Paul Krugman let off an angry post castigating the OECD for carping about structural reform being necessary to help solve the crisis, and at the same time poking fun at their support for austerity fiscal policies in the Euro Area. Since structural reform is always a good thing, he thought such carping was ‘intellectually lazy’.
Well, I for one hope the OECD continues to carp about structural reform. I take this phrase to mean things like; privatising inefficient state monopolies; deregulating other product and labour markets; reforming civil service terms and conditions to conform to euro area standards; reforming social security systems to make them affordable.
It’s not intellectually lazy to go on about this. It’s highly pertinent. For three reasons.
First, it’s partly the lack of such reform that made the crisis as intolerable as it was. At least in Greece, the structural deficit was what it was because of inefficiencies in the public sector. With a sounder public sector, Greece would have been better able to withstand a cyclical downturn.
Second, it’s partly the lack of structural reform that deters capital from flowing into the poorer afflicted periphery. Think of Italy. Or: banks in the periphery can’t lend partly because bank funders figure the peripheral sovereign can’t stand behind them because of all the other things they are on the hook for [because of the lack of structural reform].
Third, in an ideal world, the euro area monetary union would operate fiscal risk-sharing and automate fiscal transfers to the periphery in the event of a bad draw for the South. The bailouts of Ireland, Portugal and Greek were not automated, and nothing like ideal fiscal risk-sharing. And part of the reason for that was that leaders of countries with deeper fiscal pockets knew it was a hard sell to give their electorates’ taxes over. It is a much easier sell if those taxes are not going to subsidise foreign state companies or foreign civil services that enjoy easier terms than those set for home equivalents. After all, if northern electorates were going to give money away for nothing, they’d probably prefer to donate it at home. Moreover, peripheral country leaders can more easily drive through structural reform if they can explain that fiscal risk sharing is conditional on it.
Motherhood and apple pie are also good, but they aren’t part of the reason the crisis was as bad as it was, and they aren’t going to get us out of it. [Actually, maybe not true for state-funded apple pie, if you are a Keynesian].
I’ve got much more sympathy for the austerity-fun-poking. It would surely have been better, if politically infeasible, to have had easier fiscal policy in the South. But then, that would have required forgiving much more of the peripheral debt, and for northern countries to have sorted out the consequent mess in their own banking systems. And to do that, for reasons stated above, would have been too hard a sell because of, yes, a lack of structural reform.
Since peripherals ran up the debt partly because of lax regulation in northern country financial sectors, [one eg amongst many: the ECB’s treatment of all sovereign debt as equal in monetary operations], forgiving it would have had an element of fairness too, but try telling that to German voters.