Friday, 30 March 2012

Germany tramples on... Spain ( and others ) trampled on.

Spanish leaders should stop smiling and
stand up to unreasonable German demands

Germany's audacity and cheek in the way they are handling the Euro crisis, knows no limits.

How can Spain with a 25% unemployment be forced to undertake further rounds of austerity cutting God only knows how many billions from government expenditure purely because Germany insists on it?    What happened to Keynesian economics and the spirit of solidarity on which the EU is founded?

Let's put things into perspective.  Spain is  no Greece both in so far as size but particularly regarding their record for budgetary discipline.     Before the financial crisis Spain fiscal accounts were healthy and its debt to GDP ratio is low, even lower than Germany's.

So why are Spain in the financial mess they are in?

One of the main reasons for this is that the low interest rate policy that the ECB had to operate since inception to help Germany integrate the East following the fall of the Berlin Wall was not suitable for Spain's bubbly economic performance.

Low interest rates forced Spain ( and Ireland) to operate an unbalanced economic model where construction and property development became the motor of economic growth fuelled by cheap and plentiful supply of bank credit.    This kept fiscal revenues high and comfortable but it exposed the private sector to high leverage and the banking sector to concentration of risk to the real estate sector.   In short a property bubble was created in Spain fuelled by the ECB's low interest policy to assist German integration.

While Spanish governments are not blameless and could and should have taken precautionary measures to avoid the bubble buildup and re-balance their economies, the ECB and the German governments it used to serve are not blameless either.

So what sense of solidarity is there if German continues to make a feast from the crisis ( having the lowest unemployment rate and high economic growth) whilst placing the full burden of adjustment on countries like Spain, already suffering from a crushing economic contraction?

Spain is being pushed into a crippling debt trap as the more austerity gets imposed on it, the higher the unemployment, the lower tax revenues ( unemployed do not pay taxes remember?) and the higher the social payments that get triggered.

I am disgusted that after resisting the increase in the bailout fund firewall for so long, Germany has suddenly and gracefully agreed to increase it to some eight hundred million.

Why the change of heart?   Simply because the alternatives that offer a real solution, not merely a temporary solution through more bailouts, would be much more painful to Germany.

Europe does not need more bailouts.   Bailouts simply buy time, probably the time needed by Merkel until she gets her re-election wrapped up in 2013.   Europe needs economic growth.   Such growth has to come from additional export demand for countries that are in crisis so that the idle resources caused by the contraction of internal consumption get used in production for exports.

But exports can only materialise if two things happen:

a. Germany and surplus countries of the North adopt a much looser fiscal policy putting money in the hands of their consumers to boost consumpion and demands for imports.

b. The Euro falls from it current 1.33 to the USD to at least 1.15 near to the 1.18 it started from in 1999.

But Germany is obstructing these two conditions from happening.   It continues to adopt tight fiscal policies on the basis of leading by example policies when the exact reverse is needed.    And for as long as Germany remains part of the Euro system, the Euro cannot fall to where it needs to fall.

Germany could easily live with a Euro rate of 1.60 to the USD.    Most of the remaining countries in the Euro area can only be competitive with a rate of around 1.15 and extreme cases like Greece need even a lower rate.

Solutions through bailouts are a waste of time and money.  Malta, and its leaders, are not serving their citizens' interests by participating in such bailouts.   We will have to lick our wounds in future because we have let the Germans adopt and impose policies that serve their own interest not the interest of the whole Community.

Europe needs economic growth and this can only come if Germany makes a 180 degrees change to their domestic fiscal policies or at the extreme temporarily exit the Euro at the original joining rate of DM 1.95 and plan to rejoin at a realistic rate which reflects its current level of productivity and competitiveness somewhere around DM 1.50 per Euro.

Anything else is just papering over the cracks.

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