I have read very interesting articles by Münchau about the Eurozone’s finances, the debt, the debt problem, solutions to the debt problem, the Troika-measures, etc. etc. I do not recall a single article where he talks about the Eurozone’s real economies in detail. So he is focusing all his attention on the ‘derivative’ while disregarding the ‘underlying’.
If the Eurozone were identical to the USA (i. e. a United States of the Eurozone), we would today be witnessing a migration period. People would massively desert those regions where unemployment reigns and move to those regions where jobs are available. We might soon see some cities in the South reminding us of ghost cities in the American West. Fortunately, personal mobility in the Eurozone is far from the level in the US so that we do not have to see that drama.
And all of this because of austerity? Come on, Mr. Münchau!
The opposite of austerity is spending. My ears ring with Prof. Krugman’s mantra of “spend, baby, spend, spend, spend…” Wolfgang Münchau insinuates the same. And every well-meaning person joins the chorus.
Would it perhaps be an idea to talk about spending a bit more in detail? When money is spent on consumption, the money is gone after it has been spent. When money is spent on investment, money will come back once the investment is in operation.
Austerity should mean that one sacrifices consumption in favor of investment. Is that happening? Well, not really. The Greek state has impressively reduced spending in the last 3 years but almost half of the reduction came from cutting investments. Sounds more like cutting investment in favor of consumption (or other things).
Ludwig Poullain, the legendary former German banker, wrote a very interesting article a few days ago at age 93. One of the issues he focuses on is industrialization. He argues that much of Europe, mostly the South, has been de-industrialized in the last decades. More of a minor issue in Greece because Greece never was highly industrialized but a much more important issue in Spain and, certainly, Italy. But – the real time bomb, according to Poullain, is France. He argues that France, as opposed to Germany, did not use the pre-Euro decades to shape up its industrial competitiveness. On the contrary, it covered-up this weakness through continuous devaluations. On average, Poullain states, France devalued 30% every decade!
Poullain’s conclusion on this issue: “No fiscal stimulus can ever solve the problem when the economy has become de-industrialized”.
Helmut Schmidt, the former German chancellor who can definitely not be suspected of ever having been a Nazi sympathizer, once said in a TV-interview: “If Hitler had been shot in 1936 (i. e. before the Nazi-machine really got into destructive operation), Hjalmar Schacht (Hitler’s Minister of Economics who parted with Hitler in 1937 and who was acquitted at the Nueremberg Trials) would have been awarded the Nobel Prize for Economics“. Why? Because he succeeded in turning record unemployment into full employment within a few years.
How did that happen? According to Schmidt, exclusively deficit spending BUT spending on investment and not on consumption (Autobahn’s & Co.). I can already hear the objection that this was only possible because of a huge war machine being built up. Probably, but so what? What if all those arms, by 1939, had been destroyed instead of being used for war? They were destroyed during the war, anyway. Had they been destroyed in 1939, those arms could at least not have destroyed so many other things. Even if those arms had been destroyed by 1939, they would still have played a major role in converting record unemployment into full employment (not to even think about the benefit for the German economy if Hitler had, by 1939, exported all those arms to the rest of the world instead of using them against the rest of the world…).
My point is this: notwithstanding the brilliance of all the comments made by Münchau & Co. about the ‘derivative’, that discussion will not accomplish a thing if one continues to ignore the ‘underlying’. The ‘underlying’ of France, Italy, Spain, Portugal and Greece is in big trouble. To improve the ‘underlying’, investment is required so that jobs come into existence. Investment flows to places where opportunities are. And opportunities are in those places where one can operate productively and competitively.
Yes, the kind of austerity we have seen in Greece (cutting investments) makes things worse. Trying to get out of this de-industrialization cycle by more spending on consumption makes matters worst.
I would find it very interesting to see a comparison between Greece’s commercial and industrial output today compared to, say, 20 years ago or so. My guess is that today’s output is less than then. In actual fact, today’s output should be lot more than then.
It is an illusion to think that Greece can make it as an exclusive service economy. To achieve that, Greeks would have to start-up at least one Microsoft.