The Economist can’t be wrong (or PERHAPS it can …)


A famous saying has it that, if we were to ask “n” economists for their opinion, we would be assured of at least “n+1” opinions because one of them would surely have two opinions all by himself.

So when 172 economists (professors all and by and far German, to boot!), motivated by the outcomes of the recent EU summit (specifically the politically agreed-on direct recapitalization of troubled banks through the European Financial Stability Facility, and its planned future replacement, the Europen Stability Meachnisms, or ESM), … when these 172 economists sign off on one statement, something extraordinary must be happening. Indeed it is.

Germany’s chancellor, Angela Merkel, already losing fast her domestic political support (see here), now also faces considerable public opposition in the form of a letter to the public (see here) that those 172 professors – many of them quite prominent – have signed. (Here is The Economist’s take on things ). The letter of the 172 profs is quite a challenge. Nevermind the multiple legal challenges that are on the way (see here) and that already led Germany’s president, Joachim Gauck, upon request of the country’s High Court, to postpone his signature on documents initiating the European fiscal pact and the ESM.

The letter of the 172 profs drew immediate reactions from Merkel and Schaeuble (her minister of finance) as well as the popular press which has supported Merkel for years in a fairly uncritical manner. (Indeed, Merkel’s public approval ratings until recently were almost those of Gillard and Abbott together.) The 172 profs were called everything from “unknowns outside of their university”  (clearly wrong) to “Stammtisch economists” to “irresponsible” by various partisan commentators including two groups of economists: one spearheaded by alleged “heavyweight” Bofinger and the other by a group of economists connected to the Frankfurt Center of Financial Studies. It is noteworthy that the first group consists of a handful of economists while the second group of about 15. Hardly a strong counterattack, to go by the numbers.

Most recently, a couple of prominent Swiss economists (Monika Bütler, Urs Birchler, B&B from here on) have commented for Swiss newspaper Der Tagesanzeiger on this developing story (see here). Coming from well-informed outsiders, what they have to say strikes me as about right. What follows below is a summary (and partial translation of key passages) of their commentary.

B&B start out by stating that the 172 profs see the proposed European banking union as a means to have tax payers ultimately pay for bank debts (and private profiteering gone awry). They stress that the signatories swim against a current that got stronger in recent weeks and months, with even The Economist, which they call “otherwise reliably market-oriented”, now suggesting to Germany: Pay already! And even though Merkel already has a worldwide reputation as a spoilsport, due to her resistance to the socialization of European debt, the 172 economists argue that she has gone way too far with her agreement to the plans hammered out at the recent EU summit.

B&B summarily dismiss the critique of Bofinger et al. as high in rhetoric and low in substance. B&B then argue that, in contrast, the critique of the 15 economists from the Center for Financial Studies (CFS) in Frankfurt, including Jan Krahnen and Martin Hellwig, ought not to be dismissed. They note that these economists see the ESM as a suitable mechanism to recapitalize banks directly, in return for various suitable conditions.

B&B next ask who is right in their assessment of the EU summit agreements (and in particular the ESM): the 172 economists who wrote the public letter or the 15 CFS economists? B&B conclude that the assessment in the latter case is based on the idea as such (no socialization of European debt), while in the former case the assessment is based on the likely reality (money today for promises to be enacted tomorrow but promises that will not be kept).

B&B then offer an “anatomy of the crisis” stressing that there are really three separate crises (the Euro-crisis which has to do with the diverging competitiveness of the countries in the Euro-zone, which seems to necessitate the exit of some of the countries from the Euro-zone or tremdous efforts by Germany and others able to provide such effort; the national debt crisis, which puts many governments at the mercy of the vagueries of international financial markets; and the bank debt crisis, which has European banks suffering the consequences of the financial crisis, the real estate bubble and the high stock of government bonds with many undercapitalized still distributing huge amounts of dividends and bonuses.)

B&B argue that the EU has been responding to these three crises without any recognizable concept but with ever larger amounts and with ever emptier slogans through which subsets of the crises were linked (“If the euro fails, Europe fails”) and which were then used to dismiss previously adopted rules. B&B argue that the increasing amounts of funds invested in rescue operations and emergency pots have helped neither the Euro nor the indebted countries, and that the Euro can only be saved with economic adjustments in the afflicted countries. Whatever help is currently being given out ends up in the hands of the banks’ creditors, i.e., internationally active banks.

The concluding paragraphs seem worth translating:

“Rescued Banks – Shattered state institutions

With the bailout of Spain, the facade has now fallen. Money goes directly from the printing presses of the ECB to ailing commercial banks. You have to imagine such transactions five years ago. The financial press would have raised hell: A central bank finances troubled commercial banks! By abandoning the commercial banks’ (and their owners’) responsibility for losses and by abandoning its abstinence from handing out selective benefits, the ECB destroys two pillars of the financial architecture.

It seems that no one bothers – except those 172 economists from German-speaking countries through their, in light of the circumstances rather tame, letter. Admittedly, the letter simplifies much, but in its essence it is right on target. The results of the attempts to rescue the Euro and the Euro-zone come to this: on the one hand the far-reaching bailout of banks, on the other hand a shattered European monetary system, broken public finances, and a shattered confidence in European institutions.
This time no one will be able to say: The economists did not warn us.“

So much for B&B.

The subject matter is, of couse, complicated and reasonable people can have differing opinions on some of the matters. The letter of the 172 profs has created new realities in the current debate and certainly will make it more difficult for Merkel and her government to push things through without proper examination of what she commits Germany to.

At the minimum, the 172 profs have invigorated a debate that so far was mostly conducted by professional politicians (i.e., the same people who are majorly responsible for the current malaise of Europe and the Euro). That has to be a good thing. As Germany’s influential weekly Der Spiegel noted (see here), the discussion has become one about ideas rather than ideologies and that has to be a good thing, too.

Will developments in Europe have an effect on Australia? The local experts seem for the most part to think it won’t (see here) but they diverge widely in their forecasts. As one might expect in such a complex matter.

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