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The Rebalancing Challenge in
Europe
J. Bradford DeLong
U.C. Berkeley
and NBER
O
ë
NB Conference on European Economic Integration
Vienna
, Austria
November 24-25, 2014
There is an important purpose
to
an opening keynote talk like this one. Its task is to
start from fi rst principles
,
and then give a large-scale bird's-eye overview to what is
to come.
We have panels to come on monetary policy, balance-sheet adjustment and growth,
inequality and its role in generating internal macroeconomic imbalances, external
macroeconomic rebalancing, and banking sector regulation. They all presuppose
that Europe, and within it the regions of Central, Estern, and Southeastern Europe
that we focus on here, need not just higher aggregate demand in the short-term but
more. They need large-scale sectoral rebalancing. And that sectoral rebalancing
needs to be rapid. Why? Because these economies will not grow smoothly without
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of
1
deep structural reforms--in these reforms need to be not just at the bottom but at
the top, reforms of institutions, governance structures, an regulatory practices and
mandates need to be carried out as well.
Note that the need, while urgent in Central Europe, Eastern Europe, and
Southeastern Europe, is not by any means more urgent here then in the other
regions of Europe.
So why is more than higher aggregate demand right now what is needed? And
which of the many things that go under the labels of "rebalancing" and "structural
adjustment" are most needed? And why?
If in the next half-hour I can answer these questions convincingly then there will
be an intellectual framework into which the rest of the conference's pieces will fi t
naturally, and we will all go back to our day jobs with a fi rmer grasp of the
rebalancing challenge in Central and Southeastern Europe.
Thus let me try to place the rest of today in its proper perspectives.
The fi rst perspective to take is the very long-run perspective.
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Let me note three dates: September 12, 1683; June 18, 1815; and November 19,
1942.
September 12, 1683 was, of course, the end of the Turkish imperial project.
1
It was
the date of the last truly mass slaughter right here. On that day the defending
armies commanded by Ernst Rüdiger von Starhemberg, reinforced by the relieving
forces of King John III Sobieski of Poland, defeated and forced the retreat down
the Danube Valley of the armies commanded by Grand Vizier Merzifonlu Kara
Mustafa Pasha. That was the last time that this segment, at least, of the Danube
Valley saw the chaos, destruction, and death of large-scale long-lasting war. If von
Starhemberg and Mustafa Pasha could see Southeastern Europe now, while they
might mourn the loss of power of the dynasties they served, they would both be
very pleased at the state of the people who live her--and both be very grateful that
the peoples and states are, for the most part, not still locked in what looked then
like an eternal region-encompassing destructive war of intolerant, militant faiths.
June 18, 1815 was, of course, the end of the French revolut
i
onary-imperial project
,
with the fi nal defeat at Waterloo in Belgium of the army of the French Emperor
3
of
3
1
Michael Hochedlinger (2002),
Austria's Wars of Emergence, 1683-1797
(New York: Routledge:
0582290848). The part on the siege of 1683 and the subsequent campaigns down the Danube is short but
very good.
http://www.amazon.com/gp/product/0582290848/ref=as_li_tl?
ie=UTF8&camp=1789&creative=9325&creativeASIN=0582290848&linkCode=as2&tag=brde-20&linkI
d=VAVOOHRO5LETPG5C
Napoleon I Bonaparte by British, Dutch, and German forces under the command of
the Irish-born Arthur Wellesley, Duke of Wellington.
2
We all do owe a great deal to
the implementation and then transmission of the good ideals of the Enlightenment
by the French Revolution. We owe less than zero to the habit of deadly ideological
purges introduced by the Convention in Paris and in the Vendee. And the practice
of introducing and maintaining those ideals by every four years having a French
army come through, burning as it went and living off the land, leaving famine in its
wake, is something we can live without. If either Metternich or Talleyrand could
see right now that we are now longer engaged in the military destruction of the
struggle for French dominance over Europe that consumed the sixteenth,
seventeenth, and eighteenth centuries and that seemed to them to be perpetual, they
would be pleased.
And November 19, 1942 was, of course, the end of the Nazi imperial project with
the initial breakthrough of the Soviet Union's Red Army at Stalingrad on the
Volga
.
