Archive for the ‘European debt crisis’ Category

Union Européenne: La crise de la démocratie européenne

May 23, 2012 1 comment

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


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.


France: Live–Presidentielles–François HOLLANDE ELU PRESIDENT

May 6, 2012 29 comments




Ambiance à Tulle à l’annonce des résultats

Rue Solférino: LA LIESSE

More detailed results: Paris

  • François Hollande l’emporte dans le 2e (57,6%), le 3e (61,35%), le 4e (54,96%), le 5e (56,22%), le 9e (54,19%), le 10e (69,39%), le 11e (67,76%), le 13e (65,27%), le 14e (60,26%), le 18e (70,31%), le 19e (67,64%) et le 20e arrondissement (71,83%).
  • Nicolas Sarkozy arrive en tête dans le 1er (52,17%), le 6e (57,66%), le 7e (71,76%), le 8e (72,47%), le 15e (54,50%), le 16e (78,01%) et le 17e arrondissement (58,22%).

More detailed results:

  • A Sablé (Sarthe), la ville de François Fillon, Nicolas Sarkozy recueille 52,89% des voix, contre 57,16% en 2007.
  • A Saint-Quentin (Aisne), ville dont Xavier Bertrand est maire, François Hollande (54,18%) devance largement Nicolas Sarkozy (45,82%).
  • A Troyes (Aube), où François Baroin est maire, Nicolas Sarkozy (50,39%) compte seulement 171 voix d’avance sur François Hollande.
  • A Nancy (Meurthe-et-Moselle), fief de Nadine Morano, où Nicolas Sarkozy était arrivé en tête il y a cinq ans, François Hollande (55%) compte dix points d’avance sur le président sortant.
  •  Au Puy-en-Velay (Haute-Loire), ville dont Laurent Wauquiez est maire, François Hollande (55,89%) arrive très nettement devant Nicolas Sarkozy.
  • A Chaumont (Haute-Marne), ville de Luc Chatel, François Hollande arrive également en tête avec 51,85% des voix.

UPDATE 26: (RTS) Comme l’annonçaient tous les sondages, François Hollande deviendra bien le nouveau président de la République française à l’issue du deuxième tour du scrutin présidentiel ce dimanche. Il a remporté, selon les premières estimations (pas encore définitives), entre 52,5% et 53,3% des voix contre 46,7% à 47,5% pour son adversaire, Nicolas Sarkozy, le président sortant qui devrait donc quitter donc l’Elysée le 15 mai prochain.





UPDATE 21: 18h55 (RTBF) : FRANÇOIS HOLLANDE AURAIT GAGNÉ LES ÉLECTIONS PRÉSIDENTIELLES. La fourchette reste a déterminer quand même

UPDATE 20: 18h51: La foule crie victoire rue de Solférino, le siège de PS, alors que l’ambiance est plus tendue à la Mutualité, où Nicolas Sarkozy doit s’exprimer.


UPDATE 18: 18H47: Pierre Moscovici, directeur de campagne de François Hollande: «On ressent de l’émotion, on attend».

UPDATE 17: 18h37: Selon le journal Suisse, Le Matin, “La victoire de François Hollande se confirme”

UPDATE 16: 18h01: selon l’entourage de François Hollande, le socialiste s’envolera de Brives à destination de Paris à bord d’un avion privé aux alentours de 22h, quel que soit le résultat.

UPDATE 15: 18h00: des proches de Nicolas Sarkozy arrivent à l’Elysée: sa porte-parole Nathalie Kosciusko-Morizet et son conseiller spécial Henri Guaino.






UPDATE 12: Selon le Ministere de l’Interieur, le taux de participation a 17h00 etait de 71.96%

A bit of humor to relax the tension of this electoral night

En directe de la frontiere Franco-Suisse 🙂

UPDATE 11: On commence à s’affairer devant le siège du Parti socialiste, rue de Solférino à Paris. 


UPDATE 10: 16h52 (Tweets des correspondants de la RTS) Des militants commencent à arriver à la Bastille, où François Hollande avait prévu de faire la fête en cas de victoire. Des écrans géants commencent à être installés

UPDATE 9: (source: Le Monde, RTBF, RTS) François Hollande, s’il est élu président, devrait avoir dans la soirée un échange avec la chancelière allemande Angela Merkel, a indiqué un de ses plus proches ami, Jean-Marc Ayrault, le maire de Nantes (ouest).

