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For an Immediate End of Austerity Policy in Europe
by Alternative Economic Policy and Jens Berger
Wednesday Jun 12th, 2013 4:39 AM
The growth model forced in the past with redistribution from bottom to top and increasing export surpluses has failed. The social and ecological demands for a sustainable economic policy grow. For years, the demands of the AQlternative Economic Policy study group emphasized combating mass unemployment and poverty, taming the financial markets and an adequately financed public sector to do justice to the social-ecological redesign of society. Jens Berger explains how the chief economist of the IMF admitted its error about the fiscal multiplier and austerity policy.

MEMORANDUM 2013 of the Alternative Economic Policy study group, 4/29/2013, translated abridged from the German on the Internet,


The growth model forced in the past with redistribution from bottom to top and higher export surpluses has failed. The social and ecological demands for a sustainable economic policy grow. For years, the demands of the Alternative Economic Policy study group emphasized combating continuous mass unemployment and poverty, taming the financial markets and an adequately financed public sector to do justice to the social-ecological redesign of society as a mega-social project. This should be financed by a tax concept tied to the principle of efficiency and stressing justice.

In the meantime demands are part of combating the crisis. Model Germany may not be exported as a blueprint to enforce redistribution processes in the member countries of the EU. This would start an under-cutting competition in wages and social benefits whose costs would ultimately be paid by employees. Effective regulations to curb the financial- and Euro crisis are necessary like the democratization of the economy. A possible social-ecological path of development has clear long-term advantages over the financial market-driven enrichment capitalism with its neoliberal organization.

4.1Strengthening Europe

In its result, the dominant European policy is nothing but a crisis policy. A deeper, democratically-legitimated European integration is necessary in the states of the monetary union. The economic-, fiscal-, tax-, social- and labor market policies of the Euro-member countries must be harmonized more closely. The competition in tax-, social- and wage-dumping prevailing today must be stopped. Europe has shown that peace can be safeguarded through cooperation. This may not be carelessly put at risk by nation-state egoisms. Resolute action is vital.

Firstly, stabilizing measures must be taken that do not thwart the long-term development perspective of a socio-ecological economic policy in Europe in the short-term. The European Central Bank must be granted possibilities of a pragmatic monetary policy. The Euro crisis has mercilessly revealed the dependence of state financing on the favor of the capital markets. This dependence that can cause the whole monetary zone to break apart must be ended. The Alternative Economic Policy study group proposes setting up a European bank for public loans that can receive central bank credits for their refinancing. This should be complemented by the socialization of the borrowing of Euro states on the capital markets (Euro loans) and would be a great consistent integration step in the European Monetary Union. The requirements of European policy should be rated higher than short-term nation-state interests.

The Alternative Economic Policy study group urges an immediate end of the crisis-intensifying austerity policy reinforcing the redistribution from bottom to top in crisis times. It pleads for the abolition of debt brakes and for a European wealth tax. The Alternative Economic Policy study group regards the extensive privatizations prescribed for crisis countries as a massive error. In Greece nearly all state assets must now be privatized. This narrows future state creative possibilities. This is a waste or squandering of public goods. Privatizations should be questioned on principle since whole areas of existential vital necessities – like drinking water supply – are handed over to uncontrolled market processes.

With all individual measures for short-term stabilization within the EU and the Euro zone, the macro-economic causes of the crisis and the institutional deficits must be removed. The eurozone and the EU have long been a transfer union. But the political confession to that is still lacking. As a result, politics relies more on ad hoc transfers than clear rules. This entails considerable transaction costs that can partly be ascribed to chaotic coordination processes.

One main cause for the crisis in the eurozone is the constantly growing balance of payments imbalance since the introduction of the Euro. This involves both Germany's surpluses and the deficits of today's crisis countries. The dislocations have the potential of bursting the whole eurozone. On one side the balance of payments deficits of deficit countries are the result of aggregate economic processes and cannot be simply abolished by decree. This is also true on the other side for the German balance of payments surplus. Still the states can influence foreign trade. With the threat of sanctions, a balance union could force the states of the eurozone to adjusted balances of payments. Germany could increase its imports, particularly through higher domestic demand as a resu9lt of higher wages. For crisis-ridden countries with balance of payments deficits, this means increasing exports and reducing imports.

