Martin Wolf had It Right in March 2010 – and Europe has not Learned Anything

by Dirk Ehnts, Econoblog101

There is an article in the Financial Times from March 9th, 2010 (ht to Jasper Sky).

Under the headline ‘Germany’s eurozone crisis nightmare‘, Martin Wolf sums it up nicely:

Ever since the federal republic was founded, Germany has had two over-riding strategic objectives: sound money and European integration. These were the twin imperatives learned from the calamities of the early 20th century. The euro embodies these aims. Now they conflict with each other. […]

Greece is a special case. Today’s fiscal excesses are not the result of fiscal indiscipline, but of private indiscipline. The latter, moreover, was an inherent element in the workings of the eurozone itself. It is how the eurozone economy balanced, at a reasonable level of overall demand, in the pre-crisis period.

The point is best understood from the financial balances of eurozone members in 2006, before the crisis, and 2009, at its height (see charts). […]

Germany is in a trap of its own devising. It wants its neighbours to be as like itself as possible. They cannot be, because its deficient domestic demand cannot be universalised. As another great German philosopher, Hegel, might have said, the German thesis demanded a Spanish antithesis. Now that the private sector’s bubble has burst, the synthesis is a eurozone fiscal disaster. Ironically, Germany must become less German if the eurozone is to become more so.

It is very obvious that in August 2015 the vision of Martin Wolf has come true. The eurozone is stagnating, unemployment rises again. Deficient domestic demand is the main problem. Wolf, of course, was not the first and not the only one to bring forward these arguments. Many economists predicted that austerity policies would be disastrous, that sovereign debt and government spending were not the cause of the crisis, and that because of accounting Germany’s “model” of wage suppression and low government spending cannot be exported.

To those who say that the economists are to blame I would reply that this is not correct. Some economists, who got us into this mess, are surely to blame. However, there have been alternatives from the start of the crisis onwards. It seems to be a political problem rather than an economic problem. Many people invested a lot of time joining or building networks around the idea that less government and more market is always better. Now that they found out he hard way that this is an ideology they are uncomfortable.

Change in economic thinking will come from new and young economists (and politicians), not from the old garde. Five years after the article by Martin Wolf, they are still believing in “sound money“, even if it means mass unemployment for some Europeans. As Keynes said:

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”.