Wednesday, 25 April 2012
Austerity backlash on its way
How stupid are the markets?
Faced with a growing unease over the effects of the austerity programmes, German Chancellor Merkel and her spokespersons are making it clear – this lady is not for turning. The message from Berlin is that there is no alternative to the “balanced budget” fiscal pact, and that “Europe’s Credibility” is identical to the ability of respecting budget discipline.
No, Europe’s credibility (or rather, that of the Euro-zone) depends on the ability to find a cure for the current predicament that does not kill the patient. Continuing with cutbacks in an economy with negative growth is suicidal.
To the best of my knowledge, suicides committed to prove credibility has never led to anything but a passing admiration and a shaking of the head. Too bad, so sad.
Anyway, The Dutch government collapsed on the issue. If Hollande wins the French elections, the “core” of the “Team Austerity” has shrunk to one member, Germany. With upcoming local elections in Germany we will see how strong that core really is.
As for the alternatives, are there really any? Of course, it is just a question of not putting on the ideological sunglasses on. Germany could add to domestic demand. France could unleash an economic revolution by privatising the state-controlled behemoths that increasingly hampers French competitiveness. Spain could (temporarily) nationalise the Cajas and move on, in particular with reforming the dysfunctional labour markets. All of Europe could postpone the insane idea of forcing the banks to deleverage amid the economic crisis. And so on.
The UK GDP numbers for Q1 have just been released and they showed a second consecutive quarter of negative growth. Construction fells sharply, and there is no growth in the biggest sector. The service sector. Consumers are squeezed by higher oil prices, government cutbacks, slow income growth. Oh, and then there is the problem of having too large debts related to buying property.
All of this is not surprising. A possible cause for concern is that UK exports are not doing any better after a long period of a weakened currency. Maybe because things are not looking too good in the export markets, either.
Where did the money go?
ECB President Chairman Draghi gave a testimony to the Economic and Monetary Affairs Committee of the European Parliament. Draghi clearly asked the politicians to put growth back on the agenda. And he revealed a concern (which I share): The huge loans granted to the banks are not flowing into the economy in the form of loans to businesses and consumers. Draghi is optimistic that it will happen with time.
The question is: how long time does Draghi expect this will take?
On a lighter note
FT today carries this little story about Italian Banking. Enjoy. Or cry.