Draghi: Germany has to spend if Eurozone is to exit recession

Mario Draghi, President of the European Central Bank, (EC Audiovisual Services).

Mario Draghi, President of the European Central Bank, (EC Audiovisual Services).

Mario Draghi, in a historic speech delivered yesterday in his home country, bravely surpassed the limits of his office as President of the European Central Bank, and upon receiving an honorary degree in political science, from the Luiss “Guido Carli” University in Rome, he warned the European leaders that in order to safeguard the European social model and avoid the eruption of uncontrollable protests they must “build, with passion and vigour, a shared future in which the conditions for growth are more favourable, in which all citizens feel that their skills are fully valued, in which individual well-being goes hand in hand with collective well-being. We are all working today, each within our own mandate, to achieve that goal”.

Draghi also had to propose a road for fiscal policy to secure sustainable growth. He said “Fiscal policies must follow a sustainable path, separate and distinct from cyclical fluctuations. Without this prerequisite, lasting growth is not possible. Particularly for countries with structurally high levels of public debt, rather than temporarily high levels as a result of the current crisis, this means not slipping back from the goals already achieved”.

In this passage of his speech the President of ECB says plainly, along with the vast majority of macro-economists, at the exemption of Reinhart and Rogoff, that fiscal policy should not be pro cyclical. He obviously means that if a country is in recession, government spending should be used to support the economy exit from the vicious cycle of deficit cutting and negative growth. Unfortunately this is the opposite of what is happening today in many Eurozone countries and Draghi knows it well. Of course he doesn’t forget to caution the countries which had structurally high public deficits and have now achieved a sustainable balance, to cling to that and avoid slipping back.

Be anti-cyclical

It is more interesting however to dig a bit deeper in the above passage and go beyond the obvious, that fiscal policy must be used to counter the economic cycle. In this case he addresses himself to those surplus countries, which have accumulated reserves and do not run the danger of slipping back to deficits, if they increase their government spending, to counter the recession that now plagues Eurozone. That he means Germany is very obvious, because some lines earlier he had observed this: “In the euro area, the extraordinary success of the single currency concealed for years the risks that were building up. The governments of the Member States considered themselves free from previous constraints: with the exception of Germany and a few other countries”.
In short Draghi openly proposes that Germany and a few other countries which didn’t “considered themselves free from previous constraints”, are today in position to accelerate government spending without running any danger to slip back to unsustainably high public debt.

Plainly the President of the ECB tells Germany and a few other countries like Austria, the Netherlands and Finland that now is the time to act against the economic cycle, which threatens to drag Eurozone to a deeper bottom. Ollie Rehn the European Commission Vice-President a few days ago had verified that Eurozone is about to go deeper in recession. As a matter of fact this is the first time that the President of the ECB tells Germany that given the real danger of more recession, Berlin has to spend more.

Be fair

Draghi however didn’t stop at that. He went a lot further by remembering from his years as a student of economics, that a more fair distribution of wealth is another very strong tool to achieve sustainable growth. He tells this at a moment when differences between poor and wealthy Eurozone countries are so strikingly evident, as they never were in the past. The passage of his speech is very eloquent: “Another aspect of growth sustainability, in a European context, that I would like to draw your attention to today is that of income distribution. For almost twenty years there has been a trend towards a higher concentration of family income in Europe to the detriment of the poorest households, as statistics published by Eurostat show. A more equal share in the fruits of the production of national wealth helps foster a culture of saving and, therefore, of collective involvement. A sense of being an integral part of a country and of having a stake in its economic future strengthens social cohesion and encourages individual economic behaviour that leads, in the aggregate, to economic prosperity for all”.

In a few words Draghi tells Germany and the other wealthy European countries that now is the time for those who have gained from the good times of growth, to share a part of their accumulated wealth with the rest of the co-Europeans. He also didn’t hesitate to tell them that if they do not follow this advice, there might face uncontrollable social protests.

Of course the President of the ECB was also very harsh for the Eurozone countries, which despite being ridden for years with deficits of any kind (fiscal and external account), their governments continued borrowing up to the saturation point, where they were suddenly cut off from markets. Very probably he had mainly Greece in mind. Even in this case however he pointed a finger to the wealthy northerners, by letting to be understood that it was the banks of the North that kept lending money to the South, making in this way the two sides equally responsible for the latters’ over indebtedness.

