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Fiscal Expansion or What?

January 21, 2014 Leave a comment Go to comments

The newly born Italian magazine Pagina99 published a piece I wrote on rebalancing in Europe after the German elections. Here is an English version.

The preliminary estimates for 2013 released by the German Federal Statistical Office, depict a mixed picture. Timid signs of revival in domestic demand do not seem able to compensate for the slowdown in exports to other countries in the euro zone, still mired in weak or negative growth rates. The German economy does not seem able to ignore the economic health of its European partners. In spite of fierce resistance of Germany policymakers, there is increasing consensus that the key to a durable exit from the Eurozone crisis can only be found in restoring symmetry in the adjustment following the crisis. The reduction of expenditure and deficits in the Eurozone periphery, that is currently happening, needs to be matched by an increase of expenditure and imports by the core, in particular by the Netherlands and Germany (Finland and Austria have actually drastically reduced their trade surpluses). In light of the coalition agreement signed by the CDU and the SPD, it seems unlikely that major institutional innovation will happen in the Eurozone, or that private demand in Germany will increase sufficiently fast to have an impact on imbalances at the aggregate level. This leaves little alternative to an old-fashioned fiscal expansion in Germany.

The Eurozone reaction to the sovereign debt crisis, so far, has focused on enhancing discipline and fiscal restraint. Germany, the largest economy of the zone, and its largest creditor, was pivotal in shaping this approach to the crisis. The SPD, substantially shared the CDU-Liberal coalition view that the crisis was caused by fiscal profligacy of peripheral member countries, and that little if any risk sharing should be put in place (be it a properly functioning banking union, or some form of debt mutualisation). The SPD also seems to support Mrs Merkel’s strategy of discretely looking elsewhere when the ECB is forced to stretch its mandate to respond to exceptional challenges, while refusing all discussion on introducing the reform of the bank statute in a wider debate on Eurozone governance. This consensus explains why European matters take relatively little space in the 185 pages coalition agreement.

This does not mean that the CDU-SPD government will have no impact on Eurozone rebalancing. The most notable element of the coalition agreement is the introduction of a minimum wage that should at least partially attenuate the increasing dualism of the German labour market. This should in turn lead, together with the reduction of retirement age to 63 years, to an increase of consumption. The problem is that these measures will be phased-in slowly enough for their macroeconomic impact to be diluted and delayed.

Together with European governance, the other missing character in the coalition agreement is investment; this is surprising because the negative impact of the currently sluggish investment rates on the future growth potential of the German economy is acknowledged by both parties; yet, the negotiations did not include direct incentives to investment spending. The introduction of the minimum wage, on the other hand, is likely to have conflicting effects. On the one hand, by reducing margins, it will have a negative impact on investment spending. But on the other, making labour more expensive, it could induce a substitution of capital for labour, thus boosting investment. Which of these two effects will prevail is today hard to predict. But it is safe to say that changes in investment are not likely to be massive.

To summarize, the coalition agreement will have a small and delayed impact on private expenditure in Germany. Similarly, the substantial consensus on current European policies, leaves virtually no margin for the implementation of rebalancing mechanisms within the Eurozone governance structure.

Thus, there seems to be little hope that symmetry in Eurozone rebalancing is restored, unless the only remaining tool available for domestic demand expansion, fiscal policy, is used. The German government should embark on a vast fiscal expansion program, focusing on investment in physical and intangible capital alike. There is room for action. Public investment has been the prime victim of the recent fiscal restraint, and Germany has embarked in a huge energetic transition program that could be accelerated with beneficial effects on aggregate demand in the short run, and on potential GDP in the long run. Finally, Germany’s public finances are in excellent health, and yields are at an all-times low, making any public investment program short of pure waste profitable. Besides stubbornness and ideology, what retains Mrs Merkel?

  1. January 22, 2014 at 5:47 pm

    Obviously public spending (including public investment spending) should not be allowed to fall in a recession. That it has done so in America, Germany and perhaps elsewhere, is evidence of grotesque incompetence.

    However, I’m not sure about Francesco Saraceno’s advocacy of big increases in public investments. An investment (public or private) should be made if it produces at least a standard return on capital. And the number of projects producing that return will not shoot up in a recession.

