Ger­many’s four Neins

Financial Mirror (Cyprus) - - FRONT PAGE -

Ger­many’s stance to­ward Europe has be­come one of re­jec­tion and dis­en­gage­ment. Its pol­i­cy­mak­ers deny the eu­ro­zone’s cri­sis-rid­den coun­tries a more ac­tive fis­cal pol­icy; refuse to support a Euro­pean in­vest­ment agenda to gen­er­ate de­mand and growth; have de­clared a fis­cal sur­plus, rather than faster po­ten­tial growth, as their pri­mary do­mes­tic goal; and have be­gun turn­ing against the Euro­pean Cen­tral Bank (ECB) in the strug­gle against de­fla­tion and a credit crunch. On all four counts, Ger­many is wrong.

To be sure, Ger­many is jus­ti­fied in re­ject­ing nar­row­minded calls by France and Italy for un­con­di­tional fis­cal ex­pan­sion. After all, fis­cal stim­u­lus can work only if it sup­ports pri­vate in­vest­ment and is ac­com­pa­nied by much more am­bi­tious struc­tural re­forms – the kind of re­forms that France and Italy are cur­rently re­sist­ing.

But Ger­many has all of the lever­age it needs to im­ple­ment the sta­bil­ity-ori­ented re­forms that it wants for Europe. For starters, Ger­many, to­gether with the Euro­pean Com­mis­sion, can com­pel France to pur­sue deeper re­forms in ex­change for more time to con­sol­i­date its deficit.

Ger­many can­not, how­ever, in­dulge its ob­ses­sion with sup­ply-side re­forms with­out also pur­su­ing growthen­hanc­ing poli­cies. As Ger­many knows from its own ex­pe­ri­ence in the early 2000s, the ben­e­fits of sup­ply-side re­forms – namely, im­proved com­pet­i­tive­ness and higher long-term growth rates – take a long time to emerge.

Time is a lux­ury that Europe does not have. With ev­ery month that the econ­omy loses pro­duc­tive ca­pac­ity, the like­li­hood of stag­na­tion and de­fla­tion rises.

The key to end­ing the Euro­pean cri­sis is a stim­u­lus plan that ad­dresses de­fi­cien­cies on both the sup­ply and de­mand sides. That is why Ger­many’s re­fusal to help find a way to fi­nance the pro­posed Euro­pean in­vest­ment agenda – which, for a limited time, would fund pro­duc­tive pri­vate in­vest­ment – is a mis­take.

Equally prob­lem­atic is Ger­many’s fo­cus on main­tain­ing a fis­cal sur­plus. With pro­jec­tions for Ger­man GDP growth this year and next re­vised down­ward by more than 0.6 per­cent­age points in the last few months, the gov­ern­ment could be forced to ini­ti­ate a pro-cycli­cal fis­cal pol­icy to achieve its goal, in­duc­ing even lower growth at home and through­out the eu­ro­zone.

Given that the Ger­man econ­omy’s out­put gap re­mains neg­a­tive, the gov­ern­ment should be im­ple­ment­ing ex­pan­sion­ary fis­cal pol­icy that tar­gets the coun­try’s in­fra­struc­ture weak­nesses. In this sense, Fi­nance Min­is­ter Wolf­gang Schäu­ble’s plan to spend an ad­di­tional EUR 10 bln on pub­lic in­vest­ment in 2016-2018 is a step in the right di­rec­tion. But, at just 0.1% of Ger­many’s an­nual GDP, Schäu­ble’s scheme looks more like an at­tempt to quiet crit­i­cism from the rest of Europe than a gen­uine pol­icy shift.

Ger­many’s fourth pol­icy mis­take is its ap­par­ent with­drawal of support for the ECB. Over the last seven years, the ECB’s ac­tions have helped Ger­many’s econ­omy and tax­pay­ers as much as those of its neigh­bours. More­over, the claim that the ECB’s pur­chases of as­set-backed se­cu­ri­ties amount to “toxic loans” that trans­fer risk to Ger­man tax­pay­ers is un­founded; after all, there have been almost no de­faults since 2008.

Ger­many’s lead­ers need to recog­nise this – and to de­fend the ECB pub­licly from base­less fear mon­ger­ing. Fail­ure to do so may re­flect an ef­fort to fore­stall the rise of the far-right anti-Euro­pean po­lit­i­cal forces, par­tic­u­larly the Al­ter­na­tive for Ger­many. But this strat­egy merely plays into the party’s hands.

If Ger­many re­fuses to take a more rea­soned ap­proach, it risks un­der­min­ing the ECB’s cred­i­bil­ity, thereby re­duc­ing the ef­fec­tive­ness of its mea­sures. If that hap­pens, the ECB may well be com­pelled to ini­ti­ate large-scale pur­chases of eu­ro­zone gov­ern­ment bonds through its so-called “out­right mon­e­tary trans­ac­tions” scheme – a plan that many Ger­man pol­i­cy­mak­ers and econ­o­mists staunchly op­pose.

The Ger­man gov­ern­ment can use its con­sid­er­able lever­age to com­pel France and Italy to pur­sue the struc­tural re­forms that both coun­tries need, while al­low­ing a growth-friendly de­mand stim­u­lus to lift the threat of de­fla­tion hang­ing over the eu­ro­zone. And it has the au­thor­ity to bol­ster the ECB’s cred­i­bil­ity and thus its ef­forts to en­sure fu­ture price sta­bil­ity and pre­vent fi­nan­cial con­ta­gion.

Europe needs a grand bar­gain, in­volv­ing close co­or­di­na­tion on struc­tural re­forms and fis­cal and mon­e­tary pol­icy. Ger­many’s rel­a­tive eco­nomic and po­lit­i­cal sta­bil­ity, far from en­abling it to dis­en­gage from such ef­forts, makes it among the most im­por­tant pro­tag­o­nists in their de­vel­op­ment and im­ple­men­ta­tion. The ques­tion is whether Ger­many’s lead­ers will recog­nise this be­fore Europe’s econ­omy falls into an even deeper slump.

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