The Ghosts of Europe Past

From Cambridge, UKThe cheerleaders of the European Union like to think of it as an entirely new phenomenon, born of the horrors of two world wars. But in fact it closely resembles a formation that many Europeans thought they had long since left to the dustbin of history: the Holy Roman Empire, political commonwealth under which the Germans lived for many hundreds of years. Might take that as a compliment; after all, empire lasted for almost a millennium. But they shouldn’t. If anything, today’s Europe still has to learn lessons of empire’s failures. (source: Brenden Simms – NYTimes – 1o/06/2013)

The similarities with the Holy Roman Empire, which at its greatest extent encompassed almost all of Central Europe, exist at many levels. Today’s European Council, at which union’s member states gather, reminds one of the old Reichstag, where representatives of German cities and principalities met to deliberate matters of mutual concern. And like the European project, which originated in a determination to banish war after 1945, the “modern” Holy Roman Empire, which was reformed by 1648 Treaty of Westphalia, was intended to defuse the domestic German antagonisms had culminated in the traumatic Thirty Years’ War. But most similarities are less flattering. Both the European Union and the empire are characterized by interminable and inconclusive debate. The German phrase for delay, which translates as “shoving something onto the long bench,” stems from when imperial bureaucrats pushed their uncompleted paperwork farther and farther down a long bench in the Reichstag council chamber.

And like the European Union, which is rived by tensions between larger and smaller states, the Holy Roman Empire proved too weak to contain over-mighty members like Prussia and Austria. Fears of partition and the collapse abounded. The Reichstag was paralyzed; the emperor was hamstrung by rival princes. Granted, in a world of increasingly absolutist neighbors, the empire stood out in its respect for law and a high degree of personal freedom. But the truly powerful states of the 18th and 19th centuries were those that learned from the empire’s mistakes. The German experience was a cautionary tale for American colonies after Revolutionary War. They, too, were profoundly divided over how to defend themselves, and above all on the question of how huge debt accumulated during the war should be repaid. The existing Articles of Confederation were too weak for the task, and the founders cast about for alternative models. In the Federalist Papers, James Madison and Alexander Hamilton looked at the federal system of the Holy Roman Empire, but they found it to be “a nerveless body, incapable of regulating its own members, insecure against external dangers, and agitated with unceasing fermentations in its own bowels.” Instead, the patriots embraced the model of the Anglo-Scottish Union of 1707, when the two kingdoms, formerly so divided, had come together by merging their debts, parliaments and collective efforts on the international stage. The resulting American Constitution created a powerful executive presidency and a representative legislature, made possible the creation of a consolidated national debt, a national bank and eventually a strong military, all of which in time turned the United States into the superpower it is today. The Holy Roman Empire, by contrast, failed to reform and disintegrated after it was defeated by Napoleonic France in 1806. Some 200 years later, this history has been forgotten. Today’s constant round of the European summit meetings and reform initiatives remind one of nothing so much as interminable and futile German “imperial reform debate”, and they are likely to have a similarly unhappy, if less spectacular, end.

Like old empire, the union has become preoccupied with legality and procedure at expense of participation and effectiveness. This renders the euro zone cumbersome in face of competition from the east and causes the bond markets to doubt its creditworthiness. Indeed, everything that Madison and Hamilton wrote about the empire then is being echoed today in Washington, albeit sotto voce. Fortunately, there is a solution from history. The euro zone faces the same choice as the Holy Roman Empire + the American patriots of old: how to overcome discredited forms of confederation. Rather than digging themselves into a deeper recession and a democratic deficit through austerity measures, the states in the common currency need to form a full and mighty union on the Anglo-American lines. They must create a strong executive presidency elected by popular vote across the eurozone, a truly empowered house of citizens elected according to population and a senate representing the regions. The existing sovereign debts should be federalized through “Union Bond”, with a strict subsequent debt ceiling for member state governments. There will have to be a single European military and one language of government and politics: English. This is the only framework that will endow the euro zone with the democratic legitimacy to reassure the bond markets, underpin the implementation of good financial governance across the entire union and defend its interests and values on world stage. More than 200 years ago, the choice was between Holy Roman Empire and Britain. The Americans opted wisely and prospered; the Germans continued to muddle through only to see their empire extinguished. History thus holds out both a great opportunity and a terrible warning for the eurozoners. 

