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Praising the Bundesbank

August 5, 2014 Leave a comment

I am puzzled by Wolfgang Münchau’s latest piece in the Financial Times. Let me start by quoting the end:

[…] The ECB should have started large-scale asset purchase a year ago. It certainly should do so now. The EU should allow governments to overshoot their deficit targets this year, and suspend the fiscal compact, which will result in further fiscal pain from 2016.

Even a casual reader of this blog will quickly realize that it would be hard for me to agree more with these statements. The macroeconomic stance at the EMU level has been seriously inappropriate since 2010, with fiscal policy globally restrictive (thank you austerity), and monetary policy way too timid.
So, what is the problem? The problem is the first part of Münchau’s editorial, in which he attacks the Bundesbank for its plea in favour of faster wage growth in Germany (the Buba asked for an average wage increase of 3%).
This is frankly hard to understand. The eurozone problems, and it’s flirting with deflation, stem from the victory of the Berlin View, that laid the burden of adjustment on the shoulders of peripheral countries alone.
The call for wage increases in Germany signals, and it was about time, that even conservative German institutions are beginning to realize the obvious: there will be no rebalancing, and therefore no robust recovery, unless German domestic demand recovers. This means a fiscal expansion, as well as private expenditure recovery. Unsurprisingly, the Buba rules out the former, but it is nice to see that at least the latter has become an objective. Faster wage growth may not make a huge difference in quantitative terms, but it still marks an important change of attitude. This is a huge step away from the low-wage-high-productivity-export-led model that the Bundesbank and the German government have been preaching (and imposing to their partners).
Münchau is right in calling for a different policy mix in the EMU. But this is complementary, not alternative, to a change in the German growth model. I would have expected him to applaud a small but potentially important change in attitude. Instead I have read a virulent attack. Puzzled, puzzled…

It’s the Eurozone, Stupid!

November 18, 2011 1 comment

There are two interesting developments in the eurozone crisis.

  • The first is that there seems to be no discrimination coming from financial markets anymore. The French (and Dutch, and Belgian, and counting…) spreads are dangerously increasing, not for objective reasons, but rather because France (and then Belgium, and the Netherlands, and counting…) is perceived as the next country in line after Italy. It is clear that the process will not stop, and that today the only investment that is considered safe is German bunds.
  • The second development is that besides the German government, the  Bundesbank president, and of course the ECB, there is increasing consensus that only a radical shift in monetary policy can stop contagion, building a firewall around eurozone sovereign debt. It is impossible to have well functioning bonds markets with 17 governments de facto borrowing in foreign currencies, and without a lender of last resort.

The two developments are of course related. It becomes increasingly clear that national government, independently of their past wrongdoings or virtuous behavior, are less and less responsible for speculative attacks, that seem to be fueled by the perceived flaws in the EMU governance design: countries with very limited fiscal space and even more limited fiscal pooling, borrowing in a foreign currency without a Lender of last resort umbrella, and experiencing increasing external imbalances.

As somebody would have said some time ago, “it’s the eurozone, stupid!