Piketty v. Merkel

David Stute, Vol. 36 Associate Editor

Earlier this month, Der Spiegel interviewed French economist Thomas Piketty,[i] who first rose to international fame with his 2013 study of wealth inequality over the past 250 years.[ii] In the interview, Piketty laid his finger on the stark divide in economic outcomes between the United States and the European Union (EU) seven years after the financial crisis.[iii] Two years into the crisis, the two had comparable rates of public debt and unemployment.[iv] But whereas the EU’s rate of unemployment has risen dramatically, that of the United States has dropped to 2008 levels.[v] Moreover, whereas the EU’s economic output remains below 2007 levels, the US economy has regained strength.[vi] And most devastatingly for the EU’s long-term prospects, youth unemployment across the EU was at 21.4 percent as of January, with rates exceeding 40 percent in Italy, Spain, and Greece.[vii] In contrast, US numbers for this demographic have come down from a high of nearly 20 percent in 2010 to below 12 percent in February.[viii]

It is no secret that the United States and the EU pursued different fiscal and monetary policies in response to the financial crisis. Early on, the United States Federal Reserve embarked on unprecedented steps to stimulate capital markets and economic growth through low interest rates and a massive bond-buying program, termed quantitative easing.[ix] In addition, following the Keynesian playbook, a newly elected President Obama signed into law a massive stimulus program to make up for (some of the slump) in economic activity.[x]

Meanwhile, the EU’s response was markedly more timid, and the financial crisis morphed into a sovereign debt crisis,[xi] in part inspired by the later refuted theory that sovereign debts above 90% domestic output lead to lower growth.[xii] At the persistent urging of the continent’s iron lady, Germany’s Chancellor Merkel, Greece and other EU member states had little choice but to agree to severe austerity measures in exchange for financial rescue packages from the EU and the IMF.[xiii] Today, Greece’s economic output is 25% below 2007; the economies of Spain and Italy have contracted 10% over the same period.[xiv]

These two drastically different approaches tell a compelling story. Indeed, how could Chancellor Merkel and like-minded eurozone policy makers fail to draw seemingly inescapable conclusions about their policies? It turns out that the now cliché phrase, coined by former US House Speaker Tip O’Neill, holds equally true in Europe: all politics is local.[xv] And due to Germany’s outsize sway over EU policy, German politics have had a remarkable propensity for shaping the eurozone’s response to its economic struggles. The collective conscience of Germany’s middle class remains traumatized by a period of hyperinflation during the Weimar Republic that preceded the country’s descent into fascism a mere decade thereafter.[xvi] This anachronism helps explain why Chancellor Merkel has refused to acknowledge that the supposed cure—member state deficit reduction without economic growth—is absurd, if not economically impossible.[xvii] For it would be deeply unpopular among Germany’s electorate to support looser controls on sovereign debts among member states in the short and medium term for (the promise of) higher growth, and thus the means for lowering debt-to-GDP ratios, in the future.

After close to a decade in office, Ms. Merkel’s domestic popularity—in stark contrast to President Obama’s respective approval ratings across the Atlantic—hovers around at a lofty 75 percent.[xviii] In terms of appealing to German voters in an office unbound by term limits, she arguably has little incentive to change course. Yet by the same token, her popularity should provide her with sufficient political capital to push for a course correction as the EU deliberates the next steps in dealing with a new, anti-austerity government in Athens. Plainly, Germany benefited from Greece’s membership in the eurozone as evidenced by significant increases in German exports to Greece since the inception of the euro.[xix] History provides further compelling, politically powerful arguments to stand in solidarity with Greece. After all, West Germany saw its pre- and post-World War II external debt cut in half by the London Debt Agreement.[xx] This reduction, which applied to all creditors, even covered private-sector debts and debts owed by individuals.[xxi] Germans still fondly refer to the accompanying period of sustained high economic growth as the Wirtschaftswunder (economic miracle). What’s more, the Nazi regime’s atrocities in Greece during World War II are no matter belonging to the ancient past, as the Frankfurter Allgemeine Zeitung recently suggested in a blunt rebuke to demands for reparations from Greece’s justice minister.[xxii] And neither should Greece’s renewed claims for outstanding reparations be dismissed on legal grounds as outside the window allotted to such claims under the London Debt Agreement.[xxiii] Such a dismissive approach would be utterly incongruous with Germany’s efforts to come to terms with, and record of taking responsibility for, the country’s past. Perhaps Chancellor Merkel could take a first step by appointing a commission to study the validity of remaining reparations claims and committing Greek debt held by the KfW, Germany’s state-owned development bank, to cover any claims found to be valid.[xxiv] Finally, gestures signifying Germany’s embrace of Greece as a member of the euro would help Ms. Merkel distinguish her party from the euro-skeptic, far-right Alternative für Deutschland party, which—until last year’s elections—had made the curious economic argument that Germany would be better off by returning to the Deutsche Mark.[xxv]

