American politics
America and the euro crisis
Debt, guilt and America's good fortune
Nov 8th 2011, 21:45 by M.S.
PAUL KRUGMAN writes to explain why current-account imbalances between American states aren't as dangerous a matter as those between European states. Basically, there are three reasons: Americans can move to booming states easily to find work when other states slump; the US federal government reaps the benefits no matter where the boom occurs, and can transfer tax revenues to slumping states; and an integrated banking system with a single lender of last resort helps keep panic anywhere from turning into successive panics everywhere. So the fact that Alabama runs a current-account deficit with New Jersey doesn't turn into a massive national debt crisis.
This is a side note to Mr Krugman's widely-read post earlier in the day drawing off of Gavyn Davies's column on thinking about the euro-zone mess as a product of current-account balances. Basically, the point is that inside the euro zone, Germany and the northern countries are running huge current-account surpluses, and Greece, Italy, Portugal, Spain and so forth have been running very large current-account deficits. Under those circumstances, the southern countries are going to end up heavily indebted to the northern countries. The reasons for the current-account balances had much to do with the German export powerhouse, and in the pre-2008 period with property investment in Ireland and Spain which attract investment flows. In the Greek case, they were also heavily related to government borrowing. But as Mr Davies and Mr Krugman say, the current-account flows had a great deal to do with the introduction of the euro, and it's going to be very hard to get rid of them while these economies remain inside a common currency. In this view, the received narrative about the euro-zone crisis (southern Europeans are lazy, their governments are irresponsible, they borrowed too much money) is to a great extent a German-influenced moral fable. Mr Krugman provides this rather striking graph showing the divergence in current-account balances between Germany and the southerners (Greece, Italy, Portugal and Spain):
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This looks almost too good to be true, and one immediately wonders whether 1999 might not have been an exceptional year somehow. Surely in the longer run the industrious Germans must have been running surpluses, while the southerners were enjoying themselves on the beach, retiring early and living on credit? Well, no. Mr Krugman's graph may emphasise things a bit starkly, but the current-accounts picture was certainly very different before the introduction of the euro. Here's what I got from OECD data; apologies, again, for my awful Excel skills. (The OECD data don't include Portugal. Also, for France and Greece, I had to fill in the years 1995-2000 using GDP data from Eurostat, as the OECD didn't have it.)
What you see here is Europe's economies, which were supposed to converge as a result of the introduction of the euro, instead diverging. Italy and Ireland were running substantial current-account surpluses in the late 1990s, while Germany ran a deficit. The 2003-07 recovery saw dramatic deterioration in the current-account balances of Greece, Italy, Ireland and Spain (and to a lesser extent France), while the balances of Germany and the Netherlands shot up. It certainly looks like there are some euro effects going on there.
These are total current-account balances with the entire world, rather than internal ones inside the euro zone, so they don't entirely reflect the picture of money flowing between Europe's north and south. But most of European countries' trade is with other European countries. I realise that, as a smart guy wrote last week, we liberals may be more inclined to support non-moralistic economic narratives that assign less of a role to individual responsibility. But this non-moralistic way of looking at the euro-zone crisis seems pretty convincing to me.
What I find really fascinating here, though, to get back to Mr Krugman's post, is that it doesn't occur to anyone to create a moralistic fable around the current-account balance disparities between American states. And this points to an arbitrary element in the way our concept of guilt works. When functions are assigned to two different entities, and there's a persistent disparity between the two, we may begin to introduce attributions of blame. When these functions take place inside one entity, we just think of it as part of the entity's normal flow of operations. Beyond this, there are clearly cultural elements involved in Americans' historically high tolerance for debt and default. Other countries' business cultures have more moralistic attitudes towards bankruptcy. Notably, as Mike Konczal wrote the other day, a famous philosopher made much of the tendency of Germanic peoples to conflate "debt" with "guilt", visible in the fact that they're the same root in German (schuld):
Have these genealogists of morality up to now allowed themselves to dream, even remotely, that, for instance, that major moral principle “guilt” [Schuld] derived its origin from the very materialistic idea “debt” [Schulden]?… By means of the “punishment” of the debtor, the creditor participates in a right belonging to the masters. Finally he also for once comes to the lofty feeling of despising a being as someone “beneath him,” as someone he is entitled to mistreat—or at least, in the event that the real force of punishment, of executing punishment, has already been transferred to the “authorities,” the feeling of seeing the debtor despised and mistreated. The compensation thus consists of an order for and a right to cruelty.
