Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro, gave a press conference on the in-depth reviews of macroeconomic imbalances in 13 Member States. The in-depth reviews had found that the macroeconomic adjustment in Europe was proceeding, though with differences in nature and pace among Member States. (EC Audiovisual Services, 10/04/2013).
A cascade of negative Eurozone statistics yesterday wouldn’t let the euro area social partners celebrate at ease today the 1st May labour day, because it is now proven beyond reasonable doubt that the seventeen member state euro money area is heading fast, towards a new and long recession, unless the applied austerity policy mix is balanced with growth measures. It’s not only that unemployment broke the 12% benchmark in March, with a 12.1% seasonally-adjusted estimate by Eurostat, the EU’s statistical service. It’s not only that inflation dropped a whole half percentage unit within one month from March to April, from 1.7% to 1.2%, indicating a quick drop of effective demand and a growing danger of disinflation. The Japanese economy lost ten years engulfed in a very similar vicious cycle. Is Eurozone trying the same deadly recipe?
There was much more yesterday though. On top of all that also yesterday Slovenia got a strong blow from Moody’s and saw its creditworthiness and debt paper downgraded to junk, after an undercut of rating by two categories from Ba1 to Baa2. This country is surely the next victim of Eurozone’s recession, after Italy, Spain, Greece, Portugal, Ireland and also France and the Netherlands. All those Eurozone members have either already lost large chunks of their GDP or are about to. As for Slovenia its banking system is now disintegrating fast, because households and businesses cannot repay their loans due to the prolonged recession. The country may soon end up asking for a wholesale bailout from the well know troika of European Union, European Central Bank and the IMF. Probably some people in Berlin start thinking that it may come cheaper to support growth than to pay for bailouts.
Negative indicators
Very early yesterday morning, before the flow of Tuesday’s bad statistics broke out, The European Sting writer, Suzan A. Kane, wrote the following paragraph based on the bad statistics of Monday. It went like that, “It’s a real disappointment to follow the business climate indicator (BCI) table during the last months. As from April 2012 this index is stuck in a continuous downward course and not once in the thirteen month period, from April 2012 to April 2013, this indicator didn’t record a positive price…Unfortunately there is more bad news from the European economic front. Also in April 2013, the Economic Sentiment Indicator (ESI) declined markedly in both the euro area and the EU…Alas there is no end to negative statistics. In the fourth quarter of 2012, the business investment rate was 19.7% in the euro area, compared with 20.0% in the third quarter of 2012”.
The Italian argument
Given all that, everybody agrees that all possible statistical indicators have for many months now being ringing bells, that there is something wrong in the euro area. Berlin didn’t listen. Things however change. Yesterday the German governing elite, including Chancellor Angela Merkel and the Federal Minster of Finance Wolfgang Schaeuble, were obliged to listen to what had to say the new Italian Prime Minister Enrico Letta. In reality Letta flew to Berlin with his pockets of with notes from the Italian political parties that back his government in the Italian legislatures. The Democratic Left and Berlusconi’s centre right gave him concrete notes about what kind of economic policies Italy and Eurozone need in order to come out from recession.
Those parties cover the entire Italian political, social and economic spectrum, at the exemption of a comedian. This social and economic spectrum contains tens of millions of people and hundreds of thousands of small and medium enterprises exporting every year a wealth of €400 billion. All those people are not available to play the German game of “Teutonic consolidation” of Eurozone. In short Letta went to Berlin not to hear but to tell Markel and Schaeuble, that the South wouldn’t play any more the game with German terms. Economic and monetary policies have to cater for everybody not only for Germany.
The French socialists
Last week the French Socialist party in a paper that was leaked to the Press was accusing Germany for nothing less than waging an economic war against everybody else, by making sure that all Eurozone policy centres, like the European Commission and the European Central Bank align with Berlin. Thank God both the EC President Manuel Barroso and the ECB Governor Mario Draghi have over the past few months openly told Berlin, that this game cannot go on. Barroso said it last week by demanding growth policies and Mario Draghi by insisting that the almost zero interest rate money from the ECB should reach all Eurozone countries and not only Germany. It’s the famous ECB argument for the transmission of the monetary policy.
The European Sting published yesterday two articles, which in first reading seemed as contradicting each other. The first title was “Light at the end of the Eurozone tunnel” and the second story was “EU: All economic indicators in free fall”. Is it possible that Eurozone seeing light at the end of the tunnel and at the same time all its economic indicators to be in a free fall? The idea is exactly that. The unbearable continuation of the presently applied policies having led to a dead-end more than the two-thirds of Eurozone cannot continue and must now be abandoned.
Is there money around?
Berlin’s basic argument is that Eurozone cannot overcome a debt problem with more debts. The answer that seems to be now formulating by the other side is that ‘yes you can, if the money is for free’, that is at almost zero interest rates. Japan is doing exactly that despite being much more indebted than Eurozone. The country of the rising sun owes almost two times its annual GDP, yet the Bank of Japan pumps trillions more of debts into the economy. The key idea is that the cheap money should come from within and not from outside. Eurozone’s indebtedness is only around 90% of its GDP and the ECB can extend its existing policy of buying sovereign debt in the secondary markets and start buying new national debt.
It goes without saying that at the same time the member states which will be favoured by the ECB, will undertake strict obligations to use this money for investments in infrastructure and not for consumption. The central bank’s scheme of the Outright Monetary Transactions (OMTs) has such prerequisites, and all that can be realised under the control of the European Investment Bank which has the expertise. This is the only way to transmit the monetary policy to every corner of Eurozone. The banks are there to do it.
Economic growth depends upon the desire to make money being stronger than the desire to hold on to money, not earth shattering but true. In 2008 Europe was shattered and is now hanging on for grim death, it has used negative interest rates as its life line. In normal conditions low interest rates stimulate economic activity but when there is a preponderance of distressed debt, low interest rates have the opposite effect, encouraging a lock down of private capital.
Any indebted person, society or economy that’s survival is dependent on reducing the value of money to a negative real number must be consigning themselves to an unending period of stagnation. The evidence for this is all around us, Japan has ‘survived’ with very high levels of debt (up to 200% of GDP) because interest rates have been negative for years. In ‘surviving’ they have avoided some pain but they are still terminally ill and have no prospect for recovery. Some say that monetarist are sadistic and that they just want to inflict pain for the sake of it is to misconstrue the nature of things. Humans contest and compete (read Darwin) and its clear that without the natural clearing out of the unproductive and noncompetitive parts of our economy (public and private) the whole is doomed to a slow but quite painless decline.