The Minister for Weblogs

So the Dutch Finance Minister – Gerrit Zalm – has a weblog. Not understanding too much Dutch it’s hard to make a very thorough assesment, although it does look rather austere. However, unlike Howard Dean and Wes Clark, it does appear that he is posting himself. But it is not for the fact that he has a weblog that Finance Minister Zalm is making headlines at the moment. Rather it is for some of his statements on the French government and the stability pact. According to Frans he announced last week “that he gave up trying to get the European Commission to act against France’s repeated breaching of the rules”. Now Frans understandably is scratching his head trying to determine what this might mean.

Not being particularly clued-in on Dutch political rhetoric it is hard to judge. But it is clear that this wound is open, and is not disappearing. I don’t doubt that even though many are talking of a ‘constitutional crisis’, some compromise or other will be put together. My bigger question is just how much farther down this road can you go before things do finally get serious. The Netherlands is, as I have previously suggested, the ‘odd man out’ in the euro group. You cannot keep raising the temperature a notch on each occasion before something finally gives. So what we perhaps ought to be asking ourselves, is how long have we got left before push really does come to shove? This week battle is to be joined, and according to the Financial Times:

Germany and France will on Monday night join forces in a last-ditch legal attempt to save themselves from the full impact of the EU’s budget rules…………….

German government lawyers claim it would be possible to strike a deal where Berlin and Paris agreed to take further measures if the Commission promised not to make binding policy recommendations. “The Commission must ask itself whether it wants to knowingly wreck the stability pact through an excessively rigid interpretation of the rules,” said a German government official. The legality of the move was being explored over the weekend before a two-day meeting of EU finance ministers that begins on Monday night in Brussels. Commission officials say that if the German move were successful, although illegal, it would inflict incalculable damage to the stability pact. “We have probably never been in such a serious situation,” one said.

While EU Business reminds us that it is not only Zalm who is raising the temperature:

Swedish Finance Minister Bosse Ringholm slammed France Thursday for its excessive public deficit, saying the situation Paris was in was not exceptional. “France is not in an exceptional situation, France is in a situation for which it is itself responsible,” the TT news agency quoted Ringholm as saying after a meeting of the parliament’s European affairs commission.

France faces a vote Tuesday by European Union economic and finance ministers on a European Commission recommendation that Paris cut its structural deficit by six billion euros (seven billion dollars) in 2004 in a bid to get its deficit under 3.0 percent of gross domestic product (GDP) “France is in a situation that it should be able to resolve rather easily. They could postpone (planned) tax cuts,” the Swedish finance minister said. Along with Germany, France is on course to breach the EU Stability and Growth Pact’s ceiling on public deficits — 3.0 percent of GDP — for three years running next year. Ringholm and Swedish Prime Minister Goeran Person have repeatedly criticized Paris for lax fiscal policies that have also been cited as one reason Swedes rejected the single European currency in a September 15 referendum.

Stockholm forecasts a public surplus equivalent to 0.5 percent of GDP in 2004, following a 0.2-percent surplus this year. Earlier Thursday, Dutch Finance Minister Gerrit Zalm defended the stability pact, warning of a crisis if countries flout rules for budgetary rigor contained in the 1997 agreement. “If it were the case that (France and Germany) ignored the pact and the Maastricht treaty… we will have a serious constitutional crisis,” Zalm told As finance minister Zalm pushed through highly unpopular measures such as spending cuts on healthcare, pensions and social security to meet the EU rules. “When it becomes evident that you are not complying with international agreements, it begs the question what the EU is worth,” Zalm warned.

24 thoughts on “The Minister for Weblogs

  1. I cut-and-paste from an earlier posting of mine on this subject to Brad DeLong’s blog:

    Brad DeLong asks bemusedly why the Eurozone is so fixated on the Stability Pact.

    This is my attempt at an answer, which I put forth there in the comment section there:

    The Dutch economics minster, Gerrit Zalm, is a hard-line supporter of the thinking behind the stability pact. He’s been minister in the last three Dutch administrations, and he is a firm believer in the adage “when times are good, spend; when times are bad, save”, much to the chagrin of Dutch economists who feel the Dutch economy is badly in need of a stimulus in order to kickstart local demand.

    However, some Dutch commentators (e.g. Gerbert van Loenen, writing in the daily “Trouw”) feel that there is a certain logic to Zalm’s behaviour: the idea is that by hammering through salary freezes and lowering public spending, the Netherlands will improve its competivity and lower its national debt, and be well prepared to ride the coattails of pan-European growth when its larger neighbours France and Germany resort to profligate public spending and thus stimulate general European demand.