    Second, gyrations in the amount spent on particular sectors of the economy or on particular products are not desirable. Those gyrations involve people changing jobs and learning new skills, which raises unemployment all else equal.

    Third, Francesco cites current low interest rates as a reason for a big increase in public investments. The problem with that argument is that the current low interest rates are a temporary phenomenon: sooner or later they’ll return to more normal levels. Moreover, lenders are well aware of the fact, so they will not lend money for decades at low interest rates, and most public sector investments last decades.

  2. January 24, 2014 at 3:57 am

    There can be no rebalancing as a crisis of trust pivoted the stock market from a bull market to a bear market on the week ending January 17, 2014, as Reuters reported Bond trading stings Citigroup in 4th quarter. and the Global Financials IXG, pivoted lower, as The Too Big To Fail Banks, RWW, were led lower by Citigroup, C.

    As the Global Financials, IXG, pivoted lower, the world pivoted from the paradigm and age of liberalism into that of authoritarianism, where regional economic fascism will be the dynamic of The Great Economic Transformation, where liberalism’s investor, morphs to become authoritarianism’s debt serf, through the failure of fiat money.

    Beginning with the advent of the Euro, and then the repeal of the Glass Steagall Act, and then continuing on with the Alan Greenspan Put, the Ben Bernanke Put, and the Mario Draghi Promise Of Sufficiency, liberalism’s foundation and capstone was the investor and fiat money, where the speculative investment community established ever increasing moral hazard all to advance the investor’s return, the greatest of which are seen in the investments of Global Industrial Production, FXR, Transportation, XTN, Biotechnology, IBB, Resorts and Casinos, BJK, Solar Energy, TAN, Semiconductors, SOXX, Internet Retail, FDN, Nasdaq Internet, PNQI, Aerospace and Defense, PPA, and Pharmaceuticals. PJP.

    Authoritarianism’s footprint is that of the debt serf, where the beast regime establishes ever increasing debt servitude through the establishment of diktat money, the aim of which is to advance regional security, stability and sustainability.

    Under liberalism, one had economic life as an investor, where one trusted in the investment choice policies of democratic nation state sovereignty, as well as trusted in the credit policies of the banker regime sovereignty, enjoying the seigniorage of fiat money.

    Now, one has economic life as a debt serf, where one complies in the diktat policies of regional governance sovereignty, as well as in the debt servitude policies of the beast regime, laboring under the seigniorage of diktat money.

    Under liberalism, the speculative investment leverage community, was the source of monetary transmission. Fiat money was the element of economic life. Economic life centered around both consumer spending and the investing activity of the investor. It’s important to recognize that economic growth was the outcome of the two factors of consumer spending and the investor exercising risk-on investment choice across a broad spectrum of investment opportunities. The engine of economic growth under liberalism was consumer spending and investment choice.

    For example, leading regional banks, KRE, such as HBAN, SNV, FIBK, SIVB, OZRK, GBCI, PACW, FFIN, and UCBI, spawned economic growth, as a result of consumer spending and the investment activity of the investor, which carried impact seen in economic metrics such as Housing Starts, GDP Reports, Industrial Production, ADP Payroll, Construction Spending, and the Purchasing Manager’s Index. These were not goals, but rather statistical attributes, that is metrics, associated with risk-on investing.

    Now under authoritarianism, Mrs. Merkel, and other regional leaders are the source of monetary transmission, as they rule in diktat money, which becomes the element of economic life. Economic life centers round the compliance of the debt serf as the leaders manage the economy to achieve regional security stability, security and sustainability.

    Out of Club Med waves of sovereign, banking and corporate insolvency, the Eurozone will become the model and template for the rise of economic fascism. ANSAMed News Network, a media partner of the European Commission, reports the statistics of the EU Crisis Greek public debt at 171.8% GDP, followed by Italy (132.9% GDP), Portugal (128.7%) and Ireland (124.8%), Eurostat says)”.

  1. January 24, 2014 at 12:53 am
  2. October 20, 2014 at 12:18 pm

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