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To form a more perfect Euro Union

by marco Wed Feb 17th, 2010 at 05:16:23 AM EST

In his latest column, "The Making of a Euromess", Paul Krugman gets pretty harsh on Europe's "elites" --

specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment
-- and concludes that now that they have gotten Europe into this mess (Greece, etc.), there is only one way out:

to move much further toward political union, so that European nations start to function more like American states.

(The alternative of breaking up the euro zone back into national currencies would be the "mother of financial crises", even if it were practically possible, which it isn't.)

[Update note: Originally posted as "The 'Euromess' as spur towards more political (European) union", but changed title to be shorter and more to the point that interests me.]

frontpaged - Nomad


While Krugman acknowledges that Greek fiscal irresponsibility and financial shenanigans are partly to blame for the current crisis, he argues that its more fundamental cause is the restrictions in resources and policy options that the single currency imposes on the governments of individual Euro countries facing economic difficulties.

The first question I have regarding Krugman's piece is from the following passage:

Now, if Spain were an American state rather than a European country, things wouldn't be so bad. For one thing, costs and prices wouldn't have gotten so far out of line: Florida, which among other things was freely able to attract workers from other states and keep labor costs down, never experienced anything like Spain's relative inflation. For another, Spain would be receiving a lot of automatic support in the crisis: Florida's housing boom has gone bust, but Washington keeps sending the Social Security and Medicare checks.

Wasn't Spain, as part of the European Union, freely able to attract workers from other states [that is, other countries in the European Union] and keep labor costs [and thus "relative inflation"] down?

My other question is more basic:  What does Krugman mean by move much further toward political union?  The passage above suggests Europe-wide social welfare benefits for countries having a hard time economically, but doesn't the EU already provide financial support or at least offer breaks to countries who need it?  In any case, these seem to be economic devices, not political.  What "political" structures or mechanisms could Krugman have in mind that would have staved off the current crisis?

Display:
Wasn't Spain, as part of the European Union, freely able to attract workers from other states [that is, other countries in the European Union] and keep labor costs [and thus "relative inflation"] down?

No. Spain was a mess to start with. Were Spanish labour costs ever near the EU averages?

What does Krugman mean by move much further toward political union?

Most people are stuck in a mindset where the only option is for the EU to turn into a Federal state like the US which, of course, is the best possible model.

We need an 18th C solution to a 21st C problem. That's the ticket.

by Colman (colman at eurotrib.com) on Mon Feb 15th, 2010 at 08:57:56 AM EST
What is this 'relative inflation' of which he speaks?

Clearly paying people for work is bad, because it leads to inflation.

I see now that that's where we all went wrong.

As for federalisation, or the lack of it - that's not even the right question. The right question is how to structure economies so that Wall St raiders can't freeboot them.

Economically, how much of the current 'crisis' was directly caused by Wall St - either by pressure to conform to some nonsensical version of common wisdom, as parroted by Krugman and all the other serious thinkers, or by direct hostile or subversive action, as with GS and its sneaky destructo-deal with Greece?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Feb 15th, 2010 at 09:27:02 AM EST
[ Parent ]
It seems unbelievably harsh to include Krugman in the parrots of the conventional wisdom that led to the crisis.

Or, in the way we understand the word in those parts, to call him "serious". Serious people don't count him as one of them, that's for sure.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Mon Feb 15th, 2010 at 12:14:14 PM EST
[ Parent ]
... to get a Prize in Honor of Dynamite (as opposed to a Prize Remembering Dynamite, which is a quite different thing).

Note the way that his famous "salt water" and "fresh water" economists essay goes into detail on the different varieties of economists who were all wrong, but is incredibly vague regarding the economists who were proved substantially right by the Panic of 2008 about the way that the economy worked.

And after all, its not as if Krugman would be entirely comfortable if he had to work outside the mainstream economic paradigm - even if he is comfortable as a political essayist discussing current events outside of the confines of his modeling toolkit.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Feb 16th, 2010 at 12:08:12 AM EST
[ Parent ]
Note the way that his famous "salt water" and "fresh water" economists essay goes into detail on the different varieties of economists who were all wrong, but is incredibly vague regarding the economists who were proved substantially right by the Panic of 2008 about the way that the economy worked.
See a fuller comment also by Bruce about the younger Galbraith's paper who were the economists who got it right.

Interestingly, Galbraith beat Krugman by 7 years

How the Economists Got It Wrong (JAMES K. GALBRAITH, November 30, 2002)


En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Feb 18th, 2010 at 04:56:12 PM EST
[ Parent ]
Reports of business falling off the cliff in Greece this past month and a half may take all measures off the table. First, anything the Greek gov't does will lead to a deflationary spiral (given their accelerating recession) and second, Europe may be hesitant to save Greece given the rapidly devolving business climate.
by Upstate NY on Mon Feb 15th, 2010 at 09:38:14 AM EST
Has Krugman any idea of about how many millions of workers Spain has received from "developing countries"? And how this compares to Florida attracting workers from other states?

All germans, britons and north europeans retired to Spain also receive their checks from their countries.

GDP was down 24% in Latvia in 2009 and unemployment up more or less to the same amount, and wages are going down the toilette, but the prices stick high. Where are the benefits of "inside devaluation" in this case?

Lot's of holes in Krugman column.

by kukute on Mon Feb 15th, 2010 at 10:22:02 AM EST
Wages are only down 5 %, which is far too little. Internal devaluation is a disaster.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Feb 15th, 2010 at 01:13:00 PM EST
[ Parent ]
I've also read his column series on the euro with interest. What I think I could understand was that he thinks the federal budget (or equivalent) in Europe is too small to compensate an asymetric shock on some member states.

