Yves here. Black does yeoman’s work in describing the bias in the New York Times’ Eurocrisis reporting.
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.
The New York Times’ coverage of the euro zone crisis continues to exhibit two related flaws. First, it is overwhelmingly written from the German perspective – the Berlin Consensus that is driving the crisis. Second, it continues to ignore economics. Paul Krugman, the NYT’s Nobel Laureate in economics, has been explaining the economics of the crisis for years in his weekly NYT column. We know that Berlin either doesn’t read or comprehend what Krugman has been trying to explain, but it is remarkable that so many of the NYT reporters covering the euro zone crisis share their failure to read or comprehend.
A recent example of this pattern is the May 8, 2012 article “German Patience with Greece on the Euro Wears Thin.”
The introductory paragraph establishes that the frame for the article is Berlin’s destructive and warped view of the euro zone crisis.
BERLIN — Just weeks ago, the idea that Greece would leave the euro zone was almost unthinkable. Now, with Greece’s newly empowered political parties refusing to abide by the terms of the country’s international loan agreement and Europe’s leaders talking tough, that outcome is looking increasingly likely.
We should begin with the title of the article. Germany has insisted that Greece follow austerity policies (the Berlin Consensus) that were certain to force Greece into depression. The Berlin Consensus has forced Greece into a depression. The German reaction to the economic catastrophe that it has forced on the Greek people is to be enraged that the Greek people in the recent election rebelled against their leaders who had given in to the German demands that the Greeks be forced into a depression. Greek patience with Germany’s destructive policies, its assaults on Greek sovereignty, and its constant, vitriolic insults of the Greek people has more than worn “thin.”
The Greeks are responding to the failed Berlin Consensus in a manner similar to Latin America’s revolt against the Washington Consensus. The Greek reaction, therefore, was not “almost unthinkable” – it was the typical response of a nation whose leaders caved in to a neoliberal assault on their economy and sovereignty. The NYT reporters get their analytics wrong because they studiously ignore the Greek perspective and refuse to even entertain the question of why anyone would expect a nation to accept being forced by a hostile foreign power into a great depression. As I have argued, the “Occupy” movement in the U.S. should stand in awe of Germany’s reoccupation of Greece. The Greeks have a bitter history of Greek quislings aiding Germany’s World War II occupation, so their rage at their recent leaders’ surrender to German demands is understandably intense.
The Greek reaction would be understandable if the NYT reporters bothered to consider the Greek perspective. Unfortunately, the reporters’ adoption of the German perspective leads them to emulate Berlin’s refusal to consider the Greek perspective. Instead, the reporters’ adopt the German framing of the issue. That framing is that the Greeks are inexplicably “refusing to abide by the terms of the country’s international loan agreement.” The idea that the Greek people should continue to take the Berlin elevator that has plunged their nation into a great depression because their disgraced leaders were coerced into agreeing to a deal that is destroying their nation is insane. Democracy is all about throwing out leaders who have disgraced themselves, crushed the nation’s economy, and cravenly taken orders from a hostile foreign power. The Greeks have done just that. Why would anyone expect the Greeks to continue to follow a suicidal economic policy imposed by Germany? Berlin and the NYT reporters share the bizarre belief that if your coerced leaders sign a suicide pact you have a duty to commit suicide because – a deal is a deal.
The reporters fail to ask why the Greeks object to the deal and why the consequences of the deal would be suicidal for Greece. Instead, they simply assume that Greece should continue a deal.
But the frustration with Greece here is undeniable. There is a growing conviction that it is up to Greece to follow through on its commitments, that Europe is done negotiating.
Germans are now predominantly of the opinion that they would be better off if Greece left the euro zone,’ said Carsten Hefeker, a professor of economics and an expert on the euro at the University of Siegen. ‘If the country really is continuing on the path they are taking now, it would be hard to justify keeping them in. How do you deal with a country that says we don’t want to keep any of the commitments we have made?’
