EU Commission: Germany can make Eurozone grow again just by helping itself

José Manuel Barroso, European Commission President on the left, and German Federal President Joachim Gauck, on the right, at Bellevue Palace. (EC Audiovisual Services, 21/10/2013).

On the political level, the European Commission and the IMF have been warning Germany for months now about its inextricable over stretched internal fiscal and incomes double consolidation. Now the Commission comes back with an excellent economic paper, which employs a structural multi-country model and assesses the negative impact of fiscal consolidation measures undertaken in 2011-13, in the euro area periphery and the core countries. The paper, entitled “Fiscal consolidations and spillovers in the Euro area periphery and core” is written by Jan in’t Veld, an economist of the Directorate-General for Economic and Financial Affairs of the European Commission.

Understandably, a Commission economist wouldn’t embark on such a demanding work, without prior consultation with the responsible Commissioner and Commission vice President Ollie Rehn, especially when it comes to such a politically sensitive issue. This means the Commission doesn’t back off from its position, that Germany and the other surplus Eurozone countries, should use their ability to spend more in order to help themselves and the rest of the euro area countries to grow.

This ‘spend more’ encouragement by the IMF and the Commission has a twofold target. First, it contains a recommendation that the German government relaxes its unnecessary, over stretched fiscal consolidation. Secondly, it is an inducement for Germany to favour real increases in wages and salaries in both sectors, public and private. Work remuneration in this country is stuck on the same real levels, for more than five years now.

End misery at last!

In view of all that, Jan in’t Veld concludes that “Spillovers from consolidations in Germany and core euro area countries have worstened the overall economic situation. A temporary fiscal stimulus in surplus countries can boost output and help reduce their current account surpluses. The improvement in current account deficits in the periphery is however small”. Before coming to this conclusion the writer notes that, “Average multipliers for domestic fiscal shocks range from 0.5 and 1, depending on the degree of openness. But spillovers of fiscal consolidations are large, with both the demand channel and the competitiveness channel adding to the negative GDP effects. Higher risk premia add further to the negative GDP effects”.

The above remarks by Veld and his findings that the “Fiscal multipliers are larger at the current juncture than in normal times”, are directly related to IMF’s public admission, of having erred in its economic models and its recommendations for deep austerity programmes in Eurozone. Everybody remembers that some months ago the IMF chief economist astonished the entire world, when he admitted that in the case of Greece the Fund’s experts had underestimated the magnitude of the negative multipliers of the fiscal consolidation, and consequently they misjudged the oversized negative impact on GDP. Now this Commission economist proves with a new paper, that the IMF rightly accepts now that it erred.

Needless austerity

The European Sting had identified the convergence of views between the Commission and the IMF vis-à-vis Germany. On 4 June, Sting writer Dennis Kefalakos posted an article entitled “Germany’s fiscal and financial self-destructive policies”. One day earlier, the IMF had published its regular annual assessment of the German economy, as it is the rule for all member states of the Fund, under the Article IV Consultation. The article went like this, “IMF Mission’s “Concluding Statement” on the German economy which was published yesterday, contains almost the same basic recommendations as the European Commission’s assessment aired at the Semester Press Conference in Brussels on 29 May. Both reports had references to Germany’s over stretched fiscal consolidation (meaning unneeded austerity) and the need to increase wages and reduce taxation on labour, all that in order to better serve the country’s and Eurozone’s efforts for growth”.

It is exactly what Jan in’t Veld recommends above. However, this Commission economist adds one more factor in this analysis, which exacerbates the negative impact of the fiscal consolidation multiplier on GDP; the revenue-based consolidations. As noted above, Germany apart from needlessly cutting down its government spending, it has kept real wages and salaries stuck for five years now. In crisis conditions though, the German households reduced further the part of their revenue directed to consumption. This reaction had additional negative effects, to the worst hit by the crisis countries in the south of Eurozone. Greece’s largest customer is Germany on two accounts, goods exports and tourism, thus paying double costs for Berlin’s mistakes.

In reality, Germany, apart from punishing itself and the rest of Eurozone with its own needless fiscal consolidation, adds more negative effects by applying a severe revenue-based consolidation. The end result is that the crisis hit south Eurozone countries, already in deadly fiscal and incomes diets, have to also endure the negative effects on their economies, from Germany’s needless self-imposed double misery on government spending and household incomes.

Undoubtedly, Germany has to change. If Germany changes the other surplus countries of Eurozone will do that same. Probably a CDU-SPD grand coalition government in Berlin, may be more prone to relaxing Germany’s austere ideology. In any case, Veld concludes his paper like this, “The final section looks at the effects of a temporary stimulus in Germany and other core AAA-rated member states and shows the positive spillovers to the periphery”. In short, the European Commission is now providing the scientific base for a change of policies in the entire Eurozone. It remains to be seen if Germany can grasp the meaning of the times. One more winter without a light at the end of the tunnel, and the south Eurozone countries will certainly explode.