We should not rely excessively on the production economy oriented in free enterprise. For crisis countries, the future lies in a socio-ecologically-oriented development. This requires development of the service sector and drastic improvement of research- and development-spending on the state and regional levels, development of the universities, radical improvement of vocational training and so forth. Therefore the Alternative Economic Policy study group urges a large-scale Marshall Plan for the crisis countries. With a Marshall Plan, investments in the ecological redesign of energy systems, new industries, services and transportation infrastructures and more efficient administration could be financed.

4.2Effectively Regulating Financial Markets

The eurozone will remain crisis-prone without massive regulation of the financial markets. For a long while, a higher capital holding level and improved regulation were not sufficient to end the rank growth of the last decades. The Alternative Economic Policy study group demands reducing the financial sector to its basic functions. National regulation initiatives can no longer be pillars of a new financial market architecture. Rather regulation in the European context is necessary. A European financed technical-monitoring board must be created. The courage not to allow harmful speculative financial products is crucial. Before their introduction, “financial innovations” must be shown to benefit the real economy. In that way, “investment banking” would be enormously whittled down. A regulation of shadow banks like hedge funds for example is urgently necessary. Financing- and banking businesses of all kinds should be subject to a strict oversight. In any case, a self-control of the actors should not be trusted.

In its core this demand was taken over by politics. The power of the rating agencies must be broken. Firstly, the worldwide oligopoly of these agencies operating in conflicts of interest between consultation and rating should be burst open by establishing an independent public-legal rating agency in Europe. Secondly – and this is even more important – every connection to privately organized ratings in laws, regulations and mechanisms (as in the case in the insurance branch) should be canceled or changed into a non-binding recommendation. The ratings were really only expressions of opinions. Greater liability for bad diagnoses could help in dethroning the rating agencies. Absurd developments like high-frequency trading must be restricted. The introduction of a financial transactions tax would reduce the trading volumes on the financial markets.

4.3Combating Mass Unemployment and Poverty

For a long while the Alternative Economic Policy study group did its utmost to combat prolonged unemployment. This is not only a German phenomenon. In Europe the problem of under-employment grows day by day. For its mastery, more is needed than individual measures on equal treatment and equal pay of subcontracted workers. Rather a social confrontation with atypical employment is necessary. New work contracts already represent a certain normality.

Poverty has not declined even though employment in Germany increased in the last years. This is a paradox mirrored in the continual redistribution from bottom to top. The reform of the labor market must be designed in connection with the changed working hours regime. Introduction of a general legal minimum wage of ten Euro an hour is necessary to stop the increasing impoverishment of the working population. The low wages and the precarious employment of today lay the foundation for the old age poverty of tomorrow. New rules also need to be found for protecting the unemployed. The Hartz IV rate should immediately be raised to 500 Euro. That sum would ensure existence under the poverty definition of the EU. The Alternative Economic Policy study group has long urged raising the standard payment and explained this in detail in the 2005 Memorandum.

In the neoliberal development logic, dismantling the democratic and social state is a desirable goal. Reducing public employment is part of that. This trend must be stopped and reversed. Regular public service has to be oriented again in guaranteeing good public vital necessities instead of cutbacks.

Germany is still struggling with high long-term unemployment. At the end of 2012 there were over a million persons who were jobless for more than a year. Their number has only decreased 12,000 or one percent compared to last year. Ten years after the announcement of Agenda 2010, the long-term unemployed are not permanently integrated in the first labor market. The policy of the current government reinforces this development – through cuts in labor market and employment promotion and through the so-called reform of labor market instruments. Integration- and training measures were canceled and are presently inadequate quantitatively and qualitatively. The chances of the long-term unemployed for filling a family-wage job become less and less.