Note the lack of any embarrassing questions by the reporters to Hefeker, who they describe as an expert in the euro. His premise is that if the Greeks refuse to continue to follow a suicidal austerity program mandated by Berlin, if instead they take “the path” of rejecting austerity “it would be hard to justify keeping them in [the euro].” We are back at one of the most disturbing aspects of the Berlin Consensus – the dogma that “there is no alternative” (TINA). Austerity during a recession, much less the great depression levels of unemployment Greece is suffering, deepens the depression and tears the nation apart. Berlin insists that its suicidal policies are the only alternative. Krugman (and many others, including UMKC economists) have been explaining for years why that view is economically illiterate.
The Berlin Consensus has forced the euro zone into recession and thrown the periphery into depression level unemployment. If the reporters had listened to economists they would have responded to Hefeker’s query by reformulating his question. His question invites a follow-up by the reporters: “How do you deal with a country that says we don’t want to keep any of the commitments we have made?” If the “commitments” are suicidal, then the way you deal with Greece’s refusal to commit suicide is to praise it and end the German diktats that have devastated Europe. If Chancellor Merkel gave into foreign coercion and signed an agreement that was suicidal for Germany and the German people threw her out of office through a democratic vote and repudiated the agreement, who believes that Hefeker would urge Germans to commit suicide on the grounds that a deal is deal?
The reporters then note the German praise for Spain’s conservative government because of “the government’s efforts to cut deficits in spite of a contracting economy.” Germany praises the quislings who give in to its coercion and cause their national economy to collapse into great depression levels of unemployment. Germany praises suicidal quislings, but it is venomous in its hate for the Greeks because they have thrown the quislings out of office.
Greece, on the other hand, is roundly criticized for lying about the true state of its finances again and again, before and after joining the euro zone, and its failure to take any of the numerous steps demanded by its creditors to modernize its economy and — a particularly sore point — its tax collections. Its status as a special case is underscored time and again.
I agree that Greece is a special case and that it has greater internal problems of its own making than other nations of the periphery. What isn’t special about Greece, however, is the insanity of Berlin’s demands for austerity in the midst of a recession or depression. Austerity has produced a crisis throughout the euro zone and it has caused a great depression in many nations of the periphery. Most euro zone nations have made false statements about the true state of the economy and budget deficit projections. The central reason the projections proved false is that Berlin insists that austerity will produce recovery, but it actually produces economic losses or even catastrophe. Berlin wants euro zone nations to create their budget deficit estimates on the assumption that austerity will spur economic growth. Using Berlin’s preferred means of projecting budgets deficits has caused virtually every euro zone nation to greatly underestimate the actual budget deficit.
When a nation such as Greece is forced into a great depression its tax revenues fall sharply and the need for public expenditures, e.g., for unemployment payments, grows. The result is that nations do not control their budget deficit. If they adopt austerity they may make the budget deficit even larger. If they raise taxes they reduce private sector demand and if they cut government programs they reduce public sector demand – both of which make the recession worse. My colleague Stephanie Kelton has been very strong in trying to get this basic fact across to the public and policy makers – nations do not control their budget deficits. Austerity does not lead to balancing the budget – it leads to recession and depression. If you hate budget deficits, you should realize that it is recessions that primarily drive budget deficits and that adopting austerity during a recession or the recovery from a recession is what leads to deeper recessions and severe depressions.
The reporters miss all of this (as does Berlin). The reporters then move to options, but the genius of TINA is that there are no options.
But the options are few and unpalatable. One possibility, analysts said, would be for the troika to pay Greece just enough to keep government services running, withholding the rest until the political situation clears up. In what some consider the most likely possibility, the creditors would agree to renegotiate the terms of the bailout and the new Greek government would go along.
But there is also the possibility that the troika will finally refuse to hand over any money whatsoever, something the I.M.F. did a decade ago in Argentina, when Buenos Aires failed to meet its bailout terms. If this happens, many experts say, Europe will be ready.
“Unpalatable” to who – and how did the purported unattractiveness of policy options come to be a “fact”? The reporters present these two paragraphs as facts – not Berlin’s dogma that is economically illiterate and has been falsified by the facts. If Germany stopped demanding austerity the euro zone would not be in recession and the periphery would not be continuing to descend into depression. If the euro zone followed policies to expand employment through increased public sector demand the results would be extraordinarily “palatable.” The German Consensus is catastrophically “unpalatable” – which is why it has consistently led to voter rejection of the quislings who have been coerced into giving in to Berlin’s austerity diktats.
