ECONOMICS' DIARY IN THE EURO AREA BETWEEN EVIDENCE AND MYTHS

1. THE SYLLOGISM

(Aristoteles, 384 BC - 322 BC)

Major premise: All humans are mortal. Minor premise: All Greeks are humans.        Conclusion: All Greeks are mortal.

For years citizens in the Euro area have been informed that only by pursuing policies of rigour the economies of the countries with large public debts would have  increased.  

Although their crushing effects, on the base of this reasoning still now the austerity policies are widely implemented in the euro area (EA). 

We can see in Figures 1-4 the ratio of public debt to GDP and the GDP growth rate for some countries compared to the averaged series of the EA countries in the period 2000-2013.  

Figure 1. Ratio public debt to GDP: EA vs. rest of the world (2000-2013).

Figure 2. Ratio public debt to GDP within EA (2000-2013).

Figure 3. GDP growth rate: EA vs. rest of the world (2000-2013).

Figure 4. GDP growth rate within EA (2000-2013).

After the 2009 collapse all the EA countries (except for Greece) reacted and reverted the trend. But, Greece, Spain and Italy have not yet escaped the recessive dip and the other countries seem to have run out that booster shot. Outside the euro currency area, the courses of the GDP growth rates have been sustained and after the 2009 downfall they all recovered positive values. India and China have absorbed the shock quicker and more effectively than the other countries (indeed the two big asian countries did not experience negative rates)

Figure 5. GDP growth rate vs. ratio public debt/GDP 

By comparing different countries (Brazil, China, EA, Russia, USA) between 2007 (pre-crisis) and 2012, we notice that all of them (except for the USA) have sharply decreased their growth rate, but only EA and USA have significantly increased their ratio public debt / GDP. 

2. CHANCE AND NECESSITY  

So as to make the conclusion robust, the major premise must be consistent. In 2010 Kenneth Rogoff and Carmen Reinhart, both professors at Harvard, in their work "Growth in the time of debt" [here] compare the GDP growth across varying levels of debt for forty-four countries over the period 1946-2009. Their major findings are that the low-indebted countries (i.e., with the ratio public debt to GDP < 30%) have grown at the average rate of 4.1%, the middle-indebted countries (i.e., with the ratio public debt to GDP from 30% to 90%) have grown at the average rate of 2.8%. The countries with the ratio public debt to GDP above 90%, which are classified as high-indebted countries, have scored the less rate of growth: -0.1%. Therefore, these results would support the theory that high-indebted countries need reduce their debt level for returning to grow. The supporters of the measures of austerity  have found in this work of Rogoff & Reinhart the "scientific" basis, for their economic "belief system". So, they did not let get away this chance of representing the implementation of the rigour measures as a "necessity" proved by scientific evidence. 

(Marcus Tullius Cicero, 106 BC - 43 BC)

The wise are instructed by reason, average minds by experience, the stupid by necessity and the brute by instinct.

3. ANANKE AND NEMESIS


The logical conclusion, i.e., the necessity of reducing deficits by the combination of raising revenue and/or cutting the government spending has been recently proved to be false.  
In 2013 Thomas Herndon, Michael Ash and Robert Pollin, from the University of Massachusetts Amherst, have tested the findings of Rogoff & Reinhart. By using the same data set they have verified that the average GDP growth of the high-indebted countries is not dramatically different than that of the less indebted countries [here].The study of Herndon, Ash and Pollin reveals that the calculation of Rogoff & Reinhart was wrong because of the selective bias introduced by the exclusion of some countries and some years from the computation caused by missing data and algorithm bugs. The revised computation of Herndon, Ash and Pollin reports that the average growth rate of the high-indebted countries over the period 1946-2009 equals to 2.2%.                                                                                                                              

                                                                                              (Nemesis, Alfred Rethel 1834, 

Ermitage Museum, St. Petersbourg, Russia)

However, it is confirmed that  the less indebted countries tend to grow at higher rates. Also Paul Krugman has criticized the work of Rogoff & Reinhart [here]. Some doubt that the deflation policy in recessive economies does not facilitate the GDP growth has risen even within the IMF [see Blanchard & Leigh (2013). Growth Forecast Errors and Fiscal Multipliers. 3 January here]. After having promoted for years the correlation between rigour policy and GDP growth, the IMF officials notice that they underestimated the macroeconomic multipliers and realize that any cut of public expenditure in recessive period affects the GDP growth more than normally expected.

"...earlier analysis by the IMF staff suggests that, on average, fiscal multipliers were near 0.5 in advanced economies during the three decades leading up to 2009. If the multiplier underlying the growth forecasts were about 0.5 as this informal evidence suggests, our results indicate that multipliers have actually been in the 0.9 to 1.7 range since the Great Recession" [Blanchard & Leigh (2013)]

4. THE NEIGHBOR'S GARDEN IS ALWAYS MORE ... GRAY

Therefore, the paradigm of the fiscal policy should be revised. But the supporters of the austerity and of all the collateral measures of income drainage, do not resign themselves to the evidence. We have already reported [here] the comment of the Eurogroup President and Minister of Finance of the Nederlands, Mr Jeroen Dijsselbloem, about the Cyprus' rescue program   

The current Eurogroup President, Mr Jeroen Dijsselbloem, who is also the Minister of Finance of the Netherlands, hailed the agreement between the government of Cyprus and the troika (EU-ECB-IMF) about the bank rescue as a template for bank restructurings:

 "The agreement reached tonight puts an end to the uncertainties of Cyprus and the euro zone, "said the President of the Eurogroup, who explained that" the agreement avoids the tax, and allows a thorough restructuring of the banking sector in Cyprus." 

