Thursday, 24 May 2012

German cold turkey

Iain Duncan Smith's intention to dock the benefits of drug and alcohol addicts if they refuse treatment and the Eurozone crisis have some common features. The Secretary of State for Work and Pensions says of his cunning plan:

The universal credit will allow staff in Jobcentre Plus offices to say: this person has been unemployed for some time. The staff know if people are addicted to alcohol. They know the people they are dealing with. But we want this to be positive and to be about signposting people to superb organisations that can help them. This is about changing their lives. It is very important to support addicts into the workplace.

Addiction charities have been politely appalled by the idea, as these "superb organisations" will have to deal with either increased demand with no extra funding or the fall-out from addicts driven to desperation. There is no reason to believe that the plan will work even on its own terms, as reliance on the subjective opinion of Jobcentre staff is an open invitation to them to sideline it, unless management decide to set arbitrary targets for the number of referrals/penalties. Should the policy be vigorously implemented, you can be sure we'll see false accusations and petty spite aplenty.

The mechanism to enable this coercion is the "claimant contract", which is central to the new universal benefit due to be introduced in October 2013. This is the concrete result of all that talk from Blair onwards about tackling the "something for nothing culture". The support of society for the most vulnerable must be reframed as a fair exchange, a quid pro quo, rather than a moral obligation or the acceptance of an implicit social contract.

Benefits are increasingly to be made conditional not only on a willingness to work, but on a willingness to address whatever personal behaviours the state considers to be impediments to work. As usual, this is not based on any empirical evidence but is merely a moralistic assertion. There are plenty of functioning alcoholics and addicts holding down jobs, many in The City, so why start with alcies and junkies? Why not pick on the morbidly obese or the clinically depressed? Presumably because addicts are a less sympathetic target.

This micro contract bears a resemblance to the macro contract of the EU's Stability and Growth pact, which was updated last year to include automatic penalties for excessive debt and deficits. After turning a blind eye to problematic behaviour during the 00s (including that of Germany), the EU is now getting serious about adherence. No more something for nothing.

The Eurozone crisis is often discussed as a morality play in which feckless Southern Europeans (and the Irish, who have become honorary olive pressers) became debt junkies because of low productivity and expensive lifestyles. They must now mend their spendthrift ways, knuckle down and work towards salvation. They must become more Protestant. The other main approach is to view it systemically as a flawed plan that unintentionally lowered interest rates in the periphery states, so avoiding the need for politically unpalatable structural reforms and cuts in welfare spending to achieve competitiveness. They must either quit the Euro, devalue their new/old currency and wear a hair-shirt for a few years (Methadone), or they must accept the treatment of austerity now and grin and bear it (cold turkey).

Robert Peston's recent TV summary, The Great Euro Crash, showed how these two tropes have been blended together. Euro-sceptics in The City (Terry Smith and Louise Cooper, the BBC's go-tos for this perspective) highlighted the flaw that meant Greece and Germany enjoyed similar borrowing rates but failed to explain how such a thing could happen. The different states of the USA have widely varying credit ratings despite being part of a federal union (including fiscal transfers) based on the Dollar. The decision to assume that the EU (or Germany) would stand equally behind all Eurozone nations' debts was made by the banks and financial traders. In other words, Peston interviewed the pushers, who were keen to blame the irresponsible users.

There was little recognition that the sovereign debt crisis was a consequence of the financial crisis of 2008, and that prior to the bailouts Eurozone deficits and debt-to-GDP levels were (with the exception of Greece) at manageable levels. There was also no recognition that the convergence of government bond yields (i.e. borrowing costs demanded by the money markets) among the EU states started in the early 90s, long before the introduction of the Euro.

The idea that the Germans are more industrious and averse to debt (cue reference to Swabian housewives) is a simplification. Their current happy position is the consequence of under-par performance in the decade that followed economic reunification in 1990. It's worth remembering that Helmut Kohl's decision to convert the Ostmark 1:1 with the Deutsche Mark in respect of wages (and 2:1 for savings) meant that industry in the East was thereby overvalued, on top of suffering low productivity, when exposed to the free market. The absorption of the tattered remnants of the East was a painful process that led to high unemployment, high interest rates and increased government deficits.

The pressures of the 90s caused Germany to implement austerity early, under Gerhard Schroder in 2003, at a time when it could be supported by the buying power of the rest of the EU (and under the stability and growth blind eye). Of course, only a cynic would suggest that the Germans spotted the opportunity that the Euro presented of a boom in the South coupled with devaluation in the North (German real wages were flat during the 90s as the costs of reunification were borne, however they then started to decline in the 00s as the Euro led to internal devaluation). Emulating Germany in the current economic climate would be hugely difficult for a single country. Trying to apply the same medicine simultaneously across most of the EU is insane.

The fundamental connection between Duncan Smith's plan and the Eurozone crisis is growth. The chief impediment to work is the lack of decently-paid jobs, not over-generous benefits or addiction. Unemployment hasn't risen because we've increased the JSA. The solution to the Eurozone crisis (in the short-to-medium term) is stimulus and moderate inflation, as this will produce surpluses and shrinking debt quicker than mass mutual austerity will. Germany's reluctance to consider this is because it must bear the lion's share of that inflation, or else accept de facto fiscal transfers through eurobonds. It is caught between the folk memory of hyper-inflation and the more recent experience of funding the rebuilding of the economy in the East.

You will hear the phrase "kicking the can down the road" repeatedly in reference to the EU's dithering, but in truth the policy is more a deliberate and cynical decision to kick cripples, just like Duncan Smith's playing to the press gallery. Like the war on drugs, austerity predominantly means harrassing the victims. Meanwhile, financial firewalls have been erected so that the Greek exit (or capital flight) does not damage the banks. The pushers will always be with us


  1. David, sorry can't be bothered to check out the link, but a couple of mins on google should find it. Germans work about the shortest hours in the EU, Greeks the longest. So whatever caused Greek problems, it isn't laziness.

    As for debt levels, weren't Spanish and Irish debt levels well below German levels? And even Italian levels were coming down, albeit from high levels.

  2. Luke, you're right. Greeks work longer hours on average than Germans, however that in turn reflects the higher per capita productivity that the Germans have achieved. The Greeks' problem is that too much of the capital inflow triggered by the Euro went on consumption and clientelism rather than industrial investment.

    The pre-crash debt levels in the EU were manageable, despite many countries (including Germany) missing deficit targets during the 00s. It was bank bailouts that boosted public debt to unsustainable levels, and it is austerity that is putting pressure on deficits: tax revenues drop, welfare costs increase. Despite the claims of Cameron and Osborne, the bond markets are not that bothered by the quantum of debt - it's what they trade in, after all. What bothers them is whether the sovereign looks like they have the capability to service that debt.

    This is why Japan, which has the highest debt among the developed nations (over 200% of GDP), is not being stalked by the bond vigilantes. It is deemed a "safe bet" in terms of servicing, partly because it has a lot of domestic savers who buy bonds and thus keep yields low.

    Italy, on the other hand, has been suffering from sluggish growth for a couple of decades now. Small surpluses in the past didn't whittle away their debt, and now the bond market can't see where future growth will come from, making them worry that repayments will become a struggle. The replacement of Berlusconi by Monti et al is meant to ensure the structural reforms (deregulation etc) that the neoliberal consensus believe will lead to faster growth.

  3. Thanks. My views on italy are probably biased by personal experience of hardworking debt free young people. No property speculation - you go to college, then you work. Like you, I'm peed off with morality lectures.

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