They're both "schuld" in Dutch, too. To say that the Greeks and Italians are in debt (schuldig) is already to say that they're guilty. And I'm going to take this opportunity to annoy a lot of Dutch and Germans by saying that I think this may be related to their self-defeatingly punitive anti-Mediterranean attitudes in euro-zone rescue negotiations. Fortunately, England was conquered by the French in 1066, and the long period of French-language hegemony in the English ruling class left us Americans with a healthy conceptual distinction between debt and guilt that still usually places us on Paris's side of the monetary-policy divide in Europe.
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Well, the argument is somewhat ridiculed when thinking about what the UK 10-year bond is called...gilt.
Now I see why the Portuguese were compelled to buy 2 German submarines (1,2 Billion each) while the Greeks had to buy 6 of those. They were more guilty.
Previously I thought We had a simple agreement. We should destroy our agriculture, our fishing and industrial capacity and change to a country provider of services and technology advanced. At the same time we should buy the Mercedes, The Renaults, The Nokias of Europe with the EU support, helping to keep the European working force working. We honored our part of the deal. I think we forgot the fact that walking that path one needs to be guilty to aspire a better life.
J. Almeida e Paiva
With regards to the linguistic discussion and whether they are causes or are indications of cultural norms, the Scandinavian words follow the same pattern as in Dutch or German (skyld in danish meaning both guilt, and debt).
Returning to the more pressing situation at hand, Germany naturally can not to be blamed for lack of structural reforms in the Med club, as Fiscal Conservative pointed out. However, the current account balances on internal EU trade are problematic if allowed to continue and an American-type fiscal redistribution seems politically unlikely. One answer, a part from increasing labour mobility through common regulations across the union, one could try to analyse the old construct envisaged by Keynes as the third leg of the international trade system, the international clearence organisation. Fitted into a EU perspective this construct could fine (or reduce voting rights if that's your thing) members for running current accounts with the rest of the EU outside a span of say +/- 2% of GDP. The intention is to induce savers to spend and spenders to save as a way of correcting imbalances in trade.
I liked your analysis of Germanic linguistic peculiarities relating to Dutch and German attitudes towards guilt and debt. It is interesting also that the line between pecuniary debt and moral fault were not all that well defined before the introduction of separate civil and penal codes. Another interesting fact is that pecuniary analogies and terminology concerning sin and salvation are particularly prevalent throughout Germanic forms of Christianity, such as Calvinism and Lutheranism. Nonetheless, a small clarification is in order: in Dutch "schuldig" means "guilty", but not "in debt". "Schuld", however, means both "fault" or "guilt" and "debt".
Thank you for cherry picking your data to prove your point, as you started measuring current account deficits only after the ERM crisis in the early 90s whereby Club Med countries already devalued their currencies against the dmark ahead of the fixing of rates for the EMU in 1999.
Of course, that boost in relative productivity was reversed through a decade of low, slow growth in Germany as they paid for the integration of the former ex-GDR, as well as made payments to the EU's budgets, and became more export competitive. The Club Med countries could have used interest rate convergence, and the stability of the euro, to make structural changes to their economies, but instead they went on a spending orgy. I guess that is Germany's fault, too?
Interesting stuff. Greece is getting the headlines nowadays, but they represent a small fraction of the EU total economy.
The real potential problem lies in the other bigger PIGS countries. Please kindly check out my recent data visualization of EU employment rates(with highlights for PIGS and other countries) since the 1980s.
http://dataillumination.blogspot.com/2011/11/getting-data-and-bit-of-vis...
Scroll to the second chart for the animations. I also just added EU debt as a % of GDP on the map at the end per the latest news. Please kindly note you'll need Adobe Flash to see the animation. Thanks.
While the negative correlation between the current account balances of Germany and the peripheral countries' is intriguing, blaming EMU membership is definitely an oversimplifiaction, to say the least.
