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investment and social expenditure has an important impact on long term growth and these are precisely the items of expenditure most cut by the french government in reaction to deteriorating economic conditions while president roosevelt in 1937 prematurely sought to reduce the government deficit by plunging the american economy into recession john maynard keynes famously stated that the boom not the recession is the right time for austerity the eurozone crisis was a colossal and very painful greece has not yet recovered to 2008 gdp levels a natural experiment that proved keynes right bruno le maire and the many standard bearers of fiscal discipline can perhaps be forgiven for their ignorance of the academic literature on multipliers in good and bad times perhaps they can also be forgiven for their lack of knowledge of economic history and of the debates that inflamed the twentieth century but the compulsion to repeat mistakes that only ten years ago triggered a financial crisis and threatened to derail the single currency is unforgivable even for a political class without culture and without memory categories emu governance fiscal policy france tags austerity draghi ecb eurozone expansionary austerity fiscal policies fiscal policy france growth inflation interest rates keynes le maire lindner multipliers public spending stability pact taxation whatever it takes fiscal rules a return to the past that condemns europe to irrelevance january 18 2024 leave a comment as usual lately this is an english ai translation of a piece written in italian updated to take into account yesterday s european parliament vote after three years of near inaction and a few months of frantic negotiations european finance ministers have finally reached an agreement on the reform of the stability and growth pact that is now being discussed with the european parliament at first glance one might think looking at the ballet of percentages safeguard clauses classifications that this is a technical issue for insiders nothing could be further from the truth what was at stake in the discussion that ended with the december last minute agreement was the framework within which european countries will have to operate in the coming years to face the challenges that await them few things are more relevant today and that s why it was a bad agreement a return to the past that condemns the already battered europe to irrelevance the old pact now relegated to the attic faced widespread criticism for its baroque complexity and reliance on numerous at times arbitrary indicators for its emphasis on one size fits all yearly limits fostering short term discipline that in effect often turned pro cyclical for its bias against public investment most importantly the old pact was consistent with a worldview where the state s role in the economy had to be limited among other things by imposing restrictive rules on fiscal policies that world no longer exists and this explains the opening in 2020 of the reform process of the stability pact the 2008 global financial crisis the calamitous management of the euro crisis the pandemic and finally inflation have shown that there can be no stability and growth without stabilisation policies without adequate levels of public goods such as health and education without industrial policies and public investment for the ecological and digital transitions in short without an active role of the state in the economy for this reason the discussion among academics and policy makers largely ignored by governments which woke up at the last minute centered around the necessity for a philosophical shift the new rule it was widely believed had to change this and put the protection of fiscal space for public policies a the centre of the stage ensuring of course sustainability of public finances a change in philosophy that was to be found in the reform proposal put forward in 2022 by the european commission albeit imperfect the proposal abandoned the one size fits all annual targets in favor of medium term plans designed by countries in agreement with the commission in a framework that would guarantee debt sustainability and try to achieve an excessively moderate protection of public investment that framework is still there but it has been transformed in an empty shell on paper multi annual plans and investment protection still exist but germany reverting to its old obsession with austerity has imposed a plethora of complex and as baroque as those of the old pact safeguard clauses that will be triggered in the event of excessive debt or deficits i e almost always for almost everyone and which overruling the plans agreed with the commission go back to imposing one size fits all annual numerical constraints sometimes even more restrictive than the old rule like in the widely criticized old stability pact debt reduction is still the alpha and omega and it is no coincidence that all frugal countries rejoice that the new rule will be more effective in forcing fiscal discipline than the old one the italian and french governments the only ones that could have turned the board over settled for a bare minimum some short term flexibility in order to arrive at their respective elections with some money to spend a short sighted and depressing strategy the elections and these governments will pass but the rule will remain and tie our hands while china and the united states make colossal investments in the future it s all right as long that those celebrating victory today do not to come and tear their clothes in a few years time when europe will have become even more irrelevant than it is today categories emu reform fiscal policy tags austerity emu european governance fiscal austerity fiscal governance germany industrial policy rethinking macroeconomics stability and growth pact stability pact wolfgang schäuble s ideas are alive and kicking december 29 2023 leave a comment as usual lately this is an english ai translation of a piece written for the italian daily domani wolfgang schäuble was a central figure in the german political landscape a member of parliament for the centre right christian democrats party from 1972 until his death on tuesday evening at the age of 81 he was very close to chancellor helmut kohl and as a lawyer one of the negotiators of the treaty that brought about the reunification with east germany but it was with angela merkel as chancellor that schäuble became known beyond national borders for a few years minister of the interior he was appointed minister of finance in 2009 a few weeks before the revelations about the state of greek public finances that triggered the sovereign debt crisis since then he has been one of the central figures in the calamitous management of the crisis a staunch pro european he has nevertheless always been convinced in homage to the ordoliberal doctrine that integration could only be achieved by harnessing the european economy in a dense network of rules that would guarantee the public and private thrift necessary to make the eu competitive on world markets schäuble was the main standard bearer of the berlin view or brussels or frankfurt being adopted by the heads of the european commission and the ecb of the time which attributed the debt crisis to the fiscal profligacy and lack of reforms of the so called peripheral emu countries a narrative about the crisis that forced homework austerity and structural reforms on the countries in crisis we owe to schäuble