Is Eurozone preparing to abandon austerity and stagnation?

Angela Merkel, German Federal Chancellor speaking at the 3rd General Assembly of the 'New Narrative for Europe', an even held in the Academy of Arts (Akademie der Künste) of Berlin. (EC Audiovisual Services 01/03/2014).

Angela Merkel, German Federal Chancellor speaking at the 3rd General Assembly of the ‘New Narrative for Europe’, an even held in the Academy of Arts (Akademie der Künste) of Berlin. (EC Audiovisual Services 01/03/2014).

Two unrelated at first reading, but in reality very closely connected developments, materialised this week. On the one side it’s the new fall of industrial producer prices in February 2014 (deflation), while on the other, Germany surprised everybody by adopting, for the first time in its economic history, a compulsory minimum wage, expected to be set at a generous €8.5 an hour. Those two developments point out that the threat of deflation in the real economy and a probable new cycle of recession have become real and have finally convinced Berlin that its austere ideology may lead to a catastrophe. The European Sting has reported on two occasions over the last few days, that the downwards sliding of nominal and real wages in Eurozone has become a major threat to growth and to job creation.

The Commission noted this downside risk in its Quarterly Review on Employment and Social Situation published on Monday 31 March. The EU’s executive arm observed there, that there is little improvement in the Eurozone economy despite some first signs of recovery. The fast falling inflation rate and the persistently high unemployment, at double-digit on the average and appalling country cases (Greece, Spain, Italy, even France) are bad omens for Eurozone’s future.

It’s the turn of the ECB to act

It remains to be seen if the Governing Council of the European Central Bank in today’s meeting will manage to overcome the resistance of the two German bankers among its members. The ECB, as every central bank in the developed world, has a moral obligation to support growth, usually with extraordinary monetary measures. The two German bankers though have so far vehemently resisted the idea of helping growth in the real economy with expansionary monetary policy. Obviously the two pay no attention to the needs of every other Eurozone country.

Now however, the Berlin government itself seems to change course and abandons the austere ideology and policy line with the introduction of legal minimum wage at €8.5 an hour. This might leave the German bankers of the ECB alone, probably without the support of Berlin, if they continue on the restrictive monetary policy path. It’s not the first time though that Berlin disagrees with the German members of ECB’s Governing Council. Chancellor Angela Merkel has openly disagreed with her appointees in ECB’s council, in critical occasions.

The most remembered case was in September 2012, when the President of ECB Mario Draghi reassured the world, that the “central bank will do whatever it takes to save the euro” and then he added “believe me it will be enough”. The two German members of ECB’s council, had disagreed with the “whatever it takes” expression, but Merkel finally backed Draghi, not her banking compatriots. Today the world expects Mario Draghi to announce a new reduction of interest rates and even to set a negative sign on the interest rate paid by the ECB on commercial bank’s deposits with it. Today this interest rate is zero. If it turns negative, it will act as an extra inducement for the banks to reduce their deposits with the ECB and use the money to accord more loans to the real economy, thus supporting growth.

Minimum wage to counter deflation

Coming back to this week’s developments, Eurostat, the EU statistical service, said that “In February 2014, compared with January 2014, industrial producer prices fell by 0.2% in both the euro area (EA18) and the EU282… In January prices decreased by 0.3% in both zones. In February 2014, compared with February 2013, industrial producer prices decreased by 1.7% in the euro area and by 1.6% in the EU28”. If this is not deflation then words have lost their meaning. Not to forget that in deflation, all values, real and nominal, are being decimated.

Seemingly, in view of this real threat, the German government decided for the first time to set a legal minimum wage. The strong presence of the Socialist Party leaders in the coalition government must have helped to this direction. The idea is that the extra income to be gained by more than 5 million Germans, who today gain from their labour less than €8.5 an hour, will directly find its way to strengthening the consumption demand. On top of that, the setting of a minimum wage is expected to push all labour incomes in this country upwards a bit. The positive repercussions are expected to touch the entire Eurozone, due to the large size of the German economy.

If the ECB also changes its course and starts introducing extraordinary monetary measures in support of growth, this will mean that Eurozone is definitively abandoning the austere stagnation zone. Hopefully in such a case, Eurozone will be gradually steering out from austerity in every direction, incomes, the fiscal sector and the monetary policy.