It is unacceptable for reporters from the nation’s top paper to present statements like this as facts. The reporters’ statements about the alternatives are not simply contestable; they are contrary to observed reality and economics. It is deeply disturbing that the reporters covering the euro crisis have adopted the Berlin Consensus and become devotees of cult of austerity, but the newspaper has a duty to prevent them from presenting their dogma as fact.
If the NYT reporters read Krugman (or most any sentient macroeconomist) they will learn that austerity is not the only alternative – it is the worst alternative of those under consideration. If Germany and the European Central Bank (ECB) were to increase public spending Germany and the entire euro zone, indeed, the entire world would be better off. Pushing the euro zone into recession and the periphery into great depressions is terrible for every euro zone nation and imperils the global economic recovery.
The NYT reporters do note the alternative that Greece could withdraw from the suicide pact that Berlin insisted they sign and default on its debts. The article implies that the IMF taught Argentina a lesson when it refused to continue to adhere to the suicide pact the IMF had coerced disgraced Argentine leaders to accept. The implication is that the Argentine option is unpalatable because the IMF cut off of funding results in a disaster in Germany. The facts, however, are inconvenient. First, it was Argentina that told the IMF to go jump into their choice of the Atlantic or Pacific Ocean. Second, Argentina’s rejection of the austerity suicide pact worked brilliantly for Argentina and its people – and Argentina’s government has never been cited as an exemplar of good government.
It would be relevant to know why Argentina fell into a depression so severe that the IMF intervened and prescribed its universal snake oil – austerity. Argentina eventually rejected the IMF suicide pact and defaulted on its debt. Argentina was the purported star performer demonstrating the wisdom of the Washington Consensus. Timothy Geithner, in his IMF incarnation (where he was also a policy failure), approved a report entitled “Lessons from the Crisis in Argentina” dated October 8, 1993:
In 2001-02, Argentina experienced one of the worst economic crises in its history.
Output fell by about 20 percent over 3 years, inflation reignited, the government defaulted on its debt, the banking system was largely paralyzed….
The events of the crisis, which imposed major hardships on the people of Argentina, are all the more troubling in light of the country’s strong past performance. Less than five years earlier, Argentina had been widely hailed as a model of successful economic reform….
Argentina was widely considered a model reformer and was engaged in a succession of IMF-supported programs (some of which were precautionary) through much of the 1990s, when many of the vulnerabilities were building up.
Argentina followed the IMF’s Washington Consensus game plan, which plunged it into depression. The IMF told Argentina that a partial bailout and austerity was the answer to depression and the Argentine leaders were desperate enough to agree. I set out below the IMF’s description of what it sought to impose on Argentina. If you know enough to realize its similarity to the troika’s (EU, ECB, and IMF) demands on Greece you may wonder why the troika would repeat the IMF’s failed policies from a decade ago in Argentina. (Hint: recurrent failure is the IMF’s specialty. Failure, therefore, has never led the IMF to change its insistence one size fits all financial suicide pact. Actually, I am being too kind to the IMF. Geithner concluded that the IMF had made mistakes in dealing with Argentina – it had not been draconian enough in insisting on austerity, reduced national debt-to-GDP ratios, and reduced working class wages. As I said in my first column on this subject, citizens that have experienced the tender mercies of the Washington and Berlin Consensus develop a passionate hate of those policies.)
“The program sought to bolster the prospects for economic growth through gradual fiscal consolidation—an increase in the public sector primary surplus to 1½ percent of GDP from about ½ percent of GDP in 2000— with an overall deficit of about 3 percent of GDP—and various structural measures. The consolidation plan was formulated against the backdrop of a new fiscal pact with the provinces and envisaged improvements in tax enforcement. On the structural side, the program aimed at promoting private investment and competition in domestic markets through (inter alia) elimination of tax disincentives, continued implementation of already approved labor market reforms, and deregulation of key sectors….”
The alert reader will not be surprised that austerity did not produce an economic recovery in Argentina.