    Having survived the recession with public finances largely intact, and businesses lean and mean, and enjoying the demand generated by other governments that have subsequently put themselves in deeper debt, Dutch politicians can then engage in the sanctimonious finger-wagging they are generally so fond of.

    In the same vein, I suspect, most of the other supporters of the stability pact are hoping for roughly the same thing, albeit on a somewhat larger scale: they want to get leaner and meaner, and keep deficits on a leash, all the while hoping that other countries (read the US, South-East Asia, maybe China) work hard at getting global demand back up and running.

    Remember, unpleasant as unemployment may be, as far as being unemployed goes Europeans generally have a much higher pain threshold than Americans in general, due I think to their better (YMMV) social security safety nets and also due to the fact that they have more first-hand experience of unemployment in past decades. The urgency I see in Anglosphere economists vis-a-vis the danger of deflation is simply not present to the same degree in Europe.

    I would also like to point out that far too many non-EU commentators regard the EU as a unified bloc, whose member states have a generally European outlook. This is not the case: EU solidarity is IMHO somewhat less than that within a confederation, and member states are quite prepared to screw the general EU interest in favour of their own special interests, and this goes for each and every single member. Free-riding is a much bigger problem within the current framework of the EU than it is within, say, the US, where each state acknowledges, and is beholden to, the federal interest.

    I add that I have seen little approval of Zalm’s policies among Dutch economists; most view his crusade with bemusement as far as I can see in the public dailies.

    His blog offers little insight: it’s more of a “Had lunch at 1, then met with the Prime Minister” type of thing.

  2. I must add though, that if Zalm secretly wants to profit from increased EU demand, he’s pushing his luck here. He might actually succeed in breaching Germany’s hull, in which case both the Netherlands and Germany will cheerfully sink together.

    It could also be that he really believes his own sermons, which would make him kind of the exact opposite of G.W. Bush: a balanced budget whatever the cost.

  3. I don’t follow the French economy too closely, so please correct me if my impressions are wrong, but my impression was that the economic weakness that the U.S. has been undergoing was also felt in Europe.

    Now, If I understand Keynesianism, times of economic weakness are when governments are *supposed to* turn on the debt/deficit spigot.

    (although Bush-Keynesianism is a bust; there’s no benefit to sluicing it (mostly) towards those who don’t need it)

    So are the Dutch saying that the E.U. stability pact trumps reasonable economic policy ?

  4. Nice posts Elliott. I think I learnt something, especially about the Netherlands.

    “turn on the debt/deficit spigot”

    The problem is Patrick, they already have been on rather. The point is US deficit spending (this time round) is a relatively late phenomenon, whereas many EU governments have been running deficits before they hit the problem.

    There are two sides to the argument here, the one you are advancing, and the one being defended by Solbes and the ECB about credibility and the euro.

    I am with the latter group until there is a serious alternative proposal on the table, discussed, signed and sealed. And part of any re-writing would involve taking into account the demographic situation and looming liabilities.

    Put simply, to be coherent you can’t condemn Bush’s fiscal irresponsibility in the US, while applauding the same thing here in Europe.

    I am deeply sympathetic to the idea that we need a new approach here in Europe, but that new approach should not consist in simply applying more of the old ‘failed’ medicine.

  5. To say nothing of countering the perception that EU rules are only for small countries to follow…

    (Anyone here have figures on countries’ implementation of EU directives and legislation? I’m willing to bet a handful of euros that at least one of the candidate countries has a better record implementing the acquis than at least one of the present members.)

  6. Edward,
    Except for the one year of surplus in 2000, the U.S. Federal Government has been running a deficit for decades. And arguably would not have would not have been in surplus in 2000 without the capital gains revenue brought in by the tech-stock bubble. So no, structural deficits are not a new phenomenom to the U.S. government.

    But the Clinton administration’s economic policy was keynesian in that it was actively working on reducing the deficit while times were good.

    The biggest Keynesian aspect of the Bush administration’s economic, er, activities has been the war in Iraq. To wit, see the past couple quarters’ GDP numbers.

    More to the point, How are France and Germany using their deficits ?

    Is it tax cuts for the rich, war, propping up the Iraqi occupation, or is it brought on by a decrease in revenue because of recession, tax cuts designed to stimulate spending in those with a high marginal propensity to consume, an increase in public works designed to stimulate the economy, or what ?

  7. Doug,
    My understanding, please correct me if I’m wrong, was that the deficit limit had originally been a sop to Italian ministers who desperately wanted a tool to bring Italian deficits under control rather than a dogmatic requirement for E.U. stability.

    How badly were other small E.U. countries pressured to meet the deficit target ?

