G20 to Germany: Abandon miser policies

G20 ministers of Finance and central bank Governors’ meeting in Russia, on 16 February 2013, (G20 Russian Presidency, photographic library).

Tomorrow Thursday 18 April, the 20 ministers of Finance and central bankers of the largest economies of the planet will meet in Washington DC to discuss and agree on policies over world financial and real economy affairs. The meeting takes place just hours after the International Monetary Fund issued its regular World Economic Outlook (see The European Sting’s, “IMF: The global economy keeps growing except Eurozone”).

The basic conclusion of IMF’s WEO report is that the world economy, driven by robust growth in developing and emerging countries, will increase its pace in the period 2013-2014, including the US and the Japan, with the only dark spot being Eurozone. IMF predicts a retreat of 0.3 percentage points in Eurozone’s economy this year. Everywhere else growth will prevail. The WEO report concludes that “if policymakers deliver on their commitments, this WEO report anticipates continued easing of the brakes on real economic activity, and a strengthening of growth in the advanced economies as from the second half of 2013”.

Message from the IMF

This message is clearly addressed to Eurozone and more precisely to Germany, the largest EU economy, where Berlin keeps insisting on the application of austerity and anti-expansionist fiscal and incomes policies. Given that the developing economies are performing nicely and support decisively world growth and also that the US and Japan are doing their best with (monetary) quantitative ease, it remains only Eurozone to be reprimanded for not doing enough to help itself and the world to grow again.

Obviously the heat will not be on the European Central Bank but on Berlin. The ECB, together with the other major central banks of the world, have done their bit, by offering almost free liquidity to global economy. It is the German government that proves to be the miser of the village, refusing to apply expansionist fiscal and incomes policies despite the fact that this country has hoarded hundreds of billions of euro in reserves. Unquestionably the IMF and the rest of the world this time will ruthlessly exert pressure on the stubborn German minister of Finance, Wolfgang Schäuble, during tomorrow’s G20 meeting. Predictably there will be also pressures to this direction from the European Central Bank.

Message from the ECB

As the governor of the ECB Mario Draghi said recently, the ECB cannot continue performing every time all the time the job of other’s, meaning that Eurozone governments should undertake the task that is theirs’. This statement by Draghi has many recipients. Firstly it’s the over indebted Eurozone governments that have to apply better and more carefully planned consolidation programmes. Secondly it’s the surplus countries like Germany, which must support real economy with fiscal measures and more so with better wages and salaries agreements, to help the entire Eurozone start growing again. Thirdly it’s the major banks that have to find more capital of their own and stop depending on the ECB for unlimited liquidity injections.

As mentioned above the truth is that ECB, along with the American Fed and the Bank of England and recently the Bank of Japan have expanded their low-cost refinancing to the economy by many trillions. This excessive liquidity though, before it becomes dangerous, should at some point start to shrink, if not now any time in the short-term. But this task has to be accomplished in a growth environment, otherwise it risks to hurt the real economy. That is why wages and salaries in Germany have to be generously increased.

But it’s not only that. In pointing that the excess liquidity has to be reduced the ECB is targeting also the German and the French big lenders. In reality ECB is telling Berlin that the German government cannot go on asking the central bank to support the Deutsche Bank in more than one ways, and at the same time follow a miser fiscal and incomes policies, thus undermining real economy growth.

All that criticism will be directed tomorrow at Schäuble. Anticipating this, the German minister of Finance used his usual comment that “Some believe you get this (sustainable in the long-term expansion of the economy) with consolidation, others say growth. We say growth-friendly consolidation.” This wise guy attitude however will not help the German tomorrow in Washington. The question is for how long Berlin can go on keeping everything to itself.