Heiner Flassbeck on the global economy: the problem of Europe

In the video below from the Real News Network, former economist at UNCTAD, Heiner Flassbeck, discusses some of the problems besetting today’s global economy and claims that they have deep historical roots. Germany may be heading for a recession due to shrinking exports linked to the ongoing US-China trade war and weak demand in Europe.

Flassbeck argues that the cause of sluggish global demand lies in the weakness of corporate investment compared to corporate saving alongside stagnant wages and the insufficient response of governments in Europe to counter this with more expansionary fiscal policy.

This has been brewing since the 1970s. The US under Reagan, Bush junior and most recently Trump has on a number of occasions responded to sluggish growth with higher fiscal deficits. The exception came under Clinton, when a booming economy and fiscal tightening produced several years of budget surpluses, which ultimately proved unsustainable.

In contrast, many European economies have remained wedded to tighter fiscal policies and austerity in the run-up to the creation of the euro. Since 2000 Germany has relied on foreign demand to drive growth, and now runs, in absolute terms, the largest current account surplus in the world.

Corporate surpluses are also excessively large in Japan, but the government continues to run a moderately large budget deficit which absorbs some of these savings and sustains aggregate demand to a degree. The German government is now running a budget surplus, which withdraws demand from the economy, leaving net exports as the driver of growth.

Ideally, corporations would use more of their retained earnings for investment, rather than running up surpluses as they are doing at the moment, particularly in Germany. This would increase spending on the demand side, and the capital stock on the supply side, boosting growth in output and some combination of employment and productivity.

In the absence of strong corporate investment growth, sufficient demand to support economic growth has to come from household consumption, net exports, or from the government. With insufficient household income growth, Germany has relied excessively on growth in exports enabled by sluggish wage increases for twenty years. In a weakening global economy, it is now suffering again and could be on the brink of recession.

A more sustainable return to healthy economic growth and fuller employment with rising living standards would see household incomes rising for the majority through significant wage increases, stimulating consumption and providing greater incentives for companies to increase investment in new capacity and employment. Also needed is some degree of fiscal expansion which includes public investment in necessary infrastructure and support for those on the lowest incomes.

The corporate sector surplus (the excess of savings over investment) in a number of large economies needs to shrink as wages and household incomes rise alongside corporate investment. This would lessen the need to rely on large and persistent fiscal deficits, which have supported demand in Japan on and off for well over two decades but have not by themselves created the conditions for a return to more balanced economic growth over the longer term. It would also lessen the need for consumption to be excessively dependent on rising debt, as in the UK and US.

More balanced global growth and reduced inequality within countries which have seen the latter soar since the end of the 1970s can be achieved together.

Flassbeck does not really discuss the reasons behind excessive corporate savings relative to investment, aside from a brief reference to neoliberalism, and he ignores the problem of private debt in China, but the interview is interesting and worth a watch.

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‘The left must fight for a real Brexit’ – an interview with Costas Lapavitsas

lapavitsasCostas Lapavitsas is a Professor of Economics at SOAS in London and a long-standing critic of the EU. His recent book, The Left Case Against the EU, is an interesting and provocative read, whatever your political orientation.

In this short interview, he argues for a No Deal Brexit from a left perspective, as well as political and economic transformation in countries across Europe that benefits ordinary working people via public ownership of the banks and utilities, industrial policy and redistribution, alongside increased popular and national sovereignty and democratic accountability. Continue reading

Europe’s Growth Champion: institutions, economics and politics

Poland’s success in becoming a high-income country with dramatically improved living standards since its transition from communism in 1989 may be one of the lesser-known stories in recent world economic history.

This transition is in stark contrast to Poland’s historical record over several hundred years in which its economic fortunes fluctuated relative to Western Europe, but never got as close in terms of income per head and overall prosperity as it is today.

Marcin Piatkowski has written an interesting book on this subject, Europe’s Growth Champion, which draws on and extends some of the insights of the New Institutional Economics (NIE), particularly the work of Daron Acemoglu, Simon Johnson and James Robinson (AJR). Continue reading

Interview with Costas Lapavitsas: Strategies for the renaissance of the left in Europe — Radical Political Economy

Costas Lapavitsas, a Professor of economics at SOAS, and briefly a Greek MP in the Syriza government, discusses the causes and evolution of the eurozone crisis, and potential strategies for the left in Europe. While I am sympathetic to his explanation of the crisis, his solution, especially for Greece, are for a new leftist nationalism in opposition to the EU. Perhaps in the absence of EU and eurozone reform this would be desirable, but it remains controversial.

The interview is at the link below, via the Radical Political Economy website.

The following interview, conducted by Darko Vujica was originally published by prometej.ba on June 10th 2017.

via Interview with Costas Lapavitsas: Strategies for the renaissance of the left in Europe — Radical Political Economy