There is some weird stuff going on in Germany. A new and fierce debate among German economists about the Euro summit in Brussels on June 29 in particular, and about how to proceed in the Euro crisis more generally. I have to say that this whole debate left me extremely befuddled about the level of public economic discourse in Germany. I was busy travelling for a few days, which meant that I constantly updated my iPhone for news about this debate, but I could not blog about it.
First, here is a good chronological overview of the whole thing (similarly here). The actors are four different (although sometimes with overlap) groups of Economics professors, the politicians and the Economics journalists from the Handelsblatt (really Olaf Storbeck) and the FTD.
Everything started with this manifesto in the FAZ by over 170 Economics professors, mostly in Germany or of German origin. They voiced their concern – indeed sometimes using emotional language, as I do on this blog – that Europe is heading into a liability (bank) union, which in particular will benefit owners (and debtors) of financial institutions and hurt both current and future tax payers in Germany. They, thus, bemoan a big distributional problem (as I have) in the current Euro policies. They also thought that the Brussels summit accelerated the path into such a union. I think that is the gist of the manifesto. It is also true that they left the strict positive-factual or if-then-normative language that scientists use (ought to use) when they speak as scientists, in fact they ask their fellow citizens quite openly to take action. But then again, professors are also citizens.
Then all hell broke loose. Olaf Storbeck comes in short sequence with two blog entries and calls the manifesto nationalist demagoguery and akin to the egotistic demands of the Greek socialists. I have to say that there is unnecessarily strong, sometimes vile language in there. What is also at least questionable from a journalistic ethic point of view is that Storbeck uses an unpublished version of the manifesto that was later changed considerably. But instead of apologizing Olaf uses the two versions to mock the authors of the original manifesto. Similarly the FTD, which calls the 170 plus professors dilettantes for essentially having worked for several rounds on the manifesto. This is absolutely unacceptable. I hope that FTD journalists try to improve their texts through multiple rounds of reading, criticizing, editing, re-reading, etc. Anyway, these professors did, and I can see nothing wrong with it (if you have multiple co-authors then these multiple rounds of editing are even more natural).
Then came a counter-manifesto by Peter Bofinger, Gustav Horn, Michael Hüther, Dalia Marin, Bert Rürup, Friedrich Schneider und Thomas Straubhaar, which said essentially three and a half things: 1) they claim that the Brussels summit was not a path further down a European banking liability union, 2) that recapitalization of banks a la TARP is not only necessary, but also a good thing, 3) that the first manifesto should not have been in their opinion so fear-mongering; and the half was: they more or less directly questioned the scientific integrity of the authors and signatories of the original manifesto.
Es wird Schaden angerichtet für die politische Gestaltungsfähigkeit wie für das Ansehen unseres Fachs. Wirtschaftswissenschaftler sollten vielmehr bereit sein, mit konstruktiven Lösungsvorschlägen ihre Bringschuld gegenüber Gesellschaft und Politik zu erfüllen.
I am saying half, because what some of the signatories of the counter-manifesto really meant was said in different outlets:
Das ist schlimmste Stammtisch-Ökonomie. Deutsche Ökonomen sind gut im Jammern – das ist in der aktuellen Lage aber absolut kontraproduktiv. (Bofinger)
Ich schäme mich, dass so viele Kollegen ein solches Dokument unterzeichnen. Das wirft kein gutes Licht auf unsere Zunft. (Horn)
Das weiß ich nicht. Offenkundig aber ist es nicht so einfach, aus den Gehäusen der Modelle kommend zu politisch und gesellschaftlich relevanten Fragen gleichermaßen angemessen zu argumentieren. Insgesamt und unabhängig von diesem aktuellen Vorgang beobachte ich mit Sorge, dass Relevanz kein bedeutsames Kriterium für die nur universitär orientierte Volkswirtschaftslehre ist. (Hüther, here).
Also Paul de Grauwe:
Ich bin entsetzt. Dieser Aufruf ist eine Schande.
This again is unacceptable (emotional) discourse. Calling your opponent stupid (Stammtisch-Ökonomie), expressing shame for fellow economists or being pissed because the Methodenstreit was lost by his camp in Hüther’s case (nevermind that lots of Economists who belonged to Hüther’s camp during the Methodenstreit have signed the original manifesto) is just offending.