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14 Responses to The Ghosts of Europe Past

  1. Debt is as old as history – and so are defaults. It is part of human life. Most of the time debt is not a major problem but sometimes it can become catastrophic. Unfortunately, in recent years the amount of debt outstanding in the western world compared to total economic output has massively increased. As a result, the risk of a disastrous financial breakdown in the world economy may be much greater than many people realise. Throughout history, the major protection against there being too much debt has been creditors’ concerns that, if they lend too much with too little security, they might not get repaid. This has not, however, stopped many spectacular defaults taking place. Almost every country in the world has failed to pay its debts at one time or another. Companies large and small, from Lehman Brothers (owing just under $700bn) to corner shops, have gone bust. In the UK about 135,000 individuals currently declare bankruptcy each year and a further 1.2m in the USA. Default is endemic to human society and most of the time the economic system is resilient enough to absorb the consequent bad debts. This relatively benevolent state of affairs may, however, be changing as a result of three factors coming together. These are globalisation, massive credit creation and austerity. The result is much more debt than there was before combined with much less capacity to repay it. The danger now is that the defaults which may be looming up at present are going to be so large that they destabilise the whole world’s economic system. Globalisation has been responsible for footloose capital swilling round the world – arguably generating much less benefit than is provided by free trade. But a bigger systematic problem has been the massive imbalances between the export performances of the countries which run foreign payment surpluses and those that run deficits. In 2010, for example, China had a current account surplus of 6.0% of its GDP; Singapore 13.8% and Switzerland 18.6% The UK, by contrast, had a deficit of 2.5% and the USA 3.2% while Spain chalked up 4.5% and Greece 10.5% (…..)

  2. (A BIGGER PICTURE) IN the five years since the financial crisis crippled the American economy, a favorite warning of those who have urged forceful government action, myself included, has been that the United States risked entering a long period of “Japanese-style malaise.” Japan’s two decades of anemic growth, which followed a crash in 1989, have been the quintessential cautionary tale about how not to respond to a financial crisis. Now, though, Japan is leading the way. The recently elected prime minister, Shinzo Abe, has embarked on a crash course of monetary easing, public works spending and promotion of entrepreneurship and foreign investment to reverse what he has called “a deep loss of confidence.” The new policies look to be a major boon for Japan. And what happens in Japan, which is the world’s third-largest economy and was once seen as America’s fiercest economic rival, will have a big impact in the United States and around the world. Of course, not everyone is convinced: though Japan reported a robust 3.5 percent annualized growth rate for the first quarter of this year, the stock market has dipped from a five-year high amid doubts about whether “Abenomics” will go far enough. But we shouldn’t read anything into short-term stock fluctuations. Abenomics is, without a doubt, a huge step in the right direction. To really understand why things look good for Japan requires not only looking closely at Mr. Abe’s platform, but also re-examining the popular narrative of Japanese stagnation. The last two decades are hardly a one-sided story of failure. On the surface, it does look like there’s been sluggish growth. In the first decade of this century, Japan’s economy grew at a measly average annual rate of 0.78 percent from 2000 to 2011, compared with 1.8 percent for the United States (…..) Those who see Japan’s performance over the last decades as an unmitigated failure have too narrow a conception of economic success. Along many dimensions — greater income equality, longer life expectancy, lower unemployment, greater investments in children’s education and health, and even greater productivity relative to the size of the labor force — Japan has done better than the United States. It may have quite a lot to teach us. If Abenomics is even half as successful as its advocates hope, it will have still more to teach us.