A paradigm change in labor market and employment policy is necessary. In its 1994 Memorandum, the Alternative Economic Policy study group promoted a public labor market and concretized this demand in the following years. In 2013, 300,000 additional jobs should arise through public employment opening up a personal and vocational perspective for the long-term jobless. At the same time the civil society can be strengthened and socially meaningful work organized – for example social, cultural and participative projects in city centers, associations, initiatives and networks.

Such a labor market needs firstly a permanent nationwide financing. Funds previously used to finance unemployment (unemployment benefits II, housing grants and social security benefits) should be bundled and changed into funds for active labor market measures... Additional funds from states and communes that profit from the new jobs will be needed to create family-wage jobs that pay into social security.

Secondly, the revival of a social labor market must be well-organized. Advisory regional boards for public employment should be formed in which competent unions, initiatives for the unemployed, associations and boards of businesses can collaborate. The advisory boards set the concrete operational goals according to the regional circumstances. A competition to private enterprise and a reduction or dismantling of regular jobs in public service should be excluded.

Thirdly, pay in public employment must be according to scale and not fall short of an hourly wage of ten Euro and a gross monthly salary of at least 1522 Euro (corresponding to a 35-hour week with a ten Euro hourly wage)... Employment in the social labor market is based on the principle of voluntariness.

4.4Rethinking Financial and Fiscal Policy

The Alternative Economic Policy study group demands a comprehensive public investment-, employment- and reorganization program for the next ten years. The focal points for investments are: the education system, the compatibility of family and vocation, a consolidation of the energy turn to strengthening alternative energy, urban planning, the public transportation network, the social infrastructure and so forth. This spending policy would ensure that state spending would grow faster than the overall economy. Infrastructure investments in favor of ecologically improved living and production conditions for future generations already pay off today. Moreover the economic development and quality of life will permanently increase.

These investments should cover social necessities and fulfill an economic function. The domestic demand will be strengthened and turning away from a strong export orientation speeded up. This will stabilize economic development in Germany and Europe. Simultaneously building meaningful public services, public transportation systems, renewable energy and investments in the more sustainable use of energy for a social-ecological path of development are urgently necessary. In the 2012 Memorandum, the Alternative Economic Policy study group explained that Germany is behind Central European and Anglo-Saxon countries in social social services and not only the Scandinavian countries.

For years the Alternative Economic Policy study group has urged a taxation of mammoth assets. The principles of such a taxation were set out in the 2012 Memorandum and include...

a reform of the inheritance- and gift taxes is essential for the just taxation of mammoth assets. The changes carried out by the current German government should be canceled. The top tax rate should b e raised and the tax allowances reduced.

in addition the Alternative Economic Policy study group urges the following measures for a just and high-revenue tax system (described in the 2012 Memorandum):

raising the top tax rate in the income tax to 53 percent...

raising the corporation tax rate for corporations from the present 15 to 30 percent.

changing the current trade tax as the most important autonomous source of revenue for local communities into a stable and revenue-strong local economic tax.

taxation of all financial transactions must be finally realized. The draft of the EU Commission earmarks a tax rate of only 0.2 percent on stocks and bonds and 0.02 percent on derivatives (buyers and sellers bear half of the tax rate).

tax loopholes and tax havens must be closed.

with the sales tax, vital goods and services (like doctor visits) should not be taxed or only at seven percent – instead of the normal German tax rate of 19 percent as in the past)....


by Jens Berger

[This article published on January 10, 2013 is translated from the German on the Internet,]

The chief task of economics is to advise politics. On the basis of advice from the International Monetary Fund (IMF), the politics of half Europe ordered a suicidal austerity policy. However the new year 2013 began with a dramatic turn. One of the most influential economists, Olivier Blanchard, chief economist of the IMF, suddenly admitted that a big miscalculation was made in the past: the austerity policy proposed by the Monetary Fund intensifies the current crisis. This admission puts the previous policy of the “Euro-rescuers” completely into question. People expected that Blanchard's confession would be political topic number one. That couldn't have been more wrong. The first SPIEGEL of the new year did not open with the theme “The Error of the Euro Rescuers” but asked whether the male gender was overstrained with modern society. SPIEGEL did not say a word about the new mathematical tricks of the IMF. The admitted failure of the IMF was not even worth a headline for the Tagesschau journal. The dogmatism of the economic debate in Germany manifestly makes people blind.

