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The problem of German hegemony

by Frank Schnittger Sat May 20th, 2017 at 09:17:29 AM EST

One of the impacts of Brexit on the EU will be to remove one of three most powerful and influential members of the bloc. That can only have the effect of increasing German hegemony unless the other EU and Eurozone members take concerted action to prevent this from happening. So far they have shown little sign of doing so. German led austerity policies remain in the ascendant, particularly in Greece, although economic trends have been improving elsewhere. But politically, German conservatism, inertia, complacency and a sense of entitlement appears to rule the roost.

So why do the other EU member states not take more concerted action to ensure the EU and Eurozone are managed more in their collective interests?


There appears to be a lot of ideological capture and attempts at imitation which simply can't work for everyone. Germany is only one vote on the Council and needs quite a few allies to form a blocking minority.  Draghi appears to have been doing quite a good job in resisting pressure from Germany to end his "unconventional" monetary policies, but the other EU institutions don't appear to have a will to get anything done that Germany doesn't like.

True, Germany can block Treaty change, but progressive Treaty change is never going to happen in the currently climate anyway. Hence the focus in my previous diary on initiatives that can improve the quality of administration and of life for as many EU citizens as possible without requiring unanimity or Treaty change.

Epochepoque argues that only a crisis could alter this conservative reactionary mindset, but most recent crises have resulted in regressive rather than positive change. A car crash Brexit could literally damage the German car and other industries disproportionately and force a degree of rebalancing which could benefit southern and eastern member states disproportionately without necessarily reversing austerity as a whole.

However as Krugman has observed, the deflationary impact of austerity measures is proportionate to the rate of change of public expenditure reductions, and thus even a slowing down of cutbacks can enable a (relative) recovery. It is thus appalling that we are still talking about more austerity in Greece, but the overall economic picture seems much brighter at least until we see the impact of Trump and Brexit.

Overall Europe has been in relative economic decline for a long time now, negatively impacted by a transfer of resources to oil rich states from the 1970's onwards and now more recently by the impact of globalisation and the relative rise of the far east. People have had to work harder, longer, smarter whilst standing still.  Now it takes two full time workers with increased qualifications to raise a family whereas before one worker, often less qualified, could earn enough to raise a family.

None of that is going to change any time soon unless we get a far greater rate of redistribution from the winners of globalisation to the losers and from capital to labour. That's not going to happen without a rebalancing of power from global corporates to nation states, and the larger the state, the better the chance it has of doing so. That is partly why I think the long term impact of Brexit will be catastrophic, particularly for the UK, but probably not great for the EU either.

However we also need a regional, demographic and policy  re-balancing within the EU, from Germany to poorer peripheral member states, from older to younger members of society, and from rentier capitalists to entrepreneurs. Neo-liberal economic theory is blind to all these distinctions and assumes a "trickle down effect" will "lift all boats" almost indiscriminately, or at least those who are deemed to deserve it.

And it is this quasi-moral overlay on already discredited economic theory which we need to challenge. It is not a crime, or a sign of a moral deficiency, to be younger, poorer, or from a peripheral region in Europe. The real crime is to value a rentier sense of entitlement and complacency above entrepreneurship, energy, innovation and hard work.

Perhaps one of the reasons for the decline of social democracy in Europe is a failure to recognise that distinction. Socialist parties have become identified with older, male, relatively secure workers and pensioners in state guaranteed or highly unionised environments when the reality of life for most other workers is very different.

Most workers around Europe can only dream of the wages, security, working conditions, working hours, and quality of life available to many in Germany and the richer northern states. It is time that hegemony was challenged, and the only surprise is that that challenge has been so muted to date.

Display:
IMF urges Germany to hike wages and invest - DW
Germany should use its wealth to invest in infrastructure that will enhance its growth potential, and encourage employers to raise wages for higher consumption, the International Monetary Fund says in a report.

...snip...
Wage demand

Nevertheless, the IMF insisted in its report that the country's fiscal space should be used for investment in physical and digital infrastructure, childcare, refugee integration, and relief of the tax burden on labor.

Noting that income inequality had largely stabilized, the IMF warned that poverty risks still existed.

