The Europe Issue

Update: Mark Schieritz writes in the comments:

Thanks for reporting on my interview! I believe however you are confusing my role as a journalist conducting an interview with my own view on things. I do believe that the ECB should act more forcefully and I have said that on numerous occasions (e.g. on my blog http://blog.zeit.de/herdentrieb). When interviewing officials however it is my duty to challenge there actions and as I write for a German audience it is my duty to challenge them from a German perspective. Peter Praet has enough rooms to defend himself.

(I think that’s fair. As I told him, I think this only further implicates the European elite by serving a certain “German perspective” that requires such a deep prior that any and all monetary stimulus is always and everywhere evil. And while journalists are responsible for their audience, they are also beholden to the truth: and at least given what I know the perspective peddled in this interview is an unfair representation of reality. To a layman reading the interview, the tone is dominated not necessarily by the clarity of Praet’s thought, but the forceful austerity of Schieritz’ question.

In any case, read this post and substitute “elite” for “Mark”.

That said, since I believe this was originally written in German, I cede some things are lost in translation. But where are the elite “challenging the actions” of Jens Weidmann?)

It’s no secret that the European Union is collapsing under the weight of its own bind. The political situation across the continent looks not unlike what it did before a great war more than fifty years ago and, relatedly, the economy doesn’t look better. John Oliver lambasted the fascist politics that are taking over the union last Sunday. While it may be hard for many Americans, including Oliver, to understand why Europe hates its elite so much, you need look no further than the austerity complex at Die Zie, described on Wikipedia as:

 well-regarded for its journalistic quality. With a circulation of 504,072 for the second half of 2012and an estimated readership of slightly above 2 million, it is the most widely read German weekly newspaper [...] The paper is considered to be highbrow. Its political direction is centrist and social-liberal, but has oscillated a number of times between slightly left-leaning and slightly right-leaning.

The most widely read weekly paper, it might be to Germany what Thomas Friedman is to the Beltway elite. Enter our protagonist, Mark Schieritz, in conversation with Peter Praet of the ECB in what may be the most spectacularly absurd interview of the year.

For context, inflation in Germany rolled in this month below its own low expectations at a barely-discernable-from-deflation 0.5% (consensus was 0.7%). Investors around the world are on the edge of their seats for the ECB meeting this Thursday when Draghi is widely-expected to announce Europe’s first round of quantitative easing.

Mark starts the interview curious that the ECB isn’t hiking rates because “business activity is picking up in Europe”. When Praet accurately notes that inflation is well-below target – that, indeed, 0.7 is less than 2 – he wonders whether that is “a little formalistic”. This defines the psychology of establishment economic thought across the pond: not only a requirement that the stipulations of rules-based policy themselves be hawkish, i.e. “close to, but below 2%”, but that even when we are far from meeting that goal, following rules are merely “formalistic”.

In the German mind, the one and only purpose of monetary policy must be further pain and austerity.

When told that persistently below-target inflation would harm the ECB’s credibility, Mark notes that many “experts’ expect inflation to soon again rise of its own accord. This statement is a great window into the minds of the European elite, motivating the idea that inflation is something that exists of its own accord, outside of monetary authority. This is not surprising for a country scarred by years of hyperinflation when, indeed, political and fiscal theories of the price level dominated. In most times, however, inflation is “everywhere and always a monetary phenomenon”. European policymakers for some reason believe supply, not demand, is the problem (how else would inflation come “of its own accord”). Of course, there is debate among sensible people about whether the central bank can do this in a liquidity trap, except journalists at Die Zeit have nowhere near the level of economic sophistication to actually understand that debate.

The story gets worse. When Praet gives Mark the canonical reasons for which low inflation is deadly he concludes that we cannot “allow inflation to be too low for too long”. You would think that even if people had subjective contention on what constitutes “too low” and “too long”, they would agree that given their own reference, inflation should not fall below that threshold.

Not so for Mark who wonders “why would that be dangerous?” In fact, the German elites want inflation to be too low for too long. And, unfortunately, this is probably not a logical paradox. The core elite know that austere policy is terrible for Europe as a whole. Indeed, what ignorant fools like Jens Wiedmann want is inflation that is devastatingly low for Europe and Spain, but just enough to keep the uninformed but vengeful German electorate appeased.