The attempts at strengthening the public finances failed, however, to break the cycle of rising interest rates, falling growth, and fiscal underperformance. Financial markets initially responded positively to the revised program, but already by mid-February, it became evident that the fiscal deficit was about to exceed the agreed ceiling for the first quarter. Moreover, following the resignation of the finance minister, his successor was forced out of office in less than two weeks as his planned budgetary cuts and reform measures failed to find the necessary political backing.
As always, austerity failed to deliver its promised economic benefits and produced a political backlash among the citizenry that realized that austerity was a suicide pact imposed by a hostile neo-colonial power.
Geithner predicted that Argentina’s default and anti-austerity response would make it extraordinarily difficult for Argentina to recover.
Looking forward, the country faces enormous challenges not only in restoring macroeconomic stability but also in re-establishing the pre-eminence of contracts, property rights and economic security that has been damaged by the government’s defaulting on its debt and reneging on its convertibility commitment. Damage both to the balance sheets and to the credibility of the banking system also needs to be repaired. While the devaluation has addressed immediate concerns about competitiveness, one troubling aspect of the performance of the Argentine economy was that, even during its boom years, 1991-98, unemployment remained persistently high, underscoring the need for reforms of the labor market and for other improvements in economic institutions and structures that foster a more dynamic private sector.
[T]here needs to be a fundamental rethinking of the role of the state—not least, in the relations between the federal government and the provinces, and the size and cost of the civil service—if expenditure is to be commensurate with revenues.
The IMF was writing about an Argentina in a severe recession, but Geithner’s report stressed that the IMF’s primary concern was the need to re-establish: “the pre-eminence of contracts, property rights and economic security….” “Reforms of the labor market” is code for cutting working class wages. The IMF answer to severe unemployment is to add to it by firing public workers. The needs of the Argentine people were not even tertiary to the IMF. The IMF, Washington, D.C., and Berlin are always amazed that the citizens of the nations they assault figure out that their welfare is irrelevant and become enraged at those that inflict the suicide pact.
Actually, the Geithner report did reach one sound conclusion. Unfortunately, Berlin has ignored it.
With regard to crisis resolution, the Argentine crisis illustrates the importance of timely debt restructuring in cases in which the debt dynamics have become irreversible. Once a debt restructuring has become unavoidable, measures to delay it are likely to raise the costs of the crisis and further complicate its resolution.
Berlin has mastered the art of forcing the periphery to twist slowly in the wind while being subjected to constant insults. Everyone suffers from Berlin’s passive aggressive assault on the periphery. Berlin, however, finds it politically and personally desirable to put a boot on the throat of the nations of the periphery and squeeze until quislings emerge to do Berlin’s bidding.
The 1993 Geithner report about Argentina reached another interesting conclusion that the IMF and Berlin failed to follow when dealing with the current crisis.
An important consideration that has to guide the Fund’s decision-making process and that was clearly underscored by the Argentine experience is that, in a situation in which the debt dynamics are clearly unsustainable, the IMF should not provide its financing. To the extent that such financing helps stave off a needed debt restructuring, it only compounds the ultimate cost of such a restructuring.
Greece’s “debt dynamics are clearly unsustainable” but the devotees of the cult of austerity are late to see this fact because they believe that austerity spurs economic growth. If austerity spurs economic growth then debt dynamics are rarely unsustainable. As the nation reduces spending the economy expands, which increases tax revenues, which allows the nation to achieve a budgetary surplus. Similarly, the IMF and Berlin assume that if a nation cuts working class wages during a recession it will increase exports and run a trade surplus that will provide funds it can use to pay down its sovereign debt. The IMF and Berlin do not understand that sharply reducing working class wages during a recession can cause already inadequate private sector demand to fall and deepen the recession. The result of believing in what Krugman aptly labels the “Confidence Fairy” is that it leads you to believe financial fairy tales in which austerity allows nations to recover from even severe debt crises – even when (like Argentina and the euro zone) they lack a true sovereign currency. This causes Berlin and the IMF to continuously fail to realize that debt has become unsustainable in nations that lack a sovereign currency. The Geithner report admits aspects of this problem.