  3. Professor Uziel Nogueira says: Prof Stiglitz (as usual) makes convincing arguments in favor of the Japanese economic model of capitalism. However, we cannot know ex ante whether Abenomics will be successful or not. The recent past does not speak in favor of Japan’s leadership. Japanese authorities made a huge monetary mistake in the late 80s when, pressured by the Reagan administration, accepted a strong valorization of the Yen. The end result was a real estate bubble that when exploded caused a deflationary process that still goes on. Prof Stiglitz raises an important point in this piece. Few American economists are asking the right questions about the ongoing economic recession.

    That is, what is wrong with the current US economic model?

    The US economy was successful in the 20th century as far as generating growth and prosperity for the majority of Americans. However, can the current profit maximization model guarantee sustainable growth and prosperity for all Americans in this new century?

  4. (…..) Why isn’t reducing unemployment a major policy priority? One answer may be that inertia is a powerful force, and it’s hard to get policy changes absent the threat of disaster. As long as we’re adding jobs, not losing them, and unemployment is basically stable or falling, not rising, policy makers don’t feel any urgent need to act. Another answer is that the unemployed don’t have much of a political voice. Profits are sky-high, stocks are up, so things are O.K. for the people who matter, right? A third answer is that while we aren’t hearing so much these days from the self-styled deficit hawks, the monetary hawks — economists, politicians and officials who keep warning that low interest rates will have dire consequences — have, if anything, gotten even more vociferous. It doesn’t seem to matter that the monetary hawks, like the fiscal hawks, have an impressive record of being wrong about everything (where’s that runaway inflation they promised?). They just keep coming back; the arguments change (now they’re warning about asset bubbles), but the policy demand — tighter money and higher interest rates — is always the same. And it’s hard to escape the sense that the Fed is being intimidated into inaction. The tragedy is that it’s all unnecessary. Yes, you hear talk about a “new normal” of much higher unemployment, but all the reasons given for this alleged new normal, such as the supposed mismatch between workers’ skills and the demands of the modern economy, fall apart when subjected to careful scrutiny. If Washington would reverse its destructive budget cuts, if the Fed would show the “Rooseveltian resolve” that Ben Bernanke demanded of Japanese officials back when he was an independent economist, we would quickly discover that there’s nothing normal or necessary about mass long-term unemployment. So here’s my message to policy makers: Where we are is not O.K. Stop shrugging, and do your jobs.

  5. Instead, policy makers both here and in Europe seem gripped by a combination of complacency and fatalism, a sense that nothing need be done and nothing can be done. Call it the big shrug.

  6. Professor Uziel Nogueira says:

    Ex post assessments of worldwide (deep) financial crises have always come up with two conclusions. First, it takes an average of ten years to full economic and employment recovery after a financial meltdown. Second, robust growth + jobs creation can only be sustained AFTER the financial system gets rid of bad debt in their portfolio. The behaviour of US bank stock index indicate subprime bad debt still not solved. In sum, until healthy is restored to the financial system, growth and employment will be lagging. Until then, Prof PK academic Keynesian approach will continue to be debated in the academic world and this column at the NYT.

  7. Sad reading from British economic analysts these days — sad, that is, for anyone who likes to believe that evidence actually matters for policy. First, the normally even-tempered Simon Wren-Lewis is angry, with cause: he sees the Dutch central bank calling for more austerity despite the depressed state of the Dutch economy, no prospect of recovery any time soon, no hint of debt trouble — and no explanation except boilerplate about how deficits are bad. As he says, it was one thing to buy into the austerity thing three years ago, when there wasn’t a vast accumulation of evidence about the effects of austerity in a depressed economy; but to roll out the same old line given everything that has happened since is pretty disgraceful. But then, think about the fact that Martin Wolf is out today with a column explaining that there is no current risk of inflation. He’s right, of course, and presumably what he hears from policymakers and others tells him that such a column is necessary. But my God: we had this debate in full four years ago. The usual suspects issued dire inflation warnings; the Keynesian/liquidity trap types like me insisted that this was all wrong given current circumstances. The events unfolded like this: (…..) And yet the people warning about inflation four years ago, and three years ago, and two years ago, are still at it, still making the same arguments. And they still have influence! I guess there’s nothing for it but to keep on pounding. But it’s discouraging.