Taking a closer look at the chart pictured, the Greek current account deficit reached a preliminary maximum at 7,7% in 2000 and actually fell during the first years of EMU membership to 5,8% of GDP (2004) and only reached a new high in 2006, albeit at a clearly unsustainable level of 11,2%.
The other countries showing a severe deterioration were Spain and Ireland, both experiencing real estate bubbles, which had nothing to do with low German unit labot costs or the inability to devalue. Finally, in the text you mentioned among others Italy running very large current account deficits. Italy's current account deficit peaked at 3,4% of GDP in 2008 (a time of extemely high energy prices) and averaged 1,6% of GDP during the 10 years prior to that.
By the way, adding the US to your chart would show a signficant deterioration of the current account from a deficit of around 3% in 1999 to 6% of GDP in 2006.
Coming back to Europe, foreign trade data in real terms shed further doubt on the EMU membership as the root cause of the peripheral countries' problems. Looking at growth rates during the 10 years prior to EMU acession (1989 - 98) and comparing them with the first 10 years of the EMU (1999-08) shows that Greece export growth only slowed down marginally from 55% to 50%. Import growth was even slower during the more recent period. The latter is also true for Spain, Portugal and Italy. Exports on the other hand showed a diverging picture. Spanish exports even accelerated, while Italian exports posted a significant slowdown. An uncompetetive exchange rate would result in decelerating exports and accelerating imports, none of which can be seen consistently among peripheral countries.
Greece only fixed its exchange rate in 2001 so two years later than the counties mentioned. But since Drachma movements versus the Euro were minor during these 2 years and to allow for a comparison it seems legitimate to use the same 10 year comparison periods.
I guess that's why American are addicted to debt-financed consumption, since in English the word "credit" means being recognized for one's efforts. In school, teachers reward us for doing extra credit assignments. In college, we equate credits with academic accomplishment. Noncredit courses are usually regarded as unserious, irregular, or even farcical. In movies, appearing at the top of the credits means you're a big star.
So there's no shame in living on credit. After all, banks wouldn't have extend it to you unless you were extra special.
In the end, this is all for the good of those who were content with being left behind.
Eurozone countries with large trade deficits have now a choice:start producing stuff the rest of the world is willing to pay for or go bust and descend into almost Third World status-the way Argentina did in the first half of the XXth century.
Chances are they will do their utmost to become competitive now that they are between a rock and a hard place (or Scylla and Caribdis).
"And those who don´t didn´t deserve surviving" claims a deep (German) voice in a black and white movie about schoolchildren watching black rhinoceros beetles fight for food and mates inside a large glass box.
One other thought. You mention that "Americans can move to booming states easily to find work when other states slump", the implication being that it's harder for Eurozoners to move to find work because of national boundaries. It's a fair point but one of the things which strikes me about British economic history, certainly in the last 30 years, is the limited labour mobility within the UK. (I don't have any statistics to back that assertion.) Why are Americans more willing/able to move than Brits?
Why are Americans more willing/able to move than Brits?
Just at a guess, if your family has only lived in one place for a couple of generations, your roots are more shallow than if they have been in the same place for centuries. And virtually all Americans have had their families move within the last generation or two. Many have moved house a couple of times before they finish school. Two very different traditions, both influencing the behavior of those within them.
As for your argument about "Germanic" attitudes, what about Margaret Thatcher's determination to secure a British rebate on EU contributions on the basis that UK taxpayers should not subsidise continental farmers? Mrs Thatcher may regard debt-moraliser as a compliment but I'm not sure that she'd appreciate being called Germanic.
Likewise, David Cameron has arguably tried to stir up regional resentment about public spending across the UK by proposing changes to the Barnett formula for allocating public spending to Scotland, Wales and Northern Ireland. Is PM Dave a closet German?
As I've commented on a previous post, the main reason that voters in Germany, Holland, etc are so unhappy with the bailouts is that they were specifically, repeatedly promised that there would be no bailouts. That's why the eurozone has no existing bailout mechanism. Without those promises, Germany would still be using the Deutschmark. Many people understandably feel betrayed.
Secondly, although the bailouts are, on one level, for Greece and other PIIGS governments, they are, on another level, for European banks, including UK ones, with heavy exposure to PIIGS debt, directly or indirectly. Bailouts for banks aren't popular anywhere.
