13 December 2008

ALERT: economic ignoramus in the German Treasury (or perhaps not?)

I'm a couple of days late blogging on this one but it's been pretty mental this week and well... better late than never. 

German finance minister Peer Steinbruck has criticised the UK's macroeconomic policy of fiscal expansion as "crass Keynesianism".

Reading the BBC piece on Steinbruck's critique it's hard to avoid the conclusion that - unless he's been horribly misrepresented - this guy is an economic ignoramus who should not be let anywhere near any government department, much less the finance department. However, he may have been misreported - see below. 

The BBC article makes Steinbruck sound like the kind of imbecile who was running US economic policy between 1929 and 1932 - when the world slipped into the biggest depression of the 20th century. More recently, he sounds like an adviser to former UK chancellor Geoffrey Howe, whose 1981 budget turned a downturn into a slump by contracting the economy during a recession. If we listen to people like this (or indeed to George Osborne, who jumped on the bandwagon to say the recent VAT cut was wrong) we are totally sunk. Fortunately neither Steinbruck nor Osborne have any credible alternative plan so they're unlikely to convince many people - hopefully. 

Now, certainly the details of the UK's fiscal expansion plan are open to criticism. The VAT cut will be less effective than a spending boost at stimulating demand because some people will just save the extra money rather than go out and spend it.  But only an idiot would disagree that we need some kind of stimulus to the economy now. The most important critique (as voiced by Paul Krugman) is that the stimulus ain't even halfway big enough

There's also a spirited riposte to Peer Steinbruck from Krugman here - which also contains a reference to a longer interview with Steinbruck in Newsweek. Actually, reading this, Steinbruck doesn't come across nearly as badly - maybe he has been horribly misreported by the BBC after all. According to Newsweek, Steinbruck supports the €31 billion German stimulus package - his main point is that we are in rather uncharted territory here and there is no magic "rescue plan". Which is true - I'd agree with that. But by the same token, this doesn't mean that the best course of action is "do nothing". In particular, a co-ordinated European reflationary package will be more effective than a patchwork reflation by some European governments but not others. In the end, the most serious critique of Steinbruck is that he's opposed to co-ordinated action like that - running the risk that the failure of the fiscal stimulus becomes a self-fulfilling prophecy. 

1 comment:

Van Patten said...

The main problem of a co-ordinated response is the difficulty in providing one - this is especially true of the EU countries. How do you think the UK electorate will react if a coordinated response involves diverting resources from the UK to,say, Slovakia or Bulgaria? Howe do you think electorates, for that matter in France,Germany, indeed in any EU state will react - a Good barometer of public opinion is the Red top press or the 'Daily Mail' and a recent story wherein UK organs went to patients in Cyprus, Malta and Poland (all now EU states) gave an interesting insight into how 'pro-EU' the UK electorate is. The forthcoming European Parliamnetary elections should see at least 15 UKIP MEPs, pushing Labour into 3rd place, and will again indicate the level of dissatisfaction with the EU.

One of the factors that intensified the Great Depression was each country trying to do its own thing, that's certain. Sadly, despite what pro-EU voices might wish, the EU remains a mishmash of states without even the rudiments of a common culture or common interests. This is likely to be its sternest test yet, and at the minute (riots in Greece, similar disruption in Italy and Spain scheduled) the 10th anniversary celebrations for the Euro look like the most inappropriate display of hubris since Neil Kinnock's 'victory rally' in 1992! The organisation remains mired in corruption, hopelessly unresponsive to the economic crisis, and facing a democratic deficit probably only equalled by Zimbabwe or North Korea. It's response to the Irish referendum (The only country allowed a refernedum on the Lisbon Treaty, and being heavily pressured to change its constitution to ensure no further embarrassing displays of populist opinion are allowed) shows what kind of organisation we are dealing with.

As for Steinbruck's comments, they were grossly over-simplified by the 'Brussels Broadcasting Corporation'. However, Germany, although facing significant difficulties, is nowhere near as badly off as the UK, so I'd hazard his comments worthy of at least some consideration.