The part of taxation that goes directly to the federal level in Europe is too small, and so is the part of european federal money that goes down to states.
K. also criticise the decision to make the euro for this reason (but do not ask for its removal)

I personnally think that the euro was a purely political decision. I remember the critics at the time of the euro from people (journalists and experts) afraid that the currency might not get popular support, and that people would prefer go on using national currencies. I was astounded at the time that bright economic or political pundits could think that this could happen. Or that there could be problems with new banknotes on the eve of 2002. This was and is completely missing the point that money is a political construction only, existing because of the will of states (and people's Maastricht treaty ratification in this case), and which value disappears with the state itself. (apart from the coin collector's or intrinsic value, which for paper-made banknotes is around a few cents/unit).

Today I believe we have the same kind of thought that goes on: the euro is in crisis, because some economic agents think of it in pure economic terms. But this is not the case: the euro is political, and while the majority of european states and people consent to the greek presence in Europe, there will be no possibility to avoid helping the greek government in financing its debt, and there will be no  possibility for Greece to go.

I would be much more worried if there was a continent wide media campaign against Greece, to shun the greeks as second level citizens of the Union, as aliens not deserving to be part of UE, like there may be for Turquey adhesion process.

Krugman knows about the political side of the issue, even if his columns are centered on his speciality: the economic side of it.
Nevertheless, I feel while reading him, that he aknowledges perfectly the non-economic side of the euro, when he asks for a stronger federal level in Europe.

Perhaps the media campaign on Greece, Spain, Portugal and Italy has to do with the low level of approval of a political european union in Britain: the political implications of the euros would be discarded by people who can't comprehend it.

My feeling here, is that the media are off point, and that in a few year's time a new treaty will focus on the adequate management of asymetric crisis in the frame of the monetary Union. Hope it will not get beleaguered by left-wing french ideologues...(snark)

by Xavier in Paris on Mon Feb 15th, 2010 at 10:52:03 AM EST
You have to understand that Krugman and Stiglitz believe it is insane to cut social programs and/or raise taxes in a time of a severe recession.

Everything they write goes through that lens.

by Upstate NY on Mon Feb 15th, 2010 at 12:46:29 PM EST
[ Parent ]
I agree with your analysis, but that was not really my thought here: I was more on the euro_as_econ_only money vs euro_as_political_decision currency.

but I agree that S. and K. fr what I know of their writings seem to favor deficit financed social security and state expenses.

by Xavier in Paris on Mon Feb 15th, 2010 at 12:54:22 PM EST
[ Parent ]
Depends on which taxes you are talking about.
Consumption taxes, most probably.
First layers of income taxes too.

But top marginal rates? Probably not. On mega bonuses? They'd welcome it. On speculative financial transactions? No problem there either.

Of course, the people posing as budget carers never really intended to raise those taxes.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Mon Feb 15th, 2010 at 01:09:50 PM EST
[ Parent ]
Right, I should have been clearer. On financial transactions, I doubt they'd have a problem, though it should be noted that Krugman was not in favor of rolling back the Bush tax cuts (which were for the wealthy). So, he would not be for taxes for private individuals (I can't recall him mentioning bonuses at all, though that sort of law would be nearly impossible to tailor anyway).
by Upstate NY on Mon Feb 15th, 2010 at 02:08:43 PM EST
[ Parent ]
Er, I'm not so sure about that. He did mention that he would suggest that Democrats do not roll back ALL of the Bush tax cuts -but that was because he suggested keeping the ones not for the rich that Bush had added so he could pretend his was a program for the middle class.

I have seen him repeatedly say that Democrats should let the Bush tax cuts expire if there was no way to fully roll them back before. He did say that they should not accept a "compromise" where most of them would be made permanent agains having the rest rolled back immediately. But that's something quite different.

Where did you see him say that the Bush tax cuts should be kept?

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Mon Feb 15th, 2010 at 03:04:03 PM EST
[ Parent ]
I saw him say in article at the NYT that they should not be rolled back. He said 2 years from now they expire (and presumably we won't be bleeding jobs at the time).
by Upstate NY on Mon Feb 15th, 2010 at 05:12:08 PM EST
[ Parent ]
Maybe you have a link for that?
Reading these posts, and understanding Krugman's views, I am doubtful that he actually did not want to roll back the tax cuts on the "rich" at least.


Rutherfordian ------------------------------ RDRutherford
by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Fri Feb 19th, 2010 at 06:40:52 PM EST
[ Parent ]
But the fact that they never talk about the military-industrial complex, which eats half the income of government.

They are so democratic...

by kukute on Mon Feb 15th, 2010 at 11:04:35 PM EST
[ Parent ]
... to be able to understand that the Eurozone can generate the required deficit to stabilize the Eurozone economy, Krugman is going to tend to fall back on the Samuelsonian "neoclassical / neoKeynesian synthesis" stabilizers, such as the balanced budget multiplier, which requires a large government budget.

Outside of the fantasies of "New Keynesian" economics (even Krugman's version of New Keynesian economics), and inside reality, in the face of an economic downturn, the monetary authority needs to be paired with a fiscal authority that has the ability to generate the required deficit within the scope of that monetary system.

However, setting up an Imperial Federal system a la the current US system in order to provide that fiscal authority is killing a swarm of mosquitoes with a sledge hammer - a tremendous amount of work causing a tremendous amount of collateral damage in order to achieve on partial successes - to judge by the current US failings in our response to the crisis.

