Economics and politics - comment and analysis
21. October 2015 I Heiner Flassbeck I Economic Policy, Europe, Globalisation and Development

Refugees, deficit spending and the intellectual deficit of politicians

Many factors contribute to the refugee drama that is taking place on our doorsteps at this very moment. In Germany, reactions initially proved to be generous and tolerant. Now, things are unfortunately evolving in the direction that we feared from the very beginning. This is not surprising. A couple of years ago, the country had no problem with someone like Thilo Sarrazin, who readily found a tribune to spread a crude and xenophobic message. Entrenched attitudes and strong sentiments do not dissipate overnight. It is simply not realistic to expect that Germany will betray its nature and accommodate one million people without protest here and there.

There is no denying that an influx of such an order of magnitude creates immediate practical problems for people and authorities, especially the case at the level of municipalities. Local governments simply lack the necessary financial means, the personnel and the infrastructure to accommodate so many people in such a short time. Understandably, the situation sometimes leads to excessive demands and interpersonal tensions, sometimes explosive. The German media report such local conflicts, using evocative headlines, day after day, suggesting that the refugees are troublemakers. This shows how widespread the subliminal xenophobia is in reality.

As can be expected, Germany’s political leaders are hopelessly overwhelmed. We previously addressed all sorts of artificial conflicts that are cropping up (see here) and explained how politically dangerous it is to constantly use the same, but wholly inappropriate, imagery of the “pie” that has to be shared with more people now that the refugees have arrived. The predominant idea in this country is that there is some sort of predetermined fixed income, the total social product (the pie), and that the only real issue is its optimal distribution. This ideology is evident in discussions concerning the minimum wage, which according to some economists and politicians should be decreased, or when discussing how much we need to ”save” for the refugees. This is a completely flawed way of looking at things. We can – and must – raise overall income in such a situation. Make the cake bigger. It is of course possible to accomplish this, but it calls for a minimum of economic competence. Political opposition is the real bottleneck – especially in the south of Germany.

Let us also not forget that Germany was directly involved in triggering the refugee crisis. Many refugees come from Afghanistan, where Germany and its allies have actively been intervening military for many years in order to achieve ”nation building.” Was it not to be expected that the victims of this failed experiment were going to look for refuge in Germany at one point? The complete destabilisation of Iraq and Syria in the Middle East opened a frightening Pandora’s Box in that part of the world. Germany and former colonial Europe bear their share of the responsibility for the current chaos and distintegration. The influx of refugees is a direct consequence of our political miscalculations and misguided Western military interventions in these parts of the world. And just like the military interventions, the further development with the influx of refugees is fully open.

It is certainly not a coincidence that many refugees head towards Germany. People know very well about the ”special” role that Germany plays in Europe. For several years now, the press and the media in general have created the picture of Germany as a country where everything is incredibly well. Germany is the only EU country that is not suffering from a severe economic downturn and thus tells other countries what to do and not: we are the European power house, we are experiencing a ‘new economic miracle’ (Frank Walter Steinmeier). According to much of the press, only Germany understands what really matters in this world: to be more competitive than anyone else and to amass foreign trade surpluses.

According to the defenders of ‘German values’, who boast about Germany’s power and superiority on a daily basis and never have a word to say about its role in the conflicts in the Middle East, the time has come to close the borders to Europe. Such proposals are especially popular in the south of the country. The ‘plan’ is as simple as it is utterly unrealistic. These nationalists and conservatives no longer shy away from proposing to make common cause with Mr. Orban, Hungary’s prime minister, who was a political pariah in Europe only a little while ago. The German media have a big responsibility in all of this. They really should stop playing the ages old card of ‘protecting German guiding culture.’ Channel ARD portraying Angela Merkel in a chador and showing Berlin with minarets popping up everywhere have been the absolute low points of this nasty campaign so far. However, there has never been a German guiding culture; and if some should really think that there is one, they may be reminded of how many Turkish immigrants were easily absorbed into the German culture.

