My Merkel, right and wrong

Mrs Merkel is right on a number of counts and unless the rest of us, Europeans, acknowledge the strength of her case, there will be no progress in sorting out the mess otherwise known as eurozone. The trick will be to grant her her dues but, also, to point out the logical conclusion of her own arguments (which she seems unable or unwilling to discern).

1. She is right that Europe needs common economic governance

2. She is right that common economic governance cannot be sustained in the absence of any institutionalised brakes on the member-states’ deficits

3. She is right that the underlying economic forces, of competitiveness, productivity and a greater emphasis on the boring business of making things and then selling them

4. She is right that the German taxpayer (and the Dutch, Austrian and Finnish ones) cannot constantly increase their guarantees to the EFSF on the behalf of the effectively bankrupted rest

5. She is right that extending the EFSF’s remit to indulging in fancy buy-backs of Greek and Irish junk bonds is as helpful as aspirin administered to a dying patient

6. She is right that European solidarity is undermined when German production workers retire at 67 while French paper pushers retire at 62 or Greek army personnel are pensioned off at 43

7. She is right that either all eurozone wages should be index-linked or none. That it is not defensible to have wages linked to inflation on the western side of the Belgian-German border but not on its eastern side.

8. She is right that a race-to-the-bottom, when it comes to corporate tax, is ludicrous. Usurping foreign direct investment from the rest of the eurozone with 12% tax rates is a policy that, if generalised, would lead to no greater foreign direct investment, a slump in the tax take and, more importantly, a huge redistribution from labour to capital

In short, Mrs Merkel is completely right on all the issues that she is holding out on currently. Unfortunately, as those of us on the Left have known for a while, it is much easier to be right about your dislikes and wishes than to come up with firm remedies for a better status quo whose implementation is both feasible and does not produce byproducts worse than the original disease.

Let me begin with points 6,7 and 8. The first two are a matter of cross border solidarity. Of course, one could point out that convergence does not have to be achieved at the lowest denominator. Why can the retirement age not rise in France from 62 to 65 while falling in Germany from 67 to 65? hammering out such compromises is Europe’s comparative advantage. Lock several eurocrats in a room and let them get on with it. Their brief ought to be, not only to negotiate a common number, but also to fashion common definitions and associated remedies. For instance, how exactly is a pensioner defined? In Greece, the pension system is (ab)used because of the lack of proper social security. So, in areas of chronic unemployment, the state prefers to push a 58 year old into retirement in order to avoid having her on the dole. So, convergence yes, but across the board please.

Point 8 needs no further exegesis. It is incumbent upon members of the eurozone to harmonise their corporate tax rates. This does not mean a uniform tax rate everywhere. Special economic zones can be declared on the basis of commonly agreed criteria. What is absurd is to allow Ireland to declare itself a special (low tax) economic zone and, in so doing, to invite other countries or regions into a free for all that leads to a suboptimal outcome for everyone, including Ireland. However, note that this harmonisation, again, requires a centrally administered process of deciding the corporate tax rates of each eurozone region.

Points 4 and 5 concern the hapless EFSF. Since I have written enough on the subject, I shall try to desist. Save to sum up: The EFSF is a giant CDO. It is the most inefficient means by which to raise funding for stricken states. The toxic nature of its eurobonds are a massive drag on the taxpayers of the surplus countries and, thus, a major threat to European Unity. Mrs Merkel is right to distrust it, not to want to extend any more guarantees to it and, generally, to see it as an evil whose necessity ought to be undermined. The more ‘analysts’ come up with iffy schemes (recall the buy-back of Greek debt idea) for bolstering the EFSF and allowing it to grow into something more robust than it is, the more Mrs Merkel digs in, and the deeper the eurozone sinks into the mire. Take for instance the latest proposal by Daniel Gros and Thomas Mayer. It recommends that the EFSF buys most of the debt by Greece, Portugal and Ireland by offering to replace their bonds with its own, at the current market haircut rates (giving their owners a firm deadline within which to sell). But this would immediately deplete the EFSF funds, a sure signal to the market that Spain may have nowhere to turn to if it finds itself in need. Spanish spreads will shoot up, then Italian and Belgian ones will follow and, meanwhile, the EFSF will have knocked itself out. And if Mrs Merkel (against all odds) were to decide to triple the EFSF’s funds, to avoid that eventuality, then no one would sell to the EFSF Greece’s or Ireland’s bonds at the current low price. Summing up, Mrs Merkel is wise not to see the EFSF’s evolving role as anything to write home about.

And now, to the first three points on which Mrs Merkel is right: Starting from point 3, there is no doubt that this is the key issue affecting the eurozone’s future: the fact that, while our currencies are locked up, our different economies’ productivity rise and fall at ever differentiated rates. It is like tectonic plates moving in different directions under a city. At some point, the buildings will start cracking. We cannot deal with the eurozone crisis, long term, either by loans or by fiscal transfers or by harmonising tax rates and social benefits or, indeed, by strengthening the forces of recession in the countries already in its merciless clasps. Something else is needed. And that something else cannot be a matter of boosting the eurozone’s overall competitiveness since it is a question of relative intra-eurozone competitiveness. What is that something else? It is some form of Surplus Recycling Mechanism (SRM): A mechanism by which surpluses from surplus regions become profitable investments in a deficit-producing region. Without an SRM no currency zone is vaible; something that Keynes homed in on during the Bretton Woods conference but was ignored by a Unites States on the cusp of global domination; an emerging hegemon who, while fully aware of the importance of an SRM at a global level, decided that it would itself play that role, of the SRM, in the post-war economy (and did so successfully for many years – see my Global Minotaur story; the part I call the Global Plan).

