued that Sarkozy would follow G.W. Bush’s 2004 reelection campaign strategy. In this strategy Bush II presented himself to the American people as the “experienced [candidate], battle-hardened, steady-handed leader and the captain who navigated the treacherous waters and brought Ship America to a safe harbor in these dire times.”

When i wrote those words, i did not think that Sarkozy would quote me almost verbatim four months later when he would announce his candidacy. Well, ladies and gentlemen, he just did. Here is what Sarkozy said yesterday evening on TF1

Quoting from my October 2011 post, i said that

Sarkozy’s reelection campaign strategy will look [exactly like Bush's reelection campaign]. [Sarkozy] cannot run on domestic issues. He has one of the worst record in job creation of the fifth republic; he has introduced highly controversial reforms that have not yielded any results (social security reform, retirement reform, education and so forth); he has a poor record on immigration control; he has a poor record on the economy and economic growth; and he has a poor record on security. During his tenure, deficit spending went through the roof and the overall charge of the national debt has tremendously increased. So what else out there is left to run on? In two words: Leadership, and national unity.

Well, tonight Sarkozy proved me right. He is the captain of Ship France and he cannot abandon the ship in this terrible storm. In reality, the options before Sarkozy were/are very limited. Since he cannot run on his record, he must run away from it. But the question, what can he run since he cannot run on his record? The answer is leadership. Sarkozy is betting big on his leadership quality, on his manhood, on his Savor-of-France status. Is it going to be enough? Yes, but at one condition: he has to attack Hollande violently, mercilessly, and negatively. I predict that this is going to be the nastiest electoral campaign in the history of France because any other campaign style would lead directly Hollande to elected easily.

Say whatever you want about Sarkozy, the man is a fighter. And he will fight until the bitter end. The problem with conducting a no holds barred, scorched earth negative campaign is that the attacker tends to increase his unfavorable ratings (unfovorables in electoral campaign jargon are the negatives of the candidates). Of course, the attacked candidate gets hurt in the process and loses several points, but the attacker almost always sees his negatives increases as well. Sarkozy has already huge favorable ratings (the spread is about 20 points against Sarkozy right now and has been stable for several months now) and going on the attack can literally sink his campaign. So, i am guessing that it is not going to be Sarkozy who would do the daily attacking, the most dirtiest and nastiest attacking; he will delegate that to one of his faithful campaign lieutenants–preferably someone who is trusted by the public, even liked by the public; someone with a beautiful smile and an ease with words; someone who has the reputation of a nice guy or girl–to do the dirty work.  For negative campaigning to be efficient it must look like normal innocent electoral politics. Briefly stated, the attacker must take the pettiness, the rapacity, and the meanness away from the attack and couch the whole thing in normalcy.

So, brace yourself Holland, a shit storm is about to hit you. Sarkozy could get away with such strategy if Hollande is not ready strategically and methodically to respond, and if he gets distracted by the 1001 forthcoming little daily attacks. Bush proved that this strategy can be successful. So, there is a successful model out there to successfully execute such a strategy. There is also the unsuccessful counter-strategy model of what-not-to-do.  Yes, absolutely this strategy can be successful if the Socialist Party and François Hollande roll-over and play dead. This is the time for the PS and for Hollande to go on the offensive. Hollande cannot afford to play defense on the theme of leadership. Hollande cannot let Sarkozy own the theme of leadership. As the old saying goes, the best defense is offense; this is more true in politics than in sport. If Hollande allowed Sarkozy to capture the debate and dictate the tempo and the themes upon which the campaign would be fought, the socialist candidate would lose. Period. There is no doubt about this.  Moreover, if Hollande let’s Sarkozy frame him as a weak, divisive, and an untrustworthy leader, Hollande would lose. Hollande has 3 deadly weapons in his arsenal: 1) hammer Sarkozy’s record daily; 2) don’t run against Sarkozy the man, run against Sarkozy the incumbent president with a bad record; and 3) attack Sarkozy’s strongest suit, which is leadership. If Hollande neutralizes Sarkozy’s leadership theme, he wins. Ladies and gentlemen, electoral politics is mostly a game of perception and expectation, and if you let the voters see you as weak, you might as well pack up and go home. That’s why Hollande has to fight Sarkozy on the theme of leadership.

Sarkozy: Escadron, A Droite, Salu-ez.

Today’s post is an attempt to catch up on the lasted news and the evolution of the French presidential election. We have had quite a week. First, Claude Guéant and his “civilizations are not equal” declaration, then Sarkozy’s long interview in Le Figaro Magazine titled “Mes Valeurs Pour La France”, and the possibility that Marine Le Pen will not be able to gather the 500 necessary signatures to be able to be on the ballot.  Well first, let me clear one thing: Sarkozy is running, and there was never a doubt in my mind (or on his for that matter) that he wasn’t going to run again. Those who thought otherwise either don’t know much about politics or  have not been paying close attention to the Sarkozy circus.

So, this week, we have Guéant, Sarkozy, and Le Pen. The question is: what is the link between the 3? And how does Guéant’s declaration about civilizations play a role in helping Sarkozy win his reelection bid while at the same time taking a sharp ideological turn to his right? Well, everything is linked. It is like jigsaw puzzle and each little piece fits in its little place, and when all the pieces are assembled, the resulting image is Sarkozy in the Élysée Palace for 5 more years. Allow me to explain all of this, folks.