It would be a mistake, however, to underestimate EU institutions’ own evolving arsenal of economic policy tools. While Ms. Merkel and other member-state elected officials hold significant sway, the European Commission, the Court of Justice of the European Union, and the European Central Bank each have demonstrated the ability and determination to make use of their treaty-based (some would argue constitutional) powers. With deflation taking hold in the eurozone in December 2014 for the first time on record,[xxvi] the ECB implemented a reduction in interest rates,[xxvii] as well as its own quantitative-easing program—albeit modest in scope compared to the Federal Reserve’s earlier measures.[xxviii] Although the ECB’s mandate focuses on price stability and does not explicitly list unemployment or growth,[xxix] a January ruling by an ECJ advocate general on a reference action from Germany’s Federal Constitutional Court broadly construed the ECB’s authority to institute unlimited bond-buying measures to stimulate growth during a crisis.[xxx] The ECB’s president, Mario Draghi, who made headlines in 2012 when he exclaimed that he would do “whatever it takes” to protect the euro, thus has the (preliminary) blessing for his bond-buying program from the institution that interprets the governing treaties authoritatively. Under the new leadership of Jean-Claude Juncker, the Commission meanwhile announced a 315 billion euro public-private investment initiative as EU-wide investment lags 2007 levels by 15%.[xxxi]

In total, these announcements by EU institutions perhaps signal the early beginnings of the scaling back of German-led austerity and the emboldening of investments in growth. As Piketty explained, however, the elephant in the room remains the eminent need for a fiscal union of the eurozone, signified by a common debt repayment fund such as that proposed by the German Council of Economic Experts.[xxxii] A eurozone that refuses to issue collective bonds with one common interest rate will only perpetuate the lack of economic cohesion across its member states.