Growth projections were a central element in the failure of many interested parties—including the authorities, the Fund, and market participants—to identify the vulnerabilities that were building up during the boom years of the 1990s. During that period, Argentina’s growth projections were based on what was, in hindsight, an overly favorable reading of the benefits of the structural reforms that had taken place and prospects that further reforms would be implemented. This experience calls for a careful and critical assessment of the links between structural reforms and growth, both in the context of work on individual countries and in cross-country analysis.
Sadly, it is impossible for the IMF or Berlin to undertake “a careful and critical assessment” of a core dogma. That is the nature of dogma. The result is recurrent error.
The IMF was relying on austerity to summon the “confidence fairy” and produce a miraculous Argentine recovery. David Rosnick and Mark Weisbrot of the Center for Economic and Policy Research (CEPR) authored an excellent report on Argentina (Political Forecasting? The IMF’s Flawed Growth Projections for Argentina and Venezuela) in April 2007.
‘The Argentine authorities were committed to fiscal tightening, including ‘a freeze on nominal primary spending at all levels of government, and by deepening the proposed reform of the social security system’ and the Fund staff expressed satisfaction. According to their report in the Second Review the staff insisted, ‘this strategy is appropriate, and deserves the increased financial support of the international community.’
On the basis of the optimistic projections for economic growth, the Fund pushed for deeper reforms including more fiscal tightening, privatization, and deregulation aimed at restoring market confidence. In January of 2001, First Deputy Managing Director Stanley Fischer stated, ‘Market reactions to the program and recent external developments have been positive: spreads on Argentine bonds and domestic interest rates have declined significantly in recent weeks and the stock market has rebounded strongly. These developments bode well for a recovery of confidence and economic activity in the period ahead.’
Even the IMF’s internal review found that the IMF took actions that could succeed only if confidence played a magic role. The confidence fairy, of course, never appeared.
In 2004, the IMF’s Independent Evaluation Office (IEO) would report on the Second Review declaring that the ‘[p]rogram design was highly optimistic’ based in large part on overly optimistic assumptions and inconsistent program projections. The IEO even pointed to a lack of ‘serious analysis of exchange rate sustainability.’ Subsequent decisions by the IMF to provide further loans in May and then September 2001, despite ‘increasing recognition that Argentina had an unsustainable debt profile, an unsustainable exchange rate peg, or both’ were made ‘on the basis of largely noneconomic considerations and in hopes of seeing a turnaround in market confidence and buying time.’
Once Argentina defaulted, the IMF expressed its desire to see the nation “suffer.”
In January, Stanley Fischer’s replacement, Anne Krueger, wrote in El Pais, ‘Defaults are always painful, for debtors and creditors alike. And so they should be. Countries – just like companies and individuals – should honor their debts and suffer when they fail to do so.’
What is clear is that the IMF did not approve of Argentina’s actions. Dawson expressly linked the lack of financial assistance to specific policy actions on the part of the Argentine government.
Before lending resumes, it is expected that Argentina will move to establish an internationally recognized insolvency regime and deal with the economic subversion law, which allows for arbitrary official actions against business. The authorities also must address the provincial governments’ spending and issuance of alternate “currencies.” To date, these and other necessary reforms have not been put in place, and so… no financial assistance has been offered.
‘The Fund is also concerned about the rule of law in Argentina,’ Dawson wrote. However, the very next day, the democratically elected President Hugo Chávez of Venezuela was overthrown in a military coup. On April 12, the day after the coup, Dawson noted that the IMF was already in Caracas to conduct an annual review. ‘And we hope that these discussions could continue with the new administration, and we stand ready to assist the new administration in whatever manner they find suitable.’ Chávez was returned to power a day later, after most Latin American governments refused to recognize the dictatorship, and after massive street protests by Venezuelans.
So what happened to Argentina after it defaulted, the IMF withdrew all aid, and Argentina adopted policies that Geithner claimed made its recovery extraordinarily unlikely? For the reasons I have explained, the IMF consistently overestimated how well the Argentine economy would perform under its Washington Consensus policies. “In Argentina, the IMF overestimated GDP growth for 2000, 2001, and 2002 by 2.3, 8.1, and 13.5 percentage points respectively.”