In October 2012 the IMF caused a sensation when it admitted it could have wrongly estimated the negative economic effects of state spending cuts. In a study at the beginning of the new year, the chief IMF economist Blanchard declared that the IMF actually miscalculated. An overly low “fiscal multiplier” was assumed in its forecasts.


That the budgetary policy of the state has effects on policies is undisputed among economists. When a state increases its spending by hiring personnel or making investments, this has both direct and indirect effects on the national economy. To illustrate this, one only needs to reflect when a position is created for a teacher, as an example. This teacher draws his or her salary from the state and spends the money so others profit directly or indirectly. The opposite happens with spending cuts. When the teacher's salary is cut, he or she can spend less money. Here there are direct and indirect side-effects for other economic subjects.

The British economist John Maynard Keynes introduced the “fiscal multiplier” to roughly estimate the economic effects of increased spending or spending cuts. This multiplier is one instrument among many for supporting politics in its budgetary decisions. On principle the economic effect of state spending hikes and spending cuts turns out greater the higher the “fiscal multiplier.” For example, if one assumes a high fiscal multiplier, an increase of state spending can possibly be refinanced by itself since the economic (upswing-) effects triggered by this impulse lead to higher tax revenues. Conversely a high fiscal multiplier also means that fiscal cuts weaken the economy since the tax revenues disproportionately fall away. Conversely, a low “fiscal multiplier” means that increased state spending falls flat economically and reduced state spending is without great economic consequences.

It lies in the nature of things that neoliberal economists tend to set the fiscal multiplier too low. If one believes in a low fiscal multiplier, this means the state generally withdraws from economic activity and restricts itself to its role as “nightwatchman.” Since time immemorial, this has been the dream of neoliberal ideologists. For them, state spending on principle is harmful for market forces.

However there is no fixed fiscal multiplier that is correct for every country at all times. Rather the fiscal multiplier measures in retrospect how the economic situation reacts to budgetary decisions and integrates them without other factors. For example, the interest-rate is an additional factor. One basic assumption of the fiscal multiplier is that interests correlate positively with the fiscal policy. The interest falls when the state throttles down its expenditures. However such a correlation is hardly possible with a common currency like the Euro in which the interest-level cannot be oriented in the fiscal decisions of individual member states and is actually excluded anyway in a low interest phase. In addition, the fiscal multiplier changes with the respective economic situation. In a boom phase, it naturally tends to zero while it is higher in a crisis. Incidentally, that is the foundation of Keynesianism which – expressed in a simplified way – says the state must increase its spending in crisis times to drive back its indebtedness again in boom phases. All this is not new. It was only forgotten and repressed in the neoliberal era or displaced by new economic theories.


In its past estimates the IMF started from a comparatively low fiscal multiplier of 0.5. Whoever estimates with such a low number can only reach the conclusion that there is no alternative to saving one's way out of crisis. Whoever calculates with such a low number always comes to the result that debt-financed economic programs must fall flat and the only conceivable medicine for crisis times consists in a harsh austerity policy. Now the economists of the IMF are critically checking their own forecasts and come to a much higher multiplier. Recently the IMF assumed a multiplier between 0.9 and 1.7 is necessary in the Euro crisis. This estimate is rather defensive. Many noted economists see the fiscal multiplier in crisis times at 2.5 or higher.

