As the US have got its “Obamanomics,” the euro zone now have its “Merkelomics.” This observation was first made by professor of economics, George Irvin, who is a sharp critic of Germany‘s policy and especially the politics of the German chancellor, Angela Merkel. In George Irvin’s view, the euro zone led by Germany is trying to fix the problems of the economy by implementing American style solutions.
I’ve had a number of comments on my blog about my piece on Merkelomics, Irvin writes. I shall ignore the one which says “all debt is bad” – has the person in question has ever had a mortgage?
Let me take the more serious point made by one commentator who clearly wants the euro zone to succeed—a sentiment I share fully.
The commentator says: “I believe the fault in your analysis is that you don’t see the euro zone as a national economy in the making. If you were, you would’ve realized that it doesn’t matter whether euro zone exports originate in Germany or some other euro zone country.”
My reply? I do indeed wish that the euro zone were a national economy in the making and that I could praise the Germans for their export-led growth model. That German industry is admirably efficient I have no doubt (far more so than the UK).
But perhaps I can best explain the case for euro zone reform in the following manner. Below is a short “thought experiment.”
Let us assume—you can tell I’m an economist—that the contemporary USA were like the euro zone, that there was little labor mobility, no Federal Treasury, that Congress was weak and that power lay almost entirely with the individual states (as indeed it did in the late 18th century).
Let us further assume that because there was no Treasury but only a Central Bank, there was no federal borrowing and that individual states had to finance themselves through taxation and state bond issues.
In such a world, the “rating agencies” would look at the trade statistics of the various US states.
Suppose that most US state-level trade was with other states (which it is) and that Michigan and Ohio (which produced mainly manufactures) had enormous trade surpluses while the relatively poor states of Louisiana and Mississippi (which produced mainly fish) ran persistent trade deficits.
(Remember, this story is allegorical.)
Ohio and Louisiana might initially both have AAA+ ratings, but because Louisiana was dirt poor and suddenly was struck by a hurricane causing coastal devastation, its economy became a basket case and its tax receipts collapsed.
In consequence, the rating agencies downgraded Louisiana’s dollar bonds, making it nearly impossible for the state to borrow. Nor could Louisiana export its way out of trouble because, as part of the dollar zone, it could not devalue.
Drastic cuts (internal depreciation) would make it even poorer and more likely to default.
So Louisiana—-together with Alabama and Mississippi— needed help from richer states like Ohio and Michigan. But Ohio, Michigan and various other ‘northern states’ were not without internal problems, and their citizens were reluctant to help the “lazy and feckless southerners.”
Nor would they let the Central Bank buy the bonds issued by these poorer states … until a major crisis occurred.
I leave the reader to finish the story. Needless to say, the crucial point is that the USA is not in the above situation because it has the economic institutions necessary for operating a federal economy.
At least the USA had Alexander Hamilton and James Madison to shape its structure—today, Europe has Angela Merkel and Nicolas Sarkozy.
I’m not optimistic.
By George Irvin
(Read also: The Logic of Merkelomics)
George Irvin is a retired professor of economics and for many years was at ISS in The Hague. He is now (honorary) Professorial Research Fellow in Development Studies at the University of London, SOAS.
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