Tinkerbell Economics – The Confidence Fairy, Pixie Dust and a Sleeping Dragon
While we may be hours away from a partial (and certainly a stopgap) agreement in the talks among the Greek government, the troika and private sector creditors, it is doubtful that a deal will emerge in a fully constructed fashion that will survive its application in the real economy.
It is likely that the only common view amongst participants in the various talks is a desire to try to avoid a disorderly default. Beyond that there is a severe disconnect fostered by parallel realities that seem unable to intersect. Accordingly, a deal that can hold up both in the streets of Greece and in the markets is both illusive and unlikely. Here’s why I think so.
Recently I have had opportunities to meet with and question senior members of the economics establishment within the German government and the broader German intelligentsia. Our meetings were held under Chatham House rules so I can’t name names, but – after several meetings with policy delegations from Germany over the past 60 days – I am prepared to sum up what appears to be the pretty-universally-held German policy position as follows (my apologies if the below evidences some degree of frustration – but these encounters leave me quite chagrined):
- Yes, since 2004 we have been in surplus and have benefited tremendously from debt fueled over-consumption in the periphery.
- Yes, we provided the loans (together with our core partners) to irresponsible borrowers who lacked the fiscal fortitude to protect our money. Shame on us, but we still want our money back (Greece is the only exception we believe we will have to make – and even then, only the private sector will suffer losses).
- Yes, we were a little irresponsible in the early days of monetary union, when the periphery was enjoying the benefits of competitive wages and the global situation was not as unbalanced. But we quickly recognized the error of our ways, remembered that we are Germans and took steps to cut our deficit.
- What you don’t understand is that after we entered surplus and could have shrunk our debt-to-GDP ratio using growth alone, we flogged ourselves with policy aimed at limiting consumption, increasing savings and avoiding a renewed encounter with the dreaded One Hundred Trillion (gr. Billionen) Reichsmark Note inflation we fear every day of our lives (Note: I sometimes jot down how long it takes in conversations with German policy folks before Weimar inflation enters the conversation, along with the aforementioned note). We didn’t have to do this but we did it because we are…well, you know. And during the Great Recession we didn’t just lay off all our workers like you did – we are civilized, we shared jobs (kurzarbeit).
- And by the way, before you tell us how to handle our periphery, you must remember that you in the U.S. were incredibly irresponsible too and destroyed the entire world economy and now you are obsessed with deflation and are printing money like mad which will, of course, inevitably result in [the dreaded One Hundred Trillion Reichsmark Note inflation we fear every day of our lives].
- Yes, yes, we studied Brüning and the deflation of the early 30′s that you say really brought about the National Socialism that nearly destroyed us and resulted in global horror, but we nevertheless attribute the trouble to the Weimar inflation.
- Don’t blame us for being incredibly productive and economically abstemious, we can’t help it if we make the best cars and everyone wants to buy them. And it is not our fault that the countries of the periphery are unproductive anachronisms that make nothing anyone wants to buy at the prices they want to sell their goods for. OK, we should have noticed the latter before we lent them all the money (and probably should have looked more closely at their books) – but it was the euphoria of European unification that made us do it, we’re only human.
- No full fiscal union, no Eurobonds….don’t even think about it.
- It’s one thing for Bavarians to share their wealth and income with northern and eastern Germany, but you must be kidding if you think we can get our electorate to support sending their money to support slothful southerners.
- We will never permit the ECB to monetize the sovereign debts of its member countries the way you have done in the U.S., the U.K. and Japan. Not only isn’t that the deal we made with each other but it will tank the Euro and result in [the dreaded One Hundred Trillion Reichsmark Note inflation we fear every day of our lives].
- There will be no exiting of any country from the Euro System. The System was only designed as part of a continuum leading to the full unification of greater Germ…uh…Europe.
- But we are not yet in a position to support transfer of national authorities, we Germans are not prepared to surrender national sovereignty (but we really did think that the suggestion for installing an Oberführer to supervise Greece was a nifty idea and aren’t sure why it got people so upset). [Fine, no one really used the word Oberführer]
- Finally, we believe in the written word – in law and in treaty. We can make more promises to each other and – unlike the last two times – we can this time honor them. Why do you doubt that?
