Why Eurozone can afford spending for growth

Round table with representatives of European and Russian companies. Moscow 17/6/2013. Antonio Tajani, Vice-President of the European Commission in charge of Industry and Entrepreneurship (not spotted here), went to Moscow and Saint Petersburg as part of the "Missions for Growth". For this "Mission for Growth in Russia", Antonio Tajani was accompanied by a delegation composed of representatives of companies and industry associations from 23 Member States.

Round table with representatives of European and Russian companies. Moscow 17/6/2013. Antonio Tajani, Vice-President of the European Commission in charge of Industry and Entrepreneurship (not spotted here), went to Moscow and Saint Petersburg as part of the “Missions for Growth”. For this “Mission for Growth in Russia”, Antonio Tajani was accompanied by a delegation composed of representatives of companies and industry associations from 23 Member States.

Eurostat, the EU statistical service, confirmed once more the excellent health of Eurozone’s economy, at least as far as its international competitiveness is concerned. Low inflation and large surpluses in external trade of goods constitute a solid base for the foreign value of the single money. They also advocate in favour of further relaxation of monetary, fiscal and wages/salaries policies to help the crisis hit member states and the entire Eurozone return to growth. Germany’s insistence for continued austerity is not supported by statistical evidence and has already led to social crisis in the south and in the long run can institutionalise recession. Exports cannot by themselves take Eurozone out of its present misery in the labour market. The danger of a lost decade is not excluded.

Anchored inflation

Starting from inflation, Eurostat announced yesterday that “Euro area annual inflation was 1.6% in June 2013, up from 1.4% in May. A year earlier the rate was 2.4%. Monthly inflation was 0.1% in June 2013”. Those two decimal points of higher inflation in June came from vegetables (+0.11 percentage points), fruit and electricity (+0.09 each). All those three categories do not belong to core inflation and are attributed to seasonal (fruits and vegetables) and external factors (oil and gas prices). Core inflation represents those home sectors of economic activities which determine the overall competitiveness of Eurozone. So no worries from these quarters.

Super surpluses

Now concerning foreign trade in goods, it’s more than evident that Eurozone surpluses are of a structural character and cannot be attributed to exceptional circumstances. According to Eurostat the first estimate for “the euro area (EU17) trade in goods balance with the rest of the world in May 2013 gave a €15.2 billion surplus, compared with +€6.6bn in May 2012. The April 2013 balance was +€14.1bn, compared with +€3.3bn in April 2012”.

Those statistical data confirm that Eurozone’s trade surpluses are not of an extraordinary character and represent a standard ability of a number of its member states to excel in international markets. Germany, Holland and Ireland are world champions in exports. Italy can usually cover adequately its imports with foreign sales, while even crisis stricken countries like Greece and Spain are is a virtuous path constantly reducing their foreign account deficits.

Given all that Eurozone can now reconsider its austerity policies and stop cutting down internal demand by brutal reductions of government spending and miser attitude towards wages and salaries. Three years of unseen before austerity have led Eurozone to a long-term recession without any light burning at the end of the tunnel. This is true not only for the crisis countries in the south. Recession has already affected Germany and the rest of surplus countries like Ireland and Holland.

This is a solid proof that exports cannot constitute by themselves a long-term growth locomotive. One must be blind not seeing that. Internal demand powered by competitive salaries/wages policies and mild government deficits can constitute a long-term base for overall growth. On top of that Eurozone and more so Germany cannot count only on the deficits of their trade partners to support their own economy. Apart from arrogant this attitude cannot be long-lived because partners at some point in time would go bust and the entire international economic system will suffer.

The IMF

That is why the International Monetary Fund insists that Germany abandons its austere ideology and decides to contribute more to the growth of its Eurozone and world trade partners. To this end Germany may reduce its huge foreign account surpluses without threatening the character of its exports oriented economy. This can be done very easily and in a popular way by increasing government spending and favouring larger increases of wages and salaries. True Germany has to import its food and energy and it needs export surpluses to finance this. But everything has its limits.

All in all there are currently mounting pressures to this direction. The conclusion of a free trade and investments agreement with the United States may lead the Berlin government towards a more balanced attitude in the economy.

 

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