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Hypocritical and Hippocratic Economic Policy in Europe

The crisis is multilayered-a bank crisis in the narrow sense, a crisis of wealth distribution and a misallocation of capital between long-term real investments and virtual financial investments, the latter without discernable social benefits.. The frugal Schwabian housewife is not a suitable model for fiscal policy. The equation of public with private debt carrying capacity is a classical fallacy from part to whole.

By Andreas Botsch

[This article published in 2014 is translated from the German on the Internet and is the third chapter of the German-English anthology "Restoring Shared Prosperity," December 2013. Andreas Botsch is a spokesperson in the German DGB union.]

[In the eighth direct election of the European Parliament, the margins of the political spectrum in Europe were strengthened as never before. 30 percent of the delegates in parliament understand themselves as opponents or at least skeptics of Europe's deepened political and economic integration. The reasons can be identified essentially in the failed combating of common crises.]

The nation-state is the main authority of European governments where only more and a better Europe could have effectively tackled the massive financial- and economic crisis continuing since 2008. Leading German politicians like German chancellor Angela Merkel and her finance minister Steinbrueck (until 2009) and Schauble according to Goethe's poem on the citizen's duty ("Everyone puts his own house in order and the city is straightened out") resist a European bank bailout fund. The crisis is multilayered - a bank crisis in the narrow sense, a crisis of wealth distribution and a misallocation of capital between long-term real investments and virtual financial investments, the latter without discernable social benefits. Moreover it is deep crisis of trust that should have called for a clear analysis and answer of Europe's governments.

Since the crisis year 2010 it was clear that Europe's governments would neither grapple with the causes and deep-seated reasons of the financial crisis nor earnestly tackle the momentous consequences of an incomplete monetary union. In the common Euro monetary zone there are not 18 houses that everyone can put in order. The 18 member states of the eurozone share a common house but have long neglected to build a solid inner construction of the house stable and secure for the future. The political denial of this fact was and is expensive for Europeans. The result was eleven quarters of deep economic recession, mass unemployment at all-time record highs and far-reaching uncertainty about the future prospects of present and future generations on the labor market in what was once the most economically viable and competitive continent of the world.

Europe's governments could have known better and acted differently. Recourse to dysfunctional and counter-productive prescriptions of the neoclassical economic mainstream followed a brief and very successful spring of Keynesian economic policy (Skidelsky 2010). The mainstream's neoliberal aberrations gave rise to the worst global crisis since 1929. Its new hegemony defines the policy for overcoming the crisis in the eurozone - and causes the deep economic upheaval in Southern Europe as well as great social hardships.

This economic policy can only be described as hypocritical, that is lying, insincere, dishonest, underhand or mendacious. Encyclopedias define hypocrisy as morally or ethically negative conduct, as concealment of true mentality and pretence of a false mentality arising from selfish interests. In the following, the seven most fatal hypocrisies of European economic policy are identified.

1. Belief in austerity policy or "debts cannot be fought with more debts." Never in economic history has savings in a downswing led to the desired success. Demand and production fall when all economic actors (businesses, private and public budgets and foreign countries) tighten their belts at the same time. The state undertakes little - but must actually spend more for the increasing social problems. The austerity paradox described by Keynes in 1936 means that saved assets altogether fall when everyone tries to save and no one becomes indebted any more. Seen from a macro-economic perspective, saving is harmful. We must grow out of crisis and can never save out of a crisis. Quod erat demonstrandum. Despite years of public and private savings, the debt state in the EU today is higher than ever.

2. The frugal Schawabian housewife is not a suitable model for fiscal policy. The equation of public with private debt-carrying capacity is a classical fallacy from part to whole ("fallacy of composition"). What is right for individuals can be harmful for the whole. Private households and businesses must pay attention to their debt-carrying capacity and reduce their interest-burdens to a tolerable level while state budgets are obliged to protect aggregate economic stability. In a balance-sheet recession in which private actors write off their (property) assets, the state or the EU as a whole on the European plane ensure that the total economic demand does not collapse through Eurobonds or a European monetary fund. If Japanese policy had acted like the EU after the 1990 bursting of the real estate bubble, the prosperity level of the Japanese economy would be a third lover today than it is (cf. Koo 2012). A policy oriented in the private economic logic that decries debts as morally reprehensible could end fatally for the patient Europe.