UPDATE 8: a 16h30 (source RTS) On commence à s’affairer devant le siège du Parti socialiste, rue de Solférino à Paris, comme le montre ce cliché de France Télévisions:

UPDATE 7: a 16h10 (source RTS) Nicolas Sarkozy se trouve à son bureau de l’Elysée, où il doit attendre les résultats du scrutin en compagnie de ses conseillers.


Voici un premier apercu des résultats partiels des Amériques. La participation a augmentè en moyenne de 3 a 4% par rapport au 1er tour. En règle générale, François Hollande fait le plein des voix de gauche et gagne environ le tiers des voix de François Bayrou.

FRANCOIS HOLLANDE gagne à Montreal (près de 57,74%), à Toronto (51% – la gauche n’y avait jamais triomphe), au Pérou (55%), en Argentine (51,7%), en Colombie (58,82%) et au Honduras (56%). Il comble l’ecart avec la droite au Mexique (47,3%), au Bresil (47% – ou il gagne à Rio, Brasilia et Recife), au Costa Rica (44,1%) et au Chili (44%).

UPDATE 5: (SOURCES: RTBF, RTSINFO) Selon les premières tendances et les sondages de sortie des urnes de 3 grand instituts de sondages, François Hollande serait en tête


Nous avons les premiers résultats pour le second tour de la présidentielle française en provenance des départements d’Outre-mer.

Saint-Pierre et Miquelon: François Hollande 65%,  Nicolas Sarkozy 35% ;

Martinique: Francois Hollande 68,5%, pour Nicolas Sarkozy 35.1%

Guadeloupe: François Hollande 72%

Guyane: Francois Hollande 62%

Saint-Martin:  François Hollande avec 51,5 %, tandis que Nicolas Sarkozy ne serait en tête que dans la petite île de Saint-Barthélémy, avec près de 83% des voix exprimées.

UPDATE 3: INFORMATION RTBF–Trois grands instituts de sondages annoncent donc le candidat socialiste François Hollande en tête avec entre 52,5 et 53% des voix. Cela dit ces résutats ne portent que sur les votes du matin (jusqu’à 11h) et il faut encore tenir de la traditionnelle marge d’erreur. Ces résultats sont donc encore à prendre avec précautions à ce stade.

UPDATE 2: RTSINFO– Selon des sondages effectués à la sortie d’une série de bureaux de vote, deux instituts donnent actuellement François Hollande vainqueur de l’élection présidentielle française avec une majorité de 52,5 à 53% des voix.

UPDATE 1: Le taux de participation était, dimanche à midi, de 30,66% en métropole, selon le ministère de l’Intérieur. Ce taux est en baisse par rapport à celui enregistré à la même heure en 2007 (34,11%, marqué il est vrai par une forte mobilisation). Au premier tour le 22 avril dernier, ce taux avait atteint les 28,29% à midi.

We welcome our readers from all over the world. I see that you are already hit the “refresh button” hard and i think there will be thousands of you from France, Europe, and Africa. I promise you that we will be starting our live coverage of the first estimations and exit polls now. Buckle up, this is going to be a “close” right. Let’s Go!

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

April 28, 2012 1 comment

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


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.

Iran: Analysis by Juan Cole of the US/European financial and oil embargo of Iran

April 19, 2012 Leave a comment

Prof. Juan Cole’s (University of Michigan) interview on RT television and his analysis of the current US/European sanctions leveled against Iran’s financial transactions and oil exports.

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

February 21, 2012 4 comments

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?


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


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


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.

Légendes de l’échec

November 12, 2011 2 comments

Today, i choose to post a New York Times Op-ed piece written by Paul Krugman. To those who do not who Dr. Krugman is, well let me just say that he is one of the most brilliant economists of our era. Dr. Krugman is professor of Economics and International Affairs at Princeton University.  He received his B.A. from Yale University in 1974 and his Ph.D. from MIT in 1977. He has taught at Yale, MIT and Stanford. And at MIT, he became the Ford International Professor of Economics.

Dr. Krugman is the author or editor of 20 books and more than 200 academic papers in professional journals and edited volumes. He has built his professional and academic reputation on his serious work in international trade and finance; he is one of the founders of the New Trade Theory, which represents a major rethinking of the theory of international trade. In recognition of that work, in 1991 the American Economic Association awarded him the John Bates Clark medal; the highest prize in economics which is given every two years to the “economist who is adjudged to have made a significant contribution to economic knowledge.” In 2008, Krugman won the Nobel Memorial Prize in Economic Science based on his work on the explanation of the patterns of international trade and the geographic concentration of wealth by examining the impact of economies of scale and of consumer preferences for diverse goods and services.