Better to "float" the fiscal agreements by providing an automatic per capita grant to each Eurozone member state triggered by the size of the downturn, and add that grant to tax receipts when determining a member state's fiscal deficit position.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Feb 16th, 2010 at 12:17:46 AM EST
[ Parent ]
I personnally think that the euro was a purely political decision. I remember the critics at the time of the euro from people (journalists and experts) afraid that the currency might not get popular support, and that people would prefer go on using national currencies.

I agree, if you include in your view of the political dimensions operant at the time the clear need to create a political and economic counterweight to the US influence. Many thinkers with (and without) the ability to reach the levers of power saw the US economy as unworkable in the medium term, and it's political influence as pernicious. That was clearly true, but also mistaken in at least one sense- it was not so much the pernicious US economic and political influence- too superficial- as it was a vaccuum of economic governance in the US leading to the adoption of widespread tactics of predation instead of development. That predation, as an external threat and an internal business model has been the evil gift of the Oligarchs at GS and elsewhere to the "continent".  or-- is it the other way round? Doesn't matter. It's not a blame game, but a policy disaster.

Perhaps the media campaign on Greece, Spain, Portugal and Italy has to do with the low level of approval of a political european union in Britain: the political implications of the euros would be discarded by people who can't comprehend it

Consider the possibility that rather than failing to understand the political implications, the resistance to the common currency may in part stem from an understanding of how poorly the central popular question has been answered by governing elites in Europe: How can we retain our cultures- our real treasures- and at the same time act effectively in concert?" People understand the need: they also see the blindness of those leaders -and Krugman-, who are unable to see very far beyond the economic box.
That said, I admire Paul Krugman and read him every morning. But his conceptual captivation by the discipline he has chosen for his life is clear.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Feb 17th, 2010 at 11:44:20 PM EST
[ Parent ]
Well, I don't think he misses that at all.
I was studying European Studies at LSE in 1999-2000 -you can imagine how the Euro was the hot topic.
Europeans would argue that it was a political negative that they would accept in return for the economic positive that it was.
Americans (Krugman among them, but of course it was not his main area of concern) answered that it seemed to them to be not so great economically, but that creating the Euro could make sense for the politics it carried. Euro enthusiasts were quick to dismiss the view that it may not make so much sense economically.

So, Krugman is saying that in this context: it's a bit rich to claim that he fails to see all the political good that it brought when it was precisely what he was saying then, whereas Europeans then retorted that the political implications were things they'd rather avoid, but that the economics were so great that they'd be willing to pay the price.

That's not being blinded by one's discipline. That's pointing out that what you had been saying turns out to be true. He even hints at the political implication: to make it work, we'll need to press fast forward on other kind of integration.

As an aside, I then believed as I do now that a lot of the European arguments that it was bad politically but good economically were just posturing, to limit the resistance from sovereignists -claiming you did it in order to get more integration would have invited some fury from the right. But I can't prove it.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu Feb 18th, 2010 at 02:14:06 AM EST
[ Parent ]

Europeans then retorted that the political implications were things they'd rather avoid, but that the economics were so great that they'd be willing to pay the price.

I have to say: huh?

The euro was ALWAYS sold on the continent as a political project more than an economic one. Only in London was it ever discussed in economic terms. The only way economic issues came up were also political, ie in France the discussion was about having a say in monetary policies otherwise decided by the Bundesbank on its own, and then followed without a choice by the neighbors; in Germany it was the opposite worry of seeing their strict strong currency policies being diluted by non-virtuous members (the "Club Med" countries, then the derogatory term before "PIGS" was invented).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 18th, 2010 at 07:55:42 AM EST
[ Parent ]
It was sold as something that would help the economy (even if you call that political -monetary policies do belong to economics) despite bringing more integration than would be wanted (aka losing sovereignty).

Not hacing to pay for conversion fees was a major argument. There is nothing political to that.

Now, I must admit that, despite having read lots of books and articles on the issue back then (not many by British authors) -I was studying a Master about that after all- I was living in London at the time. Therefore, I was not listening to French radio or watching French TV frequently. But I did hear the points I am referring to in the few times that I did. And plenty of times in the press.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu Feb 18th, 2010 at 08:45:55 AM EST
[ Parent ]
Only in London was it ever discussed in economic terms.

And in Sweden. Only the opponents of the euro - the left - argued that it was a political project, a project they absolutely didn't want anything to do with. Supposedly the pro-euro side - the right - felt that it was a political project as well, buy they were very careful never to mention it in that way lest the voters would notice.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Feb 18th, 2010 at 12:28:35 PM EST
[ Parent ]
won plenty of traditional economics awards in the 90s - including the very first "best young economist" by the Economist. He was exactly on the line of the pre-98 Economist, ie sane and honest about its biases, and thouroughy "liberal" in the traditional English sense.

Like Obama, he's promoting sane rightwing policies, not leftwing ones.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 18th, 2010 at 08:02:09 AM EST
[ Parent ]
Jerome a Paris: Like Obama, he's promoting sane rightwing policies, not leftwing ones.

Sane rightwing policies like even huger deficit spending to stimulate the economy?

The march of civilizations is a series of defenses that man has put up against the dread of pure existence.

by marco on Thu Feb 18th, 2010 at 08:08:11 AM EST
[ Parent ]
Paul Krugman is most definitely not some right wing economist pushing austerity for the poor and low taxes for the rich. Has has repeatedly urged the US to move in the direction of increasing its social safety net holding up European nations as an example. He and Stiglitz are the economists that I am most inclined to listen to.

