Austerity economics vs. the health of the eurozone - and how it affects the rise in German and Austria real estate

The Herbert Hoover/Heinrich Brüning market-fundamentalist economic doctrines that dominate the eurozone are putting serious limits on economic growth and opportunity. And not just in the eurozone.

Since the leading center-left parties, mainly Social Democrats but also the Greens,  embrace austerity economics to a large extent, the public discussion on that central economic concept is seriously restricted. It's not that the issues involved are impossibly complex. But understanding them does require more than endless recycling of tired clichees and Stammtisch (good ole boy) platitudes.

In Germany and Austria, not only big cities but smaller ones are experiencing soaring real estate prices and rents. Why? Frances Coppola has a big part of the answer: "Rising property prices seem to be the only means the people of the Eurozone have of restoring their lost wealth." (The Eurozone's Long Depression Coppola Comment 05/06/2019)

But because market fundamentalism so dominates press coverage and commentary and politicians' statements, some concepts that are pretty elementary sound like exotic claims to much of the public. For instance, Coppola refers here to the accounting reality that the combined public and private deficits or surpluses in an economy equal the external current accounts deficit/surplus, i.e., what is popularly referred to as the trade deficit/surplus. Jamie Galbraith provides an accessible version of this accounting identity which is produced by real-world economic factors in The Predator State (2008).

The eurozone as a whole is running significant surpluses, i.e., exports more than it imports. And its largest national economy, Germany, runs continual surpluses supported by a policy of keeping the increase in German real wages below the increase in productivity. This also means that in the eurozone, domestic savings are running high. The flip side is that domestic investment is lagging. And the structural weaknesses of the euro as a currency, Coppola points out, is keeping the eurozone at a slower rate of growth than it needs:

Economies don't always bounce back after a "sudden stop" [such as the sudden stall in eurozone net investment in 2011]. If investment doesn't return, then the economy stays stuck in a slump. That is what has happened to the Eurozone. It needs much, much more investment. Investment by domestic corporations is slowly growing, but the ECB says that households are still deleveraging. And government investment is all but absent, as balanced-budget rules proliferate across the Eurozone and Brussels threatens to impose draconian sanctions on any country that dares run much of a deficit. Meanwhile, external investors stay away, put off by the Eurozone's poor growth prospects and rising political risks.

But the Eurozone authorities have very good reasons for pursuing policies that discourage external investment. The "sudden stop" in 2011 nearly destroyed the Euro. Those in charge in the Eurozone daren't risk another one. The current account surplus, and associated capital exports, are protective. After all, if you never borrow from the outside world, they can't hurt you. And if you are a net lender to the outside world, you have some leverage over them. Of course, they can still trash your currency, but as you don't need to service external debt, that doesn't cause you a major problem. It simply helps you to sell them more goods. Alternatively, they can refuse to buy your goods, in which case the loss of export income will make your population poorer. But hey, the people are already used to austerity, because that's how you maintain your current account surplus. They won't notice even more pain when the export income dries up.

In fact the Eurozone is behaving in much the same way as developing countries have since the Asian crisis of 1997, and for much the same reasons. Just as developing countries pursued export-led growth strategies and built up large FX [foreign exchange] reserves to protect themselves from sudden stops, so now the Eurozone, scarred by its own "sudden stop", is doing the same. Perhaps Eurozone leaders think the investment chill that is causing the Eurozone's poor growth, high unemployment and stubbornly low inflation is a fair price to pay to keep the Eurozone together. [my emphasis]

We know that in Europe and the US, far-right populist parties are drawing from sections of the public that are not themselves in obvious economic distress. Other factors than strictly economic ones are driving some of the support for those parties, including factors like xenophobia with particular appeal to people with an authoritarian turn of mind.

But economic stagnation and uncertainty do create conditions that facilitate demogogic political appeals. People afraid of "losing control," always a worry for authoritarians, respond with increased fear to general conditions that become more uncertain or tumultuous. Unless democratic countries can reverse some of the effects of what Coppola calls the Long Depression, those conditions will continue to feed rightwing demogoguery.

Coppola also embeds this tweet from Adam Tooze on the eurozone:

This data on Eurozone net saving should be retweeted daily! Large foreign lending is the flip side of the current account balance. But it is the low level of domestic investment and the complete absence of net public investment since 2012 that is truly dramatic. @SoberLook pic.twitter.com/5qtbpGiny3

— Adam Tooze (@adam_tooze) May 2, 2019

I'll flag this one of his, as well:

Whilst at summit get-togethers America’s business leaders fret about “populism” and “class war”, on earnings calls they complain about “higher wages”. Love the fact that you can actually quantify this stuff. @ArborResearch via @SoberLook pic.twitter.com/M8FDcSzUgk

— Adam Tooze (@adam_tooze) May 3, 2019

(A German version of this post can be found here.)