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

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.