Prof. Krugman Himself recently felt that the time had come to declare Greece as the victim. Shame on everyone who could not immediately see his point. A young Greek blogger didn’t quite agree with his analysis and dared to write a piece where he took apart much of what the Nobel Prize Winner had said. Refreshing!
The French/UK writer Philippe Legrain called the publisher of Die Zeit, Josef Joffe, “monstrously stupid, economically illiterate and a moron”. Why? That apparent master of ignorance had dared to write a piece in the Financial Times suggesting that Europe was perhaps not witnessing extreme austerity yet.
I recently wrote a piece on the hubris of Prof. Yanis Varoufakis where I criticized him for only talking about the EU’s responsibility for fixing problems without making a single suggestion what Greece could do on its own to improve its situation. Instead of disagreeing with my criticism, Prof. Varoufakis confirmed to me “Dear Klaus, you are right. I am intentionally ignoring all treatises how to fix Greece. As long as it is the first carriage on the train derailment that is the eurosystem, Greece cannot be reformed. It is like asking Ohio in 1930 how it could escape the Great Depression by its own means. It could not. Period. As for hubris, it appears to us the audacity with which some Europeans keep blaming the canary for the methane leak and explosion”.
There was an INET-Conference in Berlin in April where the IQ of those attending must have averaged in stratospheric levels. The majority seemed to be completely like-minded in their attempts to promote “new economic thinking”. When someone wasn’t so like-minded, like the former Chief Economist of Deutsche Bank, whose additional handicaps were that his English wasn’t very classy and, God forbid, that he was/is a German – well, one almost had to feel sorry for such an outsider. The Chief Economist of Financial Times Deutschland had it much easier. Since he has credited himself for having introduced new economic thinking in Germany, and since he obviously felt that everyone attending shared that feeling with him, he didn’t have to use his time to make much of a presentation. Just chatting a bit about this, that and the other was naturally good enough. Poor former Chief Economist of Deutsche Bank! What a small thinker! He had really prepared something like a dissertation! Obviously, not a cool type!
The very last speaker was a former Finance Minister of Chile, Prof. Andres Velasco. Now, just to listen to his presentation would have made it worthwhile to attend the 3-day affair. Given that he was the last one to speak, one wonders how many still listened to him. They should have!
None of the reforms which EU-leaders had expected the periphery to make once they joined the common currency took place because, according to Prof. Velasco, “when you fix your exchange rate (i. e. join the Eurozone), you look very safe to the world, people want to lend money to you, asset prices rise, credit is plentiful, and whoever saw a country reform when money is everywhere. When you are floating in Euros, you don’t reform. Think of Greece, think of Belgium, think of Spain, think of Italy, think of Portugal!” Velasco 1, Soros 0.
Prof. Velasco had the nerve to state that the Eurozone was not really experiencing “much of a crisis” yet. “The very essence of a crisis is a sudden stop in capital flows. You are going along merrily but suddenly people stop lending to you. As a result, and if you are running a large current account deficit, you have to close that deficit overnight, you cut imports massively and you go into a huge recession. Well, Europe has been in a crisis for 4 years but Greece, Italy, Spain and Portugal still have current account deficits over 4%. So the basic requirement of a crisis has never happened here. Which, by the way, is perhaps an indication that German citizens have perhaps not been quite as ungenerous as some people in this meeting made them out to be because somebody has been lending to these countries”.
Regarding the current situation where countries of the periphery are told to become competitive, Prof. Velasco warns that “you really have to watch out for the real exchange rate. When a country like Greece, which has had a massive recession for 4 years and unemployment around 20%, still has massive external deficits, then that country has a real exchange rate problem. What does the economic literature have to say about such situations? I am sure that this will be unpleasant music to most ears – it is very, very, very hard, perhaps even impossible, to carry out a large real exchange rate depreciation without touching the nominal exchange rate”.
Prof. Velasco laments that today’s wise men and women have not taken any lessons from the experiences which countries outside of Europe and the USA have had. He says fittingly “the sociology of economic thinking is such that if it happens in Chile, if it happens in Taiwan, etc., it is not worth thinking about. So”, Prof. Velasco concludes with a recommendation for INET, “you should have a subsidy for the writing of new papers but you should also have a subsidy for the reading of old papers!”
It is not known what George Soros thought of Prof. Velasco’s speech but, then, he and his like-minded thinkers may already have been discussing new economic thinking amongst themselves at the bar while Prof. Velasco gave his talk.