Now, sixty years later, Europe needs its own SRM both to get out of the current crisis and to re-design the eurozone’s faulty architecture in a manner that absorbs shocks better. Unfortunately, unlike the USA back then, Mrs Merkel today does not seem to understand that her own programmatic views (see above) cannot hold together unless such an SRM is penned into her plan for a future Europe. That a European SRM is, if you like, the prerequisite for points 1 and 2 above: No SRM, no common economic governance. But as this is a long and interesting story, I shall have to return to it later.

My Merkel, right and wrong

 

Mrs Merkel is right on a number of counts and unless the rest of us, Europeans, acknowledge the strength of her case, there will be no progress in sorting out the mess otherwise known as eurozone. The trick will be to grant her her dues but, also, to point out the logical conclusion of her own arguments (which she seems unable or unwilling to discern).

 

1. She is right that Europe needs common economic governance

2. She is right that common economic governance cannot be sustained in the absence of any institutionalised brakes on the member-states’ deficits

3. She is right that the underlying economic forces, of competitiveness, productivity and a greater emphasis on the boring business of making things and then selling them

4. She is right that the German taxpayer (and the Dutch, Austrian and Finnish ones) cannot constantly increase their guarantees to the EFSF on the behalf of the effectively bankrupted rest

5. She is right that extending the EFSF’s remit to indulging in fancy buy-backs of Greek and Irish junk bonds is as helpful as aspirin administered to a dying patient

6. She is right that European solidarity is undermined when German production workers retire at 67 while French paper pushers retire at 62 or Greek army personnel are pensioned off at 43

7. She is right that either all eurozone wages should be index-linked or none. That it is not defensible to have wages linked to inflation on the western side of the Belgian-German border but not on its eastern side.

8. She is right that a race-to-the-bottom, when it comes to corporate tax, is ludicrous. Usurping foreign direct investment from the rest of the eurozone with 12% tax rates is a policy that, if generalised, would lead to no greater foreign direct investment, a slump in the tax take and, more importantly, a huge redistribution from labour to capital

 

In short, Mrs Merkel is completely right on all the issues that she is holding out on currently. Unfortunately, as those of us on the Left have known for a while, it is much easier to be right about your dislikes and wishes than to come up with firm remedies for a better status quo whose implementation is both feasible and does not produce byproducts worse than the original disease.

 

Let me begin with points 6,7 and 8. The first two are a matter of cross border solidarity. Of course, one could point out that convergence does not have to be achieved at the lowest denominator. Why can the retirement age not rise in France from 62 to 65 while falling in Germany from 67 to 65? hammering out such compromises is Europe’s comparative advantage. Lock several eurocrats in a room and let them get on with it. Their brief ought to be, not only to negotiate a common number, but also to fashion common definitions and associated remedies. For instance, how exactly is a pensioner defined? In Greece, the pension system is (ab)used because of the lack of proper social security. So, in areas of chronic unemployment, the state prefers to push a 58 year old into retirement in order to avoid having her on the dole. So, convergence yes, but across the board please.

 

Point 8 needs no further exegesis. It is incumbent upon members of the eurozone to harmonise their corporate tax rates. This does not mean a uniform tax rate everywhere. Special economic zones can be declared on the basis of commonly agreed criteria. What is absurd is to allow Ireland to declare itself a special (low tax) economic zone and, in so doing, to invite other countries or regions into a free for all that leads to a suboptimal outcome for everyone, including Ireland. However, note that this harmonisation, again, requires a centrally administered process of deciding the corporate tax rates of each eurozone region.

 

Points 4 and 5 concern the hapless EFSF. Since I have written enough on the subject, I shall try to desist. Save to sum up: The EFSF is a giant CDO. It is the most inefficient means by which to raise funding for stricken states. The toxic nature of its eurobonds are a massive drag on the taxpayers of the surplus countries and, thus, a major threat to European Unity. Mrs Merkel is right to distrust it, not to want to extend any more guarantees to it and, generally, to see it as an evil whose necessity ought to be undermined. The more ‘analysts’ come up with iffy schemes (recall the buy-back of Greek debt idea) for bolstering the EFSF and allowing it to grow into something more robust than it is, the more Mrs Merkel digs in, and the deeper the eurozone sinks into the mire. Take for instance the latest proposal by Daniel Gros and Thomas Mayer. It recommends that the EFSF buys most of the debt by Greece, Portugal and Ireland by offering to replace their bonds with its own, at the current market haircut rates (giving their owners a firm deadline within which to sell). But this would immediately deplete the EFSF funds, a sure signal to the market that Spain may have nowhere to turn to if it finds itself in need. Spanish spreads will shoot up, then Italian and Belgian ones will follow and, meanwhile, the EFSF will have knocked itself out. And if Mrs Merkel (against all odds) were to decide to triple the EFSF’s funds, to avoid that eventuality, then no one would sell to the EFSF Greece’s or Ireland’s bonds at the current low price. Summing up, Mrs Merkel is wise not to see the EFSF’s evolving role as anything to write home about.

