Summary: As the euro-crisis, now in its third year, grows in breadth and intensity, many analysts conclude that Europe’s leaders are stupid. Perhaps not. Perhaps they pursue hidden goals. Goals important to them, if not to Europe’s peoples.
Many people writing about the euro-crisis conclude that Europe’s leaders are stupid. How else to explain the long series of late, slow, half-measures which never address the core problems?
In a recent post about Obamacare Chet Richards advises us to take John Boyd’s advice and beware of such facile analysis. If we understand people’s orientation, we might see their actions as logical. For example, we might believe them stupid because we do not see their goals.
We know that Europe’s leaders seek to protect their banks (and bankers). They seek to preserve the European Monetary Union, and continue progress to eventual unification. Perhaps there is a third goal in the shadows. Massive deficits combined with recessions — even depressions — provide the opportunity to break Europe’s social welfare systems, including the unions and legislation that empowers workers.
The same dynamic is at work in America.
Why do they think this will work? Because it worked in Germany. And it’s working now in the periphery of Europe. But pursuing this goal while protecting the banks means they’ve not taken the reforms necessary to preserve the EMU (one cannot do everything at once). So they might achieve their two lessor goals, but in doing so wreck their greater dream of a unified Europe, for which they have worked so hard since WWII.
In 2002, with the unemployment rate at 8.7% and still increasing, German Chancellor Schroeder asked his friend Peter Hartz, former Human Resource Director at Volkswagen, to chair a commission tasked with restructuring the German labor market. Under Hartz’s leadership the commission redefined the German workforce, reducing traditional full time employment and introducing the concept of “minijobs.” These so called “minijobs” provided German companies with the ability to hire short term workers without restrictions on hours worked and who were terminable at will. While “minijob” workers did not pay taxes on earnings; the earnings maxed out at a meager €400.
From 2002 to 2005, the German public and private sectors embarked on a series of massive Hartz reform austerity measures focused on using the high levels of unemployment to extract meaningful wage reductions from public and private labor. Even though the Delors Commission report, the intellectual basis of the monetary and economic union, specifically stated that governments should convince business and labor of the advantages of “gearing wage policies largely to improvements in productivity” rather than direct intervention in the wage and price formation process, the German government interpreted this language in ways the authors never intended.
The cuts in real wages for German workers, and reductions in Government programs, benefitted the German financial sector and exports. They also indirectly but substantially supported the country’s low cost of funds, giving German business a competitive advantage relative to its EMU peers.
Germany’s success during the last decade resulted from its current account surplus within the Eurozone supported by pressure on pay and working conditions rather than superior productivity growth.
Unfortunately for the German population, while German business profited handsomely, and German Banks exported capital to the rest of the world, the costs were borne by German workers who faced wage pressure. German households never reaped the fruits of their labor. The imbalances that Delors warned about were being built into the very structure of the Eurozone by the German government’s sole focus on protecting domestic business interests at the expense of their own population.
For more information
(1) Forecasting the crisis in Europe
- The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- Can the European Monetary Union survive the next recession?, 11 July 2008
(2) Posts about Greece
- A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
- The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
- Important: Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
- Hot news! The Wehrmacht failed to take Greece. Now Germany tries again, with a different method., 28 January 2012
- Europe has chosen a harsh future. All the paths for Greece lead into darkness., 24 February 2012
- A note from Athens: Feeling on the ground has palpably changed, 1 March 2012 — A clear sign that the Greek people are ready for change
(3) Reporting Europe’s slow march to the cliff
- The periphery of Europe – a flashpoint to the global economy, 8 February 2010
- Governments cannot go bankrupt, 2 April 2010 — But they can default.
- About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
- The Fate of Europe, nearing the point of decision, 13 September 2011
- Europe drifts towards the brink of a cataclysm, 26 September 2011
- Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
- Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
- Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
- Where to from here, Europe? Some experts share their views., 8 November 2011
- Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
- Looking ahead to see the new shape of Europe, 22 November 2011
- Europe passes the last exit. A great crisis lies ahead., 21 February 2012
- The Fate of Europe has become visible. Only how and when the break comes remains uncertain., 6 June 2012
(4) Other articles about Europe’s march to unification
- “France’s Broken Dream“, Martin Feldstein (Prof Economics, Harvard), Project Syndicate, 26 May 2012
- The End Of The Euro: A Survivor’s Guide“, Peter Boone and Simon Johnson, The Baseline Scenario, 28 May 2012
- “The Euro: an alternative moral tale“, Simon Wren-Lewis (Prof Economics, Oxford), 1 June 2012
- Important: Remarks by George Soros at the Festival of Economics, Trento Italy, 2 June 2012 — Deserves attention, as he has proven to understand currency unions better than almost everybody.