The triviality with which these numbers are discussed is incomprehensible – as though they were insignificant details from the economic ivory tower. The questi0on whether the fiscal multiplier is now at 0.5, 1.5 or even 2.5 is elementary for an effective crisis policy. Whoever starts from a too low multiplier will always treat the sickness with the medicine “austerity policy.” However if one starts from a higher multiplier, the medicine “austerity policy” will not cure a crisis but worsens it. When one accepts a number of 1.5 or even 2.5, one must encourage state investments, not cuts. That has nothing to do with ideology but would be the only conceivable conclusion from the analysis of the fiscal multiplier. For overly high and overly low blood pressure, a doctor prescribes completely different medicines of which one would be a medicine and the other a poison for the diagnosed sickness. IMF economists call to mind medieval charlatans or quack doctors who always urge bloodletting to their patients, whatever their sickness.


That chief IMF economist Blanchard at least admitted making a mistake is an advance. He is thereby miles ahead of his German colleagues who still stick their heads in the dogmatic sand. Still a simple mea culpa is not enough. The IMF belongs to the notorious Troika that raises or lowers its thumb on the economic- and fiscal policy of European crisis states and negotiates the “memoranda” and clear political guidelines with these countries. The catastrophic unemployment in the crisis countries is a direct result of the political points of the Troika. The economists of the IMF determine politics; they do not counsel politics. A simple “sorry” is too little when the IMF now admits it organized a false and even counter-productive policy because of miscalculations and thereby brought disaster upon whole national economies.

If the IMF would take seriously its mistakes and draw the right conclusions, it must reverse or turn upside down the crisis policy in the eurozone. It must abruptly cancel the austerity policy and press for immediate economic programs that deserve to be called economic programs. The IMF must carry out a change of course and begin a policy that was long urged by union-friendly think tanks and many Keynesian oriented economists. This would be like a revolution in the bailout policy.

Nevertheless economists do not seem to be at all conscious of the range of their mathematical games. What may not be cannot be. The error must be sought in reality when the theory does not agree with reality. Olivier Blanchard is not an exception. His study is everything other than a clear proclamation of a new policy. On the contrary, theory and reality diverge. The supposedly wondrous effect of austerity policy pervades Blanchard's study alongside his confession.

He admits the mistake and indirectly takes responsibility for his misguided forecasts. However he avoids as much as possible taking joint liability for the consequences of his false predictions. There is no word of regret about the error. There is no sentence where Blanchard recognizes an indirect connection between his earlier predictions and the concrete policy. Rather the chief economist of the IMF steals away from responsibility by merely referring the error of the IMF to the construction of predictions. Can the IMF be blamed that politics believed these predictions and acted accordingly? The “chief economist” completely represses that these flawed forecasts and basically false underlying assumptions that led to these false predictions were directly responsible for a crisis policy that contradicted the expected positive effects of the forecasts and even caused the opposite.

When Blanchard withdraws here in the role of an uninvolved juggler with figures who refuses to take responsibility for the consequences of his mathematical games, this is a sign of an absolutely disgraceful lack of responsibility. It would be cheap or lame to pin the blame only on the “chief economist.” Theoreticians are not solely responsible. The practical policy is mainly responsible for regarding the oracle of the IMF as the revelation of truth. Many economists like Krugman, Eichengreen and Flassbeck have long criticized the mathematical models of the IMF. Didn't Angela Merkel want to bring the IMF unconditionally on board? The IMF served her as a welcome crown witness of her previously planned austerity policy – according to the German Agenda-model.


Neither politics nor the media want to understand the implications resulting from Blanchard's admission. The whole matter was not even worth a footnote to the big German newspapers and Online portals. To be sure, the material is dry and complex... Instead of being enlightened, people preferred nursing and cultivating the dogmas followed for years without wasting any time reflecting.

Politics did not have to give an accounting to anyone when jou9rnalism ignores its tasks and no public debate arises. Instead the fairy-tale of the wondrous power of austerity policy is disseminated further and half of Europe is plunged into disaster. Economic- and financial policy has long been secondary in Germany. Defending dogmas is central and rationality plays no role in dogmatic discussions as everybody knows.


Rudolf Hickel, “Creative Destruction,” March 2012

Markus Mugglin, “The State Should Rescue the Market Economy,”

Wolfgang Hetzer, “The Financial War: How Banks and Bandits Endanger Our Democracy”