German Politician Defends Austerity

The EU parliamentary elections have barely begun – they take place over a four-day stretch from Thursday to Sunday – before representatives of the European political establishment are out in media trying to explain away the surge in support for totalitarian parties. One of the most egregious examples is Wolfgang Schäuble, treasury secretary of the German government. The EU Business reports:

German Finance Minister Wolfgang Schaeuble denied in an interview Friday that the rise of eurosceptics expected in weekend elections was due to austerity policies championed by Berlin. He was asked by The Wall Street Journal whether anticipated gains by populist and anti-EU parties in the European Parliament vote until Sunday would be the price to pay for years of belt-tightening. “Some will interpret it that way,” Schaeuble replied. “I think that’s wrong. You can see that our policy to stabilise the eurozone was successful.”

The reason why he can say this with a straight face is that his definition of “successful” is strictly limited to the fact that the EU, the ECB and the IMF – the Troika – forcefully backed by the German government, prevented a break-up of the euro zone. The Troika’s purpose with the 2012 wave of austerity policies that swept through primarily – but not exclusively – the southern rim of the European continent, was not to restore, or even open a path back to growth and full employment. The purpose was instead to end the surge in expectations that Greece and Italy were going to leave the euro zone. Policy makers and analysts in the inner circles of the Troika assumed that if they could put a leash on runaway government deficits the speculators waiting for the return of the Drakhma and the Lira would be convinced that nobody was about to exit the currency union.

In the short run, they were correct. In Greece, interest rates dropped almost as dramatically as they increased:

Greek R

However, this decline could just as well be the result of the ECB’s highly irresponsible pledge to buy any amount of treasury bonds from any country within its jurisdiction. But more importantly, even if the austerity measures calmed down speculations about a currency secession, those measures did not solve the underlying macroeconomic crisis. Greece still suffers from 55-percent youth unemployment; the economy still is not growing but actually shrinking; improvements in the Greek government budget over the past year are entirely due to one-time measures related to austerity. Once these one-time effects have worked their way through the budget, there will be no lasting improvement left.

This also means that the long-term threat to the unity of the euro zone still remains. It has just fallen under the media radar for now.

Greece’s only long-term chance is that the Troika will declare austerity cease-fire. If that happens, the Greek economy will be granted some time to catch its breath and re-structure itself to function under the combination of eroded entitlements and higher taxes. Only then can the private sector begin to create jobs again – and only then will the long-term threat of a Greek secession from the euro go away permanently.

This is all common sense, founded in a sound, solid understanding of macroeconomics. Such understanding is, however, a scarce resource among political leaders, especially in Europe. As the EU Business article continues, Mr. Shäuble continues his ignorant rant:

[Schaeuble] also rejected that the tough fiscal medicine and economic restructuring [that] Germany promoted were the causes of high unemployment and recession in much of the single currency area, declaring “that is false”. “The long recession is the consequence of a financial crisis whose origin wasn’t in the eurozone,” he said, adding in a stab at the United States: “Remind me where Lehman Brothers was based.” The 2008 collapse of the US investment bank was the biggest bankruptcy in US history and sparked the global financial crisis from which the world economy is still recovering.

Yes, the myth that this was a financial crisis… If a financial crisis is going to cause a general economic recession, it needs to transmit the negative consequences of credit losses into the real sector of the economy. Consumers and businesses must be directly impacted by the credit losses in the financial system.

The problem is that there is really no evidence of such a transmission mechanism at work in 2008-2009. Put bluntly: if that transmission mechanism existed, one of its main effects would be a rise in interest rates on loans from banks to non-financial businesses. But no such increase took place. Quite the contrary, in fact, as I have explained at length: just as the financial crisis was supposed to cause a surge in interest rates, a wipe-out of credit available even to highly qualified borrowers, interest rates on business credit actually began declining.

Available evidence (which I plan to collect and thoroughly explain in a future publication; first, let’s get my book Industrial Poverty out on the market) clearly shows that there was a recession looming independently of the financial credit crunch. That crisis was already under way when the Lehman Brothers crash happened – and without that real-sector, independent downturn we would not be able to explain why the central bank policies to save the financial sector had no visible impact on the economic crisis.

In short: businesses and consumers stopped demanding credit because of a general sense of pessimism that emerges in all recessions. The problem with the Great Recession was that once growth slowed or turned negative, once unemployment rose, an entire cadre of policy makers, from the EU to the ECB to the German government, decided to make a bad macroeconomic situation even worse by raising taxes and cutting government spending.

In Greece, austerity made a bad situation worse. It does not matter how much Wolfgang Schäuble denies it – his opinion cannot change facts and solid macroeconomic analysis. In fact, even the IMF has come around on this issue.

Of course, Schäuble tries on last trick to save the unsalvageable:

Schaeuble added that “the unemployment that we have in all advanced countries, not just in the eurozone, has to do with the dramatic transformation of labour markets through technology”. “You no longer need the same number of employees to produce goods. You have different needs for skills and qualifications of young people.”

Of course. At no point in time since the first, primitive forms of manufacturing were invented back in the late Middle Ages, has there ever been any improvement in productivity. Only in the past five years has there been a spurt in productivity in European manufacturing…

Sure. Billions.

Wolfgang Schäuble is either completely incompetent – which I doubt – or politically reckless. By defending austerity as a means to somehow improve people’s lives, he aligns his political views with those who believe that “higher goals” are more important in politics than the opportunity of private citizens to build their lives and carve out a path to prosperity for themselves and their families.

There is a name for such priorities. It is arrogance. When politicians ignore the fact that millions upon millions of people suffer as a result of their policies, those politicians have forfeited their credibility as participants in a democratic government.

It is understandable that Schäuble, somewhere, somehow, is trying to fend off the challenge that he and other pro-EU politicians face from the surging totalitarian movements across Europe. But you don’t defeat aggressive government expansionists by becoming one yourself. That is exactly what Schäuble can become if he sticks to his arrogant denial of facts and continues to believe that anti-democratic austerity policies can both save democracy and people’s jobs.