The interview has not climaxed yet. Praet makes a very sensible claim that inflation is an insurance policy and goes on to note that it is necessary to facilitate economic adjustment. Since Mark has not read an economics textbook, he is yet again left wondering why. He disagrees with Praet’s correct answer about external devaluation noting that

Prices and wages in den crisis countries had risen far too rapidly over many years. The low rate of inflation helps companies there to regain competitiveness vis-à-vis rivals in the north. Why do you want to counter that?

And here, for the first time, I think Praet gets it wrong. (You can see the whole interview below). Since European trade is such an important part of peripheral growth – indeed Germany maintained a surplus only by exporting its savings to weaker countries – what matters isn’t the absolute rate of inflation of Europe as a whole so much as the relative rate of inflation between the periphery and the core. While higher inflation in general would help reduce the real burden of debt, what we need is higher inflation in the core to make peripheral labor more competitive. It makes one whole hell of a lot more sense for Germany to tolerate slightly above-trend inflation for a few years instead of forcing Greek to deflate.

Then there’s some nonsense about low rates hurting savers which is a dumb, but forgivable, mistake before we get to the most remarkable statement in economic journalism:

If the banks have to pay penalty interest [negative rates], you may well be making loans dearer. What happens then?

In the eyes of the European elite, the cost of borrowing increases when interest rates decrease! There is a perverse world in which this makes emotional, though not logical sense, and that is from the perspective of a saver for whom making a loan is more expensive at a lower rate. Of course, that is not what the English means, nor is it economically valuable information even were it to be so, but it gives us a gory insight into how European policymakers think.

Then there’s some huffing and puffing about low interest rates causing a “property price bubble in Germany” – when, no less, I wouldn’t trust Mark to monitor soap bubbles, let alone one of the world’s largest economies. It’s interesting to note that he is both worried about “dearer loans” and bubbles, which are almost mutually exclusive.

The sad part is how Praet ends the interview, discussing more accommodative policy:

That possibility, too, was discussed. But I believe that such purchases would only be made if business activity and inflation develop along lines that are significantly worse than expected.

Even if you don’t believe QE works, and there may be good reasons to hold this belief, it is scary that officials don’t think they need it. Apparently “business activity and inflation” – nonexistent as they are – have not yet reached levels “significantly worse than expected”.

Paul Krugman is right – the Germans are masters that want the beatings to continue until morale improves. I’m not fan of fascism or nutty right-wing racism, but lets hope these asshats get thrown out of office and soon.

Addendum: In the sleepy haze that I wrote this post, I forgot to mention an important point. Among smart commentators in the US, the ECB is viewed largely as an archaically-tight institution, governed by bad economics and a misunderstanding of monetary policy. That isn’t true, the ECB is damned by a cultural and emotional – not economic – unwillingness to follow the right policy. The German elite couldn’t give a shit about the logical validity of their argument, indeed Schiertz hates inflation not for any monetary reason, but as a presupposition to his worldview.

Read the whole interview:

Mr Praet, business activity is picking up in Europe. Hasn’t it become time to prepare increases in interest rates – rather than to ease monetary policy further, as the European Central Bank (ECB) indicated rather clearly last week?

That would not be in line with our mandate. The ECB is required to keep the value of money stable. We understand this to mean an inflation rate of close to, but below, 2% over the medium term. Incidentally, this definition dates back to Otmar Issing …

… formerly chief economist of the Bundesbank and your predecessor in office …

… The rate of inflation in the euro area currently stands at 0.7%. Such a small increase in prices cannot be regarded as satisfactory over the medium term if we want to attain what we have announced.

That is formalistic.

Why formalistic? What is at stake is credibility, an issue of great importance for a central bank. People must be able to rely on our keeping the annual rate of inflation at close to, but below, 2%.That is important for them to take business decisions. That is why we cannot allow inflation to deviate lastingly from our designated target figure, irrespective of whether to the upside or the downside.

Many experts, however, expect inflation to soon again rise of its own accord.