The crucial question is quite simple: if rich and powerful Germany closes its doors, which countries are supposed to take in the refugees? Should Serbia receive the largest part? Or Bulgaria perhaps? Perhaps the refugees can remain in Greece, but because of German austerity claims, the Greeks have no longer any idea how to make ends meet. Italy, which is economically speaking also weak, accepted a disproportionately large number of refugees for many years. Shall this continue, just because Italy happens to have a large external border? Would it perhaps be more “desirable” to pressure Turkey into closing its borders with Europe and keep the refugees in Turkish refugee camps? Just imagine: two million war-weary refugees in camps in Turkey! I am certain that we would be happy to make a financial contribution for this. Turkey is far enough from our frontiers. We would not witness the misery of the people first hand and our German values would not be endangered. All of this is as nonsensical as it is counterproductive.

The simple truth is that Europe’s policy in and for the countries that the people are now fleeing from has been a failure. Also the European asylum policy system (especially the infamous Dublin III agreement) has been a failure. The core countries permanently delegated some of the responsibilities for refugees and asylum seekers to the peripheral countries so that they themselves could close their eyes.. Given the dimensions of the current influx, this no longer works and that is a good thing.

It now remains to be seen if the intellectual deficits underlying German and European policy can be overcome or if politicians will just go on discussing the distribution of the pie. Luckily, there are indications that change is coming. Both Pierre Moscovici, the competent European Commissioner, and Martin Schulz, the president of the European Parliament argue that the refugee crisis constitutes an exceptional circumstance and that the criteria of the Maastricht Treaty should be temporarily relaxed in order to allow member states higher deficits in state budgets.

Bravo! The brave Moscovici and Schultz suddenly seem to understand that, currently, government deficits are a necessary condition for creating new jobs in Europe. This is turn in thinking that we need. Suddenly, this is not the distribution of the pie. This is about the financial injection that is necessary to bake a bigger one. It makes you wonder why does the same thinking not apply to the millions of unemployed in Europe? Is that not also an exceptional circumstance? If it is right – and who could deny this – that deficit spending is needed now to create jobs for refugees, then it may be asked why we are not willing to follow the same policies for the sake of the millions of European unemployed?

There is really no question about it. Governments have to spend new money from the global capital markets, not merely redistribute it: deficit spending is urgently needed. Governments have to set up new projects that help refugees directly and, more importantly, they have to stimulate new economic activity so that refugees can work and create an income. Such stimulus would boost the overall economy: there would be more income and more investment. The pie would be bigger, so that even with a million new citizens, no one would lose out. Given the macroeconomic situation in Europe, no country is better placed for the implementation of such a program than Germany.

To put it bluntly, the current debate about the need for higher income and property taxes on the rich (see for example here) is inappropriate in my view. What we need to do now instead is to maximise the effects of economic stimulus at the lowest possible cost. That is better than any kind of redistribution through borrowing at zero interest rates, and this is better achieved through credit-raising in a phase of zero interest rates than through redistribution. Redistribution projects the wrong picture of a given pie and leaves stimulus out of the equation. It also suggests that –regardless of the refugee crisis – the debt problem must be solved first. Germany has to use its savings domestically and it has to stop squeezing the other European member states. That can only happen if German sectors accumulate more debt and spend more and save less.

Under the current circumstances, we can only expect more spending from the state. A completely different dynamic of economic development is in order, in which companies instead of foreign countries are the debtors. But viewing the current power relationships, this cannot be achieved quickly enough. Therefore, governmental deficit spending is an absolute necessity. If we fail to break through the mental blockade that exists in the minds of the “frugal housewives” against deficit spending, it will be redundant to devote any more thought to the current storm. However, the current refugee crisis is but a soft breeze compared to the European hurricane that will arrive if we do not act and lead in the right way.

This is a shortened version of an article that was published October 9 on flassbeck-economics.

Translation W. Denayer