3
It was
followed by two-and-a-half more years of fi re, blood, and death, and
4
of
11
2
Andrew Roberts (2014),
Napoleon: A Life
(New York: Viking Penguin: 0670025321). The best recent--
although defi nitely Napoleon-excusing--biography of the emperor and of the French Revolution through
his eyes.
http://www.amazon.com/gp/product/0670025321/ref=as_li_tl?
ie=UTF8&camp=1789&creative=9325&creativeASIN=0670025321&linkCode=as2&tag=brde-20&linkI
d=QNDKRABV5RWSWRMW
3
David M. Glantz (2009),
Armageddon in Stalingrad: September-November 1942
(Lawrence, KS:
University Press of Kansas: 0700616640). The best English-language study of the turning point of World
War II.
http://www.amazon.com/gp/product/0700616640/ref=as_li_tl?
ie=UTF8&camp=1789&creative=9325&creativeASIN=0700616640&linkCode=as2&tag=brde-20&linkI
d=Z3RE543UWUN77SY5
then a process of reconstruction that hang in the balance in Western Europe for a
decade and is still not complete in Eastern Europe. Nevertheless, if those whose
job it was to start rebuilding in 1945, if the Adenauers and de Gaulles could see us
now, they would be very pleased. Right now the European project is a success. And
we could not have said that on September 12, 1683; on June 18, 1815; or on
November 19, 1942.
In fact, we can take a much longer perspective in which the post-World War II
project of European community, unifi cation, and peace has been a success. It was
not far from here that the tribes of the Kimbri and the Teutones who had left their
previous homes somewhere in or near Jutland crossed the Danube River into
Noricum in 113 BC.
Was it 111 BC that the Kimbri and the Teutones, having moved down from Jutland
to what is now Austria and crossed the Danube, decided they would rather cross
the Rhine into the land of feta and olives in the Rhone Valley rather than eat
Sauerkraut and sausage--or, back then, probably auroch jerky--in Noricum, near
what is now Salzburg? So they went. And so they looted, burned, ravaged, killed,
and ruled until a decade later they were broken at the battles of Aquae Sextiae and
Vercellae by the new-model Roman Republican army commanded by Gaius
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of
5
Marius C. f. seven times consul.
4
Ever since then, by my count, it is every thirty-
seven years that a hostile army crosses the Rhine going one way or the other
bringing fi re and sword. The original Swiss--the Helvetii. Julius Caesar. All of
those who claimed to be Julius Caesar's adoptive descendants. The Visigoths
heading for Andalusia. Louis XIV commanding his armies to make sure that
nothing grows in the Rhinish Palatinate so that his armies attacking Holland have a
secure right flank. And, last, Remagen bridge in 1945. Every thirty-seven years,
with increasing destructiveness as time passes.
Thirty-seven years after 1945 carries us to 1982. Thirty-seven years after 1982 will
carry us to 2019. By 2019 we will have missed two of our appointments with
slaughter. Even with Stalin's legacy, the diffi culties of post-Cold War transition,
everything that has happened in the republics of the Former Yugoslavia, and the
current struggle over austerity and adjustment between the northern and southern
pieces of the Eurozone, things have gone very well indeed recently.
Yet, I believe, most think that we desperately need political union in Europe as
insurance to keep the bad old days from 111 BC to 1945 from coming again. We do
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4
Plutarch:
Lives of the Noble Greeks and Romans
.
http://www.gutenberg.org/fi les/14114/14114-h/14114-
h.htm
not want Europe to once again fall victim to the tragedy of great power politics.
5
That means that politicians fi nd some way to union--so that differences are
thrashed out in conference rooms in Brussels and Strasbourg rather than in the
streets with Molotov cocktails, submachine guns, armed drones, and worse. That is
the necessity.
This does not mean that we should minimize Europe's current problems, just note
that the problems are not as large as the achievements. The problems facing us are
many. A very quick list consists of fi ve. There are two major political problems:
•
Incorporating ex-superpowers into the common European home--a problem
Europe has faced over and over again since 1600, fi rst with Spain, then with
France after 1815, then with Germany after 1870, and now with Great Russia.
•
Building institutions for continental governance in our late-Westphalian
nationalist age.
And there are three major economic problems and opportunities:
7
of
7
5
John Mearsheimer (2014):
The Tragedy of Great Power Politics
(New York: W.W. Norton:
0393349276).
http://www.amazon.com/gp/product/0393349276/ref=as_li_tl?
ie=UTF8&camp=1789&creative=9325&creativeASIN=0393349276&linkCode=as2&tag=brde-20&linkI
d=DWWTGH3E6NE7E7NL
•
Grasping rather than letting drop the enormous fruits of continent-scale
economic integration that nearly all studies of economies of scale and economic
integration say are there.
