So, on today’s FT the German finance minister Wolfgang Schauble forcefully argued that Europe is on the right track, that austerity is paying off, and that “Despite what the critics of the European crisis management would have us believe, we live in the real world, not in a parallel universe where well-established economic principles no longer apply.”
He then proceeds listing all the benefits that austerity and “well-established economic principles” brought to Germany, and to other countries that followed them. Today, he claims, Germany has strong growth, fueled by domestic demand, and grounded on robust investment and innovation.
Ok, let’s see who lives in a parallel world. Start from “successful austerity and reform”. Schauble cites the UK in the 1980s, Sweden in the early 1990s, East Asia in the late 1990s, and of course Germany in 2003-2005. First, as Krugman noted today, most of these countries could depreciate their currencies. Second, in my opinion even more important, during all of these episodes restructuring happened against a background of strong global growth. Look at these data from the World Bank:
It is clear that today’s period is peculiar in that austerity for peripheral European countries is happening in a globally weak context (and if I had plotted EMU or EU data, the current situation would be even more dramatic). In particular, I have pointed out many times that Mr Schauble’s country, in the early years 2000, benefited from robust exports (and important budget deficits, by the way).
Also, as Mr Schauble spends considerable time praising the German model, it is worth reminding that, in the parallel world where everybody but him lives, we observe a dual labour market, sluggish productivity growth, increasing poverty.
A final remark. I was taken aback by the startling statement that “domestic demand is the main driver of growth in Germany today”. Really? I share with Eurostat a parallel universe that looks like this:
So, yes, technically speaking Mr Schauble did not lie; in the past two(!) quarters domestic demand contributed to growth more than net exports. But maybe it could have occurred to him that this is because of recession in the Eurozone? And does the current account line looks as Germany were rebalancing? The answer is no, of course, and the rest of Europe is also diverging.
In real life austerity is killing European economies, and perpetuating imbalances. Schauble’s universe simply does not exist.