Europe can easily exit from stagnation if Germany changes perspective

Janez Potočnik, Member of the European Commission in charge of Environment, and László Andor Member of the EC in charge of Employment, Social Affairs and Inclusion, (second and third from left), gave a joint press conference on the presentation of the Communication on a Green Employment Initiative (‘Green Growth package’). Jonathan Todd, Spokesperson of László Ando firs from left. (EC Audiovisual Services, 2/07/2014).

If things continue on their present course, there is no indication that in the foreseeable future the Eurozone inflation rate could start performing its desirable role again and could signify, or probably even trigger a new period of economic expansion. If the European Central Bank continues resisting the pressures for substantial monetary quantitative easing, the euro parity with the dollar and the other major world currencies will remain at present high levels, condemning more than half of euro area countries at their actual state of deflation and recession. At the same time even the European ‘champions’ of competitiveness, like Germany, will remain stuck in a state of weak growth or stagnation. In short, Europe runs the danger of a very prolonged period of too low inflation, far below the institutional target set by ECB at or close to 2%.

Statistical facts

Towards the end of last week, Eurostat published its figures for the June inflation rate and the current account balance for the first quarter of the year. Both statistics denote a strongly competitive in international markets Eurozone economy, producing a solid foreign current account surplus of €25 billion and an inflation rate for last month as low as 0.5%, unchanged in comparison with May (0.5% in March). However, all along the last twelve months the Eurozone economy has been stagnating overall, hardly improving its GDP turning out a miserable rate of growth barely above the zero level.

In conclusion, this combination of statistics suggests that Eurozone is suffering a significant loss of potential growth. The idea is that Eurozone could afford a GDP expansion favouring increase of inflation towards the 2% benchmark, by allowing more relaxed fiscal and incomes policies plus a monetary quantitative easing by the ECB.

Raising internal demand

All those measures would for sure have raised internal demand for consumption and investments, thus leading the real economy to a higher level of growth. In such an environment of stronger increase of production, higher real incomes and a little more inflation, the Eurozone economy could even increase its exports, triggering in this way a secondary improvement of GDP. The reasoning behind is that quantitative easing and relaxed incomes and fiscal policies would bring about a cheaper euro, due to increased inflation.

Invariably, a less expensive euro would greatly help exports of goods and services, would impede imports and the Eurozone may therefore end up marking an even larger current account surplus. In conclusion, the expansive policy mix would bring about a substantial and sustainable growth effect in the real economy and start lowering unemployment and create new jobs. This policy proposal and path is not an invention. All the major western central banks and governments from the US and Japan to Britain are holding to it with tangible results. On the contrary, the EU and more so Eurozone, led by Germany, abstinently insists on restrictive fiscal and incomes policies, while at the same time applies a virtually neutral monetary dogma. All these options have led Europe to a too long a period of very low inflation, far below the institutional target of 2%. Unfortunately, this austere economic policy mix, inspired mainly by Berlin, has already generated dangerous social and political unrest and radicalization of large masses of citizens in south Eurozone countries.

Severe figures

Now let’s turn to the Eurozone statistical findings as mentioned above. Eurostat on Thursday 17 July published its latest data on inflation. The relevant Press release read like this: “Euro area annual inflation was 0.5% in June 2014, stable compared with May (also 0.5% in March 2014). A year earlier the rate was 1.6%. Monthly inflation was 0.1% in June 2014”. The same source indicated that “In June 2014, negative annual rates were observed in Bulgaria (-1.8%), Greece (-1.5%), Portugal (-0.2%), Hungary and Slovakia (both -0.1%)“.

The next day, Friday 18, Eurostat released the following Press release, “The EU28 seasonally adjusted external current account recorded a surplus of €25.4 billion (0.8% of GDP) in the first quarter of 2014, down from a surplus of €32.7bn (1.0% of GDP) in the fourth quarter of 2013 and from a surplus of €32.9bn (1.0% of GDP) in the first quarter of 2013”. Understandably, the current account surplus was found much more solid in Eurozone. In short Europe is not a laggard in the international arena as far as economic competitiveness is concerned. So there is no fear from this quarter.

All in all, the evidence is here. The EU and more so Eurozone can safely engineer an exit from the present state of economic stagnation, political uncertainty and social unrest just by changing gear. Everybody else but Germany says so. Europe cannot continue paying the cost of this Teutonic obstinacy and stubbornness.