3. Debts as Growth-Brake. A public debt of more than 90\% of the GDP would automatically strike the future economic output according to a politically influential study by two conservative US economists (Reinhart/ Rogoff 2010). Commission president Barroso and his representative Olli Rehn, Angela Merkel and Europe's top politicians cited this study to defend their narrowing of Keynesian stabilization- to austerity policy in the spring of 2010 and to justify their demand to introduce a general debt brake of public budgets and cutting the deficits in half by 2011. Three years passed until three US researchers criticized this study as methodically flawed and put its underlying Excel-tables on the Internet (Herndon/ Ash/ Pollin 2013). As a conclusion, politics should hold to empirical facts and not to fictional models.

4. Wasteful budget policy of high-spending governments as a cliché. Contrary to widespread prejudices, the countries at the periphery of the eurozone are not living "above their means." Only the Greek government can be reproached for a dubious budgetary policy that veiled the actual amount of its deficits for years with the help of financial instruments of the Goldman Sachs investment bank. That even amounted to 10\% in 2010. Between 1999 and 2007, deficits and indebtedness fell while the private indebtedness rose more than 50\% (EC 2011). Simple algebra was ignored when the term "expansive contraction" was disseminated in Europe to show that austerity policy at the end promotes growth. That the debt state is a quotient with the GDP in the denominator was "ignored." When this debt state becomes less and the GDP contracts, the value of the quotient or debt rises. As a result, the quick increase of state indebtedness was a consequence of the bank bailouts and the Great Recession in Europe, not their cause.

5. The Bailout Lie. The "bailout of the Troika (Commission, European Central Bank and the IMF) for the crisis countries rescued the banks of the creditor-countries, not the economies. These programs contain harsh conditions to realize an internal devaluation since a minimal devaluation is no longer possible with entrance in the monetary union. The prices for that are lower wages and pensions, the extensive shattering of the collective bargaining of the unions, dismantling public health- and social services as well as drastic cuts of spending on education and research. The European Central Bank can only step into the breach in the most extreme emergencies - and help countries with financing problems on the capital market. This may only happen under strict austerity conditions. This widespread view ignores a basic problem of the eurozone. Only when the Central Bank can act unrestrictedly on the market for government bonds can it also play a stabilizing role as master of money in Europe. This happens best in cooperation with a European financial ministry still to be created.

6. Competitiveness as a panacea or cure-all. Only individuals can succeed through cost-cutting in the attempt to improve market position. Businesses, not states or national economies are "competitive." States can only rival one another for land and population. That was the conception before the two murderous world wars in the first half of the 20th century. If this concept is applied to national economies of a monetary union and everyone continues simultaneous savings, a downward spiral is triggered for wages, taxes and social standards at whose end no one is "more competitive." Everyone is poorer.

7. The financial market is sufficiently regulated. This hypocrisy may be the most serious. A Great Depression as after 1929 could be avoided. However the basic principle of self-regulation of banks and financial institutions is not shaken despite ten-thousand pages of European financial market laws. The financial sector in Europe with 350\% GDP is larger and more concentrated today than ever before and proves to be one of the greatest growth obstacles (OECD 2014). Prohibiting banks from this or that business or allowing them to weigh their risks themselves is not enough. An absolute capital-holding rate must be imposed on banks. Instead of creating speculative bubbles, banks that serve the real economy must be smaller, structured more simply, oriented less in the short-term and more democratically constituted (cf. Botsch 2014).

Conclusion: Alternatives in politics are possible to all the cited hypocrisies. As described, these must follow Hippocratic principles, an exact sequence of medical history, diagnosis and prognosis. Hippocrates described the basic relation between doctor and patient as follows: "The doctor should say what was in the past, recognize what is present and predict what will be in the future... In treating sicknesses, persons should be helped or at least not harmed. Our art covers three things: the sickness, the sick and the doctor. The doctor is the servant of the art. The sick must resist sickness together with the doctor" (Hippocrates, Epidemics, Book 3). The principle of Hippocratic economics results when "economist" replaces "doctor." Like the former, the economist should not inflict any harm. So trust and the basic principle of every market economy, the unity of risk and liability (Walter Eucken) can be restored.

The crisis is not overcome. The latest brightening on the economic horizon may not obscure the fact or make us blind that the majority of EU countries are worse off today than before the crisis. Direct and indirect costs of the crisis up to 2012 amounted to 4.5 trillion Euros... If the Hippocratic policy is not changed, the annual distance to the US would amount to 750 billion Euros. This welfare loss, note well, would be realized with a "Hippocratic" economic policy.


Frithjof Bergmann, A 2020 That We Could Attain, 41 pp

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