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Saturday, June 23, 2018

Will Germany Bully Europe Over The Brink?

There’s still hope for Europe to avoid a crisis, but it will first have to reject Germany’s self-righteous demands for austerity.

The audacity Germany has shown in floating a demand to manage Greece’s finances is a window on the leaders of that country and how much perspective they’ve lost. Let’s be clear; not all in Germany agree with this narrow, insensitive stance and the uninformed and uneducated demands for austerity economics in debt-ridden and recessionary nations. For example, there are political parties in Germany that want their country to take the lead on a Marshall Plan for the periphery of the eurozone. But they are not the ones setting policy.

I am tempted to say that antediluvian economics is ruling in Germany, but it may not really be about economic theory, but rather superior pride, irrational fear of inflation, and perhaps vindictiveness. It’s as if a German version of our own Tea Party is now running economic policy in Europe. Germany reduced its unit labor costs beginning in the late 1990s, which were higher than much of the rest of the EU, but with the euro fixed, they benefited as their export prices remained low. Could they have done well without their eurozone trading partners buying more from them than they were selling? And they lent them the money to do so. Do they have no moral obligation here? Without the fixed euro, the DM would have soared.

Then there is David Cameron of Britain and his finance minister lecturing the rest of Europe about how to run their economies. Move over Monty Python. As everyone now knows, Britain’s GDP is still below its pre-recession high, its deficit is high and not falling as promised, it may have slid into recession, and often ignored, average wages are well down since a recovery supposedly began. The bombast with which Cameron proclaims the rightness of his austerity economics while his people suffer is right out of school-boy debating. This time his countrymen will lose the debate, not only him.

There are some hints that people of influence are talking sanely and recognize growth is necessary and that austerity in this environment is tragically anti-growth. Some believed there would be some actual policy initiatives in Monday’s summit, but there weren’t. Instead, the EU agreed to a nutty deficit limit for all its nations. The good news is that they won’t abide by in a crunch. Must we remind ourselves yet again that it was Germany that conspicuously violated the prevailing EU limits on deficits to 3 percent of GDP when it had problems? Some say the current limit is over a full economic cycle and therefore not that stifling, but 0.5 percent of GDP is stifling any way you size it up.

Other analysts are saying that now that Germany has won this round it will support further lending by the European Central Bank. What a group! Remember when Trichet, then the head of the ECB, actually raised interest rates in the spring of 2011? It is all a matter of confidence, he said. But trying to cut spending in the face of recession will not generate confidence; only renewed growth will.