[As usual lately, this is an English AI translation of a piece written in Italian, updated to take into account yesterday’s European Parliament vote]

After three years of near-inaction, and a few months of frantic negotiations, European finance ministers have finally reached an agreement on the reform of the Stability and Growth Pact., that is now being discussed with the European Parliament. At first glance one might think, looking at the ballet of percentages, safeguard clauses, classifications, that this is a technical issue, for insiders. Nothing could be further from the truth. What was at stake, in the discussion that ended with the December last-minute agreement, was the framework within which European countries will have to operate in the coming years to face the challenges that await them. Few things are more relevant today. And that’s why it was a bad agreement. A return to the past that condemns the already battered Europe to irrelevance.

The old Pact now relegated to the attic faced widespread criticism: for its baroque complexity and reliance on numerous, at times arbitrary indicators; for its emphasis on one-size-fits-all yearly limits, fostering short-term discipline that, in effect often turned pro cyclical; for its bias against public investment. Most importantly, the old Pact was consistent with a worldview where the state’s role in the economy had to be limited among other things by imposing restrictive rules on fiscal policies.

That world no longer exists, and this explains the opening, in 2020, of the reform process of the Stability Pact. The 2008 Global Financial Crisis, the calamitous management of the euro crisis, the pandemic and finally inflation, have shown that there can be no stability and growth without stabilisation policies, without adequate levels of public goods such as health and education, without industrial policies and public investment for the ecological and digital transitions. In short, without an active role of the state in the economy.

For this reason, the discussion among academics and policy makers (largely ignored by governments, which woke up at the last minute) centered around the necessity for a philosophical shift. The new rule, it was widely believed, had to change this and put the protection of fiscal space for public policies a the centre of the stage (ensuring, of course sustainability of public finances). A change in philosophy that was to be found in the reform proposal put forward in 2022 by the European Commission. Albeit imperfect, the proposal abandoned the one-size-fits-all annual targets in favor of medium-term plans designed by countries in agreement with the Commission, in a framework that would guarantee debt sustainability and try to achieve an (excessively) moderate protection of public investment.

That framework is still there, but it has been transformed in an empty shell. On paper, multi-annual plans and investment protection still exist. But Germany, reverting to its old obsession with austerity, has imposed a plethora of complex (and as baroque as those of the old Pact) safeguard clauses that will be triggered in the event of excessive debt or deficits (i.e., almost always for almost everyone) and which, overruling the plans agreed with the Commission, go back to imposing one-size-fits-all annual numerical constraints, sometimes even more restrictive than the old rule. Like in the widely criticized old Stability Pact, debt reduction is still the alpha and omega, and it is no coincidence that all frugal countries rejoice that the new rule will be more effective in forcing fiscal discipline than the old one.

The Italian and French governments, the only ones that could have turned the board over, settled for a bare minimum, some short-term flexibility, in order to arrive at their respective elections with some money to spend. A short-sighted and depressing strategy: the elections, and these governments, will pass, but the rule will remain and tie our hands, while China and the United States make colossal investments in the future. It’s all right, as long that those celebrating victory today do not to come and tear their clothes in a few years’ time, when Europe will have become even more irrelevant than it is today.

[As usual lately, this is an English AI translation of a piece written for the Italian Daily Domani]

Wolfgang Schäuble was a central figure in the German political landscape. A member of parliament for the centre-right Christian Democrats party from 1972 until his death on Tuesday evening at the age of 81, he was very close to Chancellor Helmut Kohl and, as a lawyer, one of the negotiators of the treaty that brought about the reunification with East Germany. But it was with Angela Merkel as Chancellor that Schäuble became known beyond national borders. For a few years Minister of the Interior, he was appointed Minister of Finance in 2009, a few weeks before the revelations about the state of Greek public finances that triggered the sovereign debt crisis. Since then, he has been one of the central figures in the calamitous management of the crisis. A staunch pro-European, he has nevertheless always been convinced, in homage to the ordoliberal doctrine, that integration could only be achieved by harnessing the European economy in a dense network of rules that would guarantee the public and private thrift necessary to make the EU competitive on world markets. Schäuble was the main standard-bearer of the “Berlin View” (or Brussels or Frankfurt, being adopted by the heads of the European Commission and the ECB of the time) which attributed the debt crisis to the fiscal profligacy and lack of reforms of the so-called “peripheral” EMU countries. A narrative about the crisis that forced “homework” (austerity and structural reforms) on the countries in crisis: we owe to Schäuble’s intransigence, backed by Angela Merkel, the Commission and the ECB (and sometimes against the IMF, which often had a more pragmatic approach), the draconian conditions imposed on Greek governments in exchange for financial assistance from the so-called Troika. In those years, he and the then president of the ECB, Jean-Claude Trichet, argued, against all empirical evidence, for expansionary austerity, the idea that fiscal restriction would supposedly free markets’ animal spirits and thus revive growth. An austerity that Schäuble imposed on countries in crisis but also followed at home. On the occasion of his departure from the Ministry of Finance in 2017, the photo of the employees forming a large zero in the courtyard in homage to the achievement of a balanced budget objective went around the world.