  8. Patrick, a bit of detail.

    “In the late 1990s budget-tightening measures?aided by the U.S. economic boom?reduced the deficit and led to two consecutive federal budget surpluses (1998?99); back-to-back surpluses had last occurred in 1956?57. In 1998, President Clinton presented to Congress a balanced federal budget, the first such budget since 1969. A balanced budget was maintained through late 2001, but tax cuts, the cost of President Bush’s ?war on terrorism,? increased defense and other spending, and the effects of an economic recession were expected to produce a deficit again beginning with the 2002 budget.”
    Source: encyclopedia

    The point is most of the eurozone governments did not use the boom to get the finances under control as Rubin and Clinton did in the US, this is why the problem is so out of control now.

    The reason for the budget-tightening measures: ageing and the coming ‘boomer retirement’ in about 10 years. Whoever doesn’t prepare for this is mad. This is what the row is all about with Bush.

    “deficit limit had originally been a sop to Italian ministers”

    I’m afraid I think your wrong again Patrick, it was a ‘sop’ to the financial markets and a test of seriousness on the part of the euro member states, a test they seem to be failing miserably. If this isn’t being felt in the markets yet, it is because we have a highly abnormal situation, where the dollar wants to come down, and the renminbi isn’t ready to come up. The situation is characterised by inertia more than anything else. But don’t imagine that this means we can’t see fireworks later.

    I’m a Keynesian in the spirit of Keynes, which means you don’t wheel out tired old formulas in new situations. This was exactly what Keynes was fighting *against* in the 20’s.

    In India, with a lot of young people, and a splendid future with a lot of growth in front I disagree with the IMF and am arguing in favour of a much more flexible attitude to the debt (but not to sustain corruption). They can burn off the debt as they grow. This is not the fiscal situation of the EU.

  9. Quickly, as the discussion was long and wearisome at the time, unless you were investing in the bond market, in which case you stood to make a bundle on the convergence play. (Convergence is probably on again in the candidate countries, though the time frame is more open. But that’s another story.)

    Anyway, there’s nothing magic about any of the specific numbers in the Maastricht criteria. The magic is that the governments at the time agreed to them and commited their countries to observing them also into the forseeable future. (The nitty gritty is in Maastricht Article 109, mostly 109(j).) The danger now is that that commitment seems to be wavering in the two largest EMU countries. The question is whether the states will be bound by imperfect rules (perfect rules for managing industrialized economies not being available at the moment) or no rules. That’s a political question, which is fine because EMU was always a political project with financial and economic components, and it is being resolved at the political level.

    At the time of the negotiations, the greatest danger to macro stability was seen in inflation. Given that in most mainstream economic theory a deficit that amounts to 7 to 9 percent of GDP is thought to be a sign of serious impending inflation, the ministers who negotiated the stability pact reasoned that they wanted to keep a great deal of daylight between eurozone economies and potential inflation. Hence 3 percent, a figure out of the warning zone’s warning zone, if you will. (Actual current inflation was addressed under another criterion.)

    Italy was the object of considerable concern in the runup to the euro. On the one hand, it had the loosest public finances of a major EU economy (Belgium’s debt-to-GDP ratio of 120 percent was also a concern, but it’s a smaller economy.) Fortunately, Italy also had probably the only public that would swallow a ‘eurotax’ and other austerity measures for the presitge of being a founding euro country. The drive for the euro allowed, or compelled, Italian governments to do things they should have been doing anyway while blunting negative public reaction. I’d call it more of a vehicle than a sop.

    The smaller countries were subject to various amounts of pressure, more from bond markets than from EU institutions. The Belgian debt was one issue. Spanish inflation was an issue in a medium-sized economy. There were worries that the an interest rate appropriate for Germany would stoke inflation in Ireland; these have been born out to an extent. If anyone’s *really* interested, I can dig through my 96-98 archive to see what else the worries were.

    The long and the short of is that the political commitment to the criteria is being tested in the euro zone’s two largest members, and this is a very important issue indeed.

  10. Here’s an interview with Zalm that gives a pretty good insight into how he thinks. Source: (registration required). Sorry for the hasty translation: all errors are mine.

    Zalm set on a collision course

    By our correspondent Frans Boogaard

    If necessary, the Netherlands will take France and Germany to court to get them to balance their books or pay a billion euro fine. In an interview with this newspaper,
    Zalm insisted that he wanted to prevent at all costs huge deficits undermining the euro, and raising interest in countries, such as the Netherlands, which stick to the rules.

    His most prominent weapon is the Sability Pact, which binds all zountries in the eurozone to a maximum deficit of 3 percent. He has no time for suggestions from Germany, France, and EU head Italy, to temporarily ease the rules. “Nonsense.”

