[Review] Stephan Schulmeister - The Road to Prosperity

Addendum 202y-06-09:

The Review has been updated.

Siehe auch:
[Rezension] Stephan Schulmeister - Der Weg zur Prosperität - Der Euro und die EU

Stephan Schulmeister is an economist and lawyer from Austria who has little in common with the economically liberal so-called Austrian school. The economist born on August 26, 1947 was a research assistant at the Austrian Economic Research Institute (Österreichisches Institut für Wirtschaftsforschung/WIFO) for forecasts, economic development, financial markets and international trade from 1972 to 2012. The focus of his work is on the conflicts of interest between employees, employers from the real economy and the financial markets or financial capital.
According to Schulmeister the orientation of the economic order fluctuates permanently between real capitalism and financial capitalism. Long upswings are caused by an alliance of interests between employees and real capital and long downswings are caused by an alliance of interests between real capital and the financial markets or financial capital.

On the one hand Schulmeister is a proponent of the Euro. On the other hand, in his 2018 work "The Road to Prosperity" he criticizes the Euro Crisis and the errors that led to it. Schulmeister’s analysis of the origins of the Euro Crisis aligns with that of Heiner Flassbeck. However Schulmeister advocates preserving the Eurozone under all circumstances.

The Architecture of a Currency-Union
The Architecture of the Euro-Zone
The so called Eurozone Crisis and the Role of Germany
The Solution according to Schulmeister

The Architecture of a Currency-Union

The concepts of a monetary system and a monetary union are of particular importance for Schulmeister and in the current economic order. The Bretton Woods System for example dictated that exchange rates would change inversely a nations foreign trade balances. Foreign trade imbalances were thus automatically counteracted. For this and because currency speculations were counteracted are the reason why the Bretton Woods System is praised by Schulmeister. [1, p.252-269]

A currency union on the other hand is much more rigid because it completely eliminates exchange rates and individual interest rates. So if wage developments and consequently price developments differ too much foreign trade imbalances will occur. In countries or regions with import surpluses or export deficits the local economy loses to imports and thus causes unemployment. And in states or regions with import deficits or export surpluses the local economy produces accounts receivable without the guarantee that they will actually be paid. In addition a uniform interest rate does not necessarily do justice to the economic development of all regions or member states. Within countries these imbalances are usually mitigated with financial transfers.

The Architecture of the Euro-Zone

According to Schulmeister the end of fixed exchange rates and inflation after the end of the Bretton Woods system promoted the Euro. The Euro thus became an alternative to the Bretton Woods System. Schulmeister describes how a major conflict was created with the introduction. On the one hand the Euro currency union is an anti-neoliberal project for Schulmeister because it prevents speculation with exchange rate fluctuations. On the other hand the Euro currency union has a neoliberal set of rules for Schulmeister. In the Euro currency union only the government sector is subject to deficit rules. As a result the other sectors can through their spending behavior hand over the state to these deficit rules and force the government to reduce benefits especially social benefits. [1, p.255-256]

Schulmeister often criticizes the European Fiscal Pact for its influence on the member states. The European Fiscal Pact is based on the Maastricht Treaty or the EU convergence criteria and sets guidelines for government finances. The two main rules are the limitation of government debt to GDP to 60% and the limitation of annual government debt to 3%. The European Fiscal Pact was ratified on March 2, 2012 with the "Treaty on Stability, Coordination and Governance in the Economic and Monetary Union". It applies to all member states of the Euro and a total of 25 member states of the EU but not to Great Britain and the Czech Republic. [1, p.210-241]

There is also a very special approach to price and wage developments in the euro zone. There is an inflation target of 1.9% but individual inflations may also be below that. In this way individual member states can introduce a wage restraint policy and thus cause foreign trade imbalances at the expense of other member states. Furthermore the EU institutions plan with the the unemployment rate (NAWRU/Non-Accelerating Wage Inflation Rate of Unemployment) which does not accelerate the rise in wages. In reality this means that EU institutions considers double-digit unemployment rates to be normal. The architecture of the Eurozone together with the European fiscal pact according to Schulmeister are the antithesis of real capitalist and demand-oriented economic policy according according to Keynes. Instead the fiscal compact and its implementation are driving a downward spiral. [1, p.210-241]