s intransigence backed by angela merkel the commission and the ecb and sometimes against the imf which often had a more pragmatic approach the draconian conditions imposed on greek governments in exchange for financial assistance from the so called troika in those years he and the then president of the ecb jean claude trichet argued against all empirical evidence for expansionary austerity the idea that fiscal restriction would supposedly free markets animal spirits and thus revive growth an austerity that schäuble imposed on countries in crisis but also followed at home on the occasion of his departure from the ministry of finance in 2017 the photo of the employees forming a large zero in the courtyard in homage to the achievement of a balanced budget objective went around the world history has taken it upon itself to show the ineffectiveness and cost of that strategy not surprisingly austerity is almost never expansionary and certainly has not been so in the eurozone the fiscal adjustment imposed on the emu peripheral countries triggered a crisis which for some of them had not yet been absorbed by the end of the decade a crisis that moreover could have been less painful if the countries in better shape had supported the eurozone growth with expansionary policies instead of adopting a restrictive stance themselves the emu is the only large advanced economy that suffered a second recession in 2012 13 after the global financial crisis of 2008 not only that since then domestic demand has remained anaemic and the european economy has become germanized managing to grow only thanks to exports this contributes to the growing trade tensions and germany stands accused by international bodies and by the united states of exerting deflationary pressure on the world economy the narrative of a crisis caused by the fiscal irresponsibility of spendthrift governments quickly lost its luster and already in 2014 many of its initial supporters e g mario draghi who in the meantime became president of the ecb opted for a more symmetrical explanation according to which the trigger of the crisis were balance of payments imbalances of which the over spendthrift and the over austere countries were equally guilty but schäuble never backed from his belief that the only necessary medicine was the downsizing of public spending germany also imposed this view to its partner when reforming the european institutions from the esm to the fiscal compact with the covid crisis and germany s staunch support for next generation eu it seemed that the ordoliberal doctrine finally went into retirement along with schäuble its proudest partisan but recent events show us that this was wishful thinking schäuble would probably have approved the non reform of the stability pact imposed by his successor lindner whose only guiding light is the reduction of public debt schäuble has left us but the fetish of public and private thrift as a healing virtue is alive and well categories emu crisis emu reform germany sovereign debt tags austerity berlin view emu crisis expansionary austerity fiscal policy germany imbalances schauble wages and inflation let workers alone december 20 2023 leave a comment note this is a slightly edited chatgpt translation of an article for the italian daily domani last week s piece of news is the gap that opened between the us central bank the fed and the european and british central banks apparently the three institutions have adopted the same strategy deciding to leave interest rates unchanged in the face of falling inflation and a slowdown in the economy but for central banks what you say is just as important as what you do and while the fed has announced that in the coming months barring surprises of course it will begin to loosen the reins reducing its interest rate the bank of england and the ecb have refused to announce cuts anytime soon to understand why the ecb remains hawkish one can read the interview with the financial times of the governor of the central bank of belgium pierre wunsch one of the hardliners within the ecb council wunsch argues that while inflation data is good it is also worth noting that as many have been saying for months inflation continues to fall faster than forecasters expect wage dynamics are a cause for concern in the eurozone in fact these rose by 5 3 in the third quarter of 2023 the highest pace in the last ten years the belgian governor mentions the risk that this increase in wages will weigh on the costs of companies inducing them to raise prices and triggering further wage demands as long as wage growth is not under control wunsch concludes the brakes must be kept on once again the restrictive stance is justified by the risk of a price wage spiral that so far never materialized despite having been evoked by the partisans of rate increases since 2021 those who like wunsch fear the wage price spiral cite the experience of the 1970s when the wage surge had effectively fueled progressively out of control inflation the comparison seems apt at first glance given that in both cases it was an external shock energy that triggered the price increase but in fact it was not necessary to wait for inflation to fall to understand that the risk of a wage price spiral was overestimated and used by many as an instrument compared to the 1970s in fact many things have changed i talk about this in detail in oltre le banche centrali recently published by luiss university press in italian automatic indexation mechanisms have been abolished the bargaining power of trade unions has greatly diminished and in general the precarization of work has reduced the ability of workers to carry out their demands for these and other reasons the correlation between prices and wages has been greatly reduced over three decades but the 1970s are actually the exception not the norm a recent study by researchers at the international monetary fund looks at historical experience and shows that in the past inflationary flare ups have generally been followed with a delay by wages these tend to change more slowly than prices so that an increase in inflation is not followed by an immediate adjustment in wages and initially there is a reduction in the real wage the wage adjusted for the cost of living when in the medium term wages finally catch up with prices the real wage returns to the equilibrium level aligned with productivity growth if the same thing were to happen at this juncture the imf researchers believe we should not only expect but actually hope for nominal wage growth to continue to be strong for some time in the future now that inflation has returned to reasonable levels looking at the data published by eurostat we observe that for the eurozone prices increased by 18 5 from the third quarter of 2020 to the third quarter of 2023 while wage growth stopped at 10 5 real wages therefore the measure of purchasing power fell by 8 2 italy stands out it has seen a similar evolution of prices 18 9 but an almost stagnation of wages 5 8 with the result that purchasing power has collapsed by 13 things are worse than these numbers show first for convergence to be considered accomplished real wages will have to increase beyond the 2021 levels in countries where productivity has grown in recent years the new equilibrium level of real wages will be higher second even when wages have realigned with productivity growth there will remain a gap to fill during the current transition period when rea...
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