Last week I gave the keynote speech at “In the EU we (mis) trust”, an event organised by the European Cultural Foundation in Amsterdam. It is part of series of events to debate the New Pact for Europe, a joint project of various think-tanks to put forward proposals to the new European Commission president to reinvigorate the EU. A video of the event is here; my speech starts 40 minutes in.
It is the duty of anyone who truly believes in Europe to not unquestioningly agree with whatever is decided in Brussels, but to say ‘no, this is not the kind of Europe that we want, we want a different kind of Europe, we want a better Europe and here is how we set out to do it’.
“The EU is now riven between creditors and debtors and the EU institutions have become an instrument for creditors to impose their will on debtors.” That’s one of my quotes from the FT interview I did with Martin Sandbu.
We spent an hour and a half talking about a wide range of subjects, but the article focuses on one aspect.
For a fuller picture, read European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right.
GDP, Q1 2008 = 100. The three lines at the top are Sweden, the US and Switzerland, all outperforming Germany. Southern Europe remains a disaster zone. As Tacitus said, “Where they make a desert, they call it peace.”
Former ECB chief economist Otmar Issing has a piece in today’s FT that is riddled with mistakes and misconceptions. The headline gives you the gist of it: “Get your finances in order and stop blaming Germany: The countries now in trouble have caused their own problems”. Here are a few of the flaws in his argument.
1. “Germany is not only the biggest economy in Europe, it is also the best performing – and it would be in everyone’s interest if the country led by example.”
Yes it is the biggest, but no it isn’t the best performing. It has grown by a mere 2.9% since the first quarter of 2008, Europe’s pre-crisis peak, whereas Norway has grown by more than 4%, Switzerland by more than 6%, Sweden by 7.5% (and Poland by 16.3%). Source: Eurostat
2. “Misguided ideas also dominate discussions about a banking union… But it is hard to justify forcing one country’s taxpayers to pay for the irresponsible practices of another country’s bank’s. [sic]”
Actually, an effective banking union would require bondholder bail-ins, with taxpayer bail-outs only a last resort. This would limit German taxpayers’ liability, both for future bailouts of German banks and indirect ones, such as the EU loan to Spain to bail out its banks, whose creditors were often German banks and investors.
The real reason why Germany has sought to gut the banking union of substance is so as not to cede control over its often distressed banks, which incurred huge losses on bad lending to southern Europe in the pre-crisis years.
3. “The countries now in trouble have caused their own problems through their own policy mistakes.”
In part, yes. But bad lending by German banks also played a huge part, as did the failure of the ECB, where Ossing was chief economist in the pre-crisis years, to curb excessive credit growth – not to mention the role that eurozone policymakers played in sparking panic between 2010-12, exacerbated by self-defeating austerity, a big reason why Italy is in such a deep hole.
Read more in my new book, European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right, available across Europe from Amazon on 24 April.
Britain and the rest of Europe are in a mess. Our economies are failing to deliver higher living standards for most people and many have lost faith in politicians’ ability to deliver a brighter future, with support for parties like UKIP soaring. Are stagnation, decline and disillusionment inevitable? Do people have to turn to the likes of UKIP for alternative solutions?
As a critically acclaimed author who was until recently a senior policymaker, Philippe Legrain has a unique combination of insider knowledge, intellectual authority and independent perspective that make him ideally placed to explain why things have gone wrong – and how to put them right. In this brilliantly original and passionate book, he explains why we need a European Spring: economic and political renewal.
“Philippe Legrain provides an original and insightful analysis of what has gone wrong with Europe’s economies and politics and a timely warning that the crisis ultimately threatens our open societies. Better still, he provides a blueprint for a brighter future and how to achieve it.” — George Soros
That is the blurb for my new book, which will be published on 24 April. Pre-order the Kindle edition in the UK now from Amazon.co.uk It’s a snip at only £2.99
In additional to its fiscal enforcement powers, the European Commission is now mandated to tackle excessive imbalances in the eurozone that could endanger its stability.
Due to German lobbying, EU rules on imbalances are dangerously unbalanced: while they deem a current-account deficit of 4% of GDP problematic, a surplus has to exceed 6% of GDP before it is considered excessive. Nor do EU rules take account of absolute size, so a surplus in tiny Luxembourg is treated like one in mighty Germany. That tilt allowed the Commission to overlook Germany’s vast current-account surplus in its first assessment of dangerous imbalances last year: Germany’s surplus averaged 5.9% over the three preceding years. Yet in dollar terms, Germany’s surplus is now the world’s largest.
The Commission’s directorate-general for economic and financial affairs is due to deliver its latest assessment of imbalances on 15 November. This time, Germany’s surplus is well above the prescribed 6% limit: according to official Eurostat figures, Germany’s current account surplus was 6.3% of GDP in 2010, 6.2% in 2011 and 7.0% in 2012. Thus, far from being a “growth locomotive”, as Wolfgang Schäuble claims, Germany is a drag on growth: not only does it buy less than it sells, the gap between its exports and imports is growing.
As an impartial enforcer of EU law, the Commission is obliged to act. It must demand corrective action in Germany. Higher wages and increased investment would be a good place to start.
Paul Krugman argues that a benefit for Britain of keeping the pound is that it has been able to devalue – unlike, for instance, Spain, which is part of the euro – and illustrates the point with a chart that shows the 20% devaluation of the UK’s real exchange rate since the crisis hit.
Fine. But a fall in the real exchange rate is just a means to an end: the real aim is to boost net exports and consequently swing the current-account deficit towards balance.
And here’s the thing: despite Britain’s devaluation, neither its trade deficit nor its current-account deficit have shrunk. Astonishingly, in a slump Britain’s current-account deficit has actually widened, from 2.3% of GDP in 2007 to 3.5% of GDP last year.
In Spain, in contrast, there has been a huge improvement in both the trade and the current-account balance. A current-account deficit of 10% of GDP in 2007 had shrunk to 1.1% of GDP by last year.
To which Krugman would doubtless retort: that’s because domestic demand has collapsed and with it imports.
Yes, imports have fallen – and I agree with Krugman that the excessive austerity in Spain has been a huge mistake (as, I would add, has the failure to fix the banking system).
But the volume of Spanish exports – even without devaluation – has also soared, as the chart shows. In Britain, in contrast, export volumes are scarcely higher than before the devaluation.
Source: Eurostat, Exports and imports by the EU countries and by third countries – volumes [nama_exi_k]
So is a British-style devaluation really what Spain needs?
Austerity alone cannot solve Europe’s economic and financial crisis. Growth and jobs need to be promoted with equal zeal.
“The notion that migration is a one-way movement of permanent settlement is outdated. Most of it is temporary—and it’s time the debate about immigration recognised this reality,” argues Philippe Legrain, an analyst of immigration and the author of “Aftershock”, a recent book analysing economic changes in the wake of the financial crash. Read the full article here.
No. I won the debate against David Goodhart on The Economist’s website, by 51%-49%. Thank you to everyone who voted No.
Headlines from a poll this week suggested nearly half of British people think there are too many immigrants in the UK.
But the findings change when people are presented with the facts.
The average respondent thought 3 in 10 people in the UK are foreign-born.
When told it’s actually 1 in 10, more than twothirds thought this was either “not many” (36%) or “a lot but not too many” (31%). Just 30% thought it was “too many”.