Debt crisis: End of the age of stability
12 September 2011
Frankfurter Allgemeine Zeitung
The resignation of the ECB’s chief economist, Juergen Stark, accelerates a trend that the Germans do not want to fess up to, writes the Frankfurter Allgemeine Zeitung: The end of the policy of stability at any cost to avoid state bankruptcy.
Institutions are sluggish creatures. They live by a schedule of habitual, well-worn procedures, which does indeed give rise to some confidence in what comes out at the end of the day. Loathing uncertainty, institutions find it tough to keep up with a changing environment. In most cases, changes spur debates about the meaning of the institutions. What are they actually supposed to be doing? This question was also posed by Juergen Stark, who resigned on Friday as chief economist of the European Central Bank (ECB).
The ECB has always been considered a legitimate child of the Bundesbank, dedicated solely to the stability of the currency. What Stark believes will happen if the central bank goes in for buying government bonds from highly indebted countries in a big way is clear. His contrarian stance he sets out as follows: “In the current environment one can assume that positive effects on confidence due to sound fiscal policy are considerable, and this is backed up by case studies that show that ambitious adjustment programmes are, after a short time, associated with positive effects on growth.” By “sound fiscal policy” and “ambitious adjustment programmes” Stark means “to save”, and nothing else.
In this view, the financial system is nothing more than the monetary equivalent of the real economy. Citizens save and businesses invest. Given that this were so, cutting government spending could well have positive effects over the long term.
Cutting back on this debt will lead to nothing
But are we the only ones still living on in this world? In Greece, something else is happening. The economic cycle depends on disposable incomes and investments, whether these come from the state or from firms. When everyone cuts back on their spending at the same time, this economy gets out of control and spins into a deflationary downward spiral.
The Greeks are getting poorer, and yet they still remain – and precisely because of this spiral – in debt. Greece is no longer an isolated case, either. The euro zone and the world economy are threatened by a wildfire. Everyone is trying to adapt, as Stark is appealing for them to do. But what to, exactly? Are there new technologies out there or ailing heavy industries, like the automobile and steel industries? Has China only now shown up as an overwhelming competitor?
Hardly. The problem is not the change in the real economy, but the attempt to service debts that have piled up in the financial system over the last 15 years and that have now landed in government bonds. It is the last of the bubbles in this messed-up system. States can only reduce their debt on one condition: that they do not try to service the debts of the past at the expense of the present. Old debts are in essence always replaced by new debts. That debt can be lowered only if the state spends less in growth periods – if they can get away with that.
Unfortunately, the problem isn’t restricted to Greece. All the countries of the West are already in crisis or on the verge of one. If these states all consolidate at once, they will all be pinned down in a similar situation: rising expenses due, for example, to rising unemployment, declining state revenues, and lack of investment. The whole, full-blown crisis. So just why are we doing this?
A world of make-believe
Not for any real economic structural adjustments, but because today Juergen Stark and others have discovered that the debt is much too high and we must reduce it. But cutting back on this debt will lead to nothing: it will mean not one cent is re-invested. Companies, that is, invest only if they can discover opportunities to make a profit, or if in the crisis the state steps into the picture to cover their losses. The state intends not to invest, however, but to consolidate.
In the end, the process of self-destruction eats through the entire economy. Without confidence, the system collapses too. Not very appealing prospects.
But what do Juergen Stark and many other Germans like him want? An ECB that searches for its meaning in something that got lost long ago: namely, in a policy of stability that makes state bankruptcies impossible. It’s evident that that cannot work. Those Germans like Juergen Stark live in a world of make-believe that recalls a long forgotten time. For it’s only Germany, as the largest economy in Europe, that can still ensure any confidence in Europe’s capacity to act.
A bankruptcy of Greece would be feasible only if it were also certain that bankruptcy would not await the rest of the euro zone as well. But it’s not likely, for the Germans simply lack the determination to bring it on. They prefer to believe in the meaning of an institution that has long since vanished. Bluntly put, it’s always been tough for the Germans to catch up with a changing environment.
Translated from the German by Anton Baer