There is a difference between setting up effective structural arrangements for macro economic management and the particular economic and political policies that are followed by those structural arrangements. In this column and in previous writing on the subject I understand Krugman to be saying that the European Monetary Union lacks adequate structural arrangements to respond to economic crisis. The present crisis is of sufficient magnitude to make what some have long predicted dramatically visible.

Krugman is not advocating a dissolution of the monetary union or of the EU as a whole. He is saying that action needs to be taken to fix the structural problems.

 

by Richard Lyon (rllyon@gmail.com) on Mon Feb 15th, 2010 at 12:53:25 PM EST
... political views are largely progressive, at least in a loose center/center-left sense, does not automatically remove his tendency to work within the flawed mainstream of economics from consideration when thinking through his arguments.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Feb 16th, 2010 at 12:20:07 AM EST
[ Parent ]
Exactly.


Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Feb 17th, 2010 at 11:45:51 PM EST
[ Parent ]
Op-Ed Columnist - The Making of a Euromess - NYTimes.com
The nation's core economic problem is that costs and prices have gotten out of line with those in the rest of Europe.

It's not easy to compare absolute unit labour costs (the stats dbases present them in year-on-year growth), but here's a (pretty boring) chart of annual average employee compensation in $US PPP-adjusted.


Click and hold to enlarge Source OECD

Germany stands a little above the Euro (to-be) zone average in 1999, but ends below it after a decade of wage austerity. With a slack period in the mid-'00s, Spain, overall, follows the Eurozone trend. No sign of ballooning wages there. And, of course, in the absolute, Spanish wages are lower than the Eurozone average.

If there's a "core economic problem" for Spain, isn't it that too much of GDP was based on construction and property? And did that bubble stem from the euro?

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Feb 15th, 2010 at 01:01:50 PM EST
Krugman has a blog which is separate from his column in the paper. His blog post tend to go into more technical economic detail. Here are some things that he has had to say about the situation in Spain.

http://krugman.blogs.nytimes.com/2010/02/09/anatomy-of-a-euromess/

This post provides the data on which he is basing his analysis of labor costs.

http://krugman.blogs.nytimes.com/2010/02/06/spains-problem-illustrated/

The Spanish Tragedy

http://krugman.blogs.nytimes.com/2010/02/05/the-spanish-tragedy/

There are several more. Right or wrong he has devoted considerable thought and writing to the issue. This is not an off the cuff reaction.

by Richard Lyon (rllyon@gmail.com) on Mon Feb 15th, 2010 at 01:25:03 PM EST
[ Parent ]
Thanks for the pointers, Richard, but most of us here have followed Krugman for years and are not anti-Krugmanites. As for his analysis of (manufacturing sector) labour costs, the chart he provides is of relative growth (it was quoted in this subthread the other day). Unfortunately, the very first comment under the chart in Krugman's post shows how misleading it can be: the commenter thinks it shows unit labour costs in Germany are lower than in Spain. No, because it's a chart of relative growth.

What I was concerned to do is look for some absolute figures and compare them to the Eurozone average. Where it appears that Spain hasn't gone that crazy.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Feb 15th, 2010 at 01:38:59 PM EST
[ Parent ]
Anytime anybody attempts to do comparisons of  international economic data, it can easily become a problem of the three blind people describing an elephant.
by Richard Lyon (rllyon@gmail.com) on Mon Feb 15th, 2010 at 01:45:53 PM EST
[ Parent ]
So it can. But Krugman's graph with no explanation is a blinder attempt than mine above.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Feb 15th, 2010 at 02:49:56 PM EST
[ Parent ]
I spent my bike ride meditating on those two graphs. Here is where I think the difference lies. Should you disagree with me, I would certainly be interested in your views.

The data from OCED reflects relative purchasing power of workers after adjustments. All of the nations concerned had some amount of inflation. Costs of living increased and wages were proportionately adjusted. Thus we see minimal change in purchasing power across the board. However, during that period all of the nations concerned did not have comparable rates of inflation. Spain's rate has been running higher than that of the Euro Zone as a whole and even higher than Germany's. The cost of food clothing and shelter has increased at a faster rate for Spanish workers than it has for German workers. Spanish wages have risen in tandem with that increase. That makes Spanish workers no better off than they were before. However, those increased wages have contributed to a higher rate of increase in the price of the goods and services produced by those Spanish workers. That is where I believe the chart presented by Krugman fits in.

It is certainly true that Spain is not a major manufacturing economy. However, they are a major tourism economy. Tourism by visitors from other nations serves the same economic function as the export of goods. It brings money into the economy. A vacation in Spain is now taking a larger chunk out of the purchasing power of a German family than it did a few years ago.

If Spain were still on its national currency it could make an adjustment for this discrepancy with a devaluation in the exchange rate without cutting the domestic purchasing power of its workers. Since they no longer have that option, they are under considerable pressure to engage in broad deflationary measures. That is going to be a painful experience for Spanish consumers.  

by Richard Lyon (rllyon@gmail.com) on Mon Feb 15th, 2010 at 04:48:46 PM EST
[ Parent ]
Krugman's chart is about relative change in unit labour costs in manufacturing. And he just presents it as a whizz-bang see-this-and-understand graph without any explanation.

As for consumer prices in Spain, they were certainly rising faster than in wage-depressed Germany. The reason was mostly a tourism and property boom that was not only fuelled by German capital, but also from non-euro countries like the UK. As I said above, construction and property took up too large a share of GDP. And the real estate boom was largely a worldwide phenomenon that found its root in excess liquidities sloshing around - not as a result of Eurozone policies.