We are assuming that prices will increase only gradually. According to our current projections – new ones will be presented in June – it is only at the end of 2016 that inflation will approach the mark of 2%. And what we have observed recently are rather surprises to the downside, which means that inflation has tended to be slightly lower than expected over the past few months. The longer this increase in inflation is delayed, the greater is the risk of a change in inflation expectations. This would cause firms and households to take very low inflation rates for granted, and to behave accordingly. That is why we cannot allow inflation to remain too low for too long.

Why would that be dangerous?

There is no central bank that would aim for an inflation rate of zero over the medium term – not even the Bundesbank has done so in the past. Normally, the goal of monetary policy is to have a moderate rate of inflation. This could be regarded as a margin of safety to avoid the risk of deflation, which would have grave repercussions for growth and employment. In a monetary union, moderate inflation would also facilitate necessary economic adjustment.

Why?

If there is a need to adjust wage and salary levels, it is an accepted fact that wage cuts are difficult to push through, while wage moderation could well be achieved. Expressed in a simplified manner, moderate inflation thus ensures that wages and salaries fall in real terms even when they remain nominally unchanged.

Prices and wages in den crisis countries had risen far too rapidly over many years. The low rate of inflation helps companies there to regain competitiveness vis-à-vis rivals in the north. Why do you want to counter that?

It is true that there were adverse developments of this kind. In the meantime, however, most of the countries concerned have made significant progress in adjusting prices, and the adjustment process will continue. What we want to prevent, however, is that this turns into a lasting change in inflation expectations for the euro area.

The President of the ECB has indicated that the Governing Council might take action at its next meeting in June. What precisely could you do?

We are preparing a number of measures. We might again lend banks money over an extended period of time, possibly subject to certain conditions. We could also lower interest rates still further. Even the combined use of several monetary policy instruments is conceivable.

As things stand today, when banks deposit surplus funds at the central bank, they receive no interest. The ECB would thus have to impose penalties in future.

Negative interest rates on deposits are a possible part of a package of measures.

That was attempted in Denmark, with a rather mixed outcome, so that the central bank there put an end to the experiment.

The situation is not comparable. The negative interest rates helped mitigate the appreciation of the Danish kroner. In the prevailing environment of low euro area inflation, any appreciation of the currency there is problematic for the whole area because a strong euro would make imports cheaper and push inflation down even further.

Paris will be glad to hear that. France has long urged the ECB to take action against the appreciation of the euro.

Various governments are calling for a number of different measures. We as the central bank are independent and will not be influenced by such demands. Moreover, our focus is not on weakening the euro in order to help exporters in Europe. We are interested, first and foremost, in the impact of the exchange rate on inflation.

You are nevertheless entering uncharted territory.

Doing nothing would also pose risks. We are currently observing that demand for loans is gradually picking up again. For the recovery in economic activity, it is extremely important that the banks actually satisfy that demand.

The ECB’s low interest rates are already proving to be detrimental for all savers. Interest rate cuts would exacerbate the problem.

I have a great deal of understanding for the concerns of savers – my money, too, lies in the bank. We must, however, resolve the crisis now. That will also be to the benefit of savers because interest rates would then rise again in future. It may well seem paradoxical, but a further easing of monetary policy in the prevailing environment could help in this respect.

If the banks have to pay penalty interest, you may well be making loans dearer. What happens then?

Given the orders of magnitude we have been discussing, I do not expect that to occur.

That said, experts are warning that the low interest rates could give rise to a property price bubble in Germany.

Low interest rates are an incentive to seek alternatives to classic savings books or time deposits at banks. However, that may certainly not lead to speculative excesses.

You intend to reduce interest rates nonetheless!

In the case of Germany, there is no justification to speak of a general property price bubble, even though prices have risen rather sharply in individual market segments, such as those for popular locations in a number of major cities. In the event of problems in a specific country, it would be the responsibility of the competent national authorities – in Germany, the Bundesbank and the Federal Financial Supervisory Authority – to take appropriate countermeasures and, for instance, to compel banks to be more cautious in extending credit. That having been said, we must see the euro area as a whole – and property prices are continuing to fall in a many of the countries there.

In the event of your indeed cutting interest rates in June, will there be a broad majority in favour thereof in the ECB’s management?

