For a European future, just add German consumers
Europe’s leaders might be relieved that the European Central Bank has stepped in to try and fix up the mess that national governments have created. Refinancing operations launched by the ECB in December have successfully reduced the interest rates owed on the debts of some embattled governments relative to the mighty German bund. But just because the arteries of Europe’s financial system are no longer quite as clogged does not mean that the patient has been healed. Make no mistake, Europe still faces a massive crisis.
Despite some evidence that policymakers recognise the need for pro-growth measures (such as structural reforms), Europe’s recovery prospects are being hamstrung by an ill-targeted focus on austerity. Yes, massive budget deficits need to be pared back over time. As Martin Wolf writes, key to this story are the economic imbalances within the Eurozone. Germany is warranted in resisting efforts to convert the Eurozone into some kind of transfer union, where prudent Germans are forever left to backstop profligacy elsewhere. But as if to make an example of the merits of austerity, Germany too is cutting its relatively modest budget deficit, when there is absolutely no need for it to do so. In fact, its consumers should be spending more — not less — to help boost intra-European trade. German belt-tightening is entirely counterproductive, and prevents the necessary rebalancing between the competitive (Germany, the Netherlands) and the uncompetitive (Spain, Italy).
Citing arguments by Christine Lagarde, the head of the International Monetary Fund, Wolf contends that Europe’s austerity drive should not be an across-the-board proposition. Rather, the adjustment process must be facilitated by a selective approach to fiscal policy. If the German government doesn’t want to hand over bucketloads of money to other European governments, then cutting spending at home is the opposite of what is needed. Instead, it should give more money (in one way or another) to its own people so that they can in turn spend it on goods and services, many of which will come from elsewhere in the region. A bubbly German economy is necessary to boost optimism in the Eurozone, and help lift its debt-ridden neighbours out of their malaise.