Addendum: Bofinger has indeed a political agenda (something he accuses his opponents of):
Auf Nachfrage räumte Bofinger allerdings ein, es gehe um mehr: Die Entwicklung in Europa komme so langsam an den Punkt, wo man sich entscheiden müsste. Entweder wolle man den Euro behalten – dann müssten auch die Deutschen mehr gemeinsame Haftung in Kauf nehmen. Oder man schaffe den Euro ab.
Notice the pseudo-factual language here: Bofinger brings up two alternatives: either Euro and liability union or no Euro. This is very misleading because Bofinger makes no factual argument, why these two should be the only two alternatives available (in fact, there is good reason to believe that they are not – see my links to John Cochrane on this blog).
Then came the third manifesto apparently initiated by Frank Heinemann and signed by, among others, Martin Hellwig, Beatrice Weder di Mauro, Dennis Snower and Michael Burda (here is the original with updating on signatories). This manifesto had a very measured tone, was well-reasoned and basically reiterated the point that the Brussels summit was no path into the liability union and that a European banking regulation, including a banking default regulation was necessary and a good thing that we should not fear. The highlight:
Es darf dabei keinesfalls um eine Vergemeinschaftung der Haftung für Bankschulden gehen. Vielmehr kommt es darauf an, dass die europäische Bankenaufsicht wirksame Durchgriffsrechte auf insolvente Banken in den Krisenländern bekommt. Die europäische Behörde muss mit der Kompetenz ausgestattet sein, eine ernsthafte Re-Kapitalisierung solcher Banken durch Ablösung der bisherigen Anteilseigner und durch die Umwandlung von Bankschulden in Eigenkapital durchzusetzen. Wir brauchen ein einheitliches europäisches Restrukturierungsverfahren, um marode Institute neu aufstellen oder auch abwickeln zu können. Das bedeutet auch: Gläubiger maroder Banken müssen für ihre riskanten Einsätze haften, so dass die Abwicklung von Banken weitestgehend ohne Steuermittel auskommen kann.
Oh, there was a fourth statement, by the so-called five wise men (one woman), the German Sachverständigenrat, cautioning German politicians to go too early into a banking union.
Finally came the politiciancs, first finance minister Schäuble, and then today the president of the Bundestag (the German equivalent of the house speaker) Lammert, criticizing the first manifesto. They had their usual condescending tone towards scientists and professors, told them basically to shut up (this is what politicians mean when they say a debate was not helpful), and used the fact that economists could not agree on something as an excuse not to have to listen to them. Unbelievable, especially in light of the fact that CDU, CSU and FDP, the three ruling parties in Germany are hopelessly at odds with each other about European politics.
Here is my take: I do not think that the original manifesto and the third one were so far apart. Olaf Storbeck and the politicians unconscionably blew up the disagreement, the former for sensationalist purposes and the latter, because they do not want to listen to maybe inconvenient truths. Both manifestos seem sceptical about a liability union, they want banks to go bankrupt, if they are insolvent, they just (apart from tone and style) disagreed whether the summit in Brussels was a step towards this liability union or not, and, more importantly, they disagreed on whether European institutions can still be trusted to create a banking union that would not be a liability union. The fact that apparently there can be so much disagreement about what this summit ultimately decided, both amongst Economists and amongst the politicians themselves (clearly Monti thought he got something different than what e.g. the Finns thought they had agreed to), does not necessarily speak for these European institutions.
In an interview Walter Krämer, one of the main authors of the original manifesto, admitted that some of the ideas from the Brussels summit were not bad at all, but expressed deep doubts that this is what would actually happen in case of future banking crises. He went further in a TV interview, where he clearly said that if Germans want to pay for a liability union, it’s their right to do so, but they should know about it and have a say in it.