[i] Julia Amalia Heyer & Christoph Pauly, Thomas Piketty on the Euro Zone: We Have Created a Monster, Der Spiegel (March 10, 2015), available at http://www.spiegel.de/international/europe/thomas-piketty-interview-about-the-european-financial-crisis-a-1022629.html.
[ii] Thomas Piketty, Capital in the Twenty-First Century (Arthur Goldhammer trans., 2014).
[iii] Heyer & Pauly, supra note 1.
[iv] Id.
[v] Michelle Jamrisko, America’s Job Machine Powers On Even as Wages Lag, Bloomberg Business (Mar. 6, 2015), available at http://www.bloomberg.com/news/articles/2015-03-06/payrolls-rose-by-295-000-in-february-u-s-jobless-rate-at-5-5-.
[vi] Heyer & Pauly, supra note 1.
[vii] James Waller-Davies, Is Europe Losing a Generation? Europe’s Youth Unemployment, Blasting News (Feb. 24, 2015), available at http://uk.blastingnews.com/politics/2015/02/is-europe-loosing-a-generation-europe-s-youth-unemployed-00278823.html.
[viii] Trading Economics, http://www.tradingeconomics.com/united-states/youth-unemployment-rate (last visited Mar. 14, 2015).
[ix] Board of Governors of the Federal Reserve, Credit and Liquidity Programs and the Balance Sheet, available at http://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm.
[x] See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5 (2009).
[xi] Heyer & Pauly, supra note 1.
[xii] See generally Carmen M. Reinhart & Kenneth S. Rogoff, Growth in a Time of Debt, 100 Am. Econ. Rev. 573 (2010); but see Mark Brost, Mark Schieritz & Wolfgang Uchatius, Verrechnet!, Zeit (July 4, 2013), available at http://www.zeit.de/2013/27/staatsverschuldung-rechenfehler-thomas-herndon/seite-1 (recounting how Rogoff was warmly received by Germany’s ministry of finance at the outset of the Greek debt crisis); Tom Wright, IMF Paper Refutes Rogoff, Reinhart Debt Study, Wall St. J. (Feb. 14, 2014), available at http://blogs.wsj.com/economics/2014/02/14/imf-paper-refutes-rogoff-reinhart-debt-study/.
[xiii]See Stability and Growth Pact, http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm (last visited Mar. 14, 2015); see generally BBC News Service, Greek Government Austerity Measures, BBC News (Oct. 19, 2011), available at http://www.bbc.com/news/business-13940431 (listing, e.g., 20% cuts to all public-sector wages and 20% across-the-board cuts for pensions above 1,000.00 euros).
[xiv] Heyer & Pauly, supra note 1.
[xv] Tip O’Neill & Gary Heimel, All Politics is Local: And Other Rules of the Game (2014).
[xvi] See generally Frederic Taylor, The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class (2013).
[xvii] Heyer & Pauly, supra note 1.
[xviii] Compare George Packer, The Quiet German, New Yorker (Dec. 1, 2014), available at http://www.newyorker.com/magazine/2014/12/01/quiet-german, with Gallup Presidential Approval Ratings – Barack Obama, http://www.gallup.com/poll/116479/barack-obama-presidential-job-approval.aspx (last visited Mar. 14, 2015).
[xix] Trading Economics, http://www.tradingeconomics.com/germany/exports-to-greece(last visited Mar. 14, 2015).
[xx] London Agreement on German External Debts, Feb. 27, 1953, 4 U.S.T. 445 [hereinafter London Debt Agreement].
[xxi] Nick Dearden, Greece and Spain Helped Postwar Germany Recover, Guardian (Feb. 27, 2013), available at http://www.theguardian.com/commentisfree/2013/feb/27/greece-spain-helped-germany-recover.
[xxii] Alison Smale & Jim Yardley, Language of Greek Crisis Shifts From Financial Jargon to Humiliation, N.Y. Times (Mar. 12, 2015), available at http://www.nytimes.com/2015/03/13/world/language-of-greek-crisis-shifts-from-financial-jargon-to-humiliation.html.
[xxiii] Id. (pointing out that the London Debt Agreement stipulates for such claims to be brought at the time of Germany’s reunification).
[xxiv] Alkis Konstantinidis, German Bank Exposure to Greece Around 24 Billion Euros: Banks, Reuters (Jan. 5, 2015), available at http://www.reuters.com/article/2015/01/05/us-eurozone-greece-banking-exposure-idUSKBN0KE16H20150105.
[xxv] Philip Oltermann, Liberals Quit Alternative For Germany Party as It Embraces a Domestic Agenda, Guardian (June 12, 2014), available at http://www.theguardian.com/world/2014/jun/12/alternative-deutschland-german-afd-politics-europe.
[xxvi] Paul Hannon, EU Consumer Prices Fall for First Time on Record, Wall St. J. (Jan. 16, 2015), available at http://www.wsj.com/articles/eu-consumer-prices-fall-for-first-time-on-record-1421402407.
[xxvii] Stefan Riecher, ECB Unexpectedly Cuts Interest Rates as Outlook Darkens, Bloomberg News (Sept. 4, 2014), available at http://www.bloomberg.com/news/articles/2014-09-04/ecb-unexpectedly-cuts-interest-rates-as-outlook-darkens.
[xxviii] Jeff Black & Simon Kennedy, Draghi Commits to Trillion Euro QE in Deflation Fight, Bloomberg News (Jan. 22, 2015), available at http://www.bloomberg.com/news/articles/2015-01-22/draghi-commits-ecb-to-trillion-euro-qe-plan-in-deflation-fight.
[xxix] Consolidated Version of the Treaty on the Functioning of the European Union art. 127, May 9, 2008, 2008 O.J. (C 115) 47 [hereinafter TFEU] (stating that the ECB “shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union”).
[xxx] Opinion of Advocate General Villalón, Case C-62/14, Gauweiler v. Deutscher Bundestag, 2015, http://curia.europa.eu/juris/liste.jsf?num=C-62/14 (last visited Mar. 15, 2015) (holding, inter alia, that the ECB must have a broad discretion when framing and implementing the EU’s monetary policy, and that the courts must exercise a considerable degree of caution when reviewing the ECB’s activity, since courts lack the expertise and experience of the ECB in this area).
[xxxi] Benjamin Fox, Ministers Reach Political Agreement on Juncker Plan, EU Observer (Mar. 10, 2015), available at https://euobserver.com/economic/127949.
[xxxii] Heyer & Pauly, supra note 1 (referring to Hasan Doluca, Malte Hübner, Dominik Rumpf & Benjamin Weigert, The European Redemption Pact: Implementation and Macroeconomic Effects, Intereconomics, July-Aug. 2012, at 230).