    According to Zalm, the six year old Pact is primarily meant to keep countries fiscally in line during hard times. “Only, we never foresaw that the two largest countries would simultaeneously break the Pact three consecutive years.” The consequences of permanent high deficits in the two largest EU economies is disastrous, according to Zalm. “In the long term for the value of the euro, but in the short term on the financial and capital market interest. The interest on national debt goes up, businesses find it more difficult to invest, and house owners will experience a rise in mortgage interest.”

    It is doubtful whether Zalm will have many allies. “There are many of us, but it’s the biggest two who have broken the norm. The third year is crucial: what will they do in 2004?”

    FB: Demand more leeway?
    GZ:”Not if I can help it. I’ve never been a fan of the case made for ‘gouvernement ?conomique’.Especially if it is the case that France gets its own way and does not give a fig about the others.”

    FB: Premier Raffarin says: “My first priority is jobs, and not the calculations and mathematical problems some government or other far away wishes to trifle us with.”
    GZ:”My answer is simple: you can’t buy jobs on credit. Our problems are not caused by lack of money, but by structural reforms in the job and social market. You can’t solve that by living beyond your means, or by borrowing on taxes. I thought we were finally rid of all those Keynesian theories, but France and Germany apparently not.”

    FB: Is Raffarin being provocative?
    GZ: “He appears to think that we’ve never had to consider mediocre economies. We have considered it, extensively. Two numbers play a part in this. You have an extraordinary situation when the economy shrinks by more than 2 percent. Countries have promised never to call upon this clausule if the shrinkage is less than three-quarters of a percent. Both France and Germany have experienced shrinkages that were less than three-quarters of a percent. Chirac and Kohl agreed to all this, eyes wide open, with full knowledge of what they were signing on to. If Raffarin denies this, that’s nonsense.”

    FB: A temporary suspension, as Chirac asks, is impossible?
    GZ: “No. They’ve exceeded the norm two years in a row. ‘Temporary suspension’ probably means till 2050. I think that rules are there especially for tough times.”

    FB: Italy is willing to allow a 4 percent deficit if structural reforms in the social security system are carried out.
    GZ: “These reforms have to take place anyway, so I don’t like that proposal. In addition: what *are* social reforms? I know what they are, but some people will present *anything* as a structural reform. Reforms ought to be carried out on their own merit, you don’t need a bribe for them. Luckily, the Pact can only be changed unanimously.”

    FB: The big countries are asking for slack: for defence, infrastructure, education, R&D…
    GZ: “Nonsense. These are worthwhile goals, of course, but they don’t have to be financed by deficits. Don’t we all have to make priorities? More money for education means less money elsewhere.”

    FB: Your Italian colleague Tremonti predicts social conflict.
    GZ: “Nobody’s going to cheer tough measures, but letting the place run to seed is no alternative. We did that in the ’70s and we paid dearly for it. Never again, as far as I’m concerned. Quick remedies are much better.”

    FB: How much can you count on the Commission? Commission chairman Prodi has called the past “rigid”
    GZ: The Commission knows what it has to do. That’s laid down in stone. In addition, member countries can go to the European Court if the Commission does not do the job its supposed to. We will use every possibility.

    FB: Do you really think Germany and France will get fined billions? Raffarin says “No way.”
    GZ: “I’m going to do my very best. And Raffarin is not the only one who gets to decide things, fortunately.”

    FB: So the second majority will come?
    GZ: “We’ll see. I don’t like making predictions, becaus e they won’t affect my determination anyway. Even if I think we won’t succeed, it’s no reason for me to shut up.”

    FB: Chirac and Shroeder can cover each other’s backs. This is common in Europe, isn’t it?
    GZ: “Not in this case. That would be breaking the law, leaders simply can’t do that.”

    FB: Isn’t it a legal flaw of the Pact that countries get to vote themselves?
    GZ: “The country under scrutiny doesn’t vote, but ideally you would prevent any country with an excessive deficit from voting, so that violators can cover each other’s backs. In a new Pact I would like to have these loopholes closed. We never imagined that two countries at the same time – and these two, to make things worse! – would break the Pact three years in a row. I always saw the Pact as a last resort, one we would never have to use. Because I always though countries would be smart enough to figure out that if you have three years to correct a deficit, you use them.”

    FB: Are you nervous about the meeting, are you priming yourself?
    GZ: “No. I’m going to speak plainly and clearly; that ought to be enough.”

  11. “I thought we were finally rid of all those Keynesian theories, but France and Germany apparently not.”