First, we start with Marine Le Pen. As i write this post, Marine Le Pen does not have the 500 necessary signatures (500 parrainages) from local officials to be on the ballot. The likelihood that she does not get those signatures is real. So, who benefits the most from such a situation? Well, let us look at a poll conducted by Le Journal du Dimanche last weekend.

Clearly, the candidate who benefits the most from Marine Le Pen’s absence in the first round of the presidential election is Sarkozy. He goes from an average of 26.6% (i averaged all the polls from December 01, 2011 to February 01, 2012 of the following polling institutes: BVA, CSA, HARRIS, IFOP, IPSOS, LH2, Opinionway, and TNS-SOFRES) to a 33% in the first round. This is a jump of more than 6%, while all other candidates maintain their normal statistical scores. Clearly, the one who benefits the most from the absence of Le Pen is Sarkozy (statistically, he is 1% outside of the margin of error upper bound). The problem for Sarkozy is that he still loses the second round badly to Holland even if Le Pen is not on the first round ballot (a difference of about 8 percentage points). Where can Sarkozy get 8 more percentage points to close the gap with Hollande in the second round and win the election? Most importantly, what can he do to close that gap in the second round and get 6 or 8 points to win? Here enters the faithful soldier, Claude Guéant, and Sarkozy’s “Mes Valeurs Pour La France.”

The minister of the interior Guéant, in an informal meeting with the young UMPists,  said last week the following:

 Contrairement à ce que dit l’idéologie relativiste de gauche, pour nous, toutes les civilisations ne se valent pas

Roughly translated, Guéant said that “Contrary to the relativist ideology and doctrine of the left, for us, not all civilizations are created equal.” This is quite a statement. It is so radical that Heinrich Luitpold Himmler would be proud of his disciple. It is important to understand that Guéant is not talking about political regimes, social and economic structures, or even political values and democracy. Guéant is talking about the importance of civilizational hierarchy. It is also very important to understand that Guéant did not make a mistake or misspoke or his remarks were taken out of context or misconstrued. Guéant meant what he said and said what he meant. Why? Why would a politician so disciplined like Guéant say something so controversial in the middle of a very contested presidential campaign? Well, this is what American politicians and observers call a strong and loud dog-whistle, and its objective is to attract or get the attention of the voters of the National Front. If Sarkozy is seen as a believer (by the way, Sarkozy did not rebuke Guéant’s remarks or distance himself from his minister of the interior. He actually defended and supported his remarks) in the hierarchy of the civilizations–i.e., that the white Catholics are racially, ethnically, culturally, economically, and politically form a more advanced civilization than the rest of immigrants in France–he would be seeing as the ideological gap and distance between him and the FN voters. And if he closes that distance, he would get a big chunk of Marine Le Pen’s vote. Add to that the possibility that she might not be able to be on the ballot, you would have a very close first round, and possibly a close second one too.

In addition, Sarkozy’s long interview in Le Figaro Magazine (a puff piece of the worse kind of journalism i have ever seen. It’s not really journalism, it’s a Soviet-like propaganda piece) leaves no doubt about his sharp ideological turn to the right. The essence of the interview is: same-sex marriage? No; Voting right for foreigners? No;  Adoption rights for homosexuals? No; Euthanasia? No; Situation of the unemployed? Take the job we give you, get some training or go somewhere else, etc… So Sarkozy has clearly opted to campaign very hard on his right. In this interview he does not talk about the economic crisis or the dire situation of most of the French people, but he talks about values, “his values for France.” In a way, Sarkozy decided to run on the cleavage left-right and create a clear and sharp distinction between him and Hollande by positioning himself to right of the traditional right-left ideological divide. He is so far to the right that the distinction between him and Marine Le Pen is only a matter of rhetoric, not policies and values.

Most French incumbent  presidents (Giscard, Mitterrand or Chirac) when they decide to run for a second term, they choose to run on the theme of unity, of bringing the country together, of creating a synergy to lift the country to a higher level and so on. They also run on their records and showcase their accomplishments. Sarkozy cannot do that. I said it before in a previous post on this blog that Sarkozy will run away from his record as vampire runs away from the sunlight. His record is abysmal and he cannot use it and hope to even win the first round. So, he needs to find another theme. Thus, Sarkozy decided to run a value-driven campaign–right-wing value-driven campaign more accurately. Can he win with this strategy? Yes, the electoral math says so. If he runs hard to his right (with the possible absence of Marine Le Pen, this strategy works better), he secures for himself a high enough score in the first round to be able to face Hollande in the second round. The whole strategy of Sarkozy can be summarized in four words: winning the first round. Then, anything is possible. It is, as the French would say, strictement une campagne du premier tour

It is up to Hollande to counter this strategy by never running against Sarkozy the man, but running against Sarkozy’s record. Hollande must talk and hammer Sarkozy’s record ad nauseam. This is Hollande’s most lethal electoral weapon. No one really cares about Hollande’s policy proposals as most voters are ignorant and don’t understand the particularities of fiscal policies or budget reduction versus generation of new revenues. Hollande already passed the most important test–i.e., he looks and sounds as a capable politician and most French people can easily imagine him in the Élysée Palace handling the business of the state–now, he has to cleverly attack the record of Sarkozy and keep it the main focus of the campaign. One more point, it is important for Hollande not to lose control over the agenda. He has to set the agenda and dictate the rhythm of the themes debated during the upcoming weeks. It is easier to say this than do it, especially when one is running against and incumbent. However, by controlling as much as possible the agenda setting, Hollande controls as much as he can his destiny. In other word: this election should be a referendum on Sarkozy’s performance in office for the last 5 years. If Hollande does that, he wins.