Brad, Oskar, Noam

Brad De Long delong at econ.Berkeley.EDU
Sat Mar 20 15:31:08 PST 1999

<irony>Yet another example of the "'euphoria' in 'jubilant' financial markets, editorial offices, and news rooms" in response to Oskar Lafontaine's resignation.</irony>

But then these are all "short-term, coincidental, tactical agreements" taking place at a "lower level of abstraction"...

Brad DeLong

>From the most recent _The Economist_

...Of course, to appoint Mr Lafontaine as finance minister in a Schröder government was about as sensible as it would have been for Tony Blair to name Ken Livingstone as his chancellor of the exchequer, or Bill Clinton to appoint Ralph Nader as his Treasury secretary. By and large, it is better that governments should not be riven at the very top by fundamental ideological differences. And certainly, if one view is to prevail, better Neue Mitte than old left. And yet, and yet. There was much to be said for Red Oskar.

On the issue where Mr Lafontaine's interventions caused the greatest dismay--his unsubtle efforts to talk the ECB into cutting interest rates--this old-left unreconstructed Keynesian was actually correct. Interest rates in Europe were too high, as the ECB may recognise by trimming them at the earliest opportunity after Oskar's departure. And Wim Duisenberg, the ECB's boss, was wrong to retort that rates are "historically low": that may be true of nominal rates, but not of real ones-the kind of mistake (or attempt to mislead) you might expect of a politician, not a central banker.

True, the ECB's calculation is complicated, because some parts of the euro zone are doing a lot better than Germany, which is in a downturn. Overall, though, recent data for the euro-11 as a whole had tipped the balance in favour of an interest-rate cut. Yes, Mr Lafontaine was rash to risk compromising the ECB's independence in its early weeks. And in all likelihood, he made it harder for the bank (determined to establish a reputation for firmness) to cut rates. But none of this alters the fact that his assessment of European monetary policy was broadly right.

The same goes for German fiscal policy, when judged in the aggregate (though certainly not at the micro-level: Mr Lafontaine appeared to think that punitive taxes on business were a fiscal free lunch). The minister evidently thought the constraint of the European Union's "stability and growth pact" was too severe. Again, he was correct. Europe's big economies have moved out of synch in recent months. With growth in Germany falling well below growth in France, in particular, an easing of fiscal policy would have been appropriate. But the stability pact, if followed at all zealously, rules this out.

Admittedly, old-left types such as Mr Lafontaine always favour lower interest rates and more public spending, regardless of the state of the economy. But at certain points in the cycle--and for Germany this is one--endangered old-school demand-managers turn out, for a while at least, to be right. So this seems a perverse time for governments to be celebrating Mr Lafontaine's political demise.

One suspects that the ex-minister's real crime, in the eyes of his erstwhile political friends, was not so much that he was wrong as that he said what should not be said--or, more precisely, that he raised questions that must not be raised. Governments should have no view on interest rates; if the stability pact is to be flouted, let it be done quietly, not in the full glare of democratic accountability.

...Another favourite theme was exchange-rate policy. Mr Lafontaine's idea for some international agreement on exchange-rate target-zones was one that America was unwilling even to talk about. It was embarrassing for Germany that Mr Lafontaine raised it and was so brusquely rebuffed (as he surely knew he would be). Also, to talk of a European exchange-rate policy was, in effect, another challenge to the ECB's independence--because exchange-rate policy is, to all intents and purposes, the same as interest-rate policy.

But sooner or later this issue will need a proper airing. The value of the euro, especially if it should one day come to seem to be too high, is a matter on which Europe's governments can be expected to have a view. Internationally co-ordinated efforts to move exchange rates are not uncommon. How is Europe to deal with this question? The Maastricht treaty lays down that exchange-rate policy is for governments, not the ECB, to decide; but since it is, in essence, the same as monetary policy, it is difficult to see how this division of labour can work. Mr Lafontaine opened this can of worms before anybody else was ready to look inside...

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