One problem generally with the EU is the extent to which France, which is highly centralized, has influenced the structure of the Union, which is obviously not. Germany would have been a much better model, but after WWII had no moral authority as the Union was being built.
It's like using a sheepdog to herd cats. It isn't easy in the first place, but the fact that the sheepdog's experience is with a completely different animal makes it harder.
The funny thing is that when you suggest this in Europe, even the Germans look at me like I'm nuts.
I have pointed out this fact as well, in Sweden it is as well Skuld/Skuld for guilt/debt, skyldig/skyldig for guilty/indebted.
But here is the thing, the Northern Protestant culture is extremely convinced of its superiority, so this fact only makes us more convinced that we are the good guys here.
Interesting. I have been trying to figure out what this means about Americans. Some [my family] regard debt as unwise-immoral-to be avoided, others [plurality or majority] regard it as a great way to achieve the good life [i.e. la dolce vita].
The US is highly conflicted but seems likely to be northern European by thought, but southern European by action.
Wait, no, I was spacing. It includes foreign aid and investment income abroad -- the other stuff would be capital accounts obviously. Eurozone transfer payments to southern Europe would be a factor, but those probably weren't affected much by introduction of the euro. For Ireland, however, inflows of currency due to corporate relocation there may have been a factor.
The markets are starting to lend in Europe(and not only there) based on ability to pay, as they should have done in the boom years.Thus imbalances will naturally level themselves out over time.The same will (already is ) happen with trade deficits.
Labor mobility within the EU seems to me to be quite significant, we would need to research the numbers but I´m not that sure a low middle class Greek will not move to Berlin or London while an Appalachian would effortlessly build a new life in the Big Apple.
The Eurozone has a banking system as integrated as they deemed good for themselves.As for transfer payments,some may be counterproductive in the long run.
Doug, the current account deficit includes all currency inflows, not just those to purchase tradables. So it includes foreign investment that flowed into Spain and Ireland in the early 2000s to invest in real estate and other equity. Those economies developed debt problems mainly because the value of the equity crashed, not because of competitiveness issues.
I thought investment inflows was the capital account which should be the inverse of the current account, trade in goods and services. Do I owe Dr. Carpenter an apology?
I confess that RestrainedRadical is right about my politics in part. I am on the lunatic Left fringe of the Right wing. I am also, perforce, on the lunatic Right fringe of the Left wing.
bampbs I often agree with you, but not this time.
If you are in the lunatic left of the Right and the lunatic right of the Left then you are just in the moderate middle and you are not a lunatic at all.Draw it on paper and you will see...
Now, if you really want to be a lunatic then you must be in the left of the Left and the right of the Right, which in a circular continuum do touch each other, just on the lunatic mirror image of the moderate common ground.
Though the US is in a recession, it is still one of the most stable nations economically. Certain states within the US are still doing alright economically, which allows citizens the opportunity to move there if necessary. Other countries don't have this luxury. The lack of options leads to an economic crisis for other nations and it becomes for difficult for them to rise above their economic distress.
The one issue I have with above analysis is its avoidance of an obvious proposition that it just might have been the markets that disciplined southern countries prior to introduction of Euro - forcing them to live more or less within their means (with exception of Greece which even in the data here seems to have been running big deficits). Following introduction of Euro, with own currencies gone, and all sovereign borrowers averaged down to German interest rate levels (which transmitted to private borrowers as well) - one could easily make an argument - the GIPS countries were free to pursue their preferences without constraint of the markets with the results clear today. So Germans might just be right - at least a bit - it would be good to see what are the differences in popular attitude towards paying back debts and printing money.
Having said that, it would be good to remember that German has had its share of bankruptcies - banks and large companies going under. The key difference seems to be the propensity of individuals to save which has provided cushion (and taxable assets in case of government) which is lacking for GPS (but not for Italy - which has also a very high saving rates - just lack confidence in Government).
Finally, as to US - I think there are occasional points made about industriousness or lack thereof for various regions. Of course, by now country is much more integrated and there is less of the previous argument contrasting industrious Yankees vs. spendthrift Southerner aristocracy vs. red necks in Appalachia etc - but some of this still persists - while often replaced by class/ethnic prejudice. A lot of opposition to tax increases is driven by that.