Friday, October 12, 2012

Wolfgang Münchau and austerity

Wolfgang Münchau seems to have the right answer for every question. At least that is the impression I get when reading his articles. His latest article on austerity in the Financial Times sounds convincing. Or is it?

I have read very interesting articles by Münchau about the Eurozone's finances, the debt, the debt problem, solutions to the debt problem, the Troika-measures, etc. etc. I do not recall a single article where he talks about the Eurozone's real economies in detail. So he is focusing all his attention on the 'derivative' while disregarding the 'underlying'.

If the Eurozone were identical to the USA (i. e. a United States of the Eurozone), we would today be witnessing a migration period. People would massively desert those regions where unemployment reigns and move to those regions where jobs are available. We might soon see some cities in the South reminding us of ghost cities in the American West. Fortunately, personal mobility in the Eurozone is far from the level in the US so that we do not have to see that drama.

And all of this because of austerity? Come on, Mr. Münchau!

The opposite of austerity is spending. My ears ring with Prof. Krugman's mantra of "spend, baby, spend, spend, spend..." Wolfgang Münchau insinuates the same. And every well-meaning person joins the chorus.

Would it perhaps be an idea to talk about spending a bit more in detail? When money is spent on consumption, the money is gone after it has been spent. When money is spent on investment, money will come back once the investment is in operation.

Austerity should mean that one sacrifices consumption in favor of investment. Is that happening? Well, not really. The Greek state has impressively reduced spending in the last 3 years but almost half of the reduction came from cutting investments. Sounds more like cutting investment in favor of consumption (or other things).

Ludwig Poullain, the legendary former German banker, wrote a very interesting article a few days ago at age 93. One of the issues he focuses on is industrialization. He argues that much of Europe, mostly the South, has been de-industrialized in the last decades. More of a minor issue in Greece because Greece never was highly industrialized but a much more important issue in Spain and, certainly, Italy. But - the real time bomb, according to Poullain, is France. He argues that France, as opposed to Germany, did not use the pre-Euro decades to shape up its industrial competitiveness. On the contrary, it covered-up this weakness through continuous devaluations. On average, Poullain states, France devalued 30% every decade!

Poullain's conclusion on this issue: "No fiscal stimulus can ever solve the problem when the economy has become de-industrialized".

Helmut Schmidt, the former German chancellor who can definitely not be suspected of ever having been a Nazi sympathizer, once said in a TV-interview: "If Hitler had been shot in 1936 (i. e. before the Nazi-machine really got into destructive operation), Hjalmar Schacht (Hitler's Minister of Economics who parted with Hitler in 1937 and who was acquitted at the Nueremberg Trials) would have been awarded the Nobel Prize for Economics". Why? Because he succeeded in turning record unemployment into full employment within a few years.

How did that happen? According to Schmidt, exclusively deficit spending BUT spending on investment and not on consumption (Autobahn's & Co.). I can already hear the objection that this was only possible because of a huge war machine being built up. Probably, but so what? What if all those arms, by 1939, had been destroyed instead of being used for war? They were destroyed during the war, anyway. Had they been destroyed in 1939, those arms could at least not have destroyed so many other things. Even if those arms had been destroyed by 1939, they would still have played a major role in converting record unemployment into full employment (not to even think about the benefit for the German economy if Hitler had, by 1939, exported all those arms to the rest of the world instead of using them against the rest of the world...).

My point is this: notwithstanding the brilliance of all the comments made by Münchau & Co. about the 'derivative', that discussion will not accomplish a thing if one continues to ignore the 'underlying'. The 'underlying' of France, Italy, Spain, Portugal and Greece is in big trouble. To improve the 'underlying', investment is required so that jobs come into existence. Investment flows to places where opportunities are. And opportunities are in those places where one can operate productively and competitively.

Yes, the kind of austerity we have seen in Greece (cutting investments) makes things worse. Trying to get out of this de-industrialization cycle by more spending on consumption makes matters worst.

I would find it very interesting to see a comparison between Greece's commercial and industrial output today compared to, say, 20 years ago or so. My guess is that today's output is less than then. In actual fact, today's output should be lot more than then.

It is an illusion to think that Greece can make it as an exclusive service economy. To achieve that, Greeks would have to start-up at least one Microsoft.