Once Argentina decided to default on its debt and break with the suicide pact demanded by the IMF, the IMF’s economic projection errors continued – but reversed their direction.
The direction of International Monetary Fund (IMF) forecasting errors was reversed after Argentina rejected the IMF suicide pact.
Argentina’s default on its public debt at the end of 2001, and the subsequent collapse of its currency. Then the IMF began underestimating the strength of Argentina’s economic recovery. As shown in Table 1, the WEO estimates for the four years 2003 through 2006 came in low by 7.8, 5.0, 5.2, and 4.3 percentage points respectively.
Argentina’s recovery, which Geithner had dismissed as next to impossible given its break with the policies mandated by the IMF suicide pact, proved extraordinary.
In December 2002, with the economy eight months into an economic recovery, the IMF staff wrote that “[f]inalizing an economic program that could be supported by the international community is an essential first step to putting Argentina on a path to recovery.” Even later, in April 2003, the IMF’s Director of Research called Argentina’s growth “a hiatus at the moment from its long economic fall.” Argentina has now completed a five year economic expansion with the fastest growth in the Western Hemisphere, with real GDP (adjusted for inflation) growth of 47 percent.
To sum it up, Argentina’s experience demonstrates one of the most palatable alternatives to Berlin’s insistence that the periphery accept a suicide pact of austerity-driven severe depression. The NYT reporters wrote about Argentina in a manner that deliberately gave the opposite impression.
The reporters end their article by channeling Berlin at is most arrogant.
Mr. Dieter said: “The mood in German government circles has become a little less enthusiastic, to put it mildly. Just last Friday, Finance Minister Wolfgang Schäuble said on the record that membership in the European Union is not compulsory, it’s voluntary, and Greek society has a choice.” He added, “I think this is a good reflection of the changing mood of German policy makers.”
“You can’t be a member of the club and disregard the rules,” he said.
Berlin’s way or the autobahn! The nations of the periphery cannot follow “the rules.” Berlin’s insistence that they do so has forced them into depression. No nation in the periphery should be trying to follow Berlin’s suicide pact. Euro zone nations cannot insure that they follow “the rules” and their attempt to do so is what has thrown the euro zone back into recession, has casued revenues to fall and expenses to rise, which has caused almost every euro zone nation to violate “the rules.” Again, a nation does not have the ability to simply make a “choice” as to whether it runs a budget surplus. Attempting to run a surplus can trigger and intensify recessions and cause enormous budget deficits. Germany and France have violated the oxymoronic “Growth and Stability Pact.” The Pact produces shrinking economies and economic crises. As the Pact threw the euro zone back into recession Berlin insisted on making the Pact more suicidal. Greece should withdraw from the euro, but the euro zone must abandon its worship of the failed austerity dogma and its endless wait for the confidence fairy.
Another team of NYT reporters wrote a slightly better article on May 8, 2012 about the financial crisis, but they too began from the TINA premise, as their title reveals: “Few Options if Europe Turns Away From Austerity.”
The authors acknowledge that austerity is counter-productive.
The situation in Europe represents a conundrum for investors who generally recognize that the cuts that have been made in recent months by countries like Italy, Spain and Greece have caused their economies to shrink.
That is a good start to an article and, logically, the admission should call for an urgent rejection of austerity. The reporters, however, do not seem to understand that a counter-productive policy cannot be the preferable policy. Instead, the reporters seem to imply that a counter-productive policy might be desirable.
‘It’s very easy to abandon austerity measures because they are painful things to do,’ said Otis Casey, the head of fixed-income research at Markit. ‘It is much tougher to figure out how to grow economies.’
Those statements are incoherent. It should in fact be “easy to abandon” a counter-productive policy like austerity. The use of the word “painful” causes the incoherence. Lancing a boil is painful, but essential to healing. The problem with austerity for nations that are in recession or seeking to recover from recessions is not that it is “painful”, but that it is counter-productive. That is why it represents the same kind of disastrous treatment as bleeding patients. The first thing to do when one finds oneself in a hole is to stop digging. So the first answer to the problem of recessions is to not make it worse by adopting austerity. It is not “much tougher to figure out” that counter-cyclical fiscal and monetary policies are superior. Economists have understood for over a half-century the desirability of creating automatic stabilizers. The Berlin Consensus has created automatic destabilizers via austerity.
