Bild Zeitung Economics Sergio Cesaratto

A plenum of leading German economists has recently signed a declaration ( to the German authorities against further support by the EU and the ECB to the highly indebted European peripheral countries. These should instead be coerced into an insolvency procedure managed by the IMF. German economists are traditionally influential on the government, and this document shows their traditional conservative political and scientific orientation. It also shows how little can we expect from an educated economic debate on how to get out of the European blind alley. The question is indeed of a clash of national interests (
), and the majority of the German economists have clearly shown where their hearts beat1.

In synthesis, the German economists warn the German authorities about a progressive Europeanisation of the peripheral debt that would heavily involve the German taxpayer in a much feared ”transfer union”, and about the inflationary impact of an enduring support of this debt by the ECB. Moreover, these guarantees would promote a moral hazard on the part of the indebted countries, giving them ”a powerful incentive to repeat the mistakes of the past and continue a policy of indebtedness at the expense of their EU partners”. So both the enlargement of the rescue fund approved in May 2011, and its renewal as a permanent facility currently discussed are condemned. The document hardly considers that the actual amount of the existing fund is much less than the nominal – given that only the money put by the ”healthy” countries is effective – and the loan shark interest rates at which money is lent.

The proposal is of a managed process of insolvency and debt restructuring. Indeed, this is not something that should in principle be opposed if one considers that careless credit from the core Europe banks – mainly German banks – have been much more responsible than the ordinary Spanish or Irish households for the housing bubble that exploded there. The friendship between the German and the former centre-right Greek governments is well known2. Never forget that the German banks have also participated, with gusto, in the US sub-prime crisis and still have plenty of toxic assets. German exports also hugely benefited from the growth of aggregate demand and imports in those countries. Following a canonical Kaleckian model (Kalecki 1971), Germans banks were indeed financing the ”external markets” where German firms could ”realise” their surplus profits. The default of the indebted markets is part of the game and the credit side may be called upon to forgive part of the credit. Questo è il capitalismo bellezza! the German colleagues seem to acknowledge. We agree. Of course, the German taxpayer and the ECB would then be called (once more) to sustain the German banks. Thus, the German economists so ready to condemn the EU and ECB support of fiscal debts, will be ready to bless the support of banks’ debt without mentioning moral hazard. Moreover, they want to protect the German taxpayer, but they are either cheating her, or perhaps implicitly telling her the truth: she will in a way or the other be called to pay for the ultimate outcome of a short sighted German and European economic model (the non existence of free lunches in Economics is certainly a favourite theme of the 189 economists)3.

The declaration narrative is the one that the German authorities want to hear, and general public have been educated to hear: the European crisis ”is a story of fiscal irresponsibility and lack of competitiveness. There is a banking crisis, but it is not central”, a ”xenophobic narrative that blames mostly southern Europeans”, as Wolfgang Munchau aptly put it. (
). As seen, however, the fiscal crisis in Spain and Ireland has originated in a market context tailored to Germany, and the Greek fiscal profligacy had the open blessing of the German government.

But what should, in the opinion of the German economists, follow the regulated default? Since these countries will not easily regain access to the financial markets to finance the remaining debt, some EU financial support will be necessary, but with Teutonic punctiliousness they remark that this lending should be given at loan shark rates in order to avoid any further moral hazard. In a few lines they then pronounce the ”key question is how after a concluded debt rescheduling procedure an over- indebted state can regain its competitiveness”. Since, they argue, ”the Eurozone does not allow nominal devaluations, international competitiveness can only be restored by means of structural reforms in the affected states.” These reforms should be managed by the IMF with its ”extensive experience in this area.” The experience is indeed of lost decades of growth in developing countries, leaving aside the fact that even the past most infamous conditionality packages by the IMF were accompanied by a currency devaluation that softened a little their impact. But even the IMF, nowadays, would feel embarrassed even to receive a proposal of involvement on such terms. In conclusion, the idea of a managed insolvency procedure is welcome, but not in the terms proposed by the 189 economists.

With great haste (though cynicism would be a better expression) the declaration acknowledges that ”nevertheless, recessionary reactions to structural adjustments will not be completely avoidable”. German economists look little interested in the social, cultural and political devastation brought about by the policies they suggest. Nobody serious can believe that competitiveness can be regained in the midst of a ferocious recession and social waste. Moreover the repercussions of such deflationary policies would be felt by Germany itself. But Germany is likely looking elsewhere, at the emerging economies’ markets. In this direction we may also read the opposition to the ”the ECB using its monetary policies in support of these [peripheral] states” that ”would endanger the reputation and the independence of the ECB”. In the present context of rising inflation expectations, the later must rapidly return to the traditional role inherited by the Bundesbank of watchdog of German wages and external competitiveness.

Were not Europe in the midst of a serious situation, the declaration might be dismissed as representative of an unfortunate tradition of closed mindedness, moralism and arrogance. Since the eruption of the European crisis, things have indeed moved against the often irrational wishes and uncertainties of Germany well represented by this pronouncement. The only serious hope for a progressive Europe is that this country, as a result of the circumstances and of political pressure from the partners, will more and more accept the unthinkable: fiscal and monetary activism, a nice touch of domestic inflation and a more fair income distribution. This declaration, full of half-truths and feeble economic arguments, many if not most of the world’s economists would disdain. Paradoxically, however, its typical German lack of political sensitivity might help more reasonable and better funded political and economic solutions to acquire terrain, in the interest of the periphery and ultimately of Germany.


Kalecki, M. 1971. ”The Problem of Effective Demand with Tugan-Baranovski and Rosa Luxemburg.” In ID, Selected Essays on the Dynamics of the Capitalist Economy. Cambridge: Cambridge University Press.

[1] The document was approved by 189 economists, disapproved by 7, 11 abstained. Among the most known signatures: Hans Werner Sinn, Jürgen von Hagen, Manfred Neumann, Michael Burda and Volker Wieland

[2] In a communiqué by the Greek Embassy in the US we can for instance read that during a visit in July 2007 ”Merkel referred to Karamanlis as a “political friend” and praised the Greek government’s “productive efforts” on the thorny constitution issue, whereas she lauded Greece’s euro zone-leading economic growth, in the neighbourhood of 4 percent annually. Both leaders, in fact, repeatedly called bilateral ties excellent.”

[3] In what has been described as ”a rare show of dissent over the European Commission’s economic policies”, the Greek commissioner Maria Damanaki supported last February the idea that if ”the banks were ready to accept their share of responsibility in the situation of restructuring of sovereign debt, fiscal consolidation could be construed in a totally more acceptable way” advocating a ”better balance between austerity and growth” since so far ”the response to the crisis has focused too much on pushing deficit cuts and not enough on job creation”. (