Wednesday, 22 February 2012

This breaks my heart!

These are the opening paragraphs from an article entitled MERKEL BETS AUSTERITY WILL RESULT IN RE-ELECTION featured in today's Der Spiegel International:

German voters value austerity. That, at least, is what Chancellor Angela Merkel is betting on as she embarks on a new package of savings measures aimed at balancing the budget in two years. She wants to show the rest of Europe how it's done -- and get re-elected in the process.
Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble believe German voters want a balanced budget.
Angela Merkel and her fellow conservative Finance Minister Wolfgang Schäuble like to play the role of teachers when dealing with their partners from the euro zone. There is hardly a European Council session in which the German chancellor doesn't preach the benefits of austerity ("solid budgets and growth are not mutually exclusive"), and hardly a meeting of finance ministers goes by without Schäuble pointing out that some countries still have homework to do when it comes to their national finances.

The admonitions.... have earned the two politicians a reputation for being patronising.
Just how healthy German finances are was revealed at the beginning of last week, in the form of an early-warning report by the European Commission. Germany was the only large country to be given an almost perfect grade.

And yet, if Merkel and Schäuble have their way, the country many in Europe already see as a model of sound budget management will become even more exemplary. "We cannot expect Greece and the other crisis-stricken countries  to accept more and more austerity measures, while nothing changes in Germany," says a close associate of the chancellor.

For a full view of the article here is the link:,1518,816464,00.html

Why does this breaks my heart?  Because it is a mixture of hypocrisy and economic fallacy.  It breaks my heart because it implies the Greeks are being put through a sausage machine without being offered any real light at the end of the endless austerity tunnel solely to render Merkel popular with her domestic base.

Even if Greece's debts were to be wiped clean Greece will still have a problem competing in the Euro monetary union.   To stand any chance of success Greece needs economic growth which has to be sourced by foreign demand.   This foreign demand has to come from the strong core countries of the EU, principally from Germany.   

So rather than leading  by fiscal prudence example this is the time for Germany to ease up, to stimulate its own internal demand to generate import demand so that the crisis stricken countries can channel the excess capacity resulting from lower internal consumption to export orders from core Europe.   This is the time for Germany to stimulate investments by its industries in the crisis stricken countries to strengthen their manufacturing base. 

If instead Germany moves in the opposite direction and in a show of sado-masochism imposes austerity on its own consumers in a crazy bid to balance the budget, then Germans fully deserves the criticism that they are out on a mission to re-occupy Greece and eventually other countries in distress.

It is easy to preach austerity from Germany, enjoying the highest level of employment and chronic balance of payments surpluses  as it is operating with a super -competitive currency at US$1.32 when on German PPP they can easily live with a rate of US$1.50.   Greece can only be competitive on a PPP basis if the Euro falls to USD0.90.

Can someone explain how German and Greece can stay in the monetary union if one can be competitive with a rate of USD 1.50 and the other needs a rate of USD 0.90 to be competitive??

The more they  fudge the more painful it will be for Greece,  and the more explosives are being packed in the Euro pressure cooker ensuring that when it eventually explodes it will hurt all, saints and sinners alike.  That's what breaks my heart.

Malta should be careful about funding such fudges which will clearly lead to nothing except pain and loss of time and money.

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