The article then descends into total incoherence by embracing TINA.
Foreign investors, who are still an important source of funding for the French bond market, are closely watching to see whether Mr. Hollande hews more closely to his more strident campaign rhetoric or to an official platform that actually called for cuts to France’s deficit, just more slowly than had been planned.
‘He needs to realize that he has very limited room to maneuver,’ said Jurgen Odenius, the chief economist at the fixed-income division of Prudential. ‘If he goes out of his room to maneuver, the markets will push back.’
The NYT journalists characterize Hollande’s statements criticizing the Berlin Consensus because it prescribes austerity for recessions as “strident campaign rhetoric.” That is a phrase that implies that the policy is extreme, unsound, and advanced solely for base political reasons. But the reporters know better, or at least they did four paragraphs earlier when they conceded that austerity was counter-productive. Hollande’s statements opposing Berlin’s counter-productive insistence on austerity that threw the euro zone back into recession and the periphery into depression were correct. In those statements, Hollande was speaking sound economics and policy. The proponents of austerity are the folks who rely on “strident campaign rhetoric” and ignores the facts that that their predictions that austerity will lead to recovery have repeatedly proven false and that they offer no coherent theory of why austerity would lead to recovery. “Strident” accurately captures the virulent nature of the Berlin Consensus’ rhetoric.
It is true that Hollande’s statements about austerity are incoherent. He has called for balancing the budget – eventually. That position is not sound economics, but it is a vastly less counter-productive policy than Berlin’s. Hollande (and the entire euro zone) “needs to realize” that it is the Stability and Growth Pact, the structure of the euro, and the limited role of the ECB combine to expose euro zone nations to the bond vigilantes. None of those exposures support adopting counter-productive policies that cause economic catastrophe. The exposures to the bond vigilantes tell us where the design flaws are in the euro zone are that the euro zone should be fixing. If Berlin is telling us that the euro, the Stability and Growth Pact, and the ECB are designed so badly that TINA arises and forces the euro zone to adopt the counter-productive policies that have forced the euro zone back into recession and the periphery into depression, then Berlin is telling us that the system must be immediately reformed or ended.
The reporters who wrote this second article also fail to realize that they are making purported statements of fact that are anti-facts. This sentence assumes that that imposing austerity on nations in recession leads to balanced budgets and reduced debt. “Beyond France, Mr. Hollande has advocated for a revision to the European fiscal compact, which would move the countries toward balanced budgets and less debt.” I hope that by now the reader spots the error in that sentence. The reporters present as fact the false claim that the Pact “would move the countries toward balanced budgets and less debt.” The Pact’s mandated austerity, as the reporters said in the seventh paragraph, “caused their economies to shrink.” It is a dangerous illusion to believe that a nation controls its budget deficit. The Pact mandates a pro-cyclical fiscal policy that makes recessions and depressions more likely and more severe. The Pact does not “move the countries toward balanced budgets and less debt.” It does the opposite.
Another example of this most basic of economic errors was presented uncritically by the reporters.
Dennis Snower, president of the Institute for World Economics in Kiel, Germany, argues that Spain and most European countries could still tap financial markets for more money if they adopted constitutional pledges to run budget surpluses in good times.
The pledge would have to be written in stone, he said. Mr. Snower argued that one reason German borrowing costs are near record lows is because the country has already adopted such a constitutional amendment.
With the exception of Greece, it would work for everyone,’ Mr. Snower argued.
No, it would not work for everyone. Indeed, it would not work reliably for anyone. Running material budget surpluses “in good times” is an excellent means of producing “bad times” (recessions). There is nothing virtuous about running budget surpluses. Governments are not like households. My colleague Randy Wray has a number of articles explaining this point. The United States and Japan “borrowing costs are near record lows.” Neither mandates budget surpluses and both have debt-to-GDP ratios far in excess of Germany’s.