    So Apparently, GZ didn’t get the memo from Richard Nixon about how we are all Keynesians now.

  12. Edward,
    “Put simply, to be coherent you can’t condemn Bush’s fiscal irresponsibility in the US, while applauding the same thing here in Europe.”

    I would like to know the scope of the ‘irresponsibility’. Zalm’s idea of fiscal irresponsibility seems to include what can be considered sound economic policy.

    Whereas Bush’s fiscal irresponsibility cannot,
    because there we’re not talking about a short-term deficit meant to counteract a recession but a drastic long-term reduction in revenue, most of which has yet to be phased in.

  13. “So are the Dutch saying that the E.U. stability pact trumps reasonable economic policy ?”
    A vast majority in parliament seems to act accordingly. Out of fear to be accused of irresponsible spending all opposition parties take the SGP as it is! When it comes to political parties the most serious comments on it comes from Zalm’s own party!

    Well, I really think we’re getting to the heart of the matter now.

    GZALM:”My answer is simple: you can’t buy jobs on credit. Our problems are not caused by lack of money, but by structural reforms in the job and social market. You can’t solve that by living beyond your means, or by borrowing on taxes. I thought we were finally rid of all those Keynesian theories, but France and Germany apparently not.”

    AND DOUG: “At the time of the negotiations, the greatest danger to macro stability was seen in inflation. Given that in most mainstream economic theory a deficit that amounts to 7 to 9 percent of GDP is thought to be a sign of serious impending inflation, the ministers who negotiated the stability pact reasoned that they wanted to keep a great deal of daylight between eurozone economies and potential inflation. Hence 3 percent, a figure out of the warning zone’s warning zone, if you will. (Actual current inflation was addressed under another criterion.)”

    AND EDWARD: “I’m a Keynesian in the spirit of Keynes, which means you don’t wheel out tired old formulas in new situations. This was exactly what Keynes was fighting *against* in the 20’s.
    In India, with a lot of young people, and a splendid future with a lot of growth in front I disagree with the IMF and am arguing in favor of a much more flexible attitude to the debt (but not to sustain corruption). They can burn off the debt as they grow. This is not the fiscal situation of the EU”.

    What inflation levels are acceptable is a base of harsh criticism of Rogov and Brad deLong towards Stiglitz too, I understood.
    For I wrote a reaction on a review of Stiglitz book Globalization and its discontent, that might be interesting to quote here:

    “…Thirdly and most important to me however was what I want to call the rehabilitation of John Maynard Keynes.
    Already on page 28 (Dutch version) where Stiglitz described the Asian Development Bank and the “Asian model” as opposed to the “Washington Consensus” I suddenly realized that at least in the Netherlands (but I am afraid in all of Western Europe) this Asian model has had very limited attention. In reaction to market-fundamentalists claiming that less government-involvement with economic affairs implies stronger economic growth, I refer to the role of the governments of the Asian tigers (“NIC’s) for many years now, but did not perceive this role as part of an Asian model.
    It’s a different classification of course, but it made me think of the “dichotomy” of the Rhineland- vs Anglo-Saxon-economies immediately: this dichotomy served for many years as some kind of paradigm; fixing the debate to a large extend to a small number of issues. A fixation that in my opinion reflects the Dutch and West-European fixation on the political relation with the USA. A fixation that somehow hides important aspects of the macro-economical relation between the USA and (western) Europe.
    I read about Bush’ “debt-increase-law” and on my own website I even made a link between the astonishing plans of the Bush regime to enlarge the national debt by hundreds of billions dollars on one hand and the rigid approach of the ECB vis-?-vis inflation-targets and the stability-pact on the other (Williamson mentions this too in his review of Stiglitz; judging the ECB more extreme then the IMF by the way), but failed to see the link with Keynes.
    Stiglitz makes this link. He makes this link in a most convincing way: throughout the book he refers to knowledge now available in the past 60 or 70 years about how to handle economic crises.
    To me, -and I am afraid that in this aspect I am somehow representative for a lot of politicians in the Netherlands-, Keynesian economical policy had lost a great part of its significance (especially to countries like the Netherlands) because of the “globalization”. In this way I did ignore the stature of Keynes. This great man not only recognized the impossibility of “Keynesian” policy for just one (smaller) nation: he worked hard and successfully to face this challenge. Most important in this effort being the stabilizing objectives for the IMF”

    AND: “I agree… that the main problem with the IMF is that they grew away from their core business: economic stabilization. For me however the unwillingness to learn from mistakes and the fact that the Funds practices in effect the exact opposite of its original objectives is reason to choose for abolition of the Fund: the debate on economic stabilization should be held again. A political and economical debate that should include some kind of consensus on the way deal with the current crises and the need for more stable currency markets”
    Read the whole thing here: ; You might find other articles of interest there. For example on the attitude of Putin and the leaders of Muslim countries towards petrodollars vs petroeuros: it is suggested that converting petrodollars into petroeuros can and should be seen as a “declaration of monetary war”.
    A horrific scenario; we really need discussion and negotiations instead. Hope the next US-president is more open to that.