The Minister of Finance of Germany, Wolfgang Schaeuble is defending and repeating [here] the same concept of the dutch homologous: 

"the involvment of owners, bondholders and uninsured depositors has to be the norm if a financial institution runs into trouble"

Honestly, such a proposition is one of the most illogical that I've ever heard from a Minister of Finance. Not by accident Great Britain has managed to hold off the trap of the euro currency. 

(dreaming a free land)

Strange times these we are living. Something of unexpected is overhanging the core countries of the EA. For example, what's going on in the Nederlands? Figure 6 plots the house price change over the period 1998-2012.

Figure 6. House Price change (% change over a year earlier) in the Nederlands: 1998-2012

Source: [here]

The Netherlands is facing a potential economic crisis on  the back a severe housing price correction, whereby house prices fell by -8% in the  year to December 2012 to be down -18% since prices peaked in 2008, pulling many  Dutch households into negative equity. 

Figure 7. Unemployment rate in the Nederlands: 2011-2013

The labour force data indicate that the Netherlands’ economy has deteriorated further, with Dutch unemployment increasing to 8.1%. The industry sector that has suffered from the largest leakage is the building industry. 

Another warning signal comes from the data of growth rate:

Figure 8. GDP annual growth rate in the Nederlands: 2007-2013

Of course, the increase in the unemployment rate relates to the worsening of the economy. Since the second half of 2011 GDP has declined (from +1.6% in Q3 2011 to - 1.2% in Q1 2013). 

Financial Times (18 April 2013) reported that just two years ago, at the beginning of the austerity plague, the Nederlands had the lowest unemployment rate. 

But the euro crisis has striken an economy where the housing policy for years have boosted easy credit and inflated the housing bubble (a third of mortgages guaranteed by the government, mortgage interest tax relief, and other forms of subsidies to the home market). This pace recalls something similar which happened in Spain:  

Figure 9. House Price change (% change over a year earlier) in Spain: 1994-2012

Source: [here] 

With bankrupticies ramping at record levels in February and with unemployment exceeding the expectations, will the Minister of Finance, Mr Jeroen Dijsselbloem, change his own perspective on the austerity faith ? In the worst scenario of crisis of the domestic bank system, will he make the Dutch citizens prove the same foolish model of bank restructuring that has been used for Cyprus and that he blessed as a good model ?  

Germany, is living the euro crisis with no apparent drama. At a first glance it seems all right in Berlin, doesn't it? But can really Germany  keep safe while even more EA countries are burning?  

( Nero Claudius Augustus Germanicus, 37-68)

Although the unemployment rate has kept on decreasing and now is stable at 5.4%, the labour force is partitioned.

Figure 10. Unemployment rate in Germany: 2011-2013

The 22% of the employees work in the so-called mini-jobs most of which involve low-skill positions. A special tax regime holds for the mini-jobs: they are exempted from tax and social insurance payments (for salaries up to 400 euro). The employers pay contributions for the social insurance of the mini-jobbers that are lower than those for homologous regular jobs, therefore mini-jobbers lose the benefits of building up pension claims. Certainly, they have contributed to the restraint of the labour unit cost making Germany more competitive and still now they are a pillar of the deflation policy.

A study of the university of Duisburg-Essen [here] has showed that mini-jobs produce wage "traps". 

"Stagnating wages and increasing shares of low-wage and

precarious employment provided a weak basis for domestic growth" 

Research material on the mini-jobs issue  also [here], [here] and [here].

Maybe some ripple effect is beginning to seep through the overconfidence on the german solidity.

Figure 11. GDP annual growth rate in Germany: 2007-2013

The GDP growth rate has lost 4.6 percentage points from Q1 in 2011 to Q1 in 2013. This result relates to the negative GDP perfomances of many trade partners in EA whose markets are now less receptive to import. Besides, the "quantitative easing" measures of USA and Japan contribute to overvalue the euro currency on the international markets.  thus undermining the market penetration of the german export. 

Figure 12. Value of german export (billion euro): 2007-2013 

The time course of the value of export (Figure 12) confirms the break of the export rally (started in 2009). We can see a similar pattern in the series of the housing prices:

Figure 13. House Price change (% change over a year earlier) in Germany: 2007-2013 
Source: [here]

It would be beneficial for the whole EA to find an agreement and review the rigour policy. In this phase of the economic cycle it is necessary for the European Union sake to implement measures which improve the GDP along with eliciting new passion for the idea of Europe.