" Step 1: GDP shrinks, the budget deficit and unemployment rise. "
" Step 2: The rise in unemployment is interpreted as "natural" or "structural", causing potential output to fall and the output gap to remain small. "
" Step 3: The deficit incurred due to the recession is interpreted as a "structural" deficit, necessitating austerity measures. "
" Step 4: Austerity dampens GDP, return to step 1. "

[1, p.217]

The so called Eurozone Crisis and the Role of Germany

Schulmeister is one of those for whom the eurozone has been in a recession since the financial crisis from 2008. In the financial crisis of 2008 he sees a major reason for the length of the recession of the eurozone. He also criticizes the reinterpretation of the financial crisis from 2008 into the euro crisis and the reinterpretation of the euro crisis into the sovereign debt crisis. According to Schulmeister the duration of the euro crisis is not due to the euro but to its neoliberal financial capitalist architecture. And this causes a lack of demand through the austerity policy, the recession to stay through lack of demand and limits the options for action by the state through the fiscal pact. [1, p.256-262]

Schulmeister sees the foreign trade imbalances within the euro zone as an additional reason for the recession in the euro zone. On the one hand he locates the member states with import surpluses that are mainly located in the south and the member states with export surpluses. The latter is mainly Germany that according to Schulmeister reached this through the policy of wage moderation by cutting social benefits and reducing employee rights and abolishing exchange rates through the introduction of the euro. The import surpluses of the south led to an economic upswing in Germany. The consequences for Germany are working poors and accounts receivable that cannot necessarily be settled and could be devalued in a currency reform. And the consequences for the deficit countries are their recession due to a lack of demand from local economies and debt. [1, p.228-229 , p.232-241 , p.259]

[2, PLCD]

In addition there is an process of manufacturing of consent according to Schulmeister that obscures the circumstances. Greece for example is a hopeless case according to media reports because the austerity measures worked elsewhere. But this is not true. Between 2008 and 2016 government expenditure decreased by 30.0% in Greece, 2.8% in Portugal, 2.8% in Spain and 6.2% in Italy. And between 2008 and 2014 social transfers decreased by 9.6% in Greece, by 21.5% in Portugal, by 26.9% in Spain and by 21.7% in Italy. [1, p.224-228 , p.228-231]

[2, UXGS] [2, UMGS]

The problem facing Eurozone countries with trade deficits is that the system's architecture does not facilitate an escape from this situation. Import surpluses displace domestic production and jobs. Moreover import surpluses are a sign of a lack of competitiveness, a problem that can no longer be easily corrected due to the elimination of exchange rates. Both the loss of production and jobs and the lack of competitiveness act as disincentives for corporate investment. In such a scenario the state is left as the only entity capable of using deficits to offset the surpluses or savings generated by private households, corporations, and the foreign trade sector. However the Fiscal Compact severely restricts this option. [1, p.190-207 , p.242-243]

The absurdity of this situation lies in the fact that Germany is the major beneficiary of this trend while simultaneously acting as the staunchest advocate of measures to discipline other nations. The foreign trade imbalances within the Eurozone consist primarily of Germany’s export surpluses with other member states of the monetary union.
These export surpluses have generated immense demand for the German economy's export sector, even though the wage restraint that made this possible simultaneously weakened the domestic sector in Germany. Furthermore the financial claims held by economies with export surpluses lose value over time, as inflation rates in other countries remain above zero. Moreover the import surpluses of Germany’s trading partners can only be sustained through corresponding government deficits.
In short the government deficits of other monetary union members sustain Germany’s export surpluses and thus keep its economy running. Yet the German government is simultaneously the party that insists most vehemently on compliance with the Maastricht Treaty, and specifically its deficit rules. [1, p.232-241 , p.242-244]