We had a very good discussion at our meeting last week, both with respect to the assessment of the current situation and with regard to the conclusions to be drawn.

Controversial, by contrast, are bond purchases of the kind undertaken by the US Federal Reserve.

That possibility, too, was discussed. But I believe that such purchases would only be made if business activity and inflation develop along lines that are significantly worse than expected.

 

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22 comments
  1. Daniel Rendall said:

    Minor point – John Oliver is English, not American. Unless they annexed Birmingham in the 70s while no-one was looking.

  2. Mark Schieritz said:

    Thanks for reporting on my interview! I believe however you are confusing my role as a journalist conducting an interview with my own view on things. I do believe that the ECB should act more forcefully and I have said that on numerous occasions (e.g. on my blog http://blog.zeit.de/herdentrieb). When interviewing officials however it is my duty to challenge there actions and as I write for a German audience it is my duty to challenge them from a German perspective. Peter Praet has enough rooms to defend himself.

    • I apologize for claiming this to be your view, in that case – I will make the necessary adjustment as soon as I have Internet. That said your comment seems to only further the case that the German hive mind of thought, then, is very austere.

      People like Praet can defend themselves, but the media defines opinion!

      Does not seem dissimilar to Grand Bargain-mania this side of the ocean.

      Sent from my iPhone

      >

  3. BMMayr said:

    Your do terrible injustice to Mark Schieritz. He is sophisticated enough to understand all economic issues, after all he is one of the driving forces behind Germany’s prime econo blog HERDENTRIEB. Just go there and read.

    He was merely playing the devil’s advocate at the beginning of the interview, parroting the German conservative view.

  4. drs said:

    “In the eyes of the European elite, the cost of borrowing increases when interest rates increase!”

    I think you mean “when interest rates decrease” here?

  5. BMMayr said:

    Ashok Rao said: But where are the elite “challenging the actions” of Jens Weidmann?

    If you can read German, just go and read Mark’s blog Herdentrieb. Mark tries to be balanced, but is more often critical of what the Bundesbank does than than he is not.

    He also had an interview with Weidmann in 2013 http://www.zeit.de/2013/48/bundesbankchef-jens-weidmann, I don’t know if there is an English translation available.

    • I did take a look at the Google translation and unfortunately it’s not very good, but from what I can tell it verifies your claim. There is still an unmistakable elite aversion to good policy, no?

      • BMMayr said:

        Ashok Rao said: There is still an unmistakable elite aversion to good policy, no?

        Absolutely!
        That’s why some “DIE ZEIT” authors started the Herdentrieb (can be loosely translated as herd behavior) blog in 2005 (Mark joined in 2010). They explicitly state that the economic debate in Germany is dominated by the neoclassical approach and the mission of the blog is to contribute alternative ideas. The motto of the blog is “Wer mit dem geistigen Rüstzeug der Tauschwirtschaft die Geldwirtschaft analysiert, kommt zu den falschen Schlüssen” (Analyses of monetary financial systems using the intellectual tools of barter economies [i.e. the neoclassical approach] lead to wrong conclusions) .

        So while Mark usually tries to be very balanced, he is in fact part of the quest to break the neoclassical dominance in Germany!

  6. Mark Schieritz said:

    Fair treatment, thanks Ashok!

    • Of course – in retrospect I realize that maybe there was an element of question/answer or satire in your questions that may have been lost in translation, and I should have been more careful not to make it about you.

      This said, even the idea that this thinking can pass as establishment consensus is frightening.

      Is there an English version of your blog? A number of connectors suggested I read it more carefully but, alas, Google Translate is not very good!

      Sent from my iPhone

      >

  7. Zolko said:

    “The core elite know that austere policy is terrible for Europe as a whole. Indeed, what ignorant fools like Jens Wiedmann want is inflation that is devastatingly low for Europe and Spain, but just enough to keep the uninformed but vengeful German electorate appeased.”

    what a load of *******

    1) “they” are not an elite, whoever you may mean by “the core elite”. Elite is the best, and economists are as dumb as astrologers (said Einstein, who did belong to the elite). What you are doing, on purpose or not, is to re-instate the notion of “aristocracy” which really means “the best”, an elite. Buy using and abusing this “elite” world, you and your likes are trying to make room in the heads of the citizens that there are “superior” humans, the elite. In not long time, you’ll be talking about alpha males ? There is no “elite”, except for specific fields like sports or science.