•
Accelerating the painfully and disappointingly slow convergence of both east
and south to northwest European standards. Looking at the Asian Pacifi c Rim
reveals that if we can get the institutions, the trade patterns, and integration
more than half-right we can look forward to a régime of convergence in which
living standards and productivity levels in a region converge halfway to the
standards of that region's core in a generation. We can do it. We have done it
elsewhere in the past. We should be doing it now in Central, Eastern, and
Southeastern Europe. And, frustratingly, we are not: it is more the slow-boring-
of-hard-boards than it is the thirty-glorious-years.
•
Successfully resolving and recovering from the shock of 2008 and its
aftereffects. This is, mostly, what concerns us today. The other four problems
are, mostly, in the background right now.
And the need is to do all of this in a global context that is not terribly supportive.
The global context of 2008 is a world that was characterized either by a global
savings glut or a global investment shortfall, depending on which blade of the
8
of
11
scissors is your favorite to focus on.
6
That imbalance in turn produced either what
one might call a global overleveraging: the gap between desired global savings at
global full employment and planned global investment at global full employment
was fi lled-in by credit creation to create funding for long-term investment projects
that was not backed by savings commitments to long-run patient capital.
7
One
might, alternatively, call it a global shortage of risk tolerance: the gap between
desired global savings at global full employment and planned global investment at
global full employment was fi lled-in by promising savers that they were not
bearing large amounts of systemic business-cycle risk when they in fact were.
8
These are alternative ways of labeling the same underlying economic failure of
expectations to be consistent that focus on somewhat different things--the
apocryphal tale of the fi ve wise men and the elephant comes to mind.
9
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9
6
Ben Bernanke (2005), "The Global Savings Glut". Truly a pathbreaking speech and argument by the
former Federal Reserve Chair
.
http://www.federalreserve.gov/boarddocs/speeches/2005/200503102
7
Gary Gorton (2010),
Slapped by the Invisible Hand: The Panic of 2007
(New York: Oxford University
Press: 0199734151). Still the best study of the origins of our current economic crisis.
http://
www.amazon.com/gp/product/0199734151/ref=as_li_tl?
ie=UTF8&camp=1789&creative=9325&creativeASIN=0199734151&linkCode=as2&tag=brde-20&linkI
d=EQBGZOEK5CGID7VC
8
Ricardo Caballero and Emmanuel Farhi (2013), "A Model of the Safe Asset Mechanism (SAM): Safety
Traps and Economic Policy", NBER Working Paper No. 18737.
http://www.nber.org/papers/w18737
9
Martin Wolf (2014), *The Shifts and the Shocks: What we've learned - and have still to learn - from the
fi nancial crisis* (New York: Penguin: 1594205442). The best work on the structural changes that created
the vulnerabilities necessary for a small fi nancial-market trigger to cause a worldwide depression of this
magnitude.
http://www.amazon.com/gp/product/1594205442/ref=as_li_tl?
ie=UTF8&camp=1789&creative=9325&creativeASIN=1594205442&linkCode=as2&tag=brde-20&linkI
d=ELAI72FAOHY3RCAA
We had a world in which there was no global
hegemon
, in a Keynes-Kindleberger
sense, in Washington, willing to take responsibility for managing the level of
global aggregate demand, even if the consequences for the domestic United States
were potentially unfortunate.
10
If in the 1950s and 1960s the U.S. under Bretton
Woods had made a durable commitment to serve as the world's importer of last
resort, its falling into the same role during what some called Bretton Woods II was
contingent and evanescent.
11
Moreover, we had a world in which there was no alternative local continental-scale
orchestra-conductor focused on balancing effective demand to potential supply
over the European continent as a whole. Instead, there were many countries, some
of them very large, most of them focused inward, none of them thinking that
responsibility needed to be taken. That, it was thought, w
a
s the business of the
European Central Bank, which had the proper monetarist tools to do the job of
managing continent-wide demand. But what if those tools proved insuffi cient? The
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10
Charles Kindleberger (1973),
The World in Depression
(Berkeley, CA: University of California Press:
0520275853)
.
http://www.amazon.com/gp/product/0520275853/ref=as_li_tl?
ie=UTF8&camp=1789&creative=9325&creativeASIN=0520275853&linkCode=as2&tag=brde-20&linkI
d=PZVUX4VXQR2GD6RR
11
Michael P. Dooley, David Folkerts-Landau, and Peter M. Garber (2009), "Bretton Woods II Still
Defi nes the International Monetary System" NBER Working Paper No. 14731.)
http://www.nber.org/
papers/w14731