 

the sting Milestone

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

The Social Committee may accept the new ‘contractual’ Eurozone

Mergers: Commission approves the acquisition of Flybe by Connect Airways, subject to conditions

New VAT rules in the EU: how a digital sea could have become an ocean

Chart of the day: This is what violence does to a nation’s GDP

Historical success for the First ever European Presidential Debate

EU legislation protecting home buyers approved in Parliament

Parliament condemns all forms of racism, hate and violence and calls for action

Africa-Europe Alliance: EU boosts pan-African Internet connectivity with €30 million

EU invests more than €100 million in new LIFE Programme projects to promote a green and climate-neutral Europe

Scientists have a new suggestion to create more climate-friendly cows

Youth and Participation: are the people rising up in Spain? 


European Union launches WTO trade dispute against Colombia’s unfair duties on frozen fries

Italy can stand the US rating agencies’ meaningless degrading

UN health agency highlights lifestyle choices that can prevent onset of dementia, as millions more succumb each year

Privatisation and public health: a question of Human Rights

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

The ethical dilemmas of medicine

‘Alarming levels’ of methamphetamine trafficking in Asia’s Mekong, UN warns

OECD Secretary-General Gurría welcomes announcement of new trade agreement between the US, Mexico and Canada

Why Opportunity Zones could be key to transforming our cities

Consumers and businesses to save money thanks to new EU cross-border payments rules

Media and entertainment in flux: it’s time for the close-up

Parliament ready to fight for a different EU budget

A Sting Exclusive: “Without climate, forget about peace!”, Swedish MEP Bodil Valero cautions from Brussels

Knowledge management and entrepreneurship: short term vs. long term perspective

Dangers of poor quality health care revealed ‘in all countries’: WHO report

Tackle ‘unacceptable inequalities’ in cancer care, saving up to seven million lives, WHO urges

UN says ‘many humanitarian achievements’, one year after ouster of ISIL from Mosul

5 ways for scientists and clinicians to double up on healthcare

Food finally features in the climate debate. Now what?

Traffic congestion cost the US economy nearly $87 billion in 2018

Dozens killed and injured by new airstrikes in western Yemen, UN coordinator condemns ‘outrageous’ toll

DR Congo: Ebola outbreak spreads to eastern ‘no-go’ zone surrounded by rebels

Currency Union might not let an independent Scotland join the EU as the “Yes” front now leads

Rising political extremism in Europe escapes control

Two major EU projects falter; the Schengen Agreement now freezes and Eurozone fails to resolve the Greek enigma

Leaders making these 5 key investments can shape an inclusive future

UN and partners appeal for $920 million to meet ‘dire needs’ of Rohingya refugees

Tokyo Olympics postponed to 2021 over coronavirus concerns

No barriers to free flow of non-personal data in the EU

IMAGINATION, FACTS AND OPPORTUNITIES – THE UNLIMITED POWER OF CHINA

How youth and technology can drive Africa’s COVID-19 response

‘Maintain calm’ and ‘exercise patience’ UN envoy urges, as Nigeria heads to polls

We need a reskilling revolution. Here’s how to make it happen

Is Haiti better prepared for disasters, nine years on from the 2010 earthquake?

Obama turns the G20 summit into warmongering platform

EU and Japan select first Erasmus Mundus Joint Master Programmes

6 ways to future-proof universities

3 ways to rebuild trust in how we regulate technology

Is 2019 the beginning of the end for coal in Europe?

EU: Divided they stand on immigration and Trump hurricanes

Residents and visitors to this Dutch neighborhood could share a pool of cars and bikes

European Labour Authority starts its work

UK Labour Party leader Corbyn readies to change Brexit political backdrop

What the US and the world can expect from the 8 November election?

Sweden is fighting loneliness by housing older and younger generations together

State aid: Commission approves French scheme deferring payment by airlines of certain taxes to mitigate economic impact of coronavirus outbreak

Does the sharing economy truly know how to share?

From mental health to suicide: the interruption of this chain reaction by prevention

We all have a ‘hierarchy of needs’. But is technology meeting them?

More Stings?

Advertising

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