Monday, January 23, 2012

Christine vs. Angie

You can't say women are running the global economy these days. But German Chancellor Angela Merkel and IMF Managing Director Christine Lagarde are certainly two key players in international finance right now.

Lagarde comes down pretty hard on Merkel's "ordoliberal" austerity policies in her message Global Challenges in 2012 (prepared remarks) 01/23/2012.

One of my former professors always made a reference to "my good friend so-and-so" if he was about to rake that particular "good friend" across the coals. Legarde opens with a reference to "my good and highly-respected friends Chancellor Merkel and Minister Schäuble", so you know it's going to be bad.

This presentation takes off from IMF findings that will be released Tuesday which, in Lagarde's words, "will lower growth forecasts for most parts of the world. Even these lower forecasts assume a constructive policy path that is by no means assured."

And she gives a sobering reminder that not so long ago would have seemed commonplace, that a depression can really screw a lot of things up. But in our real existing depression, our ruling elites in Europe and the US seem to have forgotten that to an astonishing extent, to a 1914-level-of-dysfunction extent:

Yet before we indulge in yet another bout of collective pessimism, which is becoming something of a global sport, let me ask a simple question—why did 2011 turn out so badly?

I would argue that it was not because of any fresh wound to the global economy. No, it was driven instead by a lack of a collective determination to reach a cooperative solution. We saw many false starts and half measures in 2011 — in Europe, but also, for instance, in the United States with its debt ceiling debacle.

Put simply, policymakers let an old wound fester, and in doing so made the situation worse.

Looking at it from this perspective, 2012 must be a year of healing. But as Hippocrates put it long ago: "Healing is a matter of time, but it is sometimes also a matter of opportunity".

And today, it has to be an opportunity of our making. Otherwise, we could easily slide into a "1930s moment". A moment where trust and cooperation break down and countries turn inward. A moment, ultimately, leading to a downward spiral that could engulf the entire world.
Now when an IMF head starts talking 1930s gloom-and-doom, my first instinct is to think, oh, here comes a pitch for deregulation and letting banksters run wild.

But that's not what Legrande does here. She of the creation of the the European Financial Stability Facility (EFSF) and its upcoming successor the European Stability Mechanism (the ESM), "only two years ago, this was heresy". (Yes, by the time we all learn the initials EFSF, they'll change to ESM.) Her comments are made in a fusion of diplomat-speak and bankerese. But she is encouraging policies that are still considered heretical by Angie and and the German banking Establishment.

She argues for expansionary budget and spending policies in the better-off countries to stimulate the economies of the so-called periphery like Greece and Spain; boosting the resources of the EFSF and folding it more quickly than planned into the ESM; addressing the problem of bank undercapitalization head-on; and, the creation of eurobonds or their functional equivalent. She observes that Europe "is at the epicenter of the current crisis and thus key to the global outlook."

She also pushes the Obama Administration for more mortgage relief, though she tosses in a bit of the tired and misguided conventional wisdom about bringing down the public debt. But in the section on the US, she makes this statement that also seems to be a whack at Herbert Hoover economics in Europe:

This brings me to another worrisome tendency in many quarters—to view fiscal policy as a morality play between profligacy and responsibility. Political and market commentary is too often cast in these terms. Yet markets themselves have been schizophrenic about fiscal tightening, at times rewarding it with lower interest rates, and at other times recoiling at the implied growth slowdown and pushing up interest rates.
That's exactly the perspective of Angie's "ordoliberalism", and it has promoted a retrograde, nationalist outlook in Germany toward other European countries.

And I wish this were the actual perspective of the current American President:

One more point: We must not let financial regulation slip off the policy agenda. We simply cannot carry on with the financial sector that gave us the global financial crisis. We need a safer and more stable financial system, one that serves rather than destabilizes the real economy. While policymakers have made a lot of progress, they still need to complete the reform agenda and ensure that the new standards are implemented in a way that is consistent across countries. [my emphasis]
And these remarks at the end are clearly directed toward Bundeskanzlerin Merkel in particular:

But what we must all understand is that this is a defining moment. It is not about saving any one country or region. It is about saving the world from a downward economic spiral. It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand.

The longer we wait, the worse it will get. The only solution is to move forward together. Our collective economic future depends on it.

More than most, Germany understands the virtues of determined solidarity. Through its experiences with its Soziale Marktwirtschaft and unification, it showed what can be accomplished by bringing everybody together in service of the common good. The world needs a strong leadership role from Germany today, and it is Germany’s core interest to provide such a role.

Let me end with a quote from Goethe: "It is not enough to know, we must apply. It is not enough to will, we must do." (Es ist nicht genug, zu wissen, man muß auch anwenden; es ist nicht genug, zu wollen, man muß auch tun). This is the challenge of our year ahead.
Translation: Angie, it's time to get real, now!

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