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Austerity reduces the value of the Euro which helps German exporters

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JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network, and welcome to this latest edition of The Pollin Report.

Austerity continues to take its toll on Europe, with the exception of Germany, the E.U.’s strongest member country, and whose government strongly supports austerity for other countries.

Now joining us to discuss this is Robert Pollin. He is a founder and codirector of the PERI institute in Amherst, Massachusetts. He’s a regular contributor to The Real News.

Thank you so much for joining us, Bob.


NOOR: So you just returned from a major E.U.-wide conference discussing the broad implications of the financial crisis and its aftermath. Can you tell us a little bit about what you took away from this conference?

POLLIN: Yeah. This is a very important conference that I was at most of last week that took place in Amsterdam. It’s a project that actually has been sponsored by the European Union, the European Commission. And it’s a group of, I would say, progressive economists throughout Europe. The organization is called–the acronym is FESSUD, Financialization, Economy, Society, and Sustainable Development. And it is led by an outstanding British progressive economist named Malcolm Sawyer at the University of Leeds. The project has, I don’t know, 20, 30 researchers working on this issue of why the crisis happened, the financial crisis, the Great Recession. And of course what to do now is the overarching question.

So, you know, the big issue clearly is the ongoing commitment, the clinging to the economics of austerity that is dominating in Europe, and the impact that this is having, and why we can’t get a serious alternative to austerity economics moving forward.

Now, there were, of course, a lot of different views expressed at the conference, but the main takeaway that I took from the work of European economists is basically as follows. Okay. What are the arguments? I mean, one of the big arguments in behalf of austerity, the idea that right now the job of government is to cut back on spending even though we still have mass unemployment, one of the big arguments had been that’s because when governments hit high debt levels, that automatically translates into lower GDP growth. Well, that argument has since been debunked by, among others, my coauthors here at UMass and myself, debunking this argument of professors Reinhart and Rogoff. So that argument doesn’t hold up anymore. It just doesn’t hold up in terms of evidence.

A second argument that one might think of is that, well, for the weaker economies–Greece, Spain, Portugal, Italy–they would face, if they borrowed a lot now, they would face high interest rates. This makes it difficult for them to sustain the borrowing. But on the other hand, you have the other–you have Britain, Germany, France can borrow at very low rates. And on top of that, you have, like we have–the United States Federal Reserve is keeping the interest rates at rock-bottom levels; we have the European Central Bank that could influence rates and make it more viable for the European economies.

So the question is: why isn’t that type of policy being pursued? So why aren’t the more affluent economies, Germany in particular, helping the other countries along to stimulate? And here’s a basic argument that we got. Number one, Germany has been relatively successful on the basis of it being successful in exports. And the way they’re being successful as an exporter is by having very high productivity levels in their manufacturing while keeping wages relatively low. So Germany is able to export by keeping–putting out their manufacturers at relatively low prices by not allowing workers wages to rise with productivity. So, actually, the German working class has seen inequality rising at levels comparable to U.S. inequality.

So number one, when we say Germany has been successful, we don’t mean all Germans. We mean the wealthy in Germany. We mean the most affluent in Germany. The German working class, middle class, and poor are actually doing worse. So that’s number one.

But number two–and this is a very interesting point that came out of the conference–is this, that generally when an economy is successful at exporting, what usually happens is that the value of its currency goes up. So if we think about the United States, if we exported more, that would mean more people want to hold dollars. And when more people want to hold dollars, the value of the dollar goes up relative to other currencies, which in turn would make the U.S. less competitive in export. But Germany has the situation in which it benefits, ironically, from the fact that even though they are very successful at exports, they share the common currency, the euro, with the rest of Europe, and the rest of Europe remains in the tank, the rest of Europe is not succeeding in exporting, so that Germany is, ironically, benefiting by the fact that the euro does not appreciate, does not go up in value. And that enables Germany to continue to succeed as an exporter far more than they would be under other circumstances. So the situation is in–where Germany is able to dominate economic policymaking in Europe because they’re the most successful and largest economy–and they’ve also been able to rig the policymaking with respect to the euro, because it benefits them most. It benefits them most to be able to be an exporter that still can contain the euro, the value of the currency lower.

So the austerity agenda is helping the wealthy in Germany while it is hurting everybody else in Europe.

NOOR: And lastly, there’s a new book out titled The Body Economic that examins the health consequences of austerity.

POLLIN: Right. So, it’s–you know, a lot of this stuff comes out, it sounds highly technical, and what does it really mean for people. So I think that this–that it’s a very interesting book. I don’t know the authors at all. It’s called The Body Economic. And it looks at the health consequences of austerity policies in both the U.S. and Europe.

So what are some of the main findings? What they show is a strong correlation between rises in unemployment rates and clinical depression rates and increases in suicide rates, a very close correlation. So what does austerity mean for real people? It means that they’re becoming more insecure, their life circumstances are worsening. And that gets reflected in clinical depression and suicide. Not only that. I mean, we have–in Greece we have–starting to see an outbreak of malaria, which hasn’t been a problem in Greece for generations. Now, why would you have an outbreak of malaria? What does that have to do with austerity policies? Well, actually, it’s quite direct, because when you cut back on public health spending, you’re cutting back on the controls, the sprays that are used to control the mosquitoes that carry malaria. So when you cut back on that, you start to see malaria reemerging. And, of course, the impact of these kind of health effects become cumulative. If you cut back one year, the impact is not going to be so big. But if you cut back two, three, four years, well, we’re going to see malaria reemerge in Greece and throughout southern Europe as a result of austerity. That’s the argument in The Body Economic. The subtitle of the book is called How Austerity Kills.

NOOR: Thank you so much for joining us.

POLLIN: Thanks very much for having me.

NOOR: Thank you for joining us on The Real News Network.


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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.