The Solution according to Schulmeister

Schulmeister however clearly distinguishes himself from many critics of the Euro. According to Schulmeister the Euro critics like Heiner Flassbeck, Wolfgang Streeck or Oskar Lafontaine and others whom he also calls "Eurofighters" are wrong. The Euro is good because it prevents currency speculation and a dissolution of the Euro would lead to a devaluation spiral and consequently to a currency war in Europe. Schulmeister is contradictory here however since he has already praised the Bretton Woods system as good and right but then nevertheless rates the Euro currency union as necessary despite that. According to Schulmeister the Bretton Woods system worked but is apparently no longer possible or enough. Schulmeister summarizes the Euro Crisis as follows: [1, p.252-262]

" During the first ten years of the monetary union, the economies of the "South" performed far better than those of the "North". "
" This growth differential caused current account imbalances to widen, with the deficits of the "South" being financed by lending from the "North". "
" Private lending collapsed during the 2008 financial crisis. In national monetary systems, central banks would have offset this impact. "
" This is not possible with cross-border credit flows; when they collapse, a financial crisis becomes inevitable as seen in Latin America in 1982, East Asia and Russia in 1997, or Southern Europe in 2010. "
" The European Monetary Union suffers from a fundamental design flaw: There are no established rules regarding who assumes the role of "lender of last resort". "
" This flaw enabled "financial alchemists" to speculate on sovereign default—swapping currency speculation for interest-rate speculation. "

[1, p.259]

As a solution Schulmeister suggests among other things a joint finance ministry and a common social security system for the euro zone. In the event of the Euro's dissolution, Schulmeister warns of an economic war and competitive devaluations in Europe. Schulmeister also advocates for reforming the fiscal pact, changing the criteria and limits and a European monetary fund. This is supposed to be a way to refinance countries after the currency unions has barred their own central banks from doing so. [1, p.262-269 , p.410(9)]

" The ECB should keep interest rates stable at a level close to zero and refrain from fine-tuning to stabilize the economy. "
" Through the purchase or sale of (government) bonds the ECB ensures that interest rates in any given eurozone country are no more than 2 percentage points higher than those in Germany. "
" Furthermore the ECB should implement measures to prevent or curb speculative bubbles in financial markets. "
" The "Golden Rule of Wage Policy" whereby nominal wages rise in line with productivity plus the inflation target of 2 percent would curb current account imbalances. The range of these imbalances should be limited by rules. "
" The government deficit should correspond to the private sector's surpluses. This serves in particular to finance public investment. Under the "Golden Rule of Fiscal Policy" such investments are not counted as part of the government deficit. "

[1, p.265]

Preview:

Src:
[1] Stephan Schulmeisters Buch - Der Weg zur Prosperität- ISBN 978-3711001481
[2] AMECO - annual macroeconomic database / jährliche makroökonomische Datenbank
https://economy-finance.ec.europa.eu/economic-research-and-databases/economic-databases/ameco-database_en
[3] Welche Aufgaben kommen für die Sozialdemokratie? Schulmeister und Max Lercher 2018-05-07
https://youtu.be/iJzheZwCtV0
[4] Der Weg zur Prosperität Stephan Schulmeister Buchvorstellung WU in Wien 2018-06-08
https://youtu.be/_s2SJIKk204
[5] „Wir sind in gefährlicher Nähe zu den 1930er-Jahren.“ Stephan Schulmeister im Gespräch 2018-06-18
https://youtu.be/tL0kaHQTByA
[6] Stephan Schulmeister - Europas Weg in die Krise und zurück zur Prosperität 2018-06-22
https://youtu.be/cKy4Y5Zk8ig
[7] Märkte als Religionsersatz? | Stephan Schulmeister bei quer.denken. 2019-02-07
https://youtu.be/EUCGzOkfBtc

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