Cuckoo for austerity

So what’s happening in world economics?

Steepest drop in German private sector output for three years. Euro crisis leads to survey-record monthly fall in service providers’ business outlook.

Of course, an economist could explain this better, but let’s see:

Germany is the leading voice for an austerity strategy for dealing with Europe’s economic problems. When countries practice austerity, jobs and services are cut. When that happens, citizens have less money to spend. German economic strength is based on product manufacturing. People throughout Europe buy German products. But governments throughout Europe are practicing austerity. With austerity, people don’t have money to buy products (fewer jobs, fewer payouts in social services, higher taxes, less money). When people don’t buy products, German businesses make less money.

So austerity is bad for Germany.

But Germany insists austerity is the way to go.

And now German service providers are experiencing a record fall in their business outlook.

Who could have seen that coming? Cue Paul Krugman:

Basically, it seems that even as the euro approaches a critical juncture, senior German officials are living in Wolkenkuckucksheim — cloud-cuckoo land.

Now, I know the phrase normally refers to a state of naive optimism, not normally something one attributes to German officials. But a broader interpretation would be that of believing, despite all the evidence, that the world is the way you want it to be, and acting on that false belief.

So the man from the finance ministry asserts that the euro crisis was brought on by fiscal irresponsibility, and in particular by “short-termism” — so that the remedy is to focus on long-run fiscal irresponsibility plus structural reform, which he insists has never failed.

All one can say is, My God. You have to be willfully blind not to know that private excess, not public, caused the problems in Spain and Ireland — and nowhere, not even in Greece, did Keynesian stimulus efforts have anything at all to do with the crisis. As for fiscal responsibility plus reform solving the kind of problem we face now — massive real overvaluation with a fixed exchange rate — it would be truer to say that this has never worked.

Lagarde gets the top IMF job

2011 G-20 Presser

Image by IMF via Flickr

Christine Lagarde of France was chosen as the new head of the International Monetary Fund today. It was a done deal when Treasury Secretary Tim Geithner said the U.S. would endorse her over the other candidate for the job, Mexico’s central bank governor.

So the general rule of international finance prevails: Europe gets the IMF, the U.S. gets the World Bank. The developing world is put on hold.

So now that Lagarde, the soon-to-be former French finance minister, has the job. Here is one of the first things she’s going to have to deal with:

This is Athens on Tuesday, when Greek Unions called a general strike against the austerity measures being proposed to keep the country out of bankruptcy. The Greek Parliament is calling for wage cuts, tax hikes and selling public companies to the private sectors. If that doesn’t happen, foreign lenders, specifically the European Union and the IMF, won’t lend Greece the money it needs to avoid default.

As you can see, the people are not happy. It’s pretty much expected the measures will pass. And you can pretty much expect the demonstrations are going to be more violent. And even if Greece gets the money, chances are it still won’t get out of trouble.

And Greece isn’t the only western European country on the verge of collapse. Keep an eye on Portugal, Ireland, Italy and Spain when the Greek plan fails. So Lagarde is going to be extremely busy and will be under a lot of pressure to make things right. Given the situation, it’s doubtful anyone can succeed here.

(Oh, and here’s the obligatory “Lagarde is the first woman to head the IMF” line, which is kind of ironic since the previous IMF chief, Dominique Strauss-Kahn, is awaiting a rape trial in New York.)