Krugman would say it doesn't matter what the causes were, his point is that Europe wasn't ready for the currency union and the euro was therefore at risk from extraneous shock. He doesn't appear to wish to consider where the shock came from and how it came about. In fact, the risk to the euro was not in divergence between Eurozone countries as much (and by a big, big much) as in the fact that in New York and London, the lunatics were/are in charge of the asylum. Let's not forget that the lunatics almost (and it's not over yet) broke the world economy.

Saying "Europe wasn't ready for the euro" in that context is saying that no one should attempt anything in current world circumstances (unless behind a mercantilist, protectionist wall like China), until the lunatics have been chased out. What's disappointing about Krugman is that his view of Europe never seems to understand or integrate that.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Feb 16th, 2010 at 08:53:08 AM EST
[ Parent ]
It seems plausible to me that you could make a chart of the relative change in unit labor cost between the tourism industries of Germany and Spain. Without having the appropriate data available, I don't know that to be true, but I think it can be inferred from the consistent difference in the levels of inflation. Demonstrating such a relationship would have more relevance to Spain's situation than manufacturing.

Krugman has made statements specifically saying that the euro can't be undone now and that the task is to find a way to make it better. It would seem to me that such a focus is likely to produce more productive discussion than an abstract discussion of the past. I realize that the discussion is being complicated by people in the UK who would like to see the euro undone so that they will never be forced to join it.

by Richard Lyon (rllyon@gmail.com) on Tue Feb 16th, 2010 at 10:15:07 AM EST
[ Parent ]
I started writing a response to this, but it has morphed into a 1,300 word diary in its own right.  I am no expert on Krugman, but it seems to me to be possible to construe his comments in a much more positive light.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Feb 16th, 2010 at 10:52:48 AM EST
[ Parent ]
Well, not only possible, but very much called for.

We should not be blinded by our own prejudice. And just because some people use some words in a very sleazy way does not mean that all do -having read pretty much everything that Krugman wrote in the past 10 years I really don't expect him to do so.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Feb 16th, 2010 at 11:20:16 AM EST
[ Parent ]
Krugman complained about the lunatics for at least 25 years.

And just because we hate earthquakes does not mean that we should ignore their occurence when building a town, since that would be saying that "nothing should be attempted"... The fact is that extraneous shocks do happen. And that most EU governments certainly don't want to help another country (or at least not help it much) when it gets hit.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Feb 16th, 2010 at 11:23:00 AM EST
[ Parent ]
So it's enough to disagree with Krugman on a certain point to be ignorant of what he has done elsewhere and at other times, or even to be guilty of being blinded by prejudice?

I have long read Krugman and been grateful for his principled political and economic opposition, especially in the Bush years. But I find him a touch Americanocentric, and don't often find his view of Europe particularly enlightening. Saying at this juncture "the euro is in a mess as I always said it would be" tends to add to the Eurodoom media noise and is hardly helpful.

As for extraneous shocks, the point is that this one was not an earthquake or other natural disaster, and Krugman knows that.

This is not simply kneejerk defence of Europe at any cost. Obviously the institutions and policies of the Union are way off what they should be, and the wrong people, politically speaking, are in charge. But there is no doubt in my mind that Europe is under propaganda attack by those who would be happy to see it crumble and cease to be a rival, even potential, in the "free" world. Krugman isn't one of these, but he seems frustratingly oblivious of this aspect of things.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Feb 16th, 2010 at 03:23:11 PM EST
[ Parent ]
I see no reason to claim that Krugman is oblivious of the neoliberal criticism of the EU. I don't think that he is under any obligation to be a cheerleader to make you feel better. Krugman is not infallible and there are ample points on which to take issue with his analysis. However, if you have been reading his writing, it seems that it would have been difficult to miss the many places where he finds reason to praise the achievements of European social policy.

I disagree with your assessment of the present economic crisis. It is the nearest thing to an economic earthquake that the world has seen since the 1930s and it is not over yet.  

Pointing out the ways in which he thinks that a monetary system is dysfunctional does not constitute providing aid and comfort to your enemies.

by Richard Lyon (rllyon@gmail.com) on Tue Feb 16th, 2010 at 04:50:46 PM EST
[ Parent ]
I'm not asking him to be a cheerleader to make me feel better ;), just that I may differ from his view without being pilloried for the crime of lèse-Krugman.

Richard Lyon:

your assessment of the present economic crisis. It is the nearest thing to an economic earthquake

In importance and effect, yes, but my point is that it is not a natural disaster or "act of God". It's the result of human decisions and policies.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Feb 16th, 2010 at 05:11:43 PM EST
[ Parent ]
I certainly don't think that Krugman has claimed that god had anything to do with it. Just where did you come up with that "issue"?

Regardless from whence the evil wind arose, the shock is great enough to expose all the structural weaknesses that weren't so apparent during more stable times.

by Richard Lyon (rllyon@gmail.com) on Tue Feb 16th, 2010 at 05:21:22 PM EST
[ Parent ]
"my point is that it is not a natural disaster or "act of God". It's the result of human decisions and policies. "

Well, that increases the strength of my point.
If you were to KNOW that there would be an earthquake, because it would be the result of policies, you'd be even keener to take it into account.
So, that the shock was human based does in no way lessen the pertinence of pointing it out if you think that a structure would not withstand it.