Briefly stated, when Paul Krugman speaks about economics, we all should shut up and listen closely to what he has to say. This is his take on the eurozone crisis.  And if i might add, his analysis is very close to mine, which is a great honor and validation of what i have been arguing for months now.

Legends of the Fail


This is the way the euro ends — not with a bang but with bunga bunga. Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it’s hard to see how the euro can survive at all.

But what’s the meaning of the eurodebacle? As always happens when disaster strikes, there’s a rush by ideologues to claim that the disaster vindicates their views. So it’s time to start debunking.

First things first: The attempt to create a common European currency was one of those ideas that cut across the usual ideological lines. It was cheered on by American right-wingers, who saw it as the next best thing to a revived gold standard, and by Britain’s left, which saw it as a big step toward a social-democratic Europe. But it was opposed by British conservatives, who also saw it as a step toward a social-democratic Europe. And it was questioned by American liberals, who worried — rightly, I’d say (but then I would, wouldn’t I?) — about what would happen if countries couldn’t use monetary and fiscal policy to fight recessions.

So now that the euro project is on the rocks, what lessons should we draw?

I’ve been hearing two claims, both false: that Europe’s woes reflect the failure of welfare states in general, and that Europe’s crisis makes the case for immediate fiscal austerity in the United States.

The assertion that Europe’s crisis proves that the welfare state doesn’t work comes from many Republicans. For example, Mitt Romney has accused President Obama of taking his inspiration from European “socialist democrats” and asserted that “Europe isn’t working in Europe.” The idea, presumably, is that the crisis countries are in trouble because they’re groaning under the burden of high government spending. But the facts say otherwise.

It’s true that all European countries have more generous social benefits — including universal health care — and higher government spending than America does. But the nations now in crisis don’t have bigger welfare states than the nations doing well — if anything, the correlation runs the other way. Sweden, with its famously high benefits, is a star performer, one of the few countries whose G.D.P. is now higher than it was before the crisis. Meanwhile, before the crisis, “social expenditure” — spending on welfare-state programs — was lower, as a percentage of national income, in all of the nations now in trouble than in Germany, let alone Sweden.

Oh, and Canada, which has universal health care and much more generous aid to the poor than the United States, has weathered the crisis better than we have.

The euro crisis, then, says nothing about the sustainability of the welfare state. But does it make the case for belt-tightening in a depressed economy?

You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.

First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy’s 7 percent. Britain’s fiscal prospects look worse than Spain’s, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent.

What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.

The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.

The moral of the story, then, is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse.

Crise de la Dette européenne: Il est temps de restructurer la dette et de nationaliser les banques

August 19, 2011 18 comments

European Debt Crisis: It is time to restructure the debt and to nationalize the banks

The European crisis is getting worse and it is casting a huge cloud of uncertainty on the future of every major economy. What the market is seeing is a thick and blurry shadow on the far horizon. Indeed, the question that the markets have been asking for a long time now, and the EU leaders have not answered it yet is: can the EU countries pay their debts or do they have the ability, structurally, to pay their public debt? And clearly, the markets are saying “No.” The markets have not shown any confidence in the EU institutions and in the leadership to solve this crisis. Instead, what we have seen is that the debt crisis is worsening–it went from the periphery, Greece and Ireland, to the center, Spain and Italy. Right now, there are speculations about the financial health of the French government. This is how spread and serious this crisis has become. Last week, the French ministers of budget and finance, Valarie Pécresse and François Baroin respectively, were forced to publicly defend the solvency of the French government. Both ministers were compelled to call major hedge funds and lobby large banks to calm down the speculations. It is obvious to me (and to everyone who has followed this debt crisis for the last couple of years) that the EU does not have the structural and institutional capability to deal with the crisis. Last week’s Franco-German summit is a perfect example. The French and the Germans agreed not to agree on almost anything. The only possible solution that would have seriously calmed the markets  would have been the establishment of the euro-bonds. Instead, the French and the German leaders agreed on some very weak measures that did not have any calming effect on the markets; they actually raised more fear and speculation.

So, what’s the solution to this protracted European debt crisis? Well, the N-word might be it–i.e., nationalizing the banks and restructuring the debt.

Let me back up and explain why this might be a necessary solution. First, EU politicians have not understood what the markets have been telling them all this time. The message got lost or misunderstood. If they continue to misunderstand this clear message that world markets have been sending, well the future would not be pretty at all.

