For a long time now the European Union is accused by the rest of the world for the severe austerity and recessionary economic policies it follows, also imposing them on crisis stricken euro area member states like Greece, Spain, Italy and Portugal. This is so despite the fact that the Eurozone economy as a whole doesn’t seem inept or lacking economic means to increase its spending on investment and consumption to support sustainable growth rates internally and for the global economy. Yet the euro area, guided by Germany, obstinately denies complying and continues counting on the faltering growth potential of others to increase its exports.
On the contrary, the US immediately after the outbreak of the 2008 crisis applied huge monetary, and otherwise, policy programs to support growth. This country actually achieved noticeable growth rates as from 2012 and has been expecting, in vain, so far, the Eurozone to do the same. The International Monetary Fund and the US government have repeatedly asked Berlin and Brussels, the main responsible parties for the EU austere attitude, to reconsider. Alas, the only response they got was the ‘phantom’ Juncker investment plan of €320 billion. This is not fresh money though but mostly it’s about rearranging existing spending lines of EU’s budget.
Europe withholds its powers
The truth is that the euro area’s economic health is basically good. It creates large trade surpluses with the rest of the world and its fiscal and sovereign debt accounts are far from being in the danger zone. However Eurozone’s growth rates are stuck very close to zero and the €9 trillion GDP economy doesn’t help itself or the rest of the world to gain sustainable and noticeable growth rates.
It took seven years after the 2008 financial crisis erupted for the European Central Bank to start pumping some extra money into the economy (the quantitative easing program of €1.14 trillion). This decision was taken last January and Mario Draghi, the ECB President, had a lot of difficulties to overcome the German objections. For comparison purposes it must be mentioned that the US central bank, the Fed, has pumped $4.5 trillion into the American and the world economy during the 2008-2014 period. It’s obvious that the European contribution to the world economic growth is well below the abilities of the old continent. Let’s see why.
Why blocking growth?
Eurozone, powered by Germany, traditionally produces surpluses in its foreign trade (goods and services). Let’s see the details. According to a Eurostat (the statistical office of the European Union) Press release issued last week, “The EU28 seasonally adjusted external current account recorded a surplus of €13bn in May 2015, compared with a surplus of €11.9bn in April 2015 and a surplus of €4.8bn in May 2014”. The EU achieves equal or even larger surpluses as well in its international trade in goods.
This brings EU’s annual surpluses in the trade with the rest of the world to the tune of three hundred billion of euro. This amount can be considered as ‘stolen’ growth potential from the rest of the world. The word ‘stolen’ may sound biased or irrelevant in our free trade world. Nevertheless, the idea of free trade cannot go on serving the interests of Germany alone.
Germany must cooperate
This country has presently accumulated reserves of around €1.2 trillion which came from its trade surpluses. Germany, by continuing to refuse recycling those surpluses, condemns the rest of the world to permanent recession and deficits. This recycling cannot be sustainably achieved with loans from Germany to the others. It can be healthily realized only through increased home spending for imports via augmented consumption and investments. This can be done by favouring wage increases and greater government spending on consumption and investment. Another way for Germany to do this may very well be by materially supporting other Eurozone countries to do the same (through EU programs). By the same token, the ECB should be left to inject more freshly printed money into the economy.
This has to stop
Unfortunately, this is exactly what Berlin still refuses to do. Reportedly though, this issue is dividing the German political and economic establishment’s thinking. The Federal Chancellor Angela Merkel and her minister of Finance, Wolfgang Schäuble, are the champions of two opposing camps. The chancellor favours a more relaxing economic policy, while Schäuble supported by the German central bank, the Bundesbank, insists on fiscal and incomes austerity and a strict monetary strategy.
This division has surfaced around the Greek issue. Visibly the two sides have held different positions over Athens’ future, with the minister of Finance still envisaging a Grexit. He even went as far as to threaten with his resignation, in case his policy lines are rejected. Nonetheless, during the past few days, the two sides seem to converge, with Schäuble accepting a rearrangement of the Greek financial obligations. To be noted that the Americans and the IMF have explicitly demanded a rescheduling of the Greek debt with very long maturity extensions.
Greece was the catalyst
It remains to be seen if, faced with the American and IMF pressures for far reaching economic policy changes in Eurozone, the part of the German establishment that Schäuble authentically represents is willing to bend. It must be repeated that Washington asks for less strict monetary policies and a relaxation of the austere fiscal and incomes strategy. With the Chinese growth rates stuttering and the country’s stock exchange bubble having exploded, Europe’s cure to world’s economic malaise is needed badly and urgently. But Germany has first to be convinced to deliver.