The Italian crisis may act as a catalyst for less austerity

Visit of Wolfgang Schäuble, German Federal Minister for Finance (on the right), to the EC. (EC Audiovisual Services).

Visit of Wolfgang Schäuble, German Federal Minister for Finance (on the right), to the EC. (EC Audiovisual Services).

The Italian political stalemate which threatens the financial stability of this country and risks to shake the Eurozone through the contagion effect, has not prompted Germany to relax its tough position vis-à-vis the euro area debt crisis and the severe austerity measures favoured by Berlin. As a matter of fact, Wolfgang Schaeuble, the German minister of Finance, speaking yesterday to national and global media, said that the political dead-end after the Italian election, inflates the financial risks and threatens the other weak Eurozone economies.

In view of that Schaeuble asked the Italian politicians to do what-ever it takes to formulate a viable government the soonest possible, in order to continue applying the necessary measures and secure a stable economic path for their country. Incidentally he recalled that last year Greece’s political void after the May election posed grave dangers to other weak Eurozone economies and brought forward existential questions over Eurozone.

Tough Teutonic logic

He stressed that in the present circumstances the problems of one country affect everybody else. That’s why he concluded, those who got elected and have the responsibility for Italy must formulate a viable government. The soonest they do that the fastest this crisis will be effectively countered.

The German minister however did not restrict his advises only to the Italian leaders. After stating that he never said the Eurozone crisis was over, he extended his criticism to France, by saying that this country has to introduce economic reforms in order to enhance its growth potential. Schaeuble however went even further and made his criticism more personal, when he added that both the French President Francois Hollande and his minister of Finance Pier Moscovici know that very well. In other words the German dignitary held directly responsible those two leading French decision makers, for their country’s growth problems.

Wolfgang Schaeuble is much more than a minister of Finance in his country. He is a widely and highly respected political figure not only in his own political party (CDU) but in the entire country and express authentically not only the federal government but also the German business world. That’s why his comments on France carry special weight. Apparently these strong Germanic comments constitute an answer to Pier Moscovici’s evaluation of the Italian electoral results. Earlier this week the French minister of Finance interpreted the Italian electoral results as a proof, that the austerity policies have reached their limits. This was a direct fling to Berlin’s direction, where Schaeuble is considered as the main architect of the entire austerity package imposed on Eurozone.

That is why, what Moscovici said about Italy was obviously addressed personally against the German minister of Finance, and the special weight of the Italian crisis, made the French comment even more edgy. As a result the German politician, in an indirect way, felt obliged to apologise for the Italian stalemate and for this reason he insisted that he never said the Eurozone crisis was over. This however was not enough to counter the indirect French demand for a complete reversal of the austerity policy, enunciated by the Moscovici observation. Consequently the German had to return the missile from Paris, and to this end he had to point the finger where it hearts, that is on the French fiscal deficits.

Paris asks for a change

Obviously the fight between Berlin and Paris is a fight between two diverging economic policy strategies. Obviously Francois Holland supports a quite different policy mix than the present one prevailing in Eurozone. He wants more European Central Bank intervention in support of growth through government deficit financing and doesn’t mind much a bit more inflation. This monetary accommodation of the real economy is repelled by Germany.

The problem is until when the Merkel- Schaeuble twin will be able to impose this austere option? The truth is that there are already encouraging signs for something different even from within Germany, favouring a watered down austerity. Actually in view of the next election the Berlin government is seen ready to support unusually large real wage increases this year. To this effect Schaeuble has encouraged the employers’ side to agree with the trade unions large wage increases for 2013, so as to reduce the competitive advantage of Germany, in comparison with the south Eurozone countries.

For this initiative however to have visible results the German workers have to see their incomes rise fast and substantially, so as they increase their spending on imported goods and take up more vacations in south Eurozone sea resorts. But those imports and those vacations have to be directed to favour intra-Eurozone activities, and this is a rather difficult exercise. In any case a new policy mix with richer German consumers and a more accommodating European Central Bank, the austerity plague may be at least partially cured.

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