Friday, August 12, 2011

You can't fix Europe by making some Europeans better human beings

Yglesias on German financial "prudence":
[I]f you look at the actual budget figures on the right, you’ll see that Spain — a country full of fun-loving Spanish people — was actually running extremely prudent budgets throughout the boom years. The same is true of Ireland and I believe Portugal as well. There was nothing particularly imprudent about German budget practices during this time, but the fact of the matter is that Germany was running a larger budget deficit than was Spain. Since the recession hit, that’s obviously flipped around. But again the issue here isn’t really one of “prudence.” Germany responded to the downturn with a pretty vigorous fiscal stimulus program while Spain has enacted repeated austerity packages.
As Matt points out, the tendency to characterize the Germans as a fiscally prudent people tends to mask what's actually happening in Europe. Everyone wants the Spanish to be more like the Germans, but many people seem to be mistaken about how the Germans actually are. The lesson from the German experience is not "adopt austerity measures," and may be quite the opposite of that.

But there's a more insidious error at play here, as well. "Be more like the Germans" suggests that the troubles in Spain and Italy are somehow an extension of how Spanish and Italian people tend to behave. It suggests that if you can change behavior, you can change the destiny of the respective countries.

But is there even one iota of evidence that this is true? Do Germans, presented similar economic opportunities, really act the slightest bit differently from Italians? I, for one, am incredibly skeptical. One of the real fundamental ideas of economics is that all people are basically motivated by the same stuff. And one corollary of that idea is that talking about "how people are" is a waste of time. People are how they are. What's different about the Germans is that they live in a bigger, richer country, with a more robust social safety net, more extensive industrial infrastructure, and more political clout. The only way to make an Italian more like a German, economically speaking, is to have him go live in Germany. Otherwise, we're going to need solutions that acknowledge that Madrid can't become Berlin, the Po isn't ever going to be the Danube, and the Italian economy can't be an exact facsimile of the German economy. In short, we need solutions that acknowledge that Italy and Spain exist as separate and unique places. All the withering lectures about spendthrift Spain can't change these basic facts, but you wouldn't know it from the tone of so much purported financial analysis.

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