This is the (updated) translation of an article that was issued January 28, 2015 on flassbeck-economics. We intend to publish one article in English every week to allow more readers to follow closely our analysis of global and European events.
Once again, we face the wonderful situation where German policy-makers and the international media are full of ‘good’ advice for Greece. We heard it all many times before. Everyone who has ever set a foot on a Greek island as a tourist knows perfectly well what went wrong there for several decades and cannot stop talking loudly about it: Widespread corruption, inept Greek bureaucracy, lack of land registration and, last but not least, massive tax evasion. All these “experts” know perfectly well that Greece will never function in a rational manner and that it will continue to make trouble in Europe due to all these deficiencies.
I have given economic policy advice to foreign governments for half of my professional career. In doing so, I always followed a simple maxim: do not address issues that you do not understand better than the people you address. Also, refrain yourself from dealing with matters that no one comprehends except the insiders of the country in question. When one obeys this rule, it is possible to have open, intelligent discussions with officials without being regarded as a foreigner who thinks he knows everything and who is only here to lecture everybody else. Most often, I choose to present facts about my own country and explain their macroeconomic relevance in terms of the most important relationships to foreign leaders and leave it to them to draw conclusions for their own country. To act like this is a matter of intellectual and political integrity. Essentially, most of the time, I try to open the eyes of politicians to the consequences of their own world views, demonstrating that they believe in a particular theoretical system, which may not be the only feasible one. I tell them that there are always alternatives and that superior policy choices are possible.
If one proceeds like this (Costas Lapavitsas and me did exactly this in our latest book which has just been published by VERSO), then there are only a few things to say about Greece. The first and most important thing is to understand that the euro crisis is not primarily about Greece at all. The real task at hand is to explain to all sides – and not solely to the Greeks – what a monetary union really is, what it entails and what the necessary conditions are for it to function properly. The truth about the matter is that fundamental policy mistakes have been made in Greece. However, the Germans have no right to lecture the Greeks as they have violated the rules of the Monetary Union more than Greece. Greece, just as any other country, has to live according to its own means, which means to adapt its wages to its own level of productivity. Wage growth should not exceed productivity growth plus the original inflation target, which has been set by the European Central Bank (ECB) at two per cent. But, and this is essential, countries should also not live below their means, which means that wage growth should not lag productivity growth. Greece has done the former, Germany has done the latter and the jury is no longer out on who has brought more damage to its trading partners. Germany has systematically and seriously undercut its trading partners by putting political pressure on wages and – due to its superior size – has caused large trade imbalances within the union.
An issue of principle is involved here: how a sovereign country achieves productivity growth and in which way it redistributes its social product are decisions that have to be made by the people of that country and not by any others. Of course, this goes beyond policy. Productivity covers almost all areas of life. It is an expression of our lifestyle, our general view of life, and the things we desire. The people of individual countries have to be able to decide for themselves what it is that they want and what they find important. Foreign experts can advise, but they have no mandate to dictate, or, at least, they should not do so. To make this very clear in terms of a generally shared prejudice: if people from Southern Europe generally prefer a more easy-going lifestyle while enjoying their nice weather, so be it. Hard working Northerners have no reason to complain as long as everyone adjusts correctly to its own productivity. We have decided to live in a monetary union, not in a European workhouse and not in a standardized European state.
What does it mean that countries have to adjust to their own productivity? It means that each and every member state has to live within its means. This is crucial. If all countries abide by this rule, the most important condition for stability within a monetary union or a fixed exchange rate system is in force as there can be no major trade imbalances. If monetary policy is implemented in a growth friendly way in such an environment, the most important macroeconomic conditions for economic growth within a monetary union have been met – without much intervention in the affairs of respective countries.
All that remains is the area of fiscal policy, which is much less important. Here you have to set up rules to avoid massive deficits in national accounts. The market does not regulate the divergence of government expenditure on the basis of interest rate differentials between government bonds. Even a no-bail-out clause (i.e. the stipulation that no state is obliged to help another state in the case of ‘excessive government deficits’) is quite reasonable as long as all members accept the entire set of rules. Unfortunately, this has never been the case within the EMU. From the outset, it was Germany that undermined the necessary adjustments of wages to national productivity within the union. If serious trade imbalances do not occur, even big differences in countries’ current public deficits and absolute public debt levels can be managed, as the case of Belgium proves. Belgium had a much higher public debt ratio than either Germany or France, long before the monetary union came into existence. It was nonetheless able to hold onto fixed exchange rates because, unlike Italy, where government debt was also high, the Belgian government allowed no labour costs and inflation differences in relation to Germany and France.
Matters of taxation and public spending are sovereign national decisions made by democratically elected governments. We have to respect such choices. We should refrain from giving advice to the new Greek government on issues such as the taxation of high incomes, proposals to increase wages for low pay workers and social welfare payments for unemployed people. Frankly speaking, it is not our business. What needs to be addressed internationally, or at European level, are proposals to fight tax evasion and plans to curtail ‘tax competition’ between countries. Tax competition became something of a normal practice in Europe during the last twenty years although it is unacceptable. Why do we not discuss and solve really important matters such as unequivocally connecting tax liability to citizenship? Why do we not discuss proposals for accomplishing the payment of appropriate taxes where the production and sale of goods and services take place?
Given the dire situation that Europe finds itself in at the moment, it is necessary that all countries have sufficient fiscal space to stimulate their economic growth after the means of the ECB are nearly exhausted. This requires immediate correction of the Stability and Growth Pact, no more and no less. All countries – Germany first and foremost – must borrow and spend money on a large scale in the capital market.
According to SYRIZA’s state budget estimates, Greece needs 10 to 20 billion euro this year in order to correct the most serious errors made by the Troika in recent years. The new government has the intention to ease these hardships and create an economic turnaround. This is indeed an international problem because the country received support in the past and will need more in the future. Since interest rates are currently low, no substantial repayments can be achieved through debt relief. The dogmatic controversy over the question whether debt forgiveness is possible or not is basically meaningless. Those who do not want debt forgiveness, a position for which there are good arguments, can agree to reschedule government debt owed to governments so that everyone can save face.
In ‘Against the Troika’ Costas Lapavitsas and I dedicated a chapter to the idea that flows are more important than stocks. The obsession with debt restructuring obstructs the realisation that, regardless of the level of debt, economic growth has to be stimulated. Otherwise the debt problem is unsolvable. One cannot expect debtor countries to pay back their debt if at the same time we force policies upon them, which make repaying their debt impossible. Everyone knows this, so let us stop demanding the impossible. The senseless Greek debt relief from 2012 should be a lesson to all. It is also clear that the stimulation of economic growth will not work in the long turn if price relationships (which are based on differentials in labour costs) within the European Monetary Union continue to evolve to the detriment of Greece (and other Southern European countries).
P.S. Costas Lapavitsas was elected Member of Parliament for SYRIZA on January 25th.
Translation by W. Denayer