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.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

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

Professional practices of primary health care for Brazilian health and gender inequality

UN chief of peace operations honours fallen Chadian ‘blue helmets’ serving in northern Mali

European Investment Bank to borrow €70 billion in 2013

Why cities hold the key to safe, orderly migration

Anti-vaccination movement affecting youth in Europe

International Day of Cooperatives sets stage for long-standing production and consumption

Germany and France only care about keeping their borrowing cheap

Copyright: European Union , 2017; Source: EC - Audiovisual Service; Photo: Frank Molter

EU hits deadlock on the future of glyphosate a month before deadline

Indonesian tsunami death toll climbs over 400 as Government-led relief efforts are stepped up

In Tanzania, UN refugee chief praises ‘regional peacemaker’ role, and efforts to welcome neighbours on the run

The Swiss will pay dearly for voting out fellow Europeans

For Africa, ‘winds of hope are blowing ever stronger,’ Guterres declares at conference on development

Record-high number of civilian casualties in Afghanistan: UN Report

The UN’s unyielding effort to tackle sexual abuse and exploitation: our quarterly update

The challenges of Chinese investment in Latin America

State aid: Commission opens investigation into proposed public support for Peugeot plant in Spain

Revolutionary technologies will drive African prosperity – this is why

European Parliament approves new copyright rules for the internet

Euronest: delivering reforms is the best way forward for EU’s Eastern Partners

Greferendum: the biggest political gaffe in western modern history to tear Europe apart? #Grexit #Graccident

Every bite of burger boosts harmful greenhouse gases: UN Environment Agency

What the world will look like after the Iran and 5+1 deal; the US emerges as major power broker in Middle East

Deal on tightening the rules to stop terrorists from using homemade explosives

Migrant caravan: UN agency helping ‘exhausted’ people home

These are the cities where people work the longest hours

Commissioner sings “Volar-e” but the European driver no “Cantar-e”

Why is the EU launching a doomed policy in stopping immigrant waves? What are the real targets?

The recipe for creativity involves a lot of ideas, and a short break

The decline of our oceans is accelerating, but it’s not too late to stop it

Aid funding for Occupied Palestinian Territories at ‘all-time low’

How will the NATO-EU competition evolve in the post Brexit era?

How to unleash the enormous power of global healthcare data

UN human rights office urges Egypt to immediately release detained protestors

A shocking new report reveals what we’ve done to the natural world

Want a fairer society? This economist says he has the answer

5 ways to #BeatAirPollution

China is winning the electric vehicle race

UN and partners call for solidarity, as Venezuelans on the move reach 4.5 million

Why AI will make healthcare personal

This start-up is making a palm oil alternative from used coffee grounds

Austrian Presidency priorities discussed in committees

These countries are pioneering hydrogen power

Implementation of EU Facility for Refugees in Turkey: EU mobilises €663 million in humanitarian assistance

Korea should improve the quality of employment for older workers

Half of the world’s population lack access to essential health services – are we doing enough?

DR Congo: ‘New waves of violence’ likely, UN warns, unless State acts to prevent intercommunal reprisals

COP21 Breaking News_10 December: the final sprint of the Final Agreement Negotiations

How to have a good Fourth Industrial Revolution

Now is the time to seize ‘unprecedented opportunity’ of the Sustainable Development Forum, says ECOSOC President

Afghans entitled to live ‘free from fear, intimidation’, says UN chief, condemning suicide attacks

Fighting cybercrime – what happens to the law when the law cannot be enforced?

This is where people work the longest – and shortest – hours

How Africa and Asia are joining forces on universal healthcare

At last a good price for the Greek debt!

Libya detention centre airstrike could amount to a war crime says UN, as Guterres calls for independent investigation

Africa must become more resilient to climate risk. Here’s how

Merkel: Nationalism and egoism must never have a chance again in Europe

EU Directive makes haircut on uncovered deposits a standard in bank bail-ins

These are the pitfalls of a cash-free society

Human rights breaches in Hong Kong, Russia and at the US-Mexican border

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