 

And now, to the first three points on which Mrs Merkel is right: Starting from point 3, there is no doubt that this is the key issue affecting the eurozone’s future: the fact that, while our currencies are locked up, our different economies’ productivity rise and fall at ever differentiated rates. It is like tectonic plates moving in different directions under a city. At some point, the buildings will start cracking. We cannot deal with the eurozone crisis, long term, either by loans or by fiscal transfers or by harmonising tax rates and social benefits or, indeed, by strengthening the forces of recession in the countries already in its merciless clasps. Something else is needed. And that something else cannot be a matter of boosting the eurozone’s overall competitiveness since it is a question of relative intra-eurozone competitiveness. What is that something else? It is some form of Surplus Recycling Mechanism (SRM): A mechanism by which surpluses from surplus regions become profitable investments in a deficit-producing region. Without an SRM no currency zone is vaible; something that Keynes homed in on during the Bretton Woods conference but was ignored by a Unites States on the cusp of global domination; an emerging hegemon who, while fully aware of the importance of an SRM at a global level, decided that it would itself play that role, of the SRM, in the post-war economy (and did so successfully for many years – see my Global Minotaur story; the part I call the Global Plan).

 

Now, sixty years later, Europe needs its own SRM both to get out of the current crisis and to re-design the eurozone’s faulty architecture in a manner that absorbs shocks better. Unfortunately, unlike the USA back then, Mrs Merkel today does not seem to understand that her own programmatic views (see above) cannot hold together unless such an SRM is penned into her plan for a future Europe. That a European SRM is, if you like, the prerequisite for points 1 and 2 above: No SRM, no common economic governance. But as this is a long and interesting story, I shall have to return to it later.

5 Comments

  • I totally agree that, all things considered, SRM is the only way to balance inequalities. But, from micro- to macro- economy isn’t that the everlasting quest: to make reasonable profits and use them to feed the economy (preferably starting with those in the worst economic position – if you are the type who prefers Rawls’ approach)! My pessimist side says that we have not managed to achieve that in our own countries; how will we do it internationally and inter-generationally?

    • An SRM cannot, by itself, balance inequalities. It is no guarantee of social justice. But it is a prerequisite for keeping the common currency area from stagnation. While you are right, that even nation-states have not always featured successful SRMs recycling their surpluses between their surplus and deficit regions (e.g. the North and the South of England), the fact is that in the eurozone does not even have one. In the United States, for instance, the most effective SRM is the military-industrial complex which diverts massive investments to the laggard states.

  • “A mechanism by which surpluses from surplus regions become profitable investments in a deficit-producing region. ”

    Your suggestion comment just highlights the problem that caused the crisis. Profitable investment opportunities in Greece are almost non-existent. Look at the inability of the Greek bureaucracy even to absorb the EU convergence funds. All the SRM would be doing, is paralleling an effort doomed to failure, unless Greece managed to create the ecosystem for profitable ventures, which takes us back to where we are now. Your SRM would have the added, very severe disadvantages of being also run by bureaucrats, in a command economy kind of way. A real recipe for failure.

    • Dear Jerry, thanks for this. I too remain caustic in my criticism of the Greek state and its capacity to incinerate all green shoots before they turn into beautiful, lush plants. But I hope you permit me to say that you are overly pessimistic. If Greece presents precious few profitable investment opportunities at the moment, it is because we are in the grip of a vicious recession. Much like the US in 1933. What we need is a restoration of demand, not only for our sake but also for Germany’s sake. And this new demand will only come from public investment. No entrepreneur in her right mind would dare step in where the angels fear to tread. (And not just because of the Greek state’s malcontents.) Now, I grant you that public investment is no guarantee of successful, profitable projects. Especially in Greece. Yet, on the other hand, it is stretching historical credulity too much to suggest that public investments in Greece are guaranteed to fail. The electricity company (DEH), the Athens Metro, the Rio-Antirrio Bridge and many others are examples of modernising projects that the private sector would never touch and which the Greek public sector managed, one way or another, to turn into profitable ventures, taking Greece out of the stone age in the process. More broadly speaking, my point about the centrality of a Surplus Recycling Mechanism (SRM) pertains to not just Greece but to each and every currency union. Of course, you may think that the eurozone, as is today, cannot be saved with or without an SRM. That’s fine, even if we disagree. What I do not believe is defensible is the position that we can maintain the eurozone, with Greece in it, while steadfastly refusing to incorporate an SRM within its structures. Lastly, it is (and I am not saying this ironically) nice to see that you can take the boy out of the City (and its natural antipathy toward government) but you cannot take the City out of the boy!

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