Econintersect: Wolfgang Schäuble, Germany’s Minister of Finance, says it is unsustainable levels of public debt that has led to the European financial crisis. Writing in the Financial Times, the minister says that his position is simply that what he proposes is “short-term pain for long-term gain.” He says that Europe has, for too long, done just the opposite and accepted short-term gratification which has simply built up the eventual future pain. Schäuble also disagrees strongly with those who are proposing a fiscal union should now be added to the existing monetary union. (Pictured: Schäuble, left, and Krugman, right.)From the Financial Times:
Hence my unease when some politicians and economists call on the eurozone to take a sudden leap into fiscal union and joint liability. Not only would such a step fail to durably solve the crisis by addressing only its most superficial symptoms, but it could make it worse in the medium term by removing a key incentive for the weaker members to forge ahead with much-needed reforms. It would also go against the very nature of European integration.
Europe has always moved forward one step at a time and it should continue to do so. This does not mean that fiscal policy in the eurozone should not gradually become more centralised. It should, as long as this process is legitimised by a strong democratic mandate. But strengthening the architecture of the eurozone will need time. It may need profound treaty changes, which will not happen overnight. But the direction is not disputed, and the determination of all member states to defend the common European currency is granted.
Another important point made by Schäuble was with regard to the socialization of risk:
One central lesson of the financial crisis was that markets could only function properly if risk-taking were not divorced from liability. The loosening of this bond was a central factor of the crisis. Likewise, the eurozone crisis unfolded after a decade during which economies with markedly different and, indeed, diverging fiscal profiles and competitiveness were all able to borrow at close to benchmark rates.
The finance minister also said a “broad consensus for more robust crisis resistant markets” that “need strong regulation” is weakening in the G-20.
Paul Krugman offered a rebuttal to Schäuble days in advance of the appearance of the Financial Times Op Ed. Here is what Krugman wrote on August 25 at The New York Times:
A correspondent informs me that Wolfgang Schaeuble, the German finance minister, has just given a speech asserting that excessive public debt caused the 2008 crisis. In fact, I’m told, he said that
It’s actually undisputed among economists worldwide that one of the main causes – if not the main cause – of the turbulence – not just now, but already in 2008 – was excessive public debt everywhere in the world.
OK, we can prove that wrong immediately: I dispute it, Brad DeLong disputes it, Christy Romer disputes it, and I think we fall into the category of “economists worldwide”.
But more seriously, let’s look at the full list of countries that got into trouble because of high debts accumulated before the crisis, as opposed to those that have developed large deficits as a consequence of the crisis. Here’s the full list:
Spain and Ireland had low debts and budget surpluses on the eve of the crisis. The US financial crisis represented a collapse of confidence in private debt, not public debt. So Schaeuble is just making stuff up, inventing a crisis that didn’t happen rather than dealing with the crisis that did happen.