Thursday, July 25, 2013

Stagnation - the new Boom

The new IFO index is out and is like most other economic data showing stagnation in Germany. Yes, it rose a tiny bit from 105.9 to 106.2, but that is no improvement that anybody should be proud of since it is well below the level of 2011. and it did not even reach the level of Febuary and March 2013.

The press release's language suggests, otherwise:

The Ifo Business Climate Index for industry and trade in Germany rose for the third time in succession. Assessments of the current business situation are more positive than last month. Although the six-month business outlook weakened slightly, firms remain cautiously optimistic with regard to their future business outlook. Conditions in the German economy remain fair.
That last sentence is not bloomy enough. I liked the language of the German release much more:

There are only few clouds on the economic sky.
Of course, if one compares this awesome looking skybox with March (106.7) and not April, which due to the early Easter had fewer workdays than normal and should be considered an exception, then one can see that there is still no reason whatsoever to proclaim an end of the stagnation in Germany.

Still, the German news media were quick to jump aboard the boom-times-train. FAZ was finding green shoots everywhere, including but not limited to France and Italy. Best sentence:

Therefore, the indications are solidifying that the phase of weakness in the first half of the year could be over.
Well, yeah the first half of the year is over.  we are seeing stagnation, after a very weak second half of 2012. Spiegel basically just copy-pastes most of the press release and avoids any own thought. The above is an example for the typical overly optimistic economic reporting in German news. Every positive number is the new green shoot, indicating and end to the euro-crisis. So what in the world is wrong with German and also European news?

Kevin O’Rourke wrote two days ago:

There is an additional cost to the two-quarter rule of thumb in the Irish and Eurozone context: it implies that Ireland is periodically proclaimed to be out of recession. This then allows Eurozone politicians and central bankers to defend the status quo monetary and fiscal policies prolonging the economic crisis in Ireland and elsewhere.

I fully agree, but it is important to add that this wouldn't be possible if the news media employed more people with a functioning memory, or the ability to understand graphs, or the will to actually look at the context of what they are reporting on. The main reason that the politicians can get away with their failed policy is media incompetence.

Additionally, the German reporters for the most part seem to have bought into the neo-liberal believe system of  austerity good, state bad, structural reforms good. It is very much simplistic thinking, one might argue that there is actually no thinking at all involved. This believe system makes it very easy to make deadlines for content, and is therefore journalist friendly. Bad numbers? Call for structural reforms. There isn't any need to mention any specifics.Worsening debt to GDP ratios in Europe? Not enough reform pressure: call for more structural reforms. Increasing unemployment in Europe? Call for structural job market reforms. Somebody wants more state investment? Public investment is always short term: call for structural reforms. This is the perfect believe system for any journalist reporting on the economy. No need to think to sound smart.

Since the wishes of the austerity god have been fulfilled one should now be seeing improvements. Stagnation is not what should be happening, and if the situation is still deteriorating in Europe with no growth in sight, then it must be due to not praying enough  structural reforming fast enough. Also, the journalist will look to to any news reaffirming his/her believe that boom times are just around the corner. Green shoots everywhere!
The media is significantly invested into this believe system. Calling for stimulus programs is not an option anymore, since they have written comment after comment after.... in favor of austerity. Abandoning the believe now would mean that their credibility is significantly reduced. This was easier in Germany than elsewhere since here austerity is called saving policy (Sparpolitik).

Also, the media is scared of initiating a self-fulfilling prophecy. You tell your readers that Germany is not the locomotive of everlasting growth, but instead is stagnating, and there are significant downward risks of under-investing industry in the country itself,  the risk of Italy needing help that nobody can actually pay for, and China might see significantly lower growth in the coming months, over and over again and you just might cause a change in behavior. The population will reduce their investment and thereby the recession one has been seeing might just be caused by the media itself.

Some might also say that German experts have something to do with the reporting. This might also be true, but the journalist chooses whom to include. So if one is looking for an expert opinion and calls Sinn or Hüther, then the result will of course be a state bad article.
The result of failing to make it clear that the current policy is not delivering the promised results, neither in Europe nor in Germany itself, will get Merkel re-elected. Her coalition is at least partly responsible for the mess we are in in Europe. There might be some more critical reporting until the election, but I think the damage has already been done. Europe's political system is not stable anymore, the debt to GDP ratios and unemployment numbers are significantly worse than before the German government came up with the plan of keeping German inflation low and pushing all of the adjustment, which was needed, onto the program countries thereby forcing them into deep recession. The media is responsible for letting them get away with a policy which is not making us more competitive but is in fact destroying more and more absolutely legitimate industry jobs all over Europe.

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