All of this ends with a full-throated advocacy of the concept that has become known as “expansionary austerity” which forms the bedrock of German and other core nations’ policies towards the massively over-indebted periphery: Countries that have been irresponsible borrowers need only to demonstrate their fiscal discipline and prudence, reduce their indebtedness and reform their inefficiencies and over-regulation and investment and growth will resume because markets will once again have confidence in the economies of those countries. Yes, there it is…the return of the same confidence fairy that supply-siders hold out as the magic pixie dust that allows economies to fly once more without regard to the adequacy of demand or the competitiveness of a given nation relative to others.
In other words Tinkerbell Economics.
“[Tinkerbell] was saying that she thought she could get well again if children believed in fairies….’Do you believe?’ Peter cried.” — The Adventures of Peter Pan, J.M. Barrie
There are many quite practical reasons why “Austerianism” will not work, and countless others have written on the subject at length. For the purposes of this essay I will briefly list three:
- The continuing presence of several of the GIPSI’s within the Euro System effectively blocks two of the three transmission mechanisms that would otherwise enable those countries to re-balance trade. They can neither devalue their currencies nor, given their membership in the EU, can they restrict trade and take action (which would be highly unlikely anyway) to internalize production.
- The world in general is fighting over insufficient demand relative to a global glut in the supply of labor, productive capacity and capital. Within the Eurozone, the countries of the core have been the principal beneficiaries of whatever internal and external demand exists. Yes, this results from their superior productivity and manufacturing talents, but – relative to global demand – is substantially enhanced by the weakness of the Euro relative to the value of former or reconstituted core currencies. Even if the German view were to suddenly change relative to ECB monetization, the devaluation would be universal (throughout the zone) and would not re-balance trade amongst the 17 member countries.
- The core-recommended re-balancing transmission mechanism - internal devaluation (falling wages and prices - to the level of depression if the pixie dust doesn’t work its magic) - is functionally impossible. It is the economic equivalent of ancient bloodletting. Not only does it it result in killing off even more internal demand, but it necessitates a level of austerity that cannot possibly be tolerated by citizens of countries that still enjoy sovereign borders and popularly elected governments, merely to repay foreign creditors. They will simply refuse, at the ballot box or through other means. To believe otherwise is very much akin to believing in fairies.
A colleague of mine, present at one of the above mentioned meetings, likened the German response, to Eurozone realities, to Act II of Richard Wagner’s ring series opera, Seigfried. As Fafner the dragon is awoken from his slumber and warned by the conniving Alberich that the hero Siegfried is on his way to kill Fafner, the fearless dragon dismisses Alberich’s warning and returns to sleep.
The world cannot afford the luxury of sleeping on this. What is at stake here is more than the issue of recovering monies lent to Greece. A very substantial amount of European capital is at stake and plans to recover it by placing the populations of the GIPSI’s under indentured servitude to their creditors are the stuff of fairies and pixie dust.
It is past time to tighten the belt at both ends, recognize the money that has been lost throughout the periphery, recapitalize core institutions and bite the bullet on the secession of the defaulting nations. Sorry Tinkerbell!
20 Responses to “Tinkerbell Economics – The Confidence Fairy, Pixie Dust and a Sleeping Dragon”
As German who has (like 99% of the Germans) NOT benefited 'from debt fueled over-consumption in the periphery', quite the contrary: who got buying power reductions imposed since more than a dozen years by all political parties (w/o exception, yes), I feel offended by what German 'senior members of economics establishment' told you, since most of it is rubbish.
But then, maybe certain more sensible statements they made were more or less unintentionally lost thanks to your translation, or interpretation.
Yes, your government has promulgated policies that have placed fiscal conservatism above consumerism. On the one hand, there is nothing wrong with taking a prudential approach to consumption and savings (provided it is applied equally throughout a society). On the other hand, you are correct in asserting that the collective judgment of your leadership comes at significant sacrifice by the German population at large. I noted this in the line above: "we flogged ourselves with policy aimed at limiting consumption, increasing savings and avoiding a renewed encounter with [inflation]." So please don't think I am at all insesitive to the point you have made.
As to your questioning whether I have misinterpreted the remarks I have heard from German leaders, I don't fault you at all for thinking that might be the case! I am as troubled as you are by what I have summarized – and assure you it was not the outcome of a single meeting or a meeting with one individual, or I would never have written what I have.
