Juergen Stark reminds us just how important his Resignation was
Excelente artigo de Andrew Watt, Social Europe Journal:
Leaving Berlin on Friday after an interesting meeting at the FES and with spring in the air, I had a choice of newspapers for the flight home. I could have read something innocuous in the Süddeutsche Zeitung. There would likely have been something interesting about my favourite German city in the Tagesspiegel. But a seemingly almost life-size Juergen Stark, former ECB Chief Economist, was staring archly down his nose at me from the front page of the Handelsblatt. Headline: “The world financial system is on drugs”.
I stuffed the paper in my bag for the plane.
Stupid, of course: the wisdom of Mr. Stark, spread over a full-six pages – an abridged electronic version is here – was more than enough to sour the memory of the trip and take the ‘Spring’ out of my step.
Juergen Stark’s ‘Wisdom’
Apart from some broadly sensible remarks concerning the overdimensioned financial sector – just a pity that they were made after rather than before the crisis – Juergen Stark gets almost everything almost diametrically wrong. Basic facts. Directions of causation. Balance of risks. Policy alternatives. Everything. At times the intellectual level exhibited in the interview leaves one wondering how the speaker could possibly have been entrusted with one of the most important economic policy positions in Europe, indeed globally. Not helpful, but also no excuse for an interviewee, are the often inane and leading questions from the Handelsblatt journalists.
From a much longer list, let me mention three critical points (all translations mine):
- The interview starts with the idea that the ‘western countries’ were living above their means prior to the crisis due exploding liquidity provided by bubble-inflating central banks monetary and a fateful government deficit bias. This is of course nonsense. The euro area as a whole was not living above its means (balanced current account), and Mr. Stark’s Heimatland was living dramatically below its means, running permanent current account surpluses. Precisely because of the cited ‘iron law’ that income must equal consumption (at an appropriate level of aggregation), the whole idea that ‘western countries’ as a group were living above their means is a preposterous journalistic canard that any half-competent economics student should have disabused them of. On policy, yes, fiscal policy was undoubtedly too loose in some countries, but by no means all: high deficits and debts were the result not the cause of the crisis. And as for over-expansionary central banks, it is very odd that the former Vice-President of the Bundesbank (98-06) and ECB Chief Economist (06-11) talks as if he and Weber, and before that Issing – all proud defenders of the Bundesbank’s privileged position within the ECB – were somehow powerless marionettes, rather than being responsible at the highest level for setting monetary policy in the world’s second-most-important central bank. (A point a half-way competent journalist might be expected to raise.)
- Stark repeatedly makes the incredible claim that governments are not now consolidating public finances, and even that fiscal policy is currently ‘very expansionary in most developed economies’. Yet fiscal policy shifted to an austerity course in a number of economies already in 2010 and by early 2011 virtually all the leading economies had begun reducing spending and raising taxes. It is precisely this premature and exaggerated austerity, along with the interest rate hikes in early 2011 that Stark was instrumental in pushing through that derailed the recovery. Such blatant disregard for the most basic facts about economic policy is nothing short of scary.
- Stark claims that central bank policies, and notably the recent decision to expand the ECB balance sheet by around EUR1 trn to provide cheap loans to the banks, will lead to inflation: ‘we know from history that every particularly strong expansion of the central bank balance sheet leads to inflation in the medium-term.’ (The Handelsblatt editors helpfully stimulate the reader’s imagination by putting the quote alongside a photo of German children playing with blocks of worthless banknotes in 1923.) Such a prediction is obviously not wrong in the sense that the claim about current fiscal policy is factually incorrect. But any halfway decent journalist would have challenged his argumentation. What would have been the effect on inflation (amongst other things!) if the ECB had allowed the banking system to collapse at the end of 2011? How fast is the overall money supply (not just central bank money) increasing? (Answer: M3 at derisory rates of around 2%.) Are all commodity and asset prices rising fast (as Stark claims) or is it not specific markets (oil, equities) and don’t they have other causes than central banks?
Understanding Juergen Stark
I think the key to understanding the position of Stark and others like him can be seen where he claims that he was acting to remind politicians of ‘the Maastricht Treaty and its underlying concept’. Earlier in his career Stark had helped negotiate the Treaty as a German finance ministry official. The point is that he has been unable to recognise that that Treaty architecture was badly flawed and, in the crisis, has simply proved unworkable. He is like those that reject distributing condoms as an AIDS-prevention measure because all that is necessary is complete sexual abstinence before and complete fidelity during marriage. Distributing condoms merely encourages morally reprehensible behaviour.
So I won’t bore the reader with Stark’s resignation, which is discussed here in some detail. The main thing is that he has in fact resigned. It is regrettable that he is exerting a pernicious influence on German political opinion through such articles. But his and Weber‘s removal from the levers of monetary-policy power was a necessary condition for the (limited and partial) improvement in the prospects for overcoming the crisis we have seen this year.
The global financial system is “on drugs” because it was (and remains) deeply sick. This interview makes it clear that if those two gentlemen had stayed in power, the patient would have died. Given that, my almost choking on my Brussels Airlines sandwich is not even a detail.
