Originally appeared in Business Insider.
I’m flattered that New York Times columnist Paul Krugman – Nobel prize winning economist and darling of crunchies everywhere – has seen fit to attack me not once, but twice, over a recent Times Op-Ed column of mine about the Eurozone mess.
The nub of my sin, says Krugman, is suggesting that the key to restoring growth in Europe is structural reforms, rather than either expansionary fiscal policies or more monetary stimulus along the lines of what the European Central bank recently announced.
Well, let’s start with the fact that I never wrote that. What I argued was that the E.C.B.’s quantitative easing program (which I called “commendable”) and more government spending (“well advised”) would only succeed if accompanied by a thousand smaller measures to unclog Europe’s economic arteries.
I’ve done banking and investing in Europe for more than two decades and have seen first hand the tragic consequences of over regulated, Balkanized countries seemingly more interested in scrapping over a stagnant pie than in creating an environment conducive to growth.
The arrival of the common currency in 1999 only exacerbated these tendencies. Enabled by foolish lenders, even the weakest countries were able to borrow huge sums at low interest rates, creating an illusion of economic expansion while competitiveness was, in fact, deteriorating.
From his armchair in Princeton, Krugman refuses to acknowledge those failings. Doubtless, he has visited Europe, perhaps to speak at a conference in Barcelona or vacation on the shores of Lake Como.
But the thousands of words that he has written about the Euro crisis don’t suggest that he has spent any time trying to understand how the private sector actually functions (or doesn’t) within the Eurozone.
I don’t recall him acknowledging the problem of Greek hairdressers retiring at 50 because it is a “hazardous” profession or France’s 29% employer-paid payroll taxes or Italy’s 2,700 pages of labor market regulation.
For Krugman, the problems of Europe are all about the classic Keynesian slant of insufficient demand, brought on by miserly monetary policy and fiscal austerity insisted upon by Germany and its factotums in the Eurozone’s command post in Brussels.
Out here in the real world, life is more complicated.
No amount of demand is going to help Europe compete internationally. We are living in a global world and as an ardent free trader, Krugman should be among the first to recognize that remaining competitive in the 21st century requires becoming ever more efficient.
However, since December 1999, productivity in Italy has fallen by 5%, and it has lagged in many other Eurozone countries. Meanwhile, in the United States, it has increased by 25% (and not surprisingly, by a lot more in China and other emerging countries.)
That might not be tragic if Europe recognized its problems and was taking steps to address them. A few countries – notably Spain and Ireland – have made some progress.
And in Italy, a youthful new prime minister has proposed a gaggle of reforms and has even gotten a couple close to the finish line, although the Italian economy remains depressingly dormant.
Otherwise, not so much. Yes, Greek workers have taken serious pay cuts (after having gotten indefensibly large increases.) Yes, the Greek budget deficit has come down sharply, perhaps too sharply.
But no, Greece’s record of implementing other much needed structural reforms is bad and getting worse. In 2011, as part of its negotiations with creditors, Greece agreed to raise 50 billion euros by selling government assets to private investors.
Since then, its privatization program has fallen wildly short; it has completed only 3.1 billion euros of sales, with another 4.6 billion euros of disposals under contract.
All told, according to the Financial Times’ Martin Wolf, the country’s leadership succeeded in implementing only one of the 14 reforms that it agreed to institute.
Now, a new left wing government has taken office, pledging to rehire 12,000 public sector workers, abandon the privatization program altogether and institute a big increase in the minimum wage, thereby negating Greece’s progress toward greater competitiveness.
Greece is just the worst house in a bad neighborhood. Even Germany needs to do some rethinking; flawed energy policies have saddled its vaunted industrial machine with huge costs.
France needs to much more mending. Among many other missteps, French President Francois Hollande lowered the retirement age to 60 and required that all part time jobs be at least 24 hours a week.
Under those circumstances, how would a few billion euros more public spending or a small cut in interest rates help Peugeot compete with Japanese or even American auto companies in cutthroat world markets?
Contrary to Krugman’s assertion in one of his blog posts, I’m as eager as anyone to see wages in Europe go up. Indeed, I’m willing to bet that my palette of structural reform packaged with sensible monetary and fiscal policies is more likely to achieve that outcome than just pumping money into a broken system.