An article in the NYT about Romney economic adviser Glenn Hubbard caught my eye. Mr. Hubbard published an op-ed critical of economic advice given to Europe by the Obama Administration in the German business publication Handelsblatt (I used Google Translate and pasted it at the bottom of this post – sorry if it look like a ransom note I can’t read German). The NYT is crying foul for Mr. Hubbard’s meddling in foreign policy, which might be an issue of egos and of questionable propriety, but it misses entirely the fact that Mr. Hubbard’s own prescription is not only rather vague, but nearly as wrong as President Obama’s.
Basically what he says is this:
- Euro debt crisis is a confidence crisis caused by government overspending with low interest rates during good times.
- Euro-bonds redistribute wealth from solvent countries to insolvent ones and therefore won’t solve the problem because insolvent countries will still overspend
- The European rescue funds have enough money to finance the PIIGS for two years and should be made available to all of them now.
- The Europe problem cannot be solved by fiscal tricks.
He said a little more than that, specifically pertaining to the event that Greece leaves the Euro, but that isn’t relevant to my complaints.
What I find odd is that he never nails down why, no matter how much money is thrown at the problem, it just keeps getting worse. The markets have known about the size and shape of the rescue funds (is this not a “fiscal trick”?) for months and all of those things are priced into to the current situation. The markets are saying very loud and clear that those funds are inadequate to the size of the problem that keeps getting larger. The markets are telling all of Europe and Mr. Hubbard that everything that has been done thus far is pure folly.
Mr. Nigel Farage pointed out part of problem in a speech on the floor of the EU parliament last week when he said that rescue funds are the responsibility of all euro zone countries. Money is loaned from the rescue funds at 3% interest, of which a country like Italy is responsible for ~20% of the sum and has to borrow that money at 7% to loan to a country like Span at 3%. How does this kind of arrangement inspire the confidence fairy to suddenly appear, Mr. Hubbard? Please tell us.
And that is only a miniscule part of the problem. The rest of the problem is the real problem which is monetary – not fiscal – that has been pointed out by many blogger economists such as Scott Sumner, Lars Christensen, David Beckworth, David Glasner, and many others, just follow the links on their blogs after scouring through what they have to say.
Mr. Hubbard closes his article by saying the America’s problem is also a crisis of confidence. Well, he just may be correct, but not for the reason he believes. America appears to be very stuck with politicians from both sides of the political spectrum listening to economic advisers who are so colored by their own ideological bent that they cannot see the forest through the trees and we have very little hope of solving the real monetary problem regardless of who wins the election in November. I have to say that after reading this article I am more depressed about the possibilities for the future than I have ever been.
Google Translate translation of Mr. Hubbard’s op-ed:
The European debt crisis threatens the growth in the euro zone and in the world. This crisis is observed in reality a crisis of confidence, and any attempt to solve this need. Unfortunately, the advice of the U.S. government going to solve the crisis is misleading. For Europe and especially Germany.
In a hitherto unusual ways the Obama administration tries, Germany to force them to stand up for financially-strapped governments and banks in the euro-zone, so that the Greek crisis infects not other states. Specifically, calls the U.S. Treasury-Bond €. This would mean that Germany guaranteed the debt for all members of the monetary union. It also calls for the recapitalization of insolvent banks on the Spanish rescue fund ESM and the purchase of government bonds of weak countries by the European Central Bank (ECB) in a big way.
These tips are not only unwise. They also reveal ignorance about the causes of the crisis and on a growth path into the future.
Low interest rates in the euro area had led to a boom in private and public credit in many states. This debt reveals the imprudent fiscal policy, which was made in the currency union. The public finances were hardly controllable. In addition, strong differences in competitiveness led to current account surpluses in countries like Germany and large deficits in countries such as Greece. More growth would generate if the financially ailing euro-zone countries would reduce their spending (and therefore the future tax burden).
Euro Bonds be considered in the U.S. as a solution to the European debt crisis in the sense of Hamilton. This refers to America’s first Treasury Secretary Alexander Hamilton, who advocated independence after the war to take over the debts of the American states by the federal government. This bold step, improved confidence in the financial strength of the new republic. But that was a one time thing.
The federal government has not followed the loans granted to individual states in the long run.