  8. Professor Uziel Nogueira says: I think Prof PK is missing an important point of the discussion post financial debacle and economic depression. The 2009 Wall Street financial meltdown –not anticipated by any of thousands of PhD and Nobel Prize economist winners in the US — had a tremendous (negative) impact in public perception about economists and the science of economics. Economists –treated pre 2008 as high priests of a religious cult of prosperity — were caught flat footed, totally unprepared by the financial debacle that devastated the lives of millions of Americans, particularly the unemployed. The 2009 HBO movie drama of Wall Street meltdown taught more about the crisis than hundreds of academic papers. As a result, economists have lost their credibility with main street. Prof PK should be discouraged by the reality described above instead of writing about his discouragement caused by the academic inflation debate.

  9. For the last five years, the world’s leading central banks have been combatting the crisis with extremely low interest rates and vast bond purchases. Now the American Fed is breaking ranks, as it cautiously suggests a change in its policy — sending the markets into turmoil (…..) Central bankers know what years of low interest rates and all the resulting cheap money have done to the markets. But eliminating these “sweets” again is difficult, says one expert, who isn’t willing to rule out a scenario like the one in 1994. At the time, the Fed’s decisions on monetary policy triggered a global tremor in bond markets. Within nine months, rates on German government bonds rose from 5.7 percent to just under 8 percent. Jaime Caruana, general manager of the Bank for International Settlements, recently outlined what is needed so that central banks can finally regain the freedom to impose tighter monetary policy without shocking the markets: “Banks, households and firms need to redouble their efforts to deleverage and to repair their balance sheets, while policymakers must redouble their efforts to enact far-reaching reforms.” Progress in this area, he added, would also enable central banks to normalize their monetary policy. But how likely is that?

  10. (…..) I’ve noted before that the nature of rising inequality in America changed around 2000. Until then, it was all about worker versus worker; the distribution of income between labor and capital — between wages and profits, if you like — had been stable for decades. Since then, however, labor’s share of the pie has fallen sharply. As it turns out, this is not a uniquely American phenomenon. A new report from the International Labor Organization points out that the same thing has been happening in many other countries, which is what you’d expect to see if global technological trends were turning against workers. And some of those turns may well be sudden. The McKinsey Global Institute recently released a report on a dozen major new technologies that it considers likely to be “disruptive,” upsetting existing market and social arrangements. Even a quick scan of the report’s list suggests that some of the victims of disruption will be workers who are currently considered highly skilled, and who invested a lot of time and money in acquiring those skills. For example, the report suggests that we’re going to be seeing a lot of “automation of knowledge work,” with software doing things that used to require college graduates. Advanced robotics could further diminish employment in manufacturing, but it could also replace some medical professionals. So should workers simply be prepared to acquire new skills? The woolworkers of 18th-century Leeds addressed this issue back in 1786: “Who will maintain our families, whilst we undertake the arduous task” of learning a new trade? Also, they asked, what will happen if the new trade, in turn, gets devalued by further technological advance?

    And the modern counterparts of those woolworkers might well ask further, what will happen to us if, like so many students, we go deep into debt to acquire the skills we’re told we need, only to learn that the economy no longer wants those skills? Education, then, is no longer the answer to rising inequality, if it ever was (which I doubt).

    So what is the answer? If the picture I’ve drawn is at all right, the only way we could have anything resembling a middle-class society — a society in which ordinary citizens have a reasonable assurance of maintaining a decent life as long as they work hard and play by the rules — would be by having a strong social safety net, one that guarantees not just health care but a minimum income, too. And with an ever-rising share of income going to capital rather than labor, that safety net would have to be paid for to an important extent via taxes on profits and/or investment income. I can already hear conservatives shouting about the evils of “redistribution.” But what, exactly, would they propose instead?