Dreadful fragmentation

Last but not least Draghi had a lot to say about the dreadful complete fragmentation of Eurozone’s financial market, a fact that deprives the productive sector of the South from adequate, if any, access to finance. In this chapter he lamented mainly the Small and Medium Enterprises, the productive backbone of all economies. He stressed that. “The ECB’s recently published “Survey on the access to finance of SMEs in the euro area” provides a clear picture of the difficulties this sector, so crucial for the euro area economy, finds itself in. Among the principal causes for concern cited by the SMEs interviewed, access to credit was second only to the difficulties encountered in finding customers for their products. The obstacles to obtaining credit (linked to the refusal to grant credit) persist, and represent one of the main factors of heterogeneity between countries in the euro area, though they are not confined to those countries under stress. In fact, in addition to SMEs in Greece, Ireland and Spain, a large number of SMEs operating in the Low Countries are encountering significant obstacles (around 45% of the firms surveyed). These figures reflect the considerable heterogeneity in borrowing conditions, as also shown by the most recent bank lending survey. This fragmentation is all the more troublesome in an economy such as that of the euro area”.

This last Draghi’s phrase, speaking about Eurozone as being ‘one economy’, contains the essence of his entire speech. It is a phrase with huge semantics. In two words he asks everybody and more so the wealthy countries of the north, to behave like true Europeans and consider Eurozone as their home.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Syria’s groundbreaking constitutional talks: ‘a clear success of mediation’ says Guterres in Turkey

10 million Yemenis ‘one step away from famine’, UN food relief agency calls for ‘unhindered access’ to frontline regions

“911, What’s your emergency?”

Nearly a third of the globe is now on Facebook – chart of the day

Climate change is forcing 20 million people a year from their homes, Oxfam says

4 ways Africa can prepare its youth for the digital economy

Germany objects to EU Commission’s plan for a Eurozone bank deposits insurance scheme but Berlin could go along

Alcohol abuse kills three million people a year, most of them men – WHO report

2013, a Political Odyssey: What future for Italy?

This is why mental health should be a political priority

Commission welcomes European Parliament adoption of EU4Health programme

Commission welcomes agreement on the modernisation of EU export controls

7 ways to break the fast fashion habit – and save the planet

ECB again to subsidize euro area banks with more than one trillion euro

Thomas Cook bankruptcy: Better consumer and employee protection needed

MWC 2016 LIVE: Ingenu steps up efforts to build LPWA networks across the globe

Greener tourism: Greater collaboration needed to tackle rising emissions

How digital entrepreneurs will help shape the world after the COVID-19 pandemic

MEPs back plans to promote water reuse for agricultural irrigation

The ECB proposes a swift solution for SMEs’ financing

Working fewer hours makes you more efficient. Here’s the proof

COVID-19: A coordinated EU health strategy needed, say MEPs

‘BioSolar Leaves’ are better at cleaning the air than trees, say the technology’s developers

EU leaders agree to delay Brexit until 31 October

Yemen war ‘a test of our humanity’, and we’re ‘badly failing’ warns UN Children’s Fund chief

German Presidency outlines priorities to EP committees

The refugee crisis seen through the eyes of a young doctor from Turkey

EU, Latin America and the Caribbean: Partnering for prosperity, democracy, resilience and global governance

Collective action to enable sustainable growth will be critical to end tropical deforestation

Adoption of new rules to better protect children caught in cross-border parental disputes

Arrest of three Libyans wanted for grave crimes ‘would send strong and necessary message’ to victims, urges top Prosecutor

State aid: Commission approves around €36 million Romanian rescue aid to state-owned flag carrier TAROM

COVID-19: from the chaos of the pandemic to the difficulties in vaccination

Ecofin: ‘The Friday battle’ for the banking union

Haiti cholera outbreak ‘stopped in its tracks’

The UK option: An overarching alternative for the whole Brexit options

Security Council gravely concerned by Ebola outbreak in DR Congo, demands immediate end to violence hampering response

Here’s how to achieve growth in the Middle East and North Africa

Civil society groups matter for Cambodia’s sustainable development: UN expert

European Institute of Innovation and Technology: Commission welcomes political agreement on strategy for 2021-2027

The von der Leyen Commission: for a Union that strives for more

Number of MEPs to be reduced after EU elections in 2019

The challenge of palliative care in universal health coverage

The world needs carbon-neutral flying. Here’s how to bring it one step closer

Facts, not fear, will stop COVID-19 – so how should we talk about it?

Concorde is a reminder that the only way for innovation is up

Parlamentarians to “break up” with reality in the Google antitrust case

Implementation of tax transparency initiative delivering concrete and impressive results

The world has made spectacular progress in every measure of well-being. So why does almost no one know about it?

EU guidance on the handling of visa applications from residents of Ukraine’s Donetsk and Luhansk regions

MEPs to prioritise environment and climate action in next long-term budget

GDP growth slows in most G20 economies in third quarter of 2019

This is why retail is such a sore point in India-US trade relations

Khashoggi murder trials must public and meet international standards, UN expert urges

UN chief seeking ‘renewed commitment’ to global rules and values, as world leaders head to New York

Agriculture and Fisheries Council

A reality check on inclusive innovation

Austerity lovers to put a break on Renzi’s growth vision for Europe? the Sting reports live from World Economic Forum 2015 in Davos

This man is turning cities into giant sponges to save lives

4 key trends on how COVID has impacted women in business

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s