  14. “there we’re not talking about a short-term deficit”

    Patrick just quickly because I’m running, look at what France and Germany are offering in return for more spending now: even more long term structural tightening. So this issue is very complex, as Doug says the political credibility is the number one item, but be careful not to swallow a bit of short term pleasure for an even bigger dose of long-term pain.

  15. Edward,
    you’ll need to offer up some specifics as to what you see as long-term problematic. Keynesianism is about spending/catalysing the economy when times are bad, *and* tightening up when the economy improves, to dampen the extremes of the business cycle.

    I admit I haven’t followed France’s situation all that closely, but I was under the impression Raffarin was embattled domestically precisely because he was also pushing for necessary but unpopular long-term reforms.

  16. 1) The rate of change with which countries have moved into deficit is appreciably larger in the U.S. now than in Europe.
    2) The German government has reduced the numbers of federal employees at a rate of 1% per year for several years in a row, whereas the Bush administration is creating new jobs for bureaucrats. The emphasis on investment is definitely more pronounced in Europe than in the U.S.
    3) If demographic concerns are to be factored in, then the EU should be given more leeway than the U.S. Look at Japan, and you might come to the conclusion that the relative deficit ratios among the largest economies are about right – just excepting the elements of a militarized and bureaucratized version of Keynesianism in Bush?s policies.
    4) A balanced budget does nothing to directly support pension benefits under either a paygo or a “fully-funded” system. The third alternative – a system like the Danish one (or a composite variation thereof, like that in Switzerland) – relies on taxes to pay for benefits, but also clearly legitimizes the significantly higher tax rates the Danes pay.
    5) Government borrowing costs are determined by the interest rate – which is set by the issuer of the currency, not the market. Both the current Japanese and the historical U.S. experience clearly demonstrate that the interest rate can be stabilized at very low levels for very long times. Accepting Edward?s worst-case scenario (which he claims is guaranteed to be what reality will look like without adducing any evidence) – namely that productivity advances and improving participation ratios will not compensate for worsening dependency ratios (although Edward paradoxically also insists that “things get faster faster”; apparently only productivity doesn?t), a demographic crisis of the sort Edward envisions could be a legitimate reason for following a long-term low-interest-rate policy (since it would compensate for a one-off generational readjustment).
    6) Currently many New Keynesians underestimate both the potential for and the consequences of higher inflation, esp. in the U.S. This year Brad DeLong wrote that he thought 10% inflation would be an o.k. price to pay for escaping from the clutches of deflation. On the other hand they make exaggerated claims about the inflation-curbing effects of higher interest rates. Nowadays there is a saver for every borrower. How was the cost-push inflation of the 1970s subdued? It was caused by rising energy costs and subsequent fruitless attempts by labour unions to ensure nominal wage rises would be equal to real rises. Instead of taxing energy use, the U.S. decided to attract foreign capital and squeeze the domestic private sector by instituting a high-interest-rate policy. As a consequence, outsourcing of production emerged as a major problem-solving strategy for the U.S. private sector. Subsequent bouts of deficit spending relieved the pressure on the private sector, whereas Clinton?s balanced budget announced the crash to come and further deepened the private sector?s emphasis on outsourcing production. This development can be characterised as a long-term trend of U.S. inflation exports – my preference – or as an American inclination for importing productivity (Stephen Roach?s version). The import-of-producivity variant, however, might entail the misunderstanding that foreign labour productivity is higher, whereas, in fact, we have to look at capital and energy productivity to explain the observable phenomena. In summa: a mature, financially highly developed economy characterised by a large public sector cannot exclusively or predominantly rely on interest-rate policy to fight inflation. Its elites then either adopt ultra-conservative policies in order to cut the public sector in half (the agenda Krugman senses to be the long-run goal of U.S. conservatives), or they recognize that government spending reductions (at times of significant actual inflation) and tax policies geared towards rewarding efficient resource usage are called for (which would have been the correct response to the stagflation scenario of the 70s, when the Keynesians committed the error of continuing to support inflationary spending and falling back on wage and price control regimes to mitigate the effects.
    7) Since money is endogenous, the only way to ensure that pension claims will be met in the future is to put people to work now. The problem of economic efficiency can be addressed by avoiding overspending on public works and emphasizing subsidies to jumpstart new industries and technologies, preferably concentrating on investments that private industry wouldn?t have initiated. Even though Boeing has just landed a big deal in China, we should not forget that this year Airbus surpassed Boeing for the first time. Recent evidence also shows that the Pentagon has been subsidising Boeing to the tune of 5-6$ billion – invalidating any claims that Airbus? success is in reality just a loss to the European taxpayer inflicted by inefficient European aircraft manufacturers that are being shielded from superior competition. The EU investment programme recently unveiled thus passes the tests for what constitutes a sensible policy proposal.
