Free Riders in Frankfurt
The Financial Times highlights one of the most striking conclusions of the latest ECB Financial Stability Report (full document here). The ECB, using FT’s words, “issued a stark warning over the threat posed by the scaling back of US monetary stimulus, calling on eurozone policy makers to do more to prepare for the market shocks from Federal Reserve tapering.”
There are of course many reasons why a change of policy of the largest world economy is closely monitored because of its potential impact. The ECB statements nevertheless are striking to me, because they are further confirmation of the small country syndrome that I pointed out in the past.
Quantitative Easing has been pivotal in ensuring that the hasty reversal of the fiscal stance in the United States did not dip their economy into a new recession. One may argue that today’s US economy is not sufficiently robust for exiting monetary stimulus. But it is sooner or later going to happen. The rest of the world has been free riding on Fed’s policies. In particular, the eurozone has benefited from QE in a context of sharp and pro-cyclical austerity, and very timid monetary policy.
Here is the statement I would have expected from the ECB: “The eurozone, the second largest economy of the world, has benefited from exceptional measures implemented by the Fed. This helped our economies and our financial markets in the context of a difficult consolidation process. Domestic factors in the United States will most likely cause a reversal of these policies. It is time European policy makers stand on their legs. As our economies persist in a state of chronic weakness, the ECB will consider its own quantitative easing program, to compensate for tapering in the United States, and provide to the European economy the environment it needs to rebound”
Such a statement, that I would find reasonable and balanced (maybe even too prudent), is nevertheless revolutionary nonsense in European policy circles. Instead we had the same old “copy-and-paste” demand to EMU countries of structural reforms and stable macroeconomic policies (read austerity). Not a single hint of even remotely possible non orthodox policies here at home. The sad truth is that we are structurally incapable of finding within our economy and our institutions the instruments to ensure growth and prosperity. We are structurally free riders. We siphon aggregate demand from the rest of the world running increasing current account balances, and we are not capable of implementing an autonomous monetary policy.
The world’s second largest economic area remains a parasite of the global economy, and it is incapable of living up to its responsibilities. Nothing good can come out of this.
“Free Riders in Frankfurt” (or rather: Berlin) is a good slogan which seems to carry the day these days. But is it really true in the final analysis?
The below article from the WSJ calculates that, from 2007-11, the German economy has lost 575 BEUR of its foreign assets. Gross foreign assets of Germany are now in excess of 7.000 BEUR, so there is a lot left for them to lose.
http://online.wsj.com/news/articles/SB10001424052702303332904579226120436774220
What Germans don’t understand (yet) is that their current account surpluses translate 1:1 into an increase in net foreign assets of their economy. They don’t understand that yet because those losses have not yet directly hit tax payers (they were recorded at upper layers of the economy, mostly banks and insurance companies).
If one wants to change German mentalities, silly slogans like ‘reign in your exports’ nor intelligent slogans like ‘import more’ won’t carry the day. The fastest way to scare Germans it to warn them that, by pursuing their economic model, their pensions – and, in fact, their future living standard – are at risk. I wish the debate would focus on that and not on silly things.
http://klauskastner.blogspot.gr/2013/11/the-most-effective-argument-against.html
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