The German Social Democratic Party and Greece

7 July, 2015 at 11:55 | Posted in Economics | 5 Comments

As I sat in my office at Brown University on December 16, 2014, an email popped into my inbox with the title “Herzlichen Glückwunsch – Sie sind der 1. Preisträger des Hans-Matthöfer-Preises für wirtschaftspublizistik.” This was the award given by the Friedrich Ebert Stiftung (FES), the research foundation closest to the German Social Democratic Party (SPD), and the Hans-Matthöfer Stiftung for the best economics publication in German in 2014 …

So I was awarded the prize at a ceremony in Berlin for “thinking differently” about economics … I had ten minutes to say something useful at the end of the event. But what should I say that would be of use to the six hundred social democrats gathered in the room …

20150702_handels1All eyes are on Greece and the possibility of default or “Grexit.” Indeed, it’s an impossible position for all sides. The Greeks cannot pay back what they owe, given that the policies enacted to help them grow have resulted in the collapse of nearly a third of their economy. The young and the talented have left, leaving pensioners and the public sector behind.

But to recognize that fact and accommodate policy opens up issues in debtor countries such as Ireland and Portugal and Spain that creditor countries such as Germany do not want to deal with.

So how do we move forward, and what is the role of a social-democratic party in shaping this path? Two issues stand out for me. The first is what I refer to in Austerity as “the false promise of structural reform.” There can be no doubt that the debtor countries of Europe need major reforms in taxation systems, labor markets, business regulation, and a host of other areas.

But . . .

1) When we say “structural reform” we really have no idea what those words actually mean, and we often fall back on them as a back-handed acknowledgment that austerity has failed, or

2) We misunderstand what we did when we refer to prior episodes of structural reform, and thereby miss that it is impossible for anyone else to do what we once did.

Let me explain. “Structural reform” used to be called “structural adjustment.” And European lefties like us used to condemn it as absurd, ridiculous, “neoliberalism gone mad” — and yet we seem quite happy to unleash these policies, despite the damage that they have done in the developing world, upon our European partners.

When you ask for the content of what structural reform means, it seems to be a checklist of lower taxes, deregulate everything in sight, privatize anything not nailed down, and hope for the best. But are these policies not disturbingly American, if not Thatcherite? Indeed, isn’t this everything that the SPD is supposed to be against, and much of which the German public would never put up with?

European reforms take the more subtle cover of simply asking everyone to become “more competitive” — and who could be against that? Until one remembers that being competitive against each other’s main trading partners in the same currency union generates a “moving average” problem of continental proportions.

It is statistically absurd to all become more competitive. It’s like everyone trying to be above average. It sounds like a good idea until we think about the intelligence of the children in a classroom. By definition, someone has to be the “not bright” one, even in a class of geniuses.

Mark Blyth

5 Comments »

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  1. Mark Blyth’s conclusion, namely that improved competitiveness in periphery countries is a zero sum game does not stand inspection.

    Competitiveness can take the form of simple straightforward price reductions, i.e. internal devaluation. And/or it can take the form of improved labour market efficiency and so on.

    Periphery countries tend to have balance of payments deficits, i.e. external deficits because they are not competitive relative to core countries, Germany in particular. That means that under the defective system that is the Euro, periphery countries have to undergo a period of deficient demand so as to get their costs and prices down. Once they’ve done that, i.e. once the entire EZ is at the same level of competitiveness, then demand EZ wide can be increased and, at least in theory, every country will then enjoy full employment.

    That is not a zero sum game.

    • Wouldn’t it be quicker and easier to increase prices in the core countries?

      • Yes, Min.Though the real thing that would help most is increasing demand, not prices in the core countries. Abba Lerner definitively treated, praised and criticized the internal devaluation (a la EZ Austerity) idea long ago. Sure, it could theoretically work as Ralph says. It is conservation of energy 1st law, accounting consistent. Paraphrasing Lerner – So if would be dandy, if it were possible. But it ain’t possible.

        It is not consistent with arrow of time, 3rd law reality. It has never worked that way anywhere. The length of time it takes is a sizable fraction of a human lifespan, much longer than necessary for people to starve – and as Lerner notes – there will be a revolution before then. (I added an energy analogy above, may help).

      • Thanks, Calgacus.🙂

    • Min,

      You could be right. If I was economic dictator of Europe, I’d force the Germans to at least implement enough stimulus to get their inflation up to 3%. Over the last fifteen years it’s averaged about 1.5% which is too spartan and hair shirt I think.


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