Tuesday, 23 April 2013

Both wrong

Der Spiegel today reported a spat between the EU Commission President Jose' Manuel Barroso and the German Foreign Minister Guido Westerwelle on whether growth or austerity is the right solution for Europe's never ending economic problems and drifting recession.

File:José Manuel Barroso MEDEF 2.jpg
Barroso maintained that:
  • Austerity has reached its limits
  • Time for growth
  • Even if right a policy needs political and social support
  • In practice austerity is crushing growth
  • Economic growth is needed to bring sick members back to health
  • So the solution is allowing more time for deficit members to correct their fiscal imbalance
Westerwelle maintained:
  • Europe must insist on budgetary consolidation
  • Fiscal laxity will increase unemployment not solve it
  • Growth cannot be purchased with new debts
  • Growth and consolidation are two sides of the same coin so in spite all evidence to the contrary we should continue hoping that austerity in the end will deliver growth
embracing his boss
Barroso is wrong not so much in the diagnosis but in the prescription.   Whereas there is no doubt that only growth policies can solve EU's economies problems allowing more time for deficit countries to correct their fiscal policies will, on its own, merely extend their problems and increase their accumulation of debt.    What is the sense of bailing out five EU economies but then leaving them eternally in the sick bay?   The purpose of a bailout should be to bring the sick patient back to health not merely to save them from death and keep them on eternal life support.   Democracies cannot withstand extended rounds of austerity measures.   Without growth, economic restructing is too painful for democracies to persist as long as it takes.

Westerwelle is wrong becasue all empirical economic evidence shows that austerity does not deliver growth.   See how the UK expirement with austerity is failing even though they still have control over their rate of exchange policy which Euro countries in distress have not.

So what needs to be done?

The reality is that deficit countries need more than just more time to work their way back to economic health.  They need a true act of soildarity from the German bloc.  Rather than prescribe mere austerity Germany et al need to launch a huge reflation of their own economies through tax cuts and transfer of purchasing power to their population so as to create export demand for the goods and services of EU's economies in distress.

It just does not make sense for Germany to run a budget surplus at this stage of the economic cycle.   Germany should be running an increasing deficit to assist the economic adjustment of countries swallowing austerity through economic restructuring.

It takes two to tango.   Succesful EU wide growth needs action both from surplus countries to stimulate their internal demand as much as from deficit countries to render their economies more competitive through painful internal devaluation so as to make the most of the demand generated by the surplus countries' reflation.

If Germany is going to stick rigidly prescribing austerity to others without doing their necessary part by reflating their economy, the EU and the Euro are doomed.   And the biggest loser would be Germany as they are presently enjoying the best benefits from the monetary union.

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