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April 27, 2013


My followers will recall that I have been critical of the common currency regime in Europe for, among other reasons, the necessary loss of sovereignty among its participants. Values of the same currency are also necessarily going to vary from one country to another in the euro zone. Manufacturing in Germany is not manufacturing in Greece. There are no Volkswagen factories in Andorra and no olive orchards in Ireland – but all have the euro, if not a common economic history.

If these member states had their own currency (as before) and the sovereign responsibility to manage their own economies based on their own economic history, they would not be running to Brussels every time bondholders complained of their “mismanagement.” When they do, bailouts, if approved by Merkel, follow, always at the cost of further invasion of the sovereignty of the borrowing state.

In sum, I don’t see how these different countries with varying economic histories, laws and customs can shoehorn their respective interests into one by mere adoption of a common currency. It is a clear invitation to the most powerful in the group to run the affairs of the less powerful, and Merkel’s Germany fits that description. Germany’s interests and those of Italy or Spain will continue to vary irrespective of the currency regime adopted and the bankers’ band-aid bailouts to the debt-ridden members. Bondholders must be kept happy, even though nobody forced them to buy or keep junk paper.

There is no magic transformation involved in adoption of a currency, common or otherwise. Aggregate demand drives successful economies; the trick is to adopt policies that drive such demand. It is not currency commonality that drives demand; it is consumers with money in their pockets and a willingness to part with that money (and perhaps extended credit) in exchange for goods and services produced by the economy and/or by trade from other economies.

Merkel, catastrophically, has thrown her lot to the austerity crowd, and at precisely the wrong time to do so. With Europe in recession or on the verge of it (even Britain, a non-euro state but greatly affected by the inability of euro states to buy British exports), there has never been a better time to adopt Keynesian policies. So what happened a few weeks ago? A new party was launched in Germany, dedicated in part to reinstituting the deutschmark and abandoning the euro, but the new party isn’t into Keynesian economics, either. It is to the right of Merkel!

Merkel has always said that Germany had “no alternative” but to bail out debt-ridden countries in the euro zone. The new party named itself the Alternative for Germany Party in an obvious retort to her constant “no alternative” statements. European columnists have had a field day in describing the new party’s denouncing of the euro and demand for a return to the mark. The new party’s leader, an economics professor, Bernd Lucke, said that the currency even threatened European integration, since German restrictions on bailout money were leading to widespread resentment of Germany in the poorer nations of the euro zone. He said that the adoption of the euro was “a fatal mistake that threatens our prosperity.” (I think not; I think it a matter of adopting the wrong policy initiatives that “threatens our prosperity.”)

An Irish newspaper correctly editorialized that Germans feel they have been responsible and have lived within their means, and have nothing but scorn for the profligacy of “debt
sinners” on Europe’s periphery, who failed to budget properly and now want Germans to bail them out.

Predictably, the German political establishment has reacted by smearing the new party as some kind of far-right fringe group. However, Merkel’s Christian Democratic Union lost the last state-level election this past January, notes a Handelsblatt (German) newspaper, which editorializes that “It’s not hard to imagine that plenty of CDU supporters are fed up with the arrogance of the party elite, who treat any questioning of their euro rescue plan as either stupidity or anti-European heresy.” Yet another writer suggests that the new Alternative Party “won’t bring about the end of the euro, but it just might “spell the end of Merkel.”

As a retired American lawyer, German politics are none of my business. However, I feel I can comment on their economic choices. I do not necessarily want to get rid of Merkel; I rather want to get rid of her insistence on following austerity economics. The new Alternative Party has a legitimate complaint in re the euro and German responsibility for euro zone mismanagement, but neither party, in my opinion, is addressing the giant underlying problem of either Germany or its fellow euro zone members. I think the euro is a convenient cover for European recession, but I think it is not the real problem; I think the real problem is a failure to adopt appropriate policies to end this unnecessary European recession.

Both parties fail to address the fundamental error in austerity economic theory, i.e., that you can get more with less. Proof that austerity economic theory doesn’t work and has never worked in large economies (per Joseph Stiglitz, Nobel prize-winning economist) is found in the current European economic scene in which virtually all countries in Europe are in recession or headed that way, and cannot change policies as a matter of sovereign right because Germany has the checkbook, and Merkel refuses to go Keynesian. Aggregate demand is what makes any market economy hum, and policies that bring that about are Keynesian, not austerity economics, which rather  guarantees that the downward spiral will continue to spiral downward – to where, no one knows.

So, from an economic theory point of view, I have this to say to both the new Alternative Party and Merkel’s CDU – A pox on both your economic houses!  Please address the real problem, because when you do, and persevere, bailouts and budgetary shortfalls will evaporate as demand puts people back to work and revenues slash the cost of bonded indebtedness to the member state. Please, in short, pursue Keynesian policies.

Economic history proves that austerity policies can only be tolerated when an economy is so revved up that inflation is out of control – too much money chasing too few goods. That is hardly the case these days anywhere, even in China. Keynesian policies were designed specifically for the existing situation – listless demand resulting from massive unemployment. Keynesian policies work. Please try them. GERALD  E

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