Second, the downward spiral in all markets has not been caused by the speculators or shorting.  This has been the biggest misdiagnosis of the century, promoted, of course, by the know-nothing media. There are not that many hedge funds that are shorting the market heavily. The decline in stocks and the rising in value of sovereign CDS and treasury notes have been the results of normal market actors and activity.  It is mostly the financial institutions that manage the savings, the pensions, the trusts, the insurance, and so forth, of everyday citizen that have been trying to protect their investments and themselves from risks. In a period of great uncertainty about the future economic growth in the core eurozone countries, and more importantly the ability of EU countries to pay their debts, these financial institutions sought to secure and protect themselves by going to quality investments and safe havens.

Third, it is evident that there is uncertainty out there, and this in turn is making the market extremely jittery, and some days, totally irrational. Last week was a good example. The triple-A status of the French debt was threatened (and it is still threatened), but is this really surprising? For decades France has run a chronic budget deficit, has had a chronically high unemployment rate, and chronically low economic growth. Structurally, France does not have much room to get out of this crisis and get back in the black. It would need to raise taxes and slash entitlement programs. Well, taxes are already high, and entitlement programs are sacrosanct politically. If we compare France to the US (the debt to GDP ratio is 58% for the US and 83% for France), the picture is totally different (capacity to increase taxes, high to moderately high economic growth, job creations, large investments etc). So, the real issue for France is not how to keep the triple-A rating, but how to restore the balance of public finances without stumping growth. The trick for France and other core eurozone countries is to strike  a careful balance between generating economic growth and cutting spending. Instead of Baroin and Pécresse lobbying large banks and financial institutions,  and issuing politically empty statements every other hour to keep France’s triple-A, they should have announced that they have a serious plan to get out of this mess, and to clean up their finances in order to maintain a certain level of consumption and business investments–because without consumption and without investments, there would not be a serious economic growth and/or job creation. As for the triple-A rating, Baroin and Pécresse should have said “on s’en fiche!” Moreover, the market is already behaving as if France does not have a triple-A rating. The market has digested the poor macro-economic indicators of France, and has factored in those variables in all future transactions.

So how does a country take a break from short term market pressures to reinvigorate its long term financial health? That’s where the nationalization of the banks comes in. Well, we need to understand something very simple: the EU politicians have completely misunderstood what markets want. Cameron, Merkel, Berlusconi, Sarkozy and so forth thought that markets demanded drastic cuts in spending–that markets demanded the so-called austerity packages: slash budgetary spending, slash public investments,  increase taxes, and slash entitlement programs.  So the political leaders in Greece, Portugal, Spain, Ireland, France, Italy and even Great Britain went on to craft the most drastic austerity packages out there. The risk, however, is to completely kill all economic growth, and they indeed killed it (just look at numbers from the last quarter: almost 0% economic growth in France and Great Britain, abysmal growth in Germany, Spain, Italy, Greece, and so forth). This was a stupid policy wrapped in total absurdity. The reaction of the markets around the world was swift, rational and expected. The message was that with this very weak economic growth and with this already over-taxed population, the EU countries cannot possibly pay back all their public debts. This is what markets are really saying. The more austerity policies they introduced (the Golden rule, la regle d’or, proposed by Sarkozy is the latest biggest and most stupidest idea ever proposed), the less confidence markets have in the eurozone politicians. Therefore, to get a break from slashing spending to the core and not having enough capital to reinvest in the economy, a country needs to restructure its debt. This is the only way to create enough breathing room to be able to generate the right macroeconomic conditions to reconnect with and reignite long-term growth. However, restructuring the debt has to be done without the market going totally nuts. This has and must be a highly coordinated political decision taken by all major world economies.  It would even be a great plan if the G7 or G20 (including all eurozone countries and all heavily indebted African countries) could coordinate their actions in such a way to provide a political cover for certain countries to restructure their public debt safely, and also provide guarantees that this restructuring would bring everyone to a balanced budget in certain amount of time (a 2 or 5 year period would be appropriate). Moreover, in order to engage in a serious public debt restructuring, the largest banks in each country must be nationalized for a certain period of time.  Why nationalizing the banks? Simply to decouple banks from market-driven activities. This allows banks to go back to their original charter and mission, which is lending money to businesses and individuals to foster economic growth and employment. Moreover, this would separate investment banks from deposit banks (a glass-steagall kind of plan).

Oh, i can hear the supply-siders screaming moral hazard. Well, when the welfare of a whole continent is at risk with all the social turmoils that more austerity policies may cause, and when worldwide negative spillover effects of a debt crisis that is choking the life out of the eurozone are considered, moral hazard becomes just an empty expression. We are truly facing a serious economic situation these days with serious political and social consequences. The time of the half-baked half-ass measures is over. It is time to put back the economic health of the G20 countries on an even keel with a serious economic growth agenda.