History has taken it upon itself to show the ineffectiveness and cost of that strategy. Not surprisingly, austerity is almost never expansionary and certainly has not been so in the eurozone. The fiscal adjustment imposed on the EMU peripheral countries triggered a crisis which for some of them had not yet been absorbed by the end of the decade.  A crisis that, moreover, could have been less painful if the countries in better shape had supported the eurozone growth with expansionary policies, instead of adopting a restrictive stance themselves. The EMU is the only large advanced economy that suffered a second recession in 2012-13, after the Global Financial crisis of 2008. Not only that: since then, domestic demand has remained anaemic, and the European economy has become “Germanized”, managing to grow only thanks to exports; this contributes to the growing trade tensions, and Germany stands accused by international bodies and by the United States of exerting deflationary pressure on the world economy.

The narrative of a crisis caused by the fiscal irresponsibility of spendthrift governments quickly lost its luster and already in 2014 many of its initial supporters (e.g. Mario Draghi, who in the meantime became president of the ECB) opted for a more “symmetrical” explanation, according to which the trigger of the crisis were balance of payments imbalances of which the over-spendthrift and the over-austere countries were equally guilty. But Schäuble never backed from his belief that the only necessary medicine was the downsizing of public spending; Germany also imposed this view to its partner when reforming the European institutions (from the ESM to the fiscal compact).

With the Covid crisis and Germany’s staunch support for Next Generation EU, it seemed that the ordoliberal doctrine finally went into retirement, along with Schäuble, its proudest partisan. But recent events show us that this was wishful thinking. Schäuble would probably have approved the (non-)reform of the Stability Pact imposed by his successor Lindner, whose only guiding light is the reduction of public debt. Schäuble has left us, but the fetish of public and private thrift as a healing virtue is alive and well.

Today, I consider the latest development in the entrenchment of neoliberalism in the Australian policy sector, specifically, the latest decision by the Treasurer to excise his powers under Section 11 of the Reserve Bank Act 1959, which allowed the Treasurer to overrule RBA policy decisions if they considered them not to be in the national…

During a hearing before a Congressional Committee on Science and Technology, Robert Solow (MIT) described himself as a "generally quite traditional, mainstream economist".

In my view, either Prof. Solow is unaware of who qualifies as a "traditional, mainstream economist" these days or the definitions of the words "traditional" and "mainstream" need to be completely changed!

Consider, for instance, his views on the notion of "expansionary fiscal consolidation":

[H]ow does a human race with limited intelligence...deal with situations in which the short run need for policy are quite different from the long run need for policy? The feeble-minded, it seems to me, attempt to solve this problem [by asserting] that fiscal consolidation is really expansionary in the short run. I have never been able to understand the mental processes that underlie that statement. But I will take it seriously only -- only -- when its protagonists faced with a situation of clear excess demand propose fiscal expansion. Because if fiscal consolidation is expansionary then fiscal expansion must be contractionary. I don't believe that would happen. So I don't take that argument seriously at all. I think it's cooked up to make a real difficulty go away. (The Feasibility of European Monetary and Fiscal Policies: Rethinking Policy from a Transatlantic Perspective)

...on the supposed lack of microfoundations in Keynesian economics:

You know, there is something a little ludicrous in the belief that microfoundations for macroeconomics were invented some time in the 1970s. If you read Keynes's General Theory or Pigou's Employment and Equilibrium (or many lesser works) you will see that they are full of informal microfoundations. Every author tries to make his behavioral assumptions plausible by talking about the way that groups or ordinary economic agents might be expected to act...But you can recall Keynes's argument that the marginal propensity to consume should be between zero and one, or his discussion about whether the marginal efficiency of investment should be sensitive to current output or should depend primarily on "the state of long-term expectations". Those are microfoundations. (2004, p. 659)

...on the claim there is a connection between the money supply and price level:

[T]he financial press sometimes writes as though there is some special direct connection between the money supply and price level. So far as fundamentals are concerned, monetary policy works through its effects on aggregate nominal demand, just like fiscal policy, in the long run, too. The only direct connection I can think of is itself the creation of pop economics. If business people and others become convinced that there is some causal immaculate connection from the money supply to the price level, completely bypassing the real economy, then the news of a monetary-policy action will generate inflationary or disinflationary expectations and induce the sorts of actions that will tend to bring about the expected outcome and thus confirm the expectations and strengthen the underlying beliefs. (1998:4)

...on the problem with Milton Friedman's reliance on correlations between and M and other variables to infer policy conclusions and the assumption of an exogenous money supply (with John Kareken):

The unreliability of this line of argument is suggested by the following reducto ad absurdum. Imagine an economy buffeted by all kinds of cyclical forces, endogenous and exogenous. Suppose that by heroic, and perhaps even cyclical variation in the money stock and its rate of change, the Federal Reserve manages deftly to counter all disturbing impulses and to stabilize the level of economic activity absolutely. Then an observer following the Friedman method would see peaks and troughs in monetary changes accompanied by a steady level of economic activity. He would presumably conclude that monetary policy has no effects at all, which would be precisely the opposite of the truth. (Karaken and Solow, 1963, p. 16)

...on choosing the right model in macroeconomics:

[I] believe rather strongly that the "right" model for an occasion depends on the context --  the institutional context, of course -- but also on the current mix of beliefs, attitudes, norms, and "theories" that inhabits the minds of businessmen, bankers, consumers, and savers. (2004, p.xi)

...on the problems with the DSGE model:

I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether. (For more, see here and here)

...on the difference between budgetary and real resources costs:

The trouble is that the great world -- including a large part of the intellectual world -- has lost sight of the fundamental difference between budgetary costs and real resource costs. An unemployed worker and an underutilized or idle plant is not something we're saving up for the future. Today's labor can't be used next year or the year after. And the machine time in a plant that's down can't be redone two years from now or three years from now. Three years from now we hope that the plant will be running for current uses. So there's that important sense in which idle resources are almost - and maybe literally - free to the economy. The problem is to get them used in a reasonable way. (see 22:00 here):

...on the importance of fiscal policy for stabilization purposes:

I start from the belief that non-trivial imbalances of aggregate supply and demand do occur in modern industrial capitalist economies, and last long enough that public policy should not ignore them...When such imbalances occur, fiscal policy is a useful tool. The single instrument of monetary policy can not do justice to the multiplicity of policy objectives; and the Ricardian equivalence claim is in practice not nearly enough to convince a realist of the ineffectiveness of fiscal policy. The real obstacles to the rational conduct of fiscal policy are the uncertainties about the proper target for real output and employment, and the tendency for stabilization goals to become inextricably tangled in and distracted by distributional and allocational controversy. (Is fiscal policy possible? Is it desirable?, p. 23)

...on the long run potency of deficit spending financed by bonds vs. deficits financed by money creation, and on the contractionary nature of open market purchases of government bonds (with Alan Blinder):

[N]ot only is deficit spending financed by bonds expansionary in the long run, it is even more expansionary than the same spending financed by the creation of money. [Foonote: An interesting corollary of this is that an open-market purchase, i.e. a swap of B for M by the government with G unchanged, will be contractionary!] (Blinder and Solow: Does Fiscal Policy Matter? 1973)

...on how statements by a central bank can influence how the public translates relative price changes into expectations about the consumer price index:

There are various interest groups in the economy: bankers, investors, savers, lenders, borrowers, buyers and sellers and what not. There is no reason for them to react in the same way. How does one aggregate expectations?

...on the use of "expectations" to explain macro policy outcomes:

[T]o rest the whole argument on expectations -- that all-purpose unobservable -- just stops rational discussion in its tracks. I agree that the expectations, beliefs, theories, and prejudices of market participants are all important determinants of what happens. The trouble is that there is no outcome or behavior pattern that cannot be explained by one or another drama starring expectations. Since none of us can measure expectations (whose?) we have a lot of freedom to write the scenario we happen to like today. Should I respond...by writing a different play, starring somewhat different expectations? No thanks, I'd rather look at data. (1998:93)

...on the claim of self-correcting markets and the role of aggregate demand in causing output fluctuations:

Capitalist economies do not behave like well-oiled equilibrium machines. For all sorts of reasons they can stray above or below potential output for meaningful periods of time, though apparently they are sightly more likely to stray below than above. Even apart from considerations of growth, macro policy should lean in the general direction that will nudge aggregate demand toward potential, whenever a noticeable gap occurs. The relevant point is that this strategy is also growth-promoting. Whatever the level of real interest rates, excessively weak aggregate demand -- and the prospect of weak and fluctuating aggregate demand -- works against investment. Few things are as bad for expected return on investment as weak and uncertain future sales...Successful stabilization contributes to growth too. (Role of macroeconomic policy, p. 301)

...on the need for public policy to address the unemployment of unskilled labor:

It needs to be insisted that the root of the problem lies in the enormous range of earning capacities generated by the interaction of modern technology (and other influences on the demand for unskilled labor) with the demographic and educational outcomes on the supply side of the labor market. There is no really good way for a market economy to deal humanely with that spread. (Too Optimistic)

...on the fallacy of self-correcting markets and the limits of monetary policy during deep recessions:

One important lesson that I hope we have learned from the crisis and the deep recession still going on is that economies like ours can experience uncomfortably long intervals of general excess supply or excess demand. Of course, we -- economists and interested civilians -- used to know that. But it was widely forgotten during the Great Moderation and the accompanying optimism among economists and civilians about smoothly self-correcting markets. The general belief than was that monetary policy was an adequate tool for taking care of any minor blip. During long and deep recessions, however, it has become evident that monetary policy may reach its limits without being able to generate enough aggregate demand to close the excess supply gap. (IMF Talk: Macro and Growth Policies)

...on the problems with Ricardian equivalence:

What might interfere with [the claim that it is optimal for households to save a tax reduction]? Any number of things: if households had been unable to consume as much as their optimal plan required because they lacked liquid assets and could not borrow freely, then the added liquidity provided by the tax reduction would enable them to consumer more now. If the Treasury were a more efficient, less risky, borrower than many households, then the appearance of some new public debt would also affect real behavior. And, of course, if consumers do not look ahead very far or very carefully, if they give little weight to the interests of descendants, or if they tend to ignore or underestimate the future implications of current budgetary actions, then Ricardian equivalence will fail, and tax reduction financed by borrowing will indeed be expansionary. All those "if" clauses strike me as very likely to be real and quantitatively important, and that suggests that Ricardian equivalence is not a practically significant limitation on fiscal policy. (Is fiscal policy possible? Is it desirable?, p. 12)

...on the problem with the natural rate of unemployment hypothesis:

Let me try to explain what nags at me in all this...We are left here with a theory whose two central concepts, the natural rate of unemployment or output and the expected rate of inflation have three suspicious characteristics in common. They are not directly observable. They are not very well defined. And, so far as we can tell, they move around too much for comfort -- they are not stable. I suspect this is an intrinsic difficulty. I have no wish to minimize the importance of, say, inflationary expectations. But we are faced with a real problem: here is a concept that seems in our minds to play an important role in macro behavior, and yet it's very difficult to deal with because it escapes observation and it even escapes clear definition. 

On the natural rate of unemployment, I think the behavior of the profession exhibits problems. In order to make sensible use of this kind of theory, you want the natural rate of unemployment to be a fairly stable quantity. It won't do its job if it jumps around violently from one year to the next. But that's what seems to happen. We, the profession, are driven to explaining events by inventing movements of the natural rate, which we have not observed and have not very well defined. The issue came up first in the passage of the big European economies from 2 percent unemployment, on average, to 8 or 9 percent unemployment, on average, within a few years. The only way to explain that within the standard model is to say that the natural rate of unemployment must have increased from something like 2 percent to something like 8 or 9 percent. The actual facts that could account for any such dynamics never seemed to me or to any critical person to be capable of explaining so big a change. So we are left with inventing changes in the natural rate of unemployment to explain the facts, and it is all done in our heads, not in any tested model. I regret to say that you often find this kind of reasoning: the inflation rate is increasing because the unemployment rate is below the natural rate. How do you know that the unemployment rate is below the natural rate? Because the inflation rate is increasing. I think we are all good enough logicians to realize that this is exactly equivalent to saying that the rate of inflation is increasing, and nothing more. 

It seems to me that we ought to be thinking much more about the determinants of whatever you choose to call it. I hate to use the phrase "natural rate" but of course I do. It was a masterpiece of persuasive definition by Milton. Who could ever want an unnatural rate of unemployment? (Fifty years of the Phillips Curve: A Dialogue on what we have learned, p.84)

...and more on the natural rate of unemployment:

There is nothing like an adjustable, unobservable parameter to keep a theory afloat in rough seas...I think the doctrine [of the natural rate of unemployment] to be theoretically and empirically as soft as a grape. To say that in the long run the unemployment rate tends to return to the natural rate of unemployment is to say almost nothing. In the long run the unemployment rate goes where it goes. You can call where it goes the natural rate; but unless you have a more convincing story than I have seen about the length of the long run and the location of the natural rate, you are only giving a tendentious name to a vague concept (1998, pp. 9, 91)