I am not even saying anything about whether it could withstand the shock. But if you think it can't, saying it only makes you intellectually honest, not someone trying to get Europe dismantled.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Wed Feb 17th, 2010 at 06:35:26 AM EST
[ Parent ]
Cyrille:
not someone trying to get Europe dismantled

For goodness' sake, where did I say Krugman was trying to get Europe dismantled?

Enough of this discussion for me.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 17th, 2010 at 07:29:13 AM EST
[ Parent ]
You did not, of course.
It may have been clumsy on my part to have written this and if I annoyed you in doing so, please accept my apologies.

I was reacting to this: "But there is no doubt in my mind that Europe is under propaganda attack by those who would be happy to see it crumble and cease to be a rival, even potential, in the "free" world. Krugman isn't one of these, but he seems frustratingly oblivious of this aspect of things. "

and of course I exagerated your point.
My view is that Krugman is not oblivious to this, however he puts himself out of such political considerations: he calls things the way he sees them, without trying to guess what effect it will have on the general discourse.

Which we may find frustrating when we fear it will play against what we like. But since I reckon that it's precisely because he will always call things the way he sees them that his writings are valuable, I am not ready to want him to do any differently when doing it might threaten what I like.

Which I probably tried to convey in too few words. Again, I never meant to offend you and I regret having done so.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Wed Feb 17th, 2010 at 02:05:46 PM EST
[ Parent ]
A similar reaction is happening with loyal US Democrats to Krugman's criticisms of Obama's economic policies. When he was criticizing Bush he was a hero. Now he has become an enemy.
by Richard Lyon (rllyon@gmail.com) on Wed Feb 17th, 2010 at 02:19:51 PM EST
[ Parent ]
Cyrille, no offence taken at all.

Just that I don't seem able, even choosing my words carefully, to be understood other than as a Krugman-basher.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 17th, 2010 at 04:20:22 PM EST
[ Parent ]
If I may--
I do not see your remarks in that light, nor do I think others do. Please don't be offended- this is a worthwhile discussion.
I think that while it is possible to admire his work deeply, there is a fully justified disappointment in Krugman's Amerocentric point of view. It blinds him to important aspects of the problem. But I see his point of view as more of an "econometric" point of view. Economics as a discipline has a component that is forever trying to catch up to, and effectively describe, within a measurement regime, things deeper. Like a man's willingness to defend passionately a world in which the need for bread with a proper crunch to the crust is properly valued--and a million other things that matter in ways that the economic perspective can not comprehend.
After all-- they eat "Wonder Bread".

 Have you ever seen a loaf of "Wonder Bread"?
It's incredible. Foam pillow guts.  

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Thu Feb 18th, 2010 at 12:08:07 AM EST
[ Parent ]
LOL, in Britain it's called "Wonder Loaf" and is precisely presliced foam pillow with special added Stick.To.Your.Teeth™.

Thanks for your words, geez. I'm truly not offended, just don't see what I can add now that isn't going to be misunderstood.

Yes, I do find Krugman Amerocentric - more so than Stiglitz, for example. And he's certainly looking at this through his econometric glasses. Speculative attacks may seize on some measurable imbalance, but they come armed with battalions of "information" and "commentary" aimed at pumping the perception of the imbalance up to crisis level. Media pronouncements make the market. Krugman's a major media pronouncer. It's a pity he's not taking that into account and broadening the perspective of his remarks. There, that's polite.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 18th, 2010 at 03:02:08 AM EST
[ Parent ]
I'm an American who bakes his own. :)
by Richard Lyon (rllyon@gmail.com) on Thu Feb 18th, 2010 at 10:17:00 AM EST
[ Parent ]
I don't think you are.

I just (rightly or wrongly) perceived a non-sequitur, and I know they make me snap. I guess I'm a non-sequitur basher.

Do I produce them myself? Why, most probably. Such are the infuriating contradictions of being human...

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu Feb 18th, 2010 at 04:59:24 AM EST
[ Parent ]
Here's German inflation for that period:

http://www.indexmundi.com/germany/inflation_rate_%28consumer_prices%29.html

Here's Spanish inflation for the same period:

http://www.indexmundi.com/spain/inflation_rate_%28consumer_prices%29.html

The difference is decidedly significant. Krugman's contention is that this greater inflation was largely driven by the foreign investment related to the Spanish housing bubble in vacation property.

by Richard Lyon (rllyon@gmail.com) on Mon Feb 15th, 2010 at 05:43:55 PM EST
[ Parent ]
Just - no. That's trial by spreadsheet, and it's both silly and sloppy.

As the comments under the 'manufacturing labour' graph say:

  1. Comparatively, manufacturing is not that huge a part of the Spanish economy. Why is he trying to cherry pick that particular factoid out of thin air?

  2. Manufacturing is a huge part of the German economy. During the period in the graph, there was strong downward pressure on German wages.

  3. Spain was in the middle of a housing bubble. Which came first - the speculative bubble, or the so-called inflationary wages?

We're supposed to take away the implication that those damn Spanish workers were earning too much and contributing to (be afraid...) inflation, when in reality the picture was quite a bit less simple-minded.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Feb 15th, 2010 at 01:42:28 PM EST
[ Parent ]
"We're supposed to take away the implication that those damn Spanish workers were earning too much and contributing to (be afraid...) inflation, when in reality the picture was quite a bit less simple-minded."

