Tag Archives: Francesco Saraceno

French-German economics debate (bonus: Finland did its homework)

This is an interesting read. Francesco Saraceno discusses with Prof.  Hans-Werner Sinn about the arguments in two of the latter’s writings. I think it shows very well how much German economics lives in a bubble of its own, and how big the gap is between the various views of economic reality (if you could call the German view that).

Also, Finland did its homework (in terms of the EMU trade balance structure!) – where it used to have a trade surplus, it has a trade deficit as of 2014. In Saraceno’s words: Finland got rid of its excessive savings (while the Netherlands, Germany and Austria did not). Another time I would write more about what that means.

“Wrong Debates” by Francesco Saraceno


This is entirely true. I eagerly await the next post!

Closing the competitiveness gap through German inflation or periphery deflation

Mr Gloomy European Economist again has a very good post. As he states, it is a ‘completely unscientific simulation’ but I think it is useful in the same way Paul Krugman’s ‘quick and dirty’ charts help sort out some basic intuitions.

The core thing Mr. Saraceno does is to simulate how long it would take for the so-called periphery countries (in the Eurocrisis) to converge their price levels with that of Germany, which would mean they are at a level field again in terms of price competitiveness. First he calculates these terms with the assumption these countries have zero inflation from now on, and next he calculates what the average rate of deflation would need to be to reach the same price level as Germany by 2020.

Obviously the assumptions are not realistic, and the mechanism through which the German inflation would be achieved is left out for the moment – it would be easier to achieve the higher level of German inflation if Germany would aim to improve domestic demand rather than exports.

But assumptions aside, the conclusion from this ‘sketch’ is clear: price convergence MUST happen and it is not going to happen anytime soon.  One can wonder about the resilience of the eurosystem, like Paul Krugman does:

This need not lead to a breakup of the euro: Pessimists on that front, me very much included, misjudged the strength of European elites’ commitment to the project. But the euro might yet survive — and be a continuing disaster.

But even given this, 6-11 years of continuous deflation (not to mention the risk that Germany itself would slip into deflation) just is VERY long, especially in politics. And the more need for deflation, the more unemployment. Which is simply not politically tenable.

Finland at the moment does not have very low inflation, but it does have a large problem with unemployment – there is a huge gap between those seeking work and the number of vacancies: the number of those seeking work was (curve (1) in the document in the link, in January 2014) still rising and the number of open vacancies ( curve (2))has been fairly stable since 2008. Regardless of these numbers, the current Finnish government (of 6 parties, led by the National Coalition Party and the Social Democratic Party) still intends to do everything to increase the labour supply. It is no surprise that the (only two!) opposition parties in parliament, the ‘agrarian conservative’ Center Party and the True Finn party have been rising in polls (even though these concern the EP elections, not domestic elections; there the picture is slightly different).

But regardless of the polls, the political field in Finland is extremely in consensus about the need to ‘break’ the increasing public debt (not even 60% of GDP) and implement measures to increase the labour supply. The goverment has even asked for a ‘national consensus’ on this issue – the ‘need’ for reforms and budget cuts will one way or another lead to increases in the labour supply, which is not necessarily (sic) a good thing at the moment.

The interesting thing is that seen from the macro-economic imbalances picture (current account surpluses etc) Finland has reduced its surplus, which is ‘good’ in terms of convergence. But politics in Finland are absolutely hyper about this fact and want to restore the surplus. This is perhaps one very clear example that Finnish politicians don’t really understand the nature of the eurocrisis. Which thus also means they won’t find the proper solutions.

“Competitive Structural Reforms”

“Competitive Structural Reforms” http://fsaraceno.wordpress.com/2013/12/16/competitive-structural-reforms/

It seems that the EU policy elite (and also national policy elites for that mattet) are still not able to get around the fallacy of composition in the advocacy of the German model we should all emulate.

It’s Domestic Demand, Stupid!

There are many ways to communicate fairly difficult issues. The case against austerity is one; again and again the ‘families tighten their belt thus also the state must do so’-argument comes up. This argument has been defeated as many times. Here you can see a ‘layman’s argument against austerity’. But in my opinion this new post by ‘A Gloomy European Economist’ puts the argument much clearer. To quote from the main points of his graph:

What is this figure telling us? Many things, actually; but I’d like to point out just three:

  1. The first is that while the US have recovered and are now above their pre-crisis GDP level, the EMU is still more than 3% below its level of January 2008. We are not going to see the pre-crisis level of activity for at least 2 or 3 years, as the Commission just revised downwards its (negative) growth forecast for 2013 (not surprising, and bound to be further revised, as the readers of this blog may know).
  2. Domestic demand is down almost 6%, mostly because of investment (-19.1%).It makes no sense claiming otherwise: this is a Keynesian (sorry for the bad word; should I rate this post R?) aggregate demand deficiency crisis. On the contrary, in the US, robust consumption growth has compensated for the equally dramatic drop of investment, and as a result domestic demand is also above its pre-crisis level. As a sidenote, the dramatic decrease of investment makes one wonder what will be left of the EMU capacity to produce, once aggregate demand resumes.(my bold)
  3. The only two engines of growth, today are public consumption (!) and exports, both at around +4% with respect to the pre-crisis peak ; they compensate, unfortunately only partially, the dramatic drop in domestic private demand. Further reducing government spending, as will most probably keep happening, will lay the burden of recovery only on the external component. It is worth repeating that this small-country-syndrome, in the second largest economic bloc of the world, can only spell disaster. It is impossible to conceive a long-term reliance of our prosperity on demand coming from the rest of the world, as proponents of the “Berlin view” would like us to believe.

If you look at the picture, then indeed public consumption and exports keep the Euro area somewhat afloat. But with the intense desire to slash government spending, this might not last. I think this picture shows very succinctly why we need a Keynesian and/or MMT view of the economy very badly – if everybody cuts expenditure at the same time, how is the economy supposed to grow, or – more specifically – where is demand coming from? Mars?

While this post is very important in showing the core problem, I personally would like to see a bit more country-specific information. It is well-known that Germany has a great domestic demand-deficit, but what about Finland, the Netherlands, Austria? A recent post by Ambrose Pritchard-Evans, and earlier ones by me (referring to yet other posts) indicate that domestic demand is being killed in the Netherlands at least through austerity, private indebtedness and a stuck and plunging housing market, but as I showed here, Finnish domestic demand (at least retail) has kept up fairly well. I haven’t recently checked the numbers, but food price inflation in Finland seems to be rather high, so domestic demand may have reached its peak already.

(in general it would be nice to have a better idea of how to get key data out of Eurostat – there is so much stuff there!)

Mr. Gloomy Economist also points to the need for wage increases; at least for Germany, this is acknowledged by serious economists (i.e. from the IMK of the Hans-Böckler-Stiftung). This is a subject which I have great interest in, as it relates strongly to industrial relations and the relevance of labour unions. As I pointed out here (sorry, in Finnish), Olli Rehn warns Finland of overindebtedness (of the state, of course) and states Finland needs wage restraint. Well, as the graph shows, the index of real wage earnings has grown approximately by 2% per year, which is consistent with the inflation of the ECB target (if I understand Andrew Watt correctly).

So, in this light I eagerly await what the employers’ and employees’ federations in Finland are serving as opening bids in the run-up to the Finnish collective agreement/centralized incomes agreement -negotiations this Autumn. I expect lots of disagreement, at least.