As a Greek who has (Like 75-80% of the Greeks) NOT benefited from "debt fueled over-consumption in the periphery", quite the contrary: Ιt raised the cost of living in great hights (average salary in Greece was 1000-1200 euros before the crisis while product and service prices were equal and sometimes higher than Germany), i feel offended by the whole situation,and most of all by the fingerpointing of the other E.U members. If we were the only bad,lazy,unthinkfull guys (i don't say that we don't need to restructure our economy with reforms) then why there are other countries at the same position like us.
I don't object at the reforms that are needed! I object at the kind of reforms that are imposed by the troika on behalf of the so called "markets" that have condemned Greece to killing recession,unemployment, demolition of wages and pensions and no visible growth.The same measures are imposed on Portugal and Ireland and have exactly the same results.That means that they do harm to the patient and must change.
European partners should help to reach an agreement and a solution beneficiary for all of them and of course for their people…not their banks and their political parties (the same applies for my country of course).Otherwhise i can't understand why should Greece bear all these austerity measures and not just default and drift with her the hole ill made E.U. Except if there is anyone who believes that his economy (apart from Germany and Holland) is based on stable cornerstones.
And something else! I am not an economist and i don't have specific knowledge on economics but can someone tell me why had greek debt to reach 160% of the GDP after the first loans of the troika (at that time it was 120%) and then to make a haircut with the PSI,fearing that it won't still be sustainable? Why didn't this happen at the begining of the crisis when our debt was 120% and by sure it would be sustainable after a haircut?
"insufficient demand relative to a global glut in the supply of labor, productive capacity and capital."
Is this not the lump of labor coming home to roost? Will we only emerge when we find the pointless equivalent of making holes to fill, or more daytime television?
Or could we start taking more vacations …
… in Greece?
I also have a problem with general phrases of dismissal and some prejudice. And I agree about the core European countries having to bite the bullet on loans they expected to benefit from. One area not dealt with are the toxic assets still unaccounted for by the European banks. As well no one has discussed the need to rule in and regulate the various hedge funds that seem currently bent on creating an untenable situation beginning with Greece and could easily continue to create more crisis. The main thing I am sure of is that the general populations of Europe are not responsible or financially liable for the money games of the players at the top and just because these same players can force socializing the pain initially doesn't mean a powerful response can't be made maybe in the form of an opposing tax movement.
Rightfully a mess — the Germans made a Faustian bargain in trading Duechmarks for the Euro; they got a devaluede currency to lift growth in exchange for funding the periphery debt. Otherwise Germany would be like Japan; a productive giant killed by a strong currency. Not sure if this is not the better choice
The best translation for "German trade surplus" is "Enteignung" (expropriation).
Chinese surpluses are transformed into T-paper which is a store of value, has a market, and generates interest.
German surpluses to the EZ peripherie are transformed into "Target-2 balances", an artificial number in the ECB's settlement system, that has no meaning outside the EZ. It will disappear once the ECB breaks up. The number now stands a EUR 500 billion.
This is effectively credit that has been unconstitutionally granted by ECB and Bundesbank employees bypassing the German parliament.
My repeated "freedom of information" enquiries to the ECB and the Bundesbank have not been answered in a substantial way.
Excellent article, giving us inside information of what the German elite is thinking.
Germans benefited tremendously from the periphery. 30% of the PIIGS are driving BMW's, Mercedes and their appliances at home are SIEMENS, AEG, Bosch and Miele.
But the Germans really have to think that without the euro-periphery, 40% of their GDP will prolly evaporate.
Focusing on the chinese and indian markets to balance losses from the weak euro-periphery is smart, but you gotta think that China is on a hard-landing and they cant been seen as a "substitute" for long.
Saving Greece will cost ALOT LESS for Germany, rather than let them default and start a domino-effect that will fragmentize Europe. If the periphery dominos start collapsing one by one, then america is in for a depression as well.
Even if things go as planned (positive senario), america is in trouble in 2015 or 17.
So Germany needs to back the heck off from the austerity plans of the periphery, before its too late. Greece is on the edge of the abyss. If u push em more, they will jump. And that will start an unbelievable domino.
Simply brilliant!. A clear and cogent essay on the realities of the Eurozone. In the end Germany will capitulate. They believed with Prussian single-mindedness in the thousand year Reich. It lasted, what 4 years?
