Cockroach Ideas and Weak Arguments
Helene Mees in a Project Syndicate Comment weighs into the dispute between Paul Krugman and the Commission officials, siding with Rehn and his people.
Mees’ criticism of Krugman is two-sided. First, she argues, Krugman omits to say that the OMTs program is subject to heavy conditionality, and that the signature of the fiscal compact was a necessary precondition for the adoption of the program. I don’t get it. The ECB is very vocal on austerity and on structural reforms, and it is clear that the OMTs program was adopted only at the very last minute, facing the perspective of eurozone collapse. A number of economists, including myself, welcomed the OMTs while criticizing the heavy conditionality attached to it. The very fact that the OMTs was reluctantly adopted shows that even austerity partisans cannot deny the fact that the EMU is desperately lacking a proper lender of last resort, of which the OMT is a pale surrogate. The more non-Keynesian institutions are forced to adopt Keynesian solutions, the more Krugman’s point is vindicated. I fail to see how the opposite could be true.
The second criticism is that the imbalances between core and periphery denote structural problems of the eurozone periphery. Ok, agreed. So? Does this mean that rebalancing needs to fall only on the shoulders of the periphery? Does the excess savings of the core stop being an imbalance, only because the periphery loses competitiveness? And more fundamentally, does excess consumption in the periphery prove that export-led growth is a viable model for the second largest economy of the world? Once again, pointing out at the imbalances vindicates Krugman’s point, rather than refuting it.
Finally, Mees argues that increasing spending in peripheral countries would only benefit the non-tradable sector and deepen the imbalances; she adds that, being the trade deficit mostly with non-EMU countries, the only way to rebalance is boosting competitiveness through internal devaluation. I have two related objections to this. The first is that the main problem with the eurozone is not the fiscal stance of individual countries. One may admit that Greece or Portugal lack the room for fiscal expansion. What is outrageous is that the eurozone as a whole, with overall healthy public finances, and engulfed in an aggregate demand slump, has a contractionary stance that deepens the recession. The consolidation in the periphery should be more gradual (it is not that crazy socialist named Paul Krugman who says it, but the IMF), and even more important be accompanied by reflation in the core. It is the fiscal stance of the eurozone as a whole that is at odds with the economic situation. Is that so hard to understand? Besides, an aggregate expansionary stance would make consolidation in the periphery less painful and more successful. Finally, if the problem is trade with extra-EMU countries, then it is really puzzling why the solution would be internal devaluation and not a weaker euro, to be obtained through, once again, a more expansionist macroeconomic (monetary and fiscal) policy. We come full circle: the EMU is running pro cyclical macroeconomic policies, and this is the main criticism people like Krugman make to its policy makers and their cockroach ideas.
If I were Krugman I’d be thrilled to be challenged by arguments that basically vindicate my points…
As a side note, of very minor importance: Mees faithfully reports the outraged tweets that followed Krugman’s remarks on cockroach ideas. It jumps to the eyes that while Krugman challenged the ideas and not people at the Commission, the response was a long sequence of personal attacks. Probably he is easier to label as unimpressive than his arguments…