France and Germany are pushing on with fast-track treaty
changes, trying to find the loopholes that will allow the Euro-zone to impose German-style budget discipline on the other member countries without being
bogged down by democratic procedure.
Presumably it means that the ECB
subsequently will be allowed to act like a central bank. Or at least one hopes.
I have come to
believe that Germany still does not get it. The German policy is consistent,
but wrong. The method for budget discipline now being pushed is just an
über-version of the tragically mis-named “Growth and Stability Pact” (PSG),
Germany’s contribution to the euro from 1997.
Already back then, economists pointed out, that the PSG
would be procyclical. It means that a country typically runs a (bigger) budget deficit
in a period of slow or negative growth. The PSG was then intended to impose cut-backs on
countries already having economic problems. It would deepen the problems, hence
causing even bigger cyclical swings on the country in question.
We all know that the PSG was largely ignored – even by
Germany, when it found it necessary.
It is correct that budget discipline and a manageable
government debt are necessary for long term stability. But it will not work to
impose deflationary policies on the other Euro-zone countries, when growth is
desperately needed to in order to grow out of the deficit situation.
In order to balance the European economy, Germany needs to
support the weaker Euro members with long term loans to the most needy and by
adding to domestic German demand.
I agree with the German vision that it is better to have an
economy based on producing things people actually need. But structural changes
cannot be introduced quickly. Greece and Portugal will probably never be
efficient producers of reliable hairdryers, much less advanced tool machines
and industrial robots. Such changes take years, and in the meantime economic
growth will be depressed.
So here is a yardstick by which you can measure the various
ideas being touted in the press. It is good news if it brings us closer towards
one of following:
- Long-term loans to the countries in problems
- Stimulation of demand in the countries that can afford it
- Co-ordination of economic policies to stimulate demand
- Help to structural development where needed
- ECB to assume the role of a real central bank.
If a new policy idea or international agreement does not bring us closer to any of those elements, it
is either bad news or quite simply irrelevant.
Whether this will end in a deep depression (as the OECD warned yesterday) or a long period
of slow growth, nobody knows yet. But if the scale tips towards the depression
outcome, Germany will suffer more than believed today. Ouch!
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