This is currently the most-read article in the FT. I recommend it as a must-read. The author is Jürgen Stark, a former ECB director. Check it out!
via The historical and cultural differences that divide Europe’s union – FT.com.
Stark argues powerfully and passionately for the integrity of Germany‘s economics, based upon ordoliberalism. There is nothing fundamentally wrong with his case but there are some exclusions. When the Euro was introduced, Germany benefited from the exchange-rate – this helped Germany’s businesses and banks. Yet once, the Eurozone turned sour, both Germany & France went to enormous ends to protect their respective banks from major bad-debt write-downs. Germany called upon the IMF to supervise the ECB and European Commission. The result was politically-driven austerity, and the hated troika was born.
Also the ECB has been unable to function like a real central bank and this has caused enormous pain for Southern Europe. But as Stark argued correctly, there are proper political and legal checks and balances in Germany.
As an advocate of Keynesian economics, I would favor a massive fiscal stimulus but recognize that this is ruled out under the Eurozone’s 3% constraint.
Critically, I agree that Germany is right about structural reform and politicians in Southern Europe, including France, have been too weak to push the reform agenda.
However, it is now a time to find a ‘win-win’ agenda. I propose that structural reforms are a pre-condition of refinancing national balances sheets and encourage greater fiscal stimulation, a one-off reprieve from the 3% fiscal constraint for a limited time.
In Totnes they have set up a small concern to provide funding for various ‘ethical’ enterprises. Because the local people know what they are being asked to support, they have yet to fail to find the funds needed. This is all small beer and I would like the type of enterprise considered to cover a far wider range but there is something here. If the was a Totnes (or South Hams – the district) Bank and people knew where it lent its money and that, say, 20% of the lending would be ‘unsecured but to individuals (be they sole traders, partners or shareholder directors in a corporate entity) believed to be trustworthy and against a properly presented and costed business plan’ whilst the rest would be loans properly secured against property (either as mortgages to purchase property or second charges securing loans for other purposes) my gut feeling is that people would be only too happy to use that bank.
Scale: that can be achieved by the creation of a central ‘local bank’ clearing system which could also provide the (now) mandatory ability for customers to access their accounts on line.
Now, if the EU did something about the power of the unions . . .
Whilst I would love to return to the age of the ‘local bank’ where the manager could act on his judgement of his customers, I fear that credit scores are too easy.
I see another major problem. The UK is too dependent upon financial services, as well as the big banks.
In my view, a national industry strategy is urgently required to diversify the country away from dependence on financial services – it’s too risky having all your eggs in one basket. This needs to include a gap analysis of skills and why the UK is so weak on exports.
It’s interesting that all the UK industries in difficulty, like banks and public services are still heavily unionized?
First Alf (and I am sorry about this) I cannot read the FT as I do not subscribe to it so the following is based on your comments not that article. Two things here: the EU situation and Keynesian economics.
I have gradually morphed from being generally pro the idea of an EU to being generally worried that the way it has developed is creating tensions that could well blow the whole thing apart. This is because political and fiscal union should be the last step when peoples have already in effect unified themselves. Instead of allowing time for trade to create so many bonds that the people are prepared to accept certain otherwise unsavoury policies (especially when they seem to be against a particular national interest) the EU has forced us to become a part of an organisation we do not trust. The UK governments (both sides of the house) have signed treaties with no mandate so to do; other countries have been asked to carry out a second referendum when the first returned the ‘wrong’ answer; it was obvious to all that economies that should not have been enjoined to the Euro were encouraged so to do; it would seem that the Troika (led by Germany) has used brute force – albeit economic rather than military brute force – to impose its will on other countries including, of course, Greece. This sounds alarmist but is not intended to be: I see so many parallels now with the way the superstate (the EU) is creating tensions within itself with the another superstate (the Austro Hungarian Empire) created tensions within itself at the end of the 19th and beginning of the 20th centuries – and that did not end well. Frankly, I think the experiment has failed and some serious thought needs to be given to how nations can disentangle themselves without causing too much damage.
Now to economics. Well, I am concerned with an economic culture that relies on debt to keep itself afloat but I agree that the UK needs some sort of stimulus to get things going again. As a further thought: I do not think that our government has as much control over the economy as people think – or even as the government thinks. Expansion is always fraught and the safest way to achieve it is through a multitude of small expansions so that if things go wrong the fallout is small. Is it possible that a way of answering both sides of this question – the debt problem and the need for economic stimulus – which is within government’s ability would be to provide a very attractive environment for SME’s and business start-ups? This would mean allowing certain businesses and investors taxation advantages but would not involve the government in any risks. Interested to know what you think.
Today I was reminded was fourth anniversary of the start of this blog, and I feel like you and I have been sparring over Europe, the Euro, Keynesian economics etc. for much of that time 🙂
On closer reflection, we’ve never really been that far apart. But then I suppose that my views have changed a bit in four years too.
As you know, I have always been pro-Europe. That said, my vision is of free-trade and mutual support. I think that we are both anti-bureaucracy and positively against creeping federalism. If we accept for a moment that most of Europe is against more federalism, then it’s the Euro and the 3% fiscal compact is the cause of so much pain. Without genuine convergence, it is really hard to see the Euro surviving, without more liberal rules.
I agree that the troika has been doing Germany’s dirty work. But if you look carefully, this situation has changed. First the IMF stopped favoring austerity and has been arguing in for growth oriented fiscal and monetary policy. Next, I spotted that the new team at the European Commission has been arguing for massive investment, re-skilling etc. Finally, the ECB has been forced to challenge Germany and embrace QE.
Where I suppose that I have changed is in relation to Germany’s views on structural reform. I now agree with Germany that a fiscal stimulus, without structural change will lead to further problems downstream. I can empathize with both the debtor and the creditor countries. But when you factor in that the Eurozone was a deeply flawed construct, then surely there should be room to find common ground and a way forward?
Turning to SMEs and start-ups, I believe that the capitalist model is not working effectively. There’s too much red tape. But most importantly, obtaining finance is a major bottleneck. For me, the overriding problem is the banks – there’s not enough competition.
I know it’s quaint but I’m still pro-Europe.
First – I agree that you and I have often argued but are mainly in agreement on the things that really matter. As to the EU – I would like to think that sense will prevail (and you are right to point out that it does seem to be doing just that in some areas) and that matters will be put right before a few hotheads destroy the whole edifice. My experience tends to the thought that hotheads move more quickly than cool heads and I am afraid that matters have gone too far for the Greeks. As to whether or not a Grexit would prove a disaster, I am not sure.
You are also right to say that there is too much red tape and there the government could step in an do something useful. May I suggest that it isn’t banks in general that are the overriding problem but only the big banks (and that means most of them). Where the government could help is in making it very easy to set up a small local bank (local being relative: I am thinking is terms of metropolitan, unitary and county but they may be too large) where depositors funds are protected in toto and where they may lend only to businesses and individuals resident in their areas. That might act as a good trigger (such a bank would have to lend to make money) and I cannot see how the big banks can be coerced into lending when they don’t want to (whatever the reasons).
I don’t think that our views diverge that much here.
I certainly agree that the problem is the major banks. In the UK, I would like to see the major banks broken up. I’m not sure about regional and local banks – economies of scale? My biggest concern is about banks that are prepared to take more of a risk with small businesses – the UK used to be pretty good here.
Anyway, perhaps this would be an opportunity for the European competition authorities to get involved? At the moment, we seem to have oligopolies, almost cartels that work in their own best interests, rather than their customers. Of course, there’s too much regulation and it’s ineffective – also the unions are too powerful in this industry.
Just a few quick thoughts…