To make an analogy to the present situation in Europe to manufacture, would have to refer to Hamilton’s argument that short-term grants. This would also be coupled to lead the country out of debt crisis with a plan. Europe 2000-2009 had been the benefits of Euro-bonds. At that time the members of the monetary union by borrowing at the same effective interest rates. The rather similar to the problem than the solution of the problem.
The current concerns are exacerbated by the political positions of the parties during the election campaign in Greece. The possibility of a withdrawal of Greece from the euro zone, possibly even in a disorderly retreat, actually represents an infection risk to Europe and beyond. But it can not conclude that euro-bonds are the best way out. Instead, offer other strategies of monetary and fiscal policy is a better alternative.
This includes the classic role of “lender of last resort”: Solvente borrowers should be operated in the context of the crisis generous, but not in the crisis itself, fiscal policy can play this role with the available instruments. This requires two steps: to stabilize the financial system and public finances.
Greece should withdraw from the euro, the financial system would have to be stabilized in two parts first: First, neither the ECB nor the Greek central bank other Greek banks give loans. The European Central Bank was expected to announce the second, however, that good collateral against all other banks in the euro-zone unlimited funding is available, which are negatively affected by a discharge of Greece.
How should the public finances are stabilized? It is obvious that the pooling of debt without a sound fiscal policy in the euro-zone leads to healthier states would have to pay very high and long-term transfers of funds to the weaker countries. However, a longer-term fiscal policy implemented, a common assumption of debt would be superfluous.
Instead, the European Commission and the International Monetary Fund (IMF) take bold steps. Both institutions should announce that the European rescue fund EFSF and ESM and the IMF are ready, all the medium and long-overdue public debt and budget deficits of those countries for the next two years to guarantee that draw up credible plans to consolidate their budgets and also apply. This step is possible because the resources of bailout funds are now big enough to satisfy the medium-term financial needs of Ireland, Italy, Portugal, to Spain for two years. Short-term debt is less of a problem, as the Greek crisis shows that this can be refinanced in the market.
The debate over fiscal policy in the euro-zone is part of the global problem of excessive Schuldenmacherei. While the U.S. president advised the Europeans making more debt-financed spending programs, he presided over an unprecedented peacetime deficit. Even in America has triggered a debate between supporters of the growth and savings policy.
The supporters of the growth policy in the U.S. and Europe usually focus on short-term results. They prefer the Keynesian solution, greater public debt anrät to the dahindümpelnde economy is boosted. The growth is still hampered by structural deficits that make future tax increases and likely affect capital accumulation and productivity. The investigations of the two U.S. economists Carmen Reinhart of the Peterson Institute for International Economics and Kenneth Rogoff of Harvard University show that growth is proceeding according to many financial crises are very slow. Thus governments are forced to react to short-term deficits with tax increases.
By contrast, a savings policy that is oriented only in the short term, to undermine the economic activity to such an extent that a country is in a growth trap. Such a strategy can also wear down the democratic consensus for reform.
However, it is possible to consolidate public finances in such a way that leaves room for growth. That’s exactly the way forward for the European Commission and the IMF in order to respond appropriately to the Greek crisis and its possible repercussions.
The commitment to consolidation with a binding timetable could build trust. It would also result in scope to stimulate growth. In the case of the Euro-zone showed up on my schedule would allow it. Higher Schuldenmacherei flanked by Euro-bonds and shows no way to consolidate leads, however no further. In the U.S., a gradual reduction of unmet promises from the government social and health programs would build confidence, create scope for future tax cuts and thus stimulating the current growth.
The Council of President Obama to the Germans and Europe has therefore the same flaw as its own economic policy: namely, that it is paying long-term, if we focus on short-term stimulus. The other way is a shoe out of it: The long-term confidence in sound public finances support growth while allowing scope for short-term transitional assistance. Mitt Romney, Obama’s Republican challenger understands this very well, and suggests such a gradual fiscal consolidation for the U.S., enhance structural reforms to boost growth.
The debt crisis in Europe is a crisis of confidence that can not be solved simply by financial tricks. America’s crisis is also a crisis of confidence. The question is whether the government can recover on both sides of the Atlantic that trust in the years to determine our economic future.