  1. It is Hjalmar Schacht not Hjilmar Schacht. Please correect it.

  2. Manchau, Krugman and their ilk spend their time talking to people in The City, Wall Street, Frankfurt etc. They don't make hard hats in their sizes - besides real businesses are often dirty and smelly, so they prefer not to go there.

    Imagine if all them Euro's that Greece squandered in the first decade of the 21st century had been invested in income generation investments.

    But I am puzzled by your reference to Microsoft in the context of a service economy. Sure MS makes money from services, especially from its corporate clients, but so do Boeing, GE, SAP, Siemens, Thyssen Krupp... But they are all essentially about making things that allow others do things.

    If your looking for a country overly dependent on services - no need to look beyond the UK.

    I note that Coke Hellenic is moving to Switzerland, puzzles me why it was in Greece anyway. Perhaps Greece was once a good place to set up offshore HQs, or it more likely it was a carrot to keep it out of the Soviet block.

    More worrying is that FAGE, a Greek dairy company, is relocating it's HQ to Luxembourg. Watch out for a takeover by Danone, Lactalis, or Fontera etc.


  3. There is a very real problem with modern industry. It is always a matter of scale. Usually that means more efficiency. Brian mentioned to me an advertisement on the back of a German lorry that said "If you think I am going too slowly, how fast could you run with 180 crates of beer on your back?"

    Which is the issue here. How fast can you run with 4,000 tons of coal? Well at 120km/h given the right machinery - that is to say a railway train. At the flick of a switch that load can be travelling at 100km/h in a matter of minutes.

    The problem here is that it is cheaper - "more efficient" to use an electric vehicle for the purpose than two steam locomotives that need considerably more maintenance and four crew members.

    This sort of efficiency has seen the railways themselves turn from delivering parcels on branch lines to delivering the sort of commodities that pass my window every day. This kind of efficiency has one serious drawback: what do the three crew members do when there are no steam engines to drive?

    What does the CNC machinist do when his job is overtaken by a robot? Nowadays, one man can run twenty machines. He won't even get his hands dirty!

    Whilst somewhat off topic, this is at the heart of Europe's problems. Germany can supply the vast industry and infrastructure that makes it possible to make things that compete on the world market. France and Spain have a real problem here because these forces of contraction have worked away from them and not towards them, just as the German parcels service on the branch line is handled by other businesses today.

    There are ways out of this, only they need the sort of imagination that few economists seem to possess. CK above makes a valid point about investing in things that bring returns - the problem is in the context of my thoughts, with what would they compete? With the infrastructure as it stands, it is cheaper to transport apricots to Germany for tinning than to do it in Greece. Those investments could have been squandered as easily as they were on bridges in remote areas had they not taken this into account. It is an extremely difficult corner to fight your way out of.

    1. @Gemma, Once upon a time I might have suggested your on-the-dole train drivers emigrate, and earn €100K+pa driving trains for Rio, BHP etc.

      But Rio and presumably others, are installing 2km long drone trains each carrying 30,000 tonnes, there are 41 trains on Rio's 1500km Pilbara network. Eventually all but the track maintenance trains will be drones. There already drone dump trucks hauling the ore to the trains and there are miner-free mines coming on stream.

      The example I use about making things that make things is sewing machines. About the time Japan was being priced out of the garment industry, it started to dominate the industrial sewing machine market. I'm sure that wasn't serendipity - it remains a major player.

      Japan has 300 robots per 10,000 workers, China has 15. China is the fastest growing market for robots, company's like Kuka (Germany), Fanuc (Japan) and ABB (Swiss/Sweden) will clean up - ARM will also do well.

      SME's dominate the manufacture of Additive Manufacturing (AM) machines (aka 3D printers), I'm not aware of any Greek companies in this business. But I am aware of German, Israeli, and Singaporean SME's that make the machines, in Germany they seem to be clustered around Munich University. AM machines are made out of software, off the shelf components and lightweight engineering & fabrication. I can't think of any structural reason why Greece should not be in this business, but I suspect we all know why they're not - I call it mindset.

      Greek tinplate imports have declined in tonnage every year since 2003 (couldn't find anything earlier), I suspect Greek canneries, like their olive oil producer counterparts, have not maintained their plant and/or upgraded to latest techniques and technologies. The world biggest & arguably most efficient tinplate plant is in Anderlach, which is half way between Cologne and Frankfurt - it exports 80% of what it produces. Germany is a major player in setting global tinplate prices. :sigh: