Austerity ends in Eurozone, Germany is isolated

Thank god it will not be any more the economists to set the course of economic policy in Eurozone but the people and the politicians. Whatever bad things one may think about politicians, there is one thing that nobody can deny; they can hear the people. In this case the theory of Reinhart – Rogoff proposing austerity and prayers to correct all sins of the western economy and more so of Eurozone’s debts, will cease to set the rules. It will be rather the politicians to decide now to end austerity and start borrowing again to finance growth. Japan opened the way deciding to increase its government debt above the already breath-taking 200% of the GDP. Old style austerity For one thing, everybody is convinced nowadays that J. M. Keynes was right and F. A. Hayek wrong. Markets cannot always guarantee a solution to economic problems, at least not in one lifetime. This was proved first in 1929 and more recently in 2008-2009. The great crash and the Hayek style wrong cure (the ‘let it be’ recipe) send the world to the WWII carnage, while the recent credit crunch in the US and Eurozone’s sovereign debt crisis, were rightly managed with more public debt and more government money spent. Unfortunately, favouring only the banks. In any case right or wrong economic policies are applied every time on a given socio-political background. In 1929 societies didn’t know anything about social care and protection, so Hayek prevailed and send the world to hell. On the contrary in 2008-2009 in the US and Europe it was inconceivable that people would queue for bread. Today’s mega-cities cannot function with unemployment rates comparable to 1929, around 25% in the US and 33% in some European countries. Yet the austerity policies applied for at least two years in Eurozone, possibly being inspired by the neo-Hayekians Reinhart and Rogoff, have sent the unemployment levels in Greece and Spain to levels comparable to the Great Depression. Of course both those countries have a history of low competitiveness and high unemployment and at the limit one may say that they have always had such problem. On top of that the two southern member states belong to Eurozone’s periphery. Unquestionably the euro would have briefly collapsed, if Germany, France, Italy or Holland suffered of similar unemployment rates. The fact remains that with 27% of the labour force out of productive employment the Greek and Spanish sociopolitical structures are now in the verge of collapse. New dead ends However recession and unemployment after having ravaged Greece and Spain and brought Ireland and Portugal to their knees are now touching Italy, France, Holland and Belgium. Germany remains the only growing economy but there too, the business sentiment is deteriorating fast. It is even more discouraging though that the applied severe austerity policies backed by Berlin, are leading to new dead ends, because Greece for example, having managed to almost cut its deficits to zero, doesn’t see any light at the end of the tunnel. The same is true for Spain, Italy, Portugal and some other countries. The newly appearing dead-end, with another recession or stagnation period dawning after the draconian reductions of fiscal deficits, became all more visible in 2013 and is predicted to haunt also 2014. In view of this Dr Peter Bofinger, a Member of the German Government’s Council of Economic Advisors, who has disagreed with this brutal kind of austerity imposed on Eurozone, is now predicting that this policy, if continued, will lead Eurozone to increased debts, exactly the opposite of the targeted aim. Fortunately it is not only this German economist who has discredited the austerity policies. The European Sting writer George Pepper noted on Saturday 4 May: “Summing up what Ollie Rehn said yesterday about the medium term prospects of Eurozone and the European Union amount to an open acknowledgment that fiscal consolidation has to be subordinated to the target of growth and job creation. To this effect he noted, “In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe. The EU’s policy mix is focused on sustainable growth and job creation”. As a matter of fact the camp of austerity lovers seems to have been restricted only in and around Berlin. In Brussels the President of the European Commission, Manuel Barroso and the Vice-President, Ollie Rehn, have definitively passed to the ‘growth camp’, attracting strong criticism from Germany. Also the President of the European Council, Herman Van Rompuy, clearly joined the growth camp a few days ago in a speech delivered in Lisbon, where he said that, “the European countries are tired of austerity and there is a need now for immediate action in favour of growth and creation of jobs”. Rompuy is a politician, like Barroso and Rehn and the three of them despite having assumed bureaucrat-like roles and being locked in golden Brussels offices away from everyday people, they finally heard their deafening cries. Cheap loans In this way Brussels have now joined in bulk the ‘camp of growth’. As a result the Commission gave two more years to many Eurozone countries, to bring their fiscal deficits below the allowed level. Berlin got furious with that. But as it usually has happened during the last three crisis years, the German government will succumb when isolated. It is questionable if Berlin’s austerity banner has now any other follower than Finland. Even Austria is now an unstable ally while the Netherlands have long abandoned the Germans. Already many Eurozone countries have gained those two more years to cut down their fiscal deficits (Spain, France, Portugal, Greece, Ireland, Holland and Slovenia) and Italy is about to join this club. It is obvious that the austerity years in Eurozone are coming to an end. This doesn’t mean of course that government budget deficits and public borrowing would rise spectacularly. At this point it must be noted that the global financial markets have shown a strong willingness to start lending again to Eurozone. The very low-interest rates they charge for months now to Spain and Italy stand as infallible witness of that. As a result the extra low-interest rate loans on offer in financial markets will constitute a strong incentive for more government borrowing in Europe. Not to forget what the Bank of America/ Merrill Lynch said to the Europeans recently: “there is out there €20 trillion waiting to be lent to you at less than 1%”.