From the IMF report:

3. Looking forward, a sustained rise in wage and price inflation in Germany is needed to help lift inflation in the euro area and facilitate the normalization of monetary policy. Our baseline forecast envisages a gradual demand-driven rise in wage, core, and headline inflation, consistent with the tight labor market conditions. There is a risk, however, that, after a long period of moderation, wages will not respond sufficiently to these conditions. This would result in protracted low inflation in Germany and a slower-than-expected normalization of inflation and monetary conditions in the euro area

4. External rebalancing would be facilitated by higher wage and price growth, but its pace would remain slow without policy action. In 2016 Germany's current account surplus was the world's largest in U.S. dollar terms, while its ratio to GDP edged down from 8.6 to 8.3 percent.

...snip...

9. Despite a well-developed social safety net and strong employment gains in recent years, relative poverty risk warrants continued attention.

by Bernard on Sun May 21st, 2017 at 11:23:54 AM EST
Most workers around Europe can only dream of the wages, security, working conditions, working hours, and quality of life available to many in Germany and the richer northern states. It is time that hegemony was challenged, and the only surprise is that that challenge has been so muted to date.

Am I to understand that you advocate for so-called neo-liberal reforms of Germany's domestic industrial, labor, and pension policies so that these are "competitive" with more those of liberalized EU members who enjoy greater insecurity in work and wages, savings or housing, social insurance benefits, and quite probably PPP of EUR?

According to the crazy IMF the first fork in the road (the second is tax relief, of course) from balanced GINI across EU-27 in order to accelerated "competition" appears to be:

8. Pension reforms to prolong working lives would foster long-term fiscal sustainability while helping external rebalancing [BWAH!]. If the fiscal space under the rules is fully used, and considering a wide range of realistic macroeconomic shocks, government debt would still decline rapidly with high probability. However, in the long term fiscal sustainability is challenged by rising aging costs. Further pension reforms that make it more attractive to extend working lives, as recommended in the past, would lower the pension bill and raise growth. By reducing the need for households to save, these reforms would also help lower external imbalances. The resulting sustainability gains [!] would also facilitate some relaxation of fiscal targets in the medium and long term.

Plugging the pensioners' holiday pipeline to the south will surely unlock the value of web 4.0 virtual tours along the "information super-highway," built, of course, by um highly-paid immigrant workforce from ... Spain, Greece, and Portgual? The "surge in labor supply" (2) in current "tight labor market conditions"(3)?!

I wonder, because my understanding is that the discredited economic theory of "trade balance" on which IMF neo-liberal cant relies is the pyrrhic resentment of US Allies.

EU-27 income inequality could be so much greater IF every union could boast of trade deficits, savings gaps, and onerous transfer payments to underdeveloped member states!
List of U.S. states by Gini coefficient


Diversity is the key to economic and political evolution.

by Cat on Sun May 21st, 2017 at 03:22:14 PM EST
No those two sentences are in unfortunate proximity and should have been in separate paragraphs. The first is more a possible part explanation for why worker solidarity has declined and contributed to a decline in support for social democratic parties and more enlightened worker solidarity policies.  

Relatively privileged workers are less likely to support "transfers" to less privileged workers and may support  "anti-immigrant" policies and "austerity" policies for feckless peasants and other foreigners in poorer countries as they we see it as the state giving away "their hard earned cash" ((TM)) to less deserving or hard working people (despite all evidence re: working hours to the contrary).  [It was bad enough giving all that cash to other Germans in the former East Germany].

My question relates more to why other EU states don't use their potential majorities in the EC and EP to push for more distributive or even just reflationary policies within the EU/EZ as a whole. It's almost as if they believe German cant that every country should have a trade surplus as a sign of their superior virtue and industriousness...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun May 21st, 2017 at 04:28:43 PM EST
[ Parent ]
Over the years, particularly, since the Panic of '08 I've been amazed by how quickly welfare "burdens" born by true, honest, and righteous citizens of the EU and US have converged in abyss of intellectual dishonesty that sustains western "values" and "standards of living." Or epic exploitation of north-south and rich-state-poor-state um comparative advantage.

Finite resources or infinite resources? You be the judge.

Someone has to play the loser.

Condemning southern and "fly-over" populations to feckless governance, laziness, and "third world" [!] status is a bourgeois pastime here. There are 14,7999,999 more "thoughts" along this track you and other 'tribers have cut into.