Hitler said that "if the Italians hadn't attacked Greece and needed our help, the war would have taken a different course. We could have anticipated the Russian cold by weeks and conquered Leningrad and Moscow. There would have been no Stalingrad". Isn't a little embarrassing for Germany an economic (and in the past a military) giant to blame others (usually Greece and Italy!) for its own mistakes?
Definatly! Come over for a vacation (lol).
Clean beaches, good food, sunshine.
Fascinating translation and you are correct about Target 2 amounts.
Yes, German trade surplus vis-a-vis Greece ( or Chinese trade surplus vis-a-vis the US ) means delivering products against printed paper of doubtful or worthless value, as the case may be. Who wants to tell me, that Germany has profited from this trade with Greece? If we also take into account Germany´s Target2-balances and Germany´s bail-out contributions for the other pheripheral Euro-zone countries, at the end of the day where has Germany profited. Ok I agree, what is expected from Greece and its population to achieve, is too much to be possible. Let Greece exit the Euro-zone asap orderly or disorderly instead of uselessly sinking more money. The rest should be managable.
Great article…..thanks Dan for sharing that analysis!!
Unfortunately, it seems that a foreseeable scenario for EZ would only be a lost decade: deleveraging plus austerity (with some attempts to implement internal devaluation
through additional job flexibility) should represent a pro-ciclical policy.
In Italy 2012 has started, for example, with an investment goods demand pace which could be considered a worst case if related to 2009 downturn. At the same time, banks have a restrictive approach in financing while inflation (i.e.: fuel) seems an additional challenge (both for firms P&Ls and private consumption) too.
Let's hope that a mix of monetarisation of debt and a global coordinated macroeconomic policy (i.e.: x-rate trend) could support an exit strategy asap.
Good article and good comments! I am not an economist – but I observe the socio-economic gyrations in the world over the last 30 years; my observation is – there are similarities in Greece to the situation in Poland in 1980 – when the Gdansk shipyards went on strike. The pseudo-democracy in Greece is just that – in the end the tanks will roll, the poor will be called 'anarchists' and 'terrorists" – and the class which profited from the Euro will be either abroad in their expensive condominiums in the 'core' countries, their villas with swimmingpools will be guarded by tanks, some careless people will be mowed down.
The Germans will not stand for the b.s. of paying for the rich Southerners, when they will need to work until they are 67 years old. There will be unrest
I believe that Germany's unemployment rates went down when the whole european periphery bought her products [Germany hasn't made profit simply by trading only with Greece but with all the PIIGS(!!!!!!!!!!!!).(I don't need to say about the billions of the weapons sales and the exclusive supply of electronic equipment after bribing Greek corrupt politicians)].Germany also made surplace by the beneficial, for her, trade with those countries.Greece and other countries had to stop producing products that produced before the Euro because in some cases were forced by the E.U regulations and other times because they simply couldn't compete Germany having such a "hard" coin.I believe that the only one who made profit by the way that the EZ was made was Germany and a couple of other industrial countries.If you want my opinion Greece and other peripheral countries shoulden't have join the EZ.Even our tourism stopped being competitive.On the other hand we could get low interest loans but as i said at my first comment most of the Greeks didn't benefited from them…the opposite.So for me as a simple Greek citizen it was only in Germany's favor the way that the Eurozone was created….and some friends of them in Greece.
Italy is in preparation for leaving the Euro.
Yes, they do harm, but you must realize that they were engineered to do harm. That is their sole purpose. The banksters and fraudsters want to essentially foreclose on entire societies, seize social overhead capital and public goods, and then extract exorbitant rents for allowing access to them. It smacks of FASCISM. Note how the banksters panicked momentarily as soon as Papandreou suggested that Austerity be placed on the ballot for a popular vote! Democracy is the one thing that those fucking Nazi bastards cannot tolerate. It is time for a Marxist REVOLUTION!!! The masses have nothing to lose but the chains of debt peonage and universal death.
No one seems to have considered the possibility of Greece achieving the needed internal devaluation through incomes policies: a coordinated, mandated reduction in wages and prices across the economy to whatever level is needed to restore competitiveness. This policy would seem preferable to the alternatives, depression or abandoning the euro. Incomes policies have been out of favor for awhile, but were used in some countries in Latin America in the 1980s to some success.