I suppose that you can take any implication that you chose to, but I don't think that was the point that Krugman was attempting to make.

by Richard Lyon (rllyon@gmail.com) on Mon Feb 15th, 2010 at 01:49:19 PM EST
[ Parent ]
So what is that graph trying to say?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Feb 15th, 2010 at 02:16:51 PM EST
[ Parent ]
The graph is saying that there is a divergence between Sapin and Germany. I think that you are trying to load considerably more moral freight onto it. If inflation does exist, that is an economic reality. It is a reality that needs to be managed. The point is that Spain is deprived of some of the management tools that it would have it were a fully free standing national economy.  
by Richard Lyon (rllyon@gmail.com) on Mon Feb 15th, 2010 at 02:36:16 PM EST
[ Parent ]
Well, Krugman is the one who seems to think that the graph describe's 'Spain's problem', so I don't see why you're blaming me, and not him, for making this a moral issue.

As for inflation - inflation is a construct of neo-classical economics, and not a reality. Real inflation, which includes value-destroying bubbles, is often driven by neo-classical policies, and yet remains oddly blind to their influence on actual prices and spending.

As we've noted many times on here, asset appreciation is classed as profit, even though it makes goods and services less affordable to a majority of spenders, while wage increases are classed as lossy and 'inflationary', even when they make goods and services more affordable to the majority of spenders, and increase overall money velocity.

This is why hardly anyone here takes neo-classical theory seriously any more - and also why it's a shame to see someone like Krugman apparently trying to make the same old discredited talking points.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Feb 15th, 2010 at 03:07:59 PM EST
[ Parent ]
This is why hardly anyone here takes neo-classical theory seriously any more - and also why it's a shame to see someone like Krugman apparently trying to make the same old discredited talking points.

"Spain's Problem".
He has no idea whatsoever about "Spain's Problems", because he views Spain from a distance, darkly, through lenses deeply colored some pale shade of red/white/blue econothink.. And he sees a bit of an economic cartoon. A caricature of Spain. That IS the Amerocentric viewpoint.
That said, Dr. Krugman does far better than most of his peers at making a real effort to transcend the limits of his perspective.  His blog suggests that it aint easy. That's the scary part.
Even Paul Krugman.  

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Thu Feb 18th, 2010 at 12:24:29 AM EST
[ Parent ]
European Tribune - To form a more perfect Euro Union
Wasn't Spain, as part of the European Union, freely able to attract workers from other states [that is, other countries in the European Union]

Of course. Free movement of labor is in there in the treaties.

and keep labor costs [and thus "relative inflation"] down?

Perhaps not.

Without knowing anything about Spanish wages, I would say that it could be the case that despite having every legal right to move to Spain and work there, workers form other nations might not have in sufficient amount to keep wages down. And that could then depend on hesitancy to leave for another culture and another language as long as there was ways to make things work back home. The EU does not have one language, and though english serves as a lingua franca, it might not be enough to make people move en masse. Better economic security then in the US might also give more incitements not to move.

If so, the problem with the euro is not to weak federal level, it is to dissimilar cultures and to good social programs. But what if commercialism and neolib reforms should be able to cure that?

Of course then the big question comes: do we want the US system of labor hunting employment, moving and sloshing all over the continent, creating boom towns and abandoned towns as it goes? Should there not be better ways of dealing with booms then hunting after them?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Feb 15th, 2010 at 05:43:14 PM EST
for most of the 2000s. The country also absorbed record number of immigrants in that same period.

So the wage icnreases were justified by the conditions of the economy, which was grwoing strongly and on top of that "enjoyed" a housing boom.

It's highly likely that a lot of the joblessness has fallen on immigrants. Not sure if that's counted in the statistics or not.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Feb 16th, 2010 at 04:55:36 AM EST
[ Parent ]
I would not agree that Spanish wages should have been kept lower. One might also argue that they should have done more to raise productivity, or (my favourite) that Germany and France should have let wages increase more. But the point that there are insufficient transfers is valid. There should be bigger financial transfers between the Member States.

Also see Eurozone Economic Governance

And in reference to that, this is exactly the debate economists like Krugman have been gearing up for since pretty much the creation of the Euro - disparate development, assymetric shocks. The current situation is far from assymetric to my eyes. Political and economic interests are largely aligned. My hunch is that they're exaggerating the problems because of mental maps years of largely speculative debate have created.

by nanne (zwaerdenmaecker@gmail.com) on Mon Feb 15th, 2010 at 07:42:38 PM EST
Yes. They speculate from the outside, and pronounce.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Thu Feb 18th, 2010 at 12:28:33 AM EST
[ Parent ]
It appears that Spanish wages only increased enough to offset the increases in the cost of living. The workers didn't get any richer. The problem is the general level of inflation that was significantly higher than that in the rest of the EMU area. It has resulted in an imbalance which is working to the disadvantage of Spain.
by Richard Lyon (rllyon@gmail.com) on Thu Feb 18th, 2010 at 10:22:09 AM EST
[ Parent ]
In that context one might wonder why deflation is such a horror scenario.
by nanne (zwaerdenmaecker@gmail.com) on Thu Feb 18th, 2010 at 04:41:49 PM EST
[ Parent ]
Deflation makes existing debt commitments harder to service.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Feb 18th, 2010 at 04:43:47 PM EST
[ Parent ]
But Spain has low debt commitments?
by nanne (zwaerdenmaecker@gmail.com) on Fri Feb 19th, 2010 at 02:11:35 PM EST
[ Parent ]
One of the things to be concerned about is that wages are the easiest thing to deflate first. Wage and price controls can be used to keep inflation within in limits, but it's easier to lower wages than prices. That leaves workers holding the sticky end.

