A factual rebuttal of remarks of ECB chief Jörg Asmussen, made at the Bank of America/Merill Lynch Investor conference

It’s sunday, an absolutely bright morning in spring – and I find myself taking down Jorg Amsussen, board member of the ECB, who held a speech titled:

“Eurozone cross-fire: the way out of economic recession – Assessment of a realist and a response to idealists and cynics“

Where did he go wrong?

Before going into details let me state that unemployment in the Eurozone periphery is not only higher than anything we’ve seen in the rich countries, post WW II, but very much higher, easily breaking the Finnish, East-German and Spanish records of the nineties. And its still increasing. This is atotal failure of economic policy (understatement). And not just economic policy of the periphery countries but also of EU and ECB economic policy, as is implicit in (A), below. It’s also a sign of the shift of old school future oriented policies aimed at increasing work, income and production to policies just aimed at the preservation of rent incomes (including the seigniorage interest incomes of banks make based on their deregulated monopoly of fiat money creation) and financial wealth. Alas, we can’t eat bonds.

A. First, the positive side. He states: “It is, at once, a crisis of public and private debt, a crisis of competitiveness and growth, and a crisis of trust; in institutions, in politics and in decision-making. Tackling the crisis successfully and comprehensively will require solutions for all of those.”  Only a few years ago the ECB, inspired by rational expectations economics, explicitly stated that private debt and differences between countries (competitiveness, as Asmussen calls it) did not matter. And did act the wrong way, as it’s still doing (partly, because they do not seem to be aware of the facts, see below). But, important – by now the ECB admits the existence of criticism. Wow (thank you, Paul, as well as a 1.001.069 people (yes, some robots, too) with a Twitter account). This is an improvement.

B. The mistakes.

B1. He states, about the reduction of unit labour costs: “The adjustment in Ireland has been spectacular, and translates into about an 18 percentage point improvement between 2008 and 2012. This means that the past excesses have by and large been undone.”

B1a. Dear Jorg, house building in Ireland has dropped to about 7% of its peak level. Productivity in construction is notoriously low. So, what does this mean for average productivity of the remains of the irish economy? For once, do the math. And comparable changes are taking place within industry where low productivity sectors declined even faster than high productivity sectors (Bank of Ireland quarterly bulletin 2011 Q1 p. 22). Unit labour costs in export industries did not decline as much as unit labour costs in the entire Irish economy.

B2. But according to Jorg adjustment still was a success: “In Greece, Portugal and Ireland, the current account balances have each improved by more than 7 percentage points of GDP between 2008 and 2012. (He is understating this, see also this blogpost about mediterranean current accounts, M.K.). It is true that much of the adjustment has been driven by a contraction in domestic demand. However, in Ireland and Portugal export performance has also been strong, because programme countries are now reaping the benefits from their significant improvement in cost competitiveness.”

B2a. Dear Jorg, you do not seem to be aware of the latest, absolutely dismal data on Irish export performance, December 2012 and January and February 2013: look here and here. Due to the expiring of patents the exports of especially the high-tech high value added high productivity modern growth sector of pharmaceuticals is falling from a cliff. Despite ‘adjustment’. The suffering serves no purpose.

B3. He states: “The adjustment in the Eurozone is underway. There is also no doubt it is painful, especially for the people in some countries of the periphery” .

B3a: make this ‘all countries of the periphery as well as almost all other Eurozone countries’, unemployment is high and/or rising fast everywhere except for Austria and Germany.

B3b: not really a mistake but fuzzy use of language: the word ‘adjustment’. Adjustment to what? Productivity is decreasing, in Greece. People are emigrating in droves, in Ireland. Long term unemployment, which causes income, skills and employability ‘scars’ which easily last a lifetime, is increasing rapidly. And there are scores of alternatives. The Spanish government could have extended university and other higher post secondary education studies with a year, lowering youth unemployment while at the same time ramping up de facto investments in human capital and decreasing de facto labor cost by introducing a mandatory year of (additional) internships – but instead of taking this future oriented approach they are only looking at the debt overhang from the past, lowering wages, increasing unemployment and evicting people from their houses. Yes, adjustments are taking place, but not the right ones.

B3c: the only real historical example we have of such policies, East Germany, was no success, despite massive emigration unemployment is still above 10% (even when this case did include a staggering amount of income transfers, unlike the periphery cases. And yes, in about five years East-Germany might be fine, albeit at a much lower population level, more than twenty-five years after re-unification).

B4. He states: “In programme countries, we have seen a strong improvement of structural primary balances since 2009. In Greece, for example, this is estimated to have improved by more than 14 percentage points of GDP between 2009 and 2012. To put this into context, in this country, the ‘sequester’ calls for cuts of 1.2 trillion dollars over ten years. The equivalent of what Greece has done would have meant for the US an adjustment of 1.6 trillion dollars over three years”.

B4a: Wasn’t this sequester meant to be absolutely, absolutely scaring… Anyway, unemployment in Greece is 27%, a level which rapidly destroys massive amounts of wealth, capital and even Greek society. And Jorg is proud of this? He is actually boasting about this? But the more important point: the Greek need a higher income to be able to py down their debt. However – Troika policies are at the moment preventing any kind of event which might even vaguely resemble economic growth. For one thing: things might have stabilized by now, but the system of European Central Banks utterly failed at keeping the amount of money (M-3) in Greece at an acceptable level, Milton Friedman and Irving Fisher and  John Maynard Keynes must be spinning in their graves,  this is the time for ‘helicopter money’ (even when it’s earmarked to pay of debts). But the opposite is happening and at this moment Greece is having a double whammy: real GDP as well as the GDP deflator are declining (and remember: this deflation thing is exactly what the ECB wants!) which means that ECB financial repression causes nominal income in Greece (the important thing when it comes to paying off nominal debt) to plummet. And don’t think that the Troika understands those things. I read a kind of draft Memorandum of Understanding for Cyprus from October . It was utterly devoid of anything even resembling macro-economics (believe it or not, but abolishing the ‘siësta’ for government workers seems to be the way ahead for Cyprus, according to this document) . But more on this tomorrow when Eurostat publishes new data on government debt and the like.

B5. He states: “Government bond spreads now fluctuate at much lower levels compared with the peak of the crisis. This will eventually also facilitate the return to bond market access in Ireland and Portugal. This was also assisted by the announcement of Outright Monetary Transactions (OMTs), which contributed significantly to removing redenomination risk in the euro area.”

B5a. Translated (and I do not mean this in an ironic way) this means: interest rates were absolutely crushing and they are lower but still way too high and we want them to be much lower but we can’t engineer this.

B6. He states: “The ECB can only take measures that are consistent with its mandate. Our primary objective is price stability, we do not have the wide mandate which for example the Federal Reserve has.”

B6a. Notice: “prime objective”. But that objective is, even when we accept a narrow reading of the treaties, only the prime objective when inflation-in-the-medium run is higher than the ECB target, which is not the case. Also, the ECB might change from an inflation target to a price level target (more interesting in a situation of debt deflations), they are entirely free to do this (as the inflation target is a ‘medium run metric they in fact have a de facto hybrid target, at the moment). At this moment, GDP-deflation has been about a percentage point below the ECB almost 2% target for four years in a stretch which means that when the ECB targeted the price level instead of inflation and considering inflation predictions they have a five percent of nominal GDP policy freedom margin. Which, considering levels of unemployment which are by a wide margin the highest of the post WW II developed world, has to be used. As the ECB does have a clear and binding prosperity mandate and is at the moment not restricted by its inflation mandate in any serious way.