  11. Professor Uziel Nogueira says: Congratulations to Prof PK on a thought provoking and relevant piece. It is no easy for a Nobel Prize winner professor to admit that many of his students may not get a good return in their costly high education degrees. Perhaps this piece could provoke a healthy debate about high education and labor market perspectives in times of economic decline and fewer jobs being created. In my case, I got a PhD degree in natural resource economics at MSU, back in 1979. I had a wonderful, rich and financially profitable career at an international financial organizations. However, I would not advise any student to get into economics and, more importantly, spend time and money to obtain a graduate degree. In Brazil, any ambitious young man/woman is better off obtaining a business degree, starting a new business or getting a franchise. That’s where the money is. Otherwise, get a degree and participate in public admission tests to get into civil service. The money is OK but the benefits are great. More importantly, civil service is the last employer to guarantee a life job.

  12. Last week the International Monetary Fund, whose normal role is that of stern disciplinarian to spendthrift governments, gave the United States some unusual advice. “Lighten up,” urged the fund. “Enjoy life! Seize the day!” O.K., fund officials didn’t use quite those words, but they came close, with an article in IMF Survey magazine titled “Ease Off Spending Cuts to Boost U.S. Recovery.” In its more formal statement, the fund argued that the sequester and other forms of fiscal contraction will cut this year’s U.S. growth rate by almost half, undermining what might otherwise have been a fairly vigorous recovery. And these spending cuts are both unwise and unnecessary. Unfortunately, the fund apparently couldn’t bring itself to break completely with the austerity talk that is regarded as a badge of seriousness in the policy world. Even while urging us to run bigger deficits for the time being, Christine Lagarde, the fund’s head, called on us to “hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability.” So here’s my question: Why, exactly, do we need to hurry up? Is it urgent that we agree now on how we’ll deal with fiscal issues of the 2020s, the 2030s and beyond? No, it isn’t. And in practice, focusing on “long-run fiscal sustainability” — which usually ends up being mainly about “entitlement reform,” a k a cuts to Social Security and other programs — isn’t a way of being responsible. On the contrary, it’s an excuse, a way to avoid dealing with the severe economic problems we face right now (…..) Still, while a “grand bargain” that links reduced austerity now to longer-run fiscal changes may not be necessary, does seeking such a bargain do any harm? Yes, it does. For the fact is we aren’t going to get that kind of deal — the country just isn’t ready, politically. As a result, time and energy spent pursuing such a deal are time and energy wasted, which would be better spent trying to help the unemployed. Put it this way: Republicans in Congress have voted 37 times to repeal health care reform, President Obama’s signature policy achievement. Do you really expect those same Republicans to reach a deal with the president over the nation’s fiscal future, which is closely linked to the future of federal health programs? Even if such a deal were somehow reached, do you really believe that the G.O.P. would honor that deal if and when it regained the White House? When will we be ready for a long-run fiscal deal? My answer is, once voters have spoken decisively in favor of one or the other of the rival visions driving our current political polarization. Maybe President Hillary Clinton, fresh off her upset victory in the 2018 midterms, will be able to broker a long-run budget compromise with chastened Republicans; or maybe demoralized Democrats will sign on to President Paul Ryan’s plan to privatize Medicare. Either way, the time for big decisions about the long run is not yet. And because that time is not yet, influential people need to stop using the future as an excuse for inaction. The clear and present danger is mass unemployment, and we should deal with it, now.

  13. Professor Uziel Nogueira says: Prof PK dixit: ” When will we be ready for a long-run fiscal deal? My answer is, once voters have spoken decisively in favor of one or the other of the rival visions driving our current political polarization. Maybe President Hillary Clinton, fresh off her upset victory in the 2018 midterms, will be able to broker a long-run budget compromise with chastened Republicans. ” Is Hillary Clinton the great white hope to deal with the budget deficit?

  14. Frank Lazar: You weren’t paying attention to his whole paragraph. He said that the election of the next president whether it be a Hillary Clinton, or a Paul Ryan would put a definitive stamp as to what the shape of an imposed policy would be. Right now the divison in power in Washington is split evenly enough that no decision is going to be made until a new Presidential victory sharply defines a decisive shape of power in Congress. And he clearly said that it would that a Clinton victory would mean one thing, and a Ryan victory would shape it another.


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