Which States Are Givers and Which Are Takers?

I truly don't think you should be palming off canon of capitalism, including but not limited to Hume, Locke, Benthem, Smith, Ricardo, and the ineffable Weber, as "German cant."
 

Diversity is the key to economic and political evolution.

by Cat on Sun May 21st, 2017 at 05:55:46 PM EST
[ Parent ]
Frank
It's almost as if they believe German cant that every country should have a trade surplus as a sign of their superior virtue and industriousness...

Cat

I truly don't think you should be palming off canon of capitalism, including but not limited to Hume, Locke, Benthem, Smith, Ricardo, and the ineffable Weber, as "German cant.

I hardly think those inestimable thinkers believed that that every country should be running a trade surplus...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon May 22nd, 2017 at 07:28:33 AM EST
[ Parent ]
Frank, you are dissembling theory of the wealth of nations --the credit of nations or the surplus of nations-- to bolster a popular sentiment among your readers.

That is the Germany state alone and despite its crushing defeat in WWII is responsible for trade (account) imbalance between European nations and every othe topical flaw in the trading agreements or their execution that constitute an inchoate federation --especially the institution of EUR currency whose value can magically be discounted by DM-hoarders when no explanation for Germany's current account surplus other than Nazi ideation presents itself.

I'll not stand for this bigotry.

Trade balance between nations is one of several fallacies purporting to represent "natural", aggregate supply and demand "equilibrium" and "comparative advantage" and "perfect knowledge" at the foundation of macroeconomic dogma said to justify centuries of abject, violent, and invidious rapine of "resource rich", "primitive" "tribes" perpetrated by the heirs of those "inestimable" deacons of the capitalist ethic. Can you, will you, denounce it?

The "wealth" of the whole so-called developed world puts to lie the conceits of balance (but of course not surplus) refined by the sophistry of 800 years of European intellectual history. It wallows in surplus, a so-called saturated market primed by "industrial revolution" of finished goods for bourgeois families and the tiniest of over-flow drains partly blocked by the wars for independence that immediately followed each world war.

C.L.R. James predicted Europe would turn "capitalism" on itself. And so it is, fighting over surplus.

If you gotta hate, hate the game, man.

Diversity is the key to economic and political evolution.

by Cat on Mon May 22nd, 2017 at 04:51:28 PM EST
[ Parent ]
If you gotta hate, hate the game, man.

One of the problems of an "old" site is that it gets pretty homogeneous, and a dissonant point of view becomes  hard to take on board.

But sometimes it's just a misunderstanding. Nobody here is hating on Germans.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon May 22nd, 2017 at 07:04:04 PM EST
[ Parent ]
I'm sorry Cat, but I don't know how any of what you have said relates to my previous comment. (For the record I am German born of German parents who became a naturalised Irish citizen when I decided to live in Ireland permanently. I have German relations and don't bear them or Germany any ill-will. My parents were anti-Nazi and I am sensitive to totalitarian trends anywhere, including Ireland, but that has nothing to do with this discussion).

My comment related to the mathematical impossibility of all nations running an indefinite structural trade surplus, and more specifically the destabilising effect of systematic German surpluses within the Eurozone. Unusually for this site I am a supporter of the Euro but see it as threatened by persistent imbalances which can only, ultimately, be resolved by policy measures to redress those balances or the ejection of either persistent deficit countries like Italy and Greece or persistent surplus countries like Germany.  I would prefer to avoid the later outcomes as they would be even more damaging than Brexit.

Even conservative economic commentators are urging Germany to invest more in infrastructure and reflate its economy as a means of reducing external surpluses.  My point is that it would be even more effective, from a Eurozone point of view, if Greece and Italy were allowed to boost their economies through fiscal transfers or other policy measures such as Eurobond investment funds, regional/cohesion funds, and EU funded minimal social welfare/health care provision in line with the EU Charter of Fundamental Rights