With 20% unemployment in Spain that should be having some impact on prices but its a very chaotic way for it to happen. The government is under great pressure to reduce various components of labor costs.

Here's an article from today's New York Times:

http://www.nytimes.com/2010/02/18/world/europe/18spain.html?ref=world

by Richard Lyon (rllyon@gmail.com) on Thu Feb 18th, 2010 at 05:10:55 PM EST
[ Parent ]
I would still think that interstate mobility of labor in the US is  easier than in Europe. Not with any statistics, of course! Would be interested to see some...
by asdf on Tue Feb 16th, 2010 at 11:45:30 PM EST
I've read quite a few of the articles this week from the US talking about the "Greece" situation.  They all seem to suffer from lack of imagination.  Because they do not have historical anecdotes to draw from in the case of a currency managed in the way the Euro is they are forced to conclude that it is the manner in which the Euro is managed that is the problem.

I don't really see a currency problem at all.  I see an economic activity problem in Greece and a severe slowdown in Spain (equal to the severe run-up in construction aka totally predictable).  How does any of this damage the Euro is any significant way?  Sure it affects "investor confidence" and "speculators" but that is merely sentiment and market games, not actual economic activity.

My point is that all of these articles argue for the use of "tools" that are apparently the "only way" to avoid "currency problems" and none of it is relevant to a situation where the currency is shared but not entirely centralized.  

I think the real fear is that the Eurozone is about to prove that all of the austerity measures and neo-con economic policy is absolutely bollocks.  Inflationary wages?  Possibly good for the economy, especially if it's occurring in only part of the zone.  

They can't seem to get past the idea that there isn't a "EUROZONE" so much as there are Euro zones.  They have thrown their lot in together and as we see Germany seems to be willing to help their coalition partner out just like they said they would.  Is there any doubt that Greece will be forced to be more like Germany in their economic future?  Of course not, to do otherwise would be politically insane domestically.

The more of these articles I see the more I'm thinking that we're watching something very good happening.

by paving on Wed Feb 17th, 2010 at 03:08:48 PM EST
Question: why is the incoming (Socialist) Greek government punished so harshly for uncovering the shenanigans of its (Conservative) predecessor? In particular, why do so many Germans, in particular from the CDU, want to kick Greece out of the Euro?

Another question: why was it okay for France and Germany to redefine away their own breaches of the Growth and Stability (Suicide) Pact in 2005 but now that everyone is in the shit they pretend it's all Southern Europe's fault for messing with their beloved D-Mark?

Final question: do we really want a German to become head of the BundesbankECB at this juncture? (Yeah, that was an interesting lapsus on my part right there...)

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 18th, 2010 at 04:48:59 PM EST
Migeru: In particular, why do so many Germans, in particular from the CDU, want to kick Greece out of the Euro?

Because they don't want to use their hard-earned money to bail out (what they see as) a bunch of dishonest and incompetent spendthrifts?

But according to Barry Eichengreen (cited by Krugman in his column), exiting the euro (whether voluntarily or involuntarily) would spell unambiguous economic doom for a country.  In particular,

In 1998, the founding members of the euro-area agreed to lock their exchange rates at the then-prevailing levels. This effectively ruled out depressing national currencies in order to steal a competitive advantage in the interval prior to the move to full monetary union in 1999. In contrast, if a participating member state now decided to leave the euro area, no such precommitment would be possible. The very motivation for leaving would be to change the parity. And pressure from other member states would be ineffective by definition.

Market participants would be aware of this fact. Households and firms anticipating that domestic deposits would be redenominated into the lira, which would then lose value against the euro, would shift their deposits to other euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the Italian government would be redenominated into lira would shift into claims on other euro-area governments, leading to a bond-market crisis. If the precipitating factor was parliamentary debate over abandoning the lira, it would be unlikely that the ECB would provide extensive lender-of-last-resort support. And if the government was already in a weak fiscal position, it would not be able to borrow to bail out the banks and buy back its debt. This would be the mother of all financial crises.

Are those Germans so indignant at Greece that they would destroy the country financially and economically?

The march of civilizations is a series of defenses that man has put up against the dread of pure existence.

by marco on Fri Feb 19th, 2010 at 03:34:22 AM EST
[ Parent ]
Greece or California: Who'd you rather be? - latimes.com

If I were the governor of California, cursed with an insoluble budget crisis, and if I had asked the federal government for help and been rebuffed, and if I hailed from Europe and noticed that the European Union had agreed -- in principle at least -- to bail out Greece, I might be mumbling, "Vut gives?"

When Greece (a charming though relatively piddling land) comes calling in Brussels, it gets embraced (and lectured); when California (an economic powerhouse) comes calling in Washington, it gets, almost universally, the cold shoulder.

The reason France and the other economic powerhouses of Europe have said they will ride to Greece's rescue is that they share a common currency, and Greece's default could wreak havoc with the value and viability of the euro and, by extension, with the whole of the European economy. But California and the United States share a common currency as well.

<...>

For now, the European Union is showing itself to be a more functional federation than the United States. You don't have to be an Austrian-born California governor to think, "How crazy is dat?"



The march of civilizations is a series of defenses that man has put up against the dread of pure existence.
by marco on Sat Feb 20th, 2010 at 05:09:29 AM EST
Our mighty govenator is facing unemployment at the end of this year. Maybe you folks can find him a good paying job in the EU.
by Richard Lyon (rllyon@gmail.com) on Sat Feb 20th, 2010 at 09:39:57 AM EST
[ Parent ]


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