I would bet that the authors of the original and the third manifesto would mainly agree on what the solution to the Euro crisis should be, if the European institutions and politicians could be trusted: failed (insolvent) banks would go bankrupt, their owners and debtors screwed (they both understand the distributional and moral hazard issues that people like I on this blog and Sahra Wagenknecht, who, incidentally praised the original manifesto, although it came from very liberal (in the European sense) economists, whom she would normally disagree with on almost everything, have warned about), there would be a European banking bankruptcy law, that would make sure that certain crucial banking functions like the payment system would continue to run through even a bankruptcy, there would probably be some kind of at least limited deposit insurance (probably on a European scale), there would be sovereign default regulations, and there probably would be some kind of targeted transfers to 1) soften extreme hardship like lack of medical treatment and 2) investment in infrastructure and better administrations (incidentally, it is rumored that Germany offered to send civil servants to help the Greek build a functioning IRS, but the Greek refused the offer). But all this with a strong conditionality and temporary. All this, of course, with a strong commitment to structural reforms, which are, at the end of the day, absolutely necessary (shock liberalization as John Cochrane has put it so aptly – that this works can be seen in Ireland and Portugal who just had to suck it up and do these reforms, because their countries are just too small to get special favors in Brussels, in contrast to Spain and Italy – this alone should one make sceptical about the functionality of European institutions). This is both good Economics and common sense.
What they will disagree about is, whether European institutions and politicians can be trusted to have a banking union. And I myself have serious doubts, as I cannot rid myself of the impression that our politicians have been essentially “bought” by the owners of financial assets and bank debtors. Sure, I may be a little paranoid, but at every step of the way they have moved in favor of banks, their own national banks, not Greece, Ireland, Italy, Spain or Europe. Either they are bought or gullible, neither is very comforting. What is more: they have lied and tricked us too often, since the beginning of the Euro (the accession of Greece is but the tip of the iceberg). Since the beginning of the crisis, taboos after taboos (whether they were economically reasonable to begin with or not is irrelevant) have been trampled on (historical experience teaches us that at the end of the day national politics make European policy, not good Economics, even if the institutions are well intentioned – Germany is as much a culprit as anybody else in this regard). This is a major lack of credibility (update: this morning another prominent member of the cabinet came out in favor of Euro bonds, although Chancelor Merkel has refused them “over her dead body” – how can you believe these guys anything anymore)! I share the pessimistic view of the first manifesto and think, although I have great respect for these great economists, that the third manifesto is a little naive (Mr. Hüther’s claim that German saving is save is, too) and too puristic. Put differently: it’s good Economics, in fact excellent Economics, I am not sure whether it’s good political economy. If you listened to former European commission member Günther Verheugen (SPD and by no means an anti-European) the other day on TV, you simply have to be sceptical about European institutions and their ability to ward off being politicized.
To sum up: the villains in this charade are the journalists (Olaf Storbeck and the FTD) for not being unbiased, for being politically motivated, sensationalist and, sometimes, offending. I wish a measured and reasonable Gerald Braunberger (FAZ) was around to report and comment on this debate (he is travelling – but we had an excellent, controversial, and at least for me highly informative email exchange about the issues). And the politicians are the second villains for their antiintellectualism and their laziness and/or lack of courage to have this debate both with the economists and the citizens of their country (of course in the grand scheme of things, they are the bigger villains for screwing this up both in terms of equity and efficiency).
I think, having the authors of the first and third manifesto discuss the issues further, in public, would be a great service to both Germany and Europe. More generally, isn’t having a public discussion of these super important issues absolutely necessary and, from an intellectual point of view, also stimulating (the other night on Maybrit Illner one could observe the most interesting coalitions – the communist Sahra Wagenknecht in alliance with the conservative Wolfgang Bosbach; the Socialdemocrat Martin Schulz in league with the president of the German industry association, Hans-Peter Keitel, and the head of the German banking association; Keitel is of course afraid of losing export markets)? This SPON article makes the same important point. Can this be done without telling the other party that they are not economists? Can this be done with journalists fascilitating and reporting on this discussion, i.e. bringing together the various groups, but also economists and politicians, so that the former better understand the political economy constraints that politicians work under and that might make purist solutions suboptimal, but also so that the latter really listen to what eocnomists have to say and do not dismiss them because of the richness of their analysis, but rather value that richness.
Update 1: Urs Birchler und Monika Bütler came out in the Ökonomenstimme and, like me, only take the first and the third manifesto serious.
Update 2: The Economist also mocks the first manifesto and the German professorate. Well, forgive me for surmising that the Economist is not quite neutral in this debate.