Longer term, I cannot see the Eurozone becoming stable without at least a limited fiscal as well as banking union with net transfers from richer to poorer states. Germany may not like that, but that is the price they will have to pay if they want the Euro to survive. As the main beneficiary of the Euro, that would be a price worth paying even from a German point of view, if only they weren't so blinkered in their approach. Ireland, too, is becoming a net contributor to the EU, and I have no difficulty with Ireland contributing to such fiscal transfers.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon May 22nd, 2017 at 08:28:16 PM EST
[ Parent ]
The problem with German hegemony is that deflation is the threat we're facing, but Germany can't stop pissing the bed every night over inflation, so it directs all its policies the wrong way.  Of course, that's the problem with US hegemony as well.
by rifek on Sun May 21st, 2017 at 04:05:20 PM EST
I do not understand this comment: "deflation is the threat ... but Germany can't stop pissing the bed every night over inflation". In flation of what? Deflation of what?
  1. IMF as usual recommends (labor, commodity but not it would seem FX) price inflation for Germany and EU-27. The mechanisms are non severable, whenever profit motive determines value of production inputs.

  2. EUR appreciation viz. USD and GBP, ironically, has posed no barrier to EU-27 trade surplus over the prior two decades. EUR:RMB is a different story: EUR 180B deficit demos EUR purchasing power is similar to USD. Are German HHs and producers alone responsible for importing Chinese goods and services rather than, say, "Belgian" aluminum, oil, or cacao to the EU?

  3. Does a German firm pay your wage or salary? IF SO (or not) you may well be wary of further wage "deflation." It is inevitable. Surplus labor throughout developed nations will never be relieved by "re-educating" millions to perform so-called high-skilled functions. So-called "producers" will continue to seek low-cost inputs everywhere in order to maintain profit margin. Without distribution of profit (by value or volume of sales everywher), enforced by the state, income "equality" will continue to deteriorate.

  4. What EU-27 "import" did you purchase recently?


Diversity is the key to economic and political evolution.
by Cat on Sun May 21st, 2017 at 05:00:45 PM EST
[ Parent ]
The topic often missing in polemic such as this one is review of private-sector investment strategies, or "foreign" direct investment by corporate-nationals within member states. What are volumes and values YoY? Which industries enjoy technical, labor arbitrage, or FX advantages? What "fiscal policy" between states stymies unmet demand within EU-27? The obvious but unstated assumption is, Why would greater DI within Germany, in particular, change HH or corporate purchasing decisions --to the extent export Q or D would fall at any rate over time?

Beyond Aggregates

Anglo-merican business press is not particularly informative, being attracted only to top-line operations that influence securities brokerage pricing or global law enforcement from inside the beltway. Aside from that EP- and Council-level interstate rulings (eg. quota, unfunded investment funds) dominate conceptualization of commerce between member states. I for one --evn tho' I've given an inordinate amount of time compared to other mericans to divining Eurostat-- feel trapped by debates about "unfair" surplus with a narrow focus on heads of state and of course central banks' bond recycling operations.

Diversity is the key to economic and political evolution.

by Cat on Sun May 21st, 2017 at 04:15:16 PM EST
The IMF is trying to encourage greater infrastructural investment within Germany to build capacity and reflate the economy, but how much more effective would that investment be in promoting growth and reducing imbalances if that investment were directly in Greece?

However even productive investment can increase the GINI co-efficient within societies without active policy interventions to ensure minimal living, education, healthcare and housing standards.  So I doubt there is a purely "economic solution" to rising inequalities.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun May 21st, 2017 at 04:39:27 PM EST
[ Parent ]
GINI across EU-27 is better, "more equal", than GINI across US. (See links above.) Is a low GINI co-efficient desirable? And is neo-liberalizing Germany's "tight labor market conditions" (IMF) likely to increase or decrease GINI across EU-27 over the next decade?

Diversity is the key to economic and political evolution.
by Cat on Sun May 21st, 2017 at 06:52:54 PM EST
[ Parent ]
Basic to the mindset of most very wealthy people is that money is a thing and their object is to get hold of as much of it as possible and make it work for them. The very idea that money is a social relationship is anathema to these people and they view everything as a zero sum game. Of course when, as a group, the top few percent own the vast majority of all financial assets, their beliefs coupled with their actions which they conceive as being in their self interest all tend to spreading and embedding such views as normative. And so they are - nonsensical as they are. It is very difficult for people to stop believing things that make them feel good about themselves. The really sad part is that they recruit so many of their victims as allies.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 22nd, 2017 at 05:08:13 AM EST


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