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. Originally published at New Economic Perspectives
As things go from bad to worse in the eurozone the putative adults have begun to fight openly in front of the kids. The putative adults, of course, have refused to act like adults for six years and instead have lived in a fantasy world in which austerity – bleeding the patient – is the optimal response to a recession. As many of us have been warning for six years, this is a great way to create gratuitous recessions and even the Great Depression levels of unemployment in three nations of the periphery with 100 million citizens.
Italy has been forced by German demands for austerity into a third recession in six years, with France likely to experience the same fate. Even Germany has stagnated and could fall into recession. Instead of the four horsemen of the apocalypse, the three horses that make up a troika consist of the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission (EC). The troika combined to force the entire eurozone to inflict austerity in response to the Great Recession.
The IMF was the first member of the troika to publish research demonstrating that austerity was harmful and fiscal stimulus in response to the crisis proved even more successful than economists anticipated. The IMF has recently lowered the eurozone’s growth forecast substantially, urged Germany to increase its spending, and warned of a serious risk of deflation.
The New York Times recently wrote an article noting (but not explaining the significance of) Olli Rehn calling on Germany to increase government spending. Germany has a budget surplus, severe unmet infrastructure needs, and a stagnating economy so its continuing austerity has become so irrational that even the crazies are starting to jump off the crazy train. Rehn was the troika’s hit man on austerity, so his call for Germany to increase government spending is significant even though it does not indicate that Rehn is no longer an austerian.
Similarly, the ultra-austerian Dutch conservatives that have dominated key EU functions have added their voices to the call for Germany to cease its insanity. As with Rehn, the Dutch conservatives remain fierce believers in austerity and claim that it leads, promptly, to growth.
Contemporaneously, the rider of the third horse of the troika, Mario Draghi, the head of the ECB, has pushed for Germany to increase its government spending on infrastructure and for the ECB to engage in quantitative easing. German conservatives have responded by launching vicious attacks on Draghi.
Again, none of this indicates that Draghi has reconsidered his faith in austerity. Indeed, Draghi, the IMF, and the Dutch conservatives are trying to broker a grand deal in which Germany would agree to increase governmental spending on much needed infrastructure in return for Italy and France capitulating more abjectly to German demands that they engage in a war on their workers’ wages. From Angel Merkel’s perspective this later demand is not only ideologically pleasing, but also an “elegant” solution that will cause the (supposedly leftish) leaders of France and Italy to self-destruct by betraying their voters and their principles and discrediting their parties (as was done with great success in Portugal and Greece).
The fact that the German conservatives are demonizing Draghi for pushing for the grand bargain that would simultaneously aid German growth, safety, and convenience while discrediting Merkel’s political opponents is a telling indication of how ideological they are in their commitment to austerity and how fully they believe they have the right to rule by German diktat. Given their (economically illiterate) attribution of virtue to budgetary surpluses by sovereign nations and moral failure to deficits it “must” follow that the larger the budgetary surplus that Germany runs the more uniquely virtuous Germans are because of their “self-sacrifice.” The German rage at anyone who points out that for a nation state the entire concept of budgetary surpluses and deficits being defined as “moral” and “immoral” is nonsensical. Ditto for anyone who points out that the claim that because surpluses are (supposedly) “good” large surpluses must be “great” is contrary to economic experience and theory and logic. Specifically, the claim commits the logical fallacy of “composition.”
German conservatives consider it illegitimate for their eurozone allies to criticize Germany’s hegemony over the EU. If Germans are uniquely virtuous (by running large budgetary surpluses) then Germany’s hegemony is morally sound. “There is no alternative” (TINA) not only to austerity, but also to German domination of the Continent. European “unity” has taken on a sinister cast