    8) Unfortunately the ECB seems to think the best Europe can do is to retrace the steps the U.S. took during the last 20 years of economic development. Since the political decision-making process in Europe is much more fragile than that of the ECB and European politicians tend to have good intentions but usually lack arguments and information to successfully confront the monetarist worldview expounded by the unelected officials at the bank, they will probably have to succumb to the tide they cannot stem. Since this is not a short-term prognostication, I would like to point out that none of this would prevent Europe from having the same kind of foreign-financed Ponzi boom the U.S. experienced under Clinton. Given current ideological preoccupations, however, massive outsourcing to Asia (without any hope of ever closing the ensuing trade gaps again) would seem to be as much of a necessary outcome as it was in the U.S.
    9) I am not at all arguing against free trade. I am arguing against monetarist and Austrian ideology and their offshoots in New Keynesianism. Upholding unsustainable interest-rate and/or exchange-rate-regime policies is in the long run detrimental rather than conducive to free trade. Creating a nominal comparative advantage for your country that is not based on production efficiency and resource availability never translates into a real comparative advantage: it only causes a financialization of the economy (witness the U.S.: during the last few decades the share of profits stemming from the finance sector quadrupled to 40% of the total, meaning that domestic industrial investment has become a very unattractive proposition. This development echoes that of Britain during the earlier globalization cycle that peaked in the first half of the 20th century.)
    10) The change in the political climate in the U.S. towards right-wing-sentiment will entail a switch toward protectionism. The manufacturing story is not going to be repeated in the services arena (putting India at a relative disadvantage vis-?-vis China). When someone like Andy Grove – one of the world?s most successful high-tech managers and an immigrant from Hungary to boot – voices indirect support for restricting job exports (or at least legitimizes it as as the logical thing for government to do), the free-trade agenda is very much in danger of being abandoned. A large part of the blame rests on the shoulders of those who always considered the high-dollar-policy sacrosanct since it put the low-hanging fruit of short-term economic expansion within such easy reach.
    11) Many people insist that we will never again be subjected to the beggar-thy-neighbour policies that initiated the race-to-the-bottom also known under the name “Great Depression” (Yes, it was initially caused by a stock crash – which itself is the result of everybody believing he can pass off overvalued shares to his neighbour -, but kept in motion by Smoot-Hawley which slapped tariffs on imports without taking account of the fact that the price to be paid was a collapse of exports at a time when the U.S. had a huge surplus – thus lots more jobs to lose by export reductions than it could gain by import substitution. In a few years, the Chinese could presumably cause the same kind of disruption by abolishing tax rebates for their exporters in one go.) Apparently it has been preordained that we are not collectively dumb enough to ever again succumb to the temptations of such policies. However, current news dispel that illusion. Putin has just given an example of the logic underlying negative feedbacks: “Speaking about nuclear security issues, Mr. Putin said that all nuclear nations were enhancing their potential, and Russia would do the same.”
    Everybody does it, so we got to get into the racket, too, right? The French concur and have just decided to direct their Force de Frappe at the “rogue states”. (In all fairness, it has to be acknowledged that the first major power taking the route down this particular slippery slope after the 1989 peace dividend had been exhausted was Bush?s America. After all, Putin continued to state that “force can only be used with the sanction of the UN Security Council.”)

  17. Woof. Frans and Joerg, I think you are setting an agenda for debate which will last us quite a way into the future. Remembering that this is not an economics blog, I will conveniently shy away from the major topics now (and come back to them one by one in subsequent posts). However:

    ‘Recent evidence also shows that the Pentagon has been subsidising Boeing to the tune of 5-6$ billion’

    So in the end the Chinese are even cleverer than I thought, they are keeping Washington happy by picking up a share of the subsidy.

    ‘although Edward paradoxically also insists that “things get faster faster”; apparently only productivity doesn?t’

    I think this is a fair representation of my position: the ever more rapid pace of technological change means we get computers which are a lot more powerful for the same price or cheaper, but this doesn’t necessarily mean that making computers gets any more profitable – everything depends on the income share which goes to computers. Since Joerg and I have been arguing the toss over this for months now, I won’t go further. One day……….