    2) when people resort to name-calling (ignorant – devastating – uninformed – vengeful) it only signals they have no argument.

    3) the current deflation is due to an ageing population and dwindling natural resources: people consume less, have all they need, and want to pay their debt down. This inevitably leads to less economic output, leading to less monetary expansion, leading to 0 interest rates. Which is not a problem at all, except for idiots like Krugman who think that there is a “natural” state for any economy, and that’s expansion. And except for central bankers, who have no tools for negative interest rates because that leads to bank-runs. For the rest of the population, zero inflation and zero interest rates is fine. What Greece needs is an exit from the €uro so they can devaluate and regain their lost competitiveness. No need for magic inflation, and past inflation actually caused the troubles.

    • Chris Michel said:

      When people resort to name-calling it only signals they have no argument.

      Does “idiot” fall under name calling? As in ‘idiots like Krugman’?

      • Zolko said:

        Did I put forward my arguments as to why I call him an idiot ? He doesn’t understand anything about economics apart his IS-LM model. That models only work as long as the assumptions are present, but that these assumptions vary independently from economics, is beyond him. He is an idiot in the sense that he sees what he wants to see.

        Just 1 example: he made analyses about wealth inequality, and also long term inflation, and there is an inflexion point for both data around 1971 … when the US defaulted on it’s commitment of convertibility between dollar and gold (yes that’s a default). But nowhere did he even mention the concordance in time, and tried to think that may-be these are linked in some way, and continues to ridicule the “gold-bugs” as some archaic relics. He has the definition “democrats=good” and “republicans=bad” and everything he says turns around this unique concept. That the Glass-Steagall act was repelled under Clinton has somehow escaped him.

        That’s “technically” an idiot, and is not “name-calling”.

  8. Shining Raven said:

    I believe you are wrong in what you consider as “one of the stupidest…” claims. Negative interest rates on deposits of banks at the ECB would in fact make consumer loans more expensive or “dear”. If you think that the banks “lend out” that money, then of course you would reach the opposite conclusion, but that is wrong. When banks make more loans, they of course need *more* reserves, not less, to settle payments that their borrowers make with the new credit. If you apply a negative rate for deposits, then you make it more expensive for banks to hold the necessary reserves, and hence you make loans mire expensive! The only exception are of course interbank loans, where banks lend the actual reserves to one another, so this measure might revive interbank lending. But it is not going to do anything positive for consumer loans and is in fact going to make them more expensive. I am certain that I have not convinced you, but perhaps I can inspire you to think about this again.

    And I wish to join the other people who said that you do an injustice to Mark Schieritz, he really is one of the better economic journalists in Germany and really critical of the views you ascribe to him.

  9. stearm74 said:

    German politicians and, more decisively, Frau Merkel have, in the last 8 years, opted for the most dangerous form of political leadership. Leadership based on opportunism, not on ideas or on a vision of what is good or bad. Simply do what gives you the smallest political advantage against your adversaries and forget the consequences. In this sense, Merkel represents well a generation of individuals raised within a deep ideological environment (East Germany). The collapse of that ideology led this generation to reject all kind of strategic long-term goals as, in some way, ‘ideological’. But what remains when strategic thinking is completely divorced by any ‘moral’ or ‘ethical’ content? Political opportunism is all you got and, hence, aversion to good policy is the norm.

  10. SteKl said:

    I would also like to take issue with the purportedly non-sensical idea of increasing borrowing costs when interest rates decrease (or, more precisely, turn negative). This is not a tenet of “the European elite”, really, but rather what Otto Normalverbraucher, the German equivalent of Joe the Plumber, actually thinks. The simple logic is thus: If banks are made to pay interest on money they deposit at the ECB, the banks will just try to reimburse themselves by adding a (more-than-)compensatory surcharge on the interest they ask from borrowers. The German public, not the elite – whoever that may be -, has really absorbed the belief that bankers are mean-spirited, greedy thugs.

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