The Schauble piece in the New York Times: ignorant and wrong about the economic facts
Schauble, the German finance minister, did it again. In the New York Times: distorting the facts using a mixture of ignorance and misunderstanding to push an ideological agenda. The finance minister of Germany is clearly is not only the man who kicks the can down the Autobahn by postponing badly needed government investments. To be more precise: who kicks this can towards the banks by (1) postponing investments (2) demonizing any kind of government deficit and (3) at a time when the German state has to pay 0% interest rate, tries to outsource financing of the badly needed maintenance investments to a private/public corporation which has to pay much higher interest rates than the state, did not know his facts. Pub quiz question: which party (the government or the banks) will, according to the present plans, bear the risk of these investments…
Schauble also is – and will be remembered as – the man who wrote inconsistent and wrong, not fact checked nonsense in the New York Times. This newspaper is famous for its fact checking but this opinion piece by a foreign finance minister seems to have slipped through.
* Inconsistent as he states that he despises debt financed spending. But at the same time he accepts that German banks and companies lend tens and even hundreds of billions of euro to counterparts in other countries – to quite an extent to finance spending. The housing bubbles in Spain and Ireland really were related to the German (and Dutch) current account surplus, the Euro and financial integration and all that!
Source: Eurostat, national account series.
* Wrong, as his idea that the so called recovery is led by an upswing in domestic demand in Germany is wrong. Germany is following, not leading. Domestic demand increased with 1% only during the last three years, despite sturdy job growth (until recently largely ’caused’ by a decrease of the length the average work week) and (the tide has turned) an inflow of immigrants of about 0,5% of the population a year. If, as Schauble suggests, Germany is not just in the recovery phase of the business cycle but somewhere at the top investments alone should have led to a larger increase of domestic demand – the increase is way too small to be complacent and clearly not the kind of upswing which can be related to even the recovery phase of the business cycle.
* Compared with the situation in the Netherlands (which has an even larger current account deficit (% of GDP) but which does not seem want to spend even a Euro of the 200% of GDP pension savings of the country to finance of new houses which, in the west of the country, are badly needed) these Germans are of course big spenders.
When Schauble does not want debt financed spending, countries like Germany and the Netherlands will have to invest their savings at home. It’s that simple.
Dear mr. Schauble: Varoufakis clearly does his homework. I suggest you start doing this too and, instead of pleasing your banking friends by wrecking the German state and promising them risk free returns, read this and start to think about the relation between massive current account surpluses in the Netherlands and Germany and housing bubbles in Spain and Ireland. Quote:
“We found a strong positive association between lagged current-account deficits and an appreciation of the real estate, where the real appreciation is magnified by financial depth, and mitigated by the quality of institutions. Intriguingly, the economic importance of current-account variations in accounting for the real-estate valuation exceeds that of the other variables, including both the real interest rate and inflation.”
P.S. – Dijsselbloem, the Dutch finance minister, also does not do his homework, as (according to De Volkskrant of this morning) he still seems to believe in the historical possibility of a 120% of GDP Greek government debt in 2020. Horrifying.