  18. My newspaper (since I blog I read the economics section with much more interest) reported that Galileo (the European GPS-system) is going to be supported by both China and India with 300 million Euro !

    On the success of European technology: if I remember well the last decades the European space-program has been very successful.

  19. Before this one finally goes to bed, I’d just like to thank Elliott for his Zalm translation which has contributed a lot to making this an informed discussion.

    Now being lead off-topic by Frans, check this ChinaBiz piece out:

    “EADS, the Franco-German aerospace group that owns 80 per cent of Airbus, plans to invest up to US$ 35 million to buy five per cent of AviChina Industry & Technology Company, said the Financial Times on Tuesday. Less than a week after putting its first man into space, China launched a satellite on Tuesday jointly developed with Brazil to study the Earth’s surface, state press reported.

    The European Aeronautic Defence and Space Company, EADS and AviChina, a unit of China Aviation Industry Corporation II (Avic II), the state-owned military conglomerate and the largest maker of small cars and helicopters in the country, agreed on a strategic co-operation that involves the joint development, manufacturing and modernization of helicopters, regional aircraft and training aircraft.

    The deal comes ahead of AviChina’s initial public offering this month under which the company plans to raise up to up to US$ 242 million through the sale of 35 per cent of its enlarged share capital. The sale, the first attempt by Avic II to spin off one of its units in Hong Kong, promises to test international investors’ appetite for companies linked to China’s military, which has been criticised for its human rights record and has occasionally clashed with the US over Taiwan, said the financial Times on Tuesday.”

    Obviously both China and India present great opportunities for Europe, they are also going to present great challenges: it is important to bear both parts in mind.

  20. Since Edward correctly accuses me of going off-topic (although the issues are all related through the subject of worldwide economic stability and growth…) I’ll make an attempt to come back to the topic.

    Remarkably short after his announcement that he gave up trying to get the European commission to act against France’s repeated breaching of the rules of the Stability and Growth Pact Dutch finance minister Zalm had some row with German finance minister Eichel on the subject. Eichel told Zalm to restrain a little bit: in the past 3 years the Netherlands went from a 1.5% surplus to a 2.7% deficit while Germany moved from a 1.2% deficit to a 4.2%.
    In a way you could say the German government achieved better.
    Most remarkable to me is that Zalm (through his spokesperson) reacted with more rigidness:
    “How can you be criticized when you plead to observe the SGP?”
    (source: NRC-Handelsblad).
    Disquieting. Looks like this is mainly for the Dutch audience. Again.

  21. “from a 1.5% surplus to a 2.7% deficit”

    Yep, but remember Frans, this was the whole point of the pact, to allow fiscal deficits (up to 3%) in difficult moments. This means surpluses in the good times. But if you start with a deficit, then things only get worse – fiscally speaking that is.

  22. BTW: you do alert us to the difficulty that if the recovery doesn’t come in the manner expected, even the Netherlands can be crashing the limit next year. I mean what’s your growth at the moment: I can’t remember but it is in the -1<G<1 range. Now the US has made this kind of fiscal switch and is coming up with 7.3% GDP growth (last quarter), which makes me want to ask some interesting questions about what happens next. I mean we’re increasing government deficit by 4.2% and we’re getting less than 1% growth. What kind of bang per euro is that?

  23. I recall reading recently (sorry, no links – may well have been on your site, Edward) that the GDP growth per capita for the US and EU was almost identical. Population increase accounts for the faster total GDP growth in the US (minus the last quarter, of course, but unless that 7% is sustainable it doesn’t matter).

  24. “Population increase accounts for the faster total GDP growth in the US”

    Two things Elliott, working age population growth and increasing participation rates. But remember gross population increase doesn’t necessarily give per capita improvement, it’s the participation that does that. But then if you have more people as a proportion in the 15-65 group you automatically get more participation and higher per capita GDP. Economics is easy really, I don’t know why so many people spend so much time trying to make it difficult.

    The thing is the averages hide a lot here. Germany has had a serious growth slowdown since the mid-ninetees, and the jury is still out on what happens next. Of course in my case factoring in ‘population ageing’ would be part of the explanation.

    In Spain this increasing working age pop as a part of the population is the big part of the ‘growth miracle’. I would throw Harrod-VBalassa-Samuelson out of the window here. Where I think it could be important is in China and India where high productivity in the traded sector could well feed into higher productivity in non tradeables. But then they are having to do this standing on their own two feet, without subsidies and without structural funds.

Comments are closed.