Monday, 12 December 2011

Where is growth coming from?

Where is Growth coming from?

The more I read about  the supposedly grand agreement reached at the EU summit (minus the UK) last week the more I get convinced that this is yet another unworkable fudge.

The more I read about it the more I get convinced that Chancellor Merkel and the Germans in general are abusing their economic power by forcing the whole Europe to become German.    What's wrong with that, one may ask, if the whole Europe could be as economically strong as Germany?

What's wrong is that it is just utopia.   Germany is economically strong because locked in a monetary union at a very competitive exchange rate compared to their efficient export machine,  the things which are depressing the peripheral countries who enjoyed the 'joie de vivre' in very typical non-German way of life, are the very same things that are pushing the German economy forward in an artificial unsustainable manner.

The scope of a fiscal union could be validated if all countries in the fiscal union were to start from a level platform.    But countries are starting from extremely disparate situations and fiscal union cannot work unless all existent debt is pooled and becomes everyone's responsibility through refinancing of Eurobonds.   But the Germans don't want that.  Their constitution would not even allow it.

The Germans want to continue enjoying the gains without undertaking the pain and want to shift all the pain on the countries already in distress.  

This won't work.  Sooner rather than later, countries undergoing round after round of austerity  in an attempt to create internal devaluation as a route to recover their competitiveness, will find it hard to stay the course.   Technical governments by their nature have limited longevity and it is not in the interest of democracy for such technical governments to become a permanent fixture.   Democracy will in the end has to be a bottom up exercise and as turkeys never vote for Christmas democracy will in the end elect demagogues who promise to challenge Brussels ( read the Germans) rather than force more bitter medicine down the throat of electorates already finding it hard to keep a roof on their head and put food on their family table.

So if fiscal union does not mean the pooling of all debts which become everyone's responsibility ( and in that case are we ready for that or shall we be next to follow Cameron?) fiscal union offers no solution to the current crisis.

We cannot solve the crisis unless the solution contains a high dose of economic growth which will make the adjustment process more bearable.   And the only countries with financial capacity to generate growth are Germany and its peers who can still borrow on the markets at absurdly cheap rates even for long term money.    Unless Germany loosens its fiscal screws to create external demand for countries in the periphery as they undergo tough austerity adjustment crushing their domestic demand,  Europe will simply stall and fall into a crushing depression.

Madame Merkel, we can all become Germans if the Germany becomes a bit more Mediterranean.

Mr Draghi we appreciate we should pay more attention to what the ECB does rather than what it says but as the guardians of the Euro ( it is your signature on the notes not that of Merkozy) the problem is not inflation.  The problem is standing on the abyss of depression and your monetary policy has to reflect that,  even as you continue to pay lip service to the virtues of strict monetarism.

President Sarkozy, acting as poodle to Madame Merkel reminds many of Petaine.  You surely don't want that to be your legacy.   You should not allow the Germans to use France's credentials to extend and exploit more the unfair advantage they are getting inside the monetary union.   So unless the Germans adopt strong policies to stimulate their internal demand, may be you should suggest that the Germans should exit the Euro so as to live with an exchange rate that reflects their strength.

Madame Merkel, President Sarkozy, Mr Draghi, where is economic growth coming from?

1 comment:

  1. Good question: Where is growth coming from? Dr Gonzi and Dr Muscat you both agreed to what was decided can you please tell us where is growth coming from??