Grow­ing op­po­si­tion to Ger­man poli­cies on growth

Financial Mirror (Cyprus) - - FRONT PAGE -

Op­po­si­tion within Europe to Ger­man eco­nomic poli­cies is hardly new. France and Italy, not to men­tion Greece and some of the smaller coun­tries, have voiced con­cerns about the present eco­nomic poli­cies of the Eu­ro­zone and par­tic­u­larly Ger­many. Op­po­si­tion has also sur­faced at the re­cent meet­ing of the G7 in Tokyo. At that meet­ing, Canada and Ja­pan took the op­por­tu­nity to stress the need for more govern­ment ac­tion (in­creased spend­ing) to stim­u­late eco­nomic growth in Europe. Ger­many op­posed.

The US has also tried to per­suade Ger­many to adopt more growth-friendly poli­cies, with­out suc­cess. More sur­pris­ing is the re­cent po­si­tion of the IMF and the di­vi­sion which has ap­peared be­tween it and Ger­many over the third Greek bailout. De­part­ing from its his­toric hard­line po­si­tion on govern­ment debt and spend­ing, the IMF has re­cently taken the view that the Eu­ro­zone plan for the Greek debt and its re­pay­ment is not prac­ti­ca­ble.

The IMF has noted that debt re­lief for Greece should be “an up­front and un­con­di­tional com­po­nent” of any new plan. In 2008, Greek govern­ment debt stood at 106% of GDP. Af­ter tax in­creases and much aus­ter­ity, it cur­rently stands at 177%. Un­der pres­sure from Ger­many’s Wolf­gang Schauble, the IMF has backed down, at least tem­po­rar­ily. But the new IMF po­si­tion and its break with Ger­man pol­icy has been made clear.

The change in the IMF po­si­tion can be traced back to a re­search pa­per pub­lished in 2014 by Olivier Blan­chard, the then IMF chief econ­o­mist. This re­search showed that the “fis­cal mul­ti­plier” was greater than pre­vi­ously es­ti­mated. This means that in­creased taxes and re­duced govern­ment spend­ing to lower debt has a greater neg­a­tive ef­fect on growth than pre­vi­ously es­ti­mated. The re­verse is also true. Since the pub­li­ca­tion of th­ese find­ings, there has been a per­cep­ti­ble shift in the IMF po­si­tion.

At risk of over­sim­pli­fi­ca­tion, the Ger­man eco­nomic phi­los­o­phy can be viewed in two parts. First there is a stress on re­struc­tur­ing to in­crease na­tional com­petive­ness. This in­cludes elim­i­na­tion of mo­nop­o­lis­tic prac­tices and other mea­sures to i mprove com­pet­i­tive­ness. There is lit­tle ar­gu­ment with the op­pos­ing school on such is­sues which many econ­o­mists con­sider pos­i­tive and con­struc­tive.

Ger­man views on debt and govern­ment stim­u­lus are an­other mat­ter. Ger­many has made sure that its po­si­tion is en­shrined in Euro­pean Union reg­u­la­tions which stip­u­late that na­tional debt should not ex­ceed 60% of GDP and an­nual na­tional deficit be lim­ited to no more than 3%. Th­ese lim­i­ta­tions on govern­ment spend­ing are the heart of the “aus­ter­ity eco­nomics” favoured by Ger­many. The the­ory is that fol­low­ing this path, growth will even­tu­ally fol­low. Not men­tioned is the un­com­fort­able fact that lim­it­ing na­tional debt may pre­vent govern­ment spend­ing on re­struc­tur­ing roads, schools and gen­eral in­fra­struc­ture that may be part of a na­tional strat­egy to in­crease com­pet­i­tive­ness.

Econ­o­mists lean­ing to­ward Key­ne­sian eco­nomics point out that there are times when it is best to in­crease debt (to stim­u­late de­mand) and times when the re­verse is called for. Debt is a tool which should be man­aged and like all tools it can be abused. In a pe­riod of low growth, such as the Eu­ro­zone is ex­pe­ri­enc­ing to­day, the main prob­lem is a lack of de­mand. Who will in­vest in new fa­cil­i­ties if there are too few cus­tomers (over-ca­pac­ity) and many ex­ist­ing fa­cil­i­ties are ly­ing idle? Any­one walk­ing down Makar­ios Av­enue can see the prob­lem.

What is the prac­ti­cal re­sult of th­ese dif­fer­ent eco­nomic poli­cies? De­spite all the ef­forts of the Euro­pean Cen­tral Bank, the Eu­ro­zone is not do­ing very well.

The UK and US fol­low­ing more de­mand-ori­ented eco­nomic poli­cies, while not grow­ing as fast as they would like, have sub­stan­tially out­per­formed the Eu­ro­zone. Re­cov­er­ing from the re­ces­sion, both coun­tries reac­quired their 2008 level of GDP some years back, the US in 2010 and the UK 2012. By 2015, the US GDP was 10% above its 2008 level. In that same year, UK GDP was some 5% above its 2008 GDP. Eu­ro­zone growth has been slower. The Eu­ro­zone only reached its 2008 level of GDP last year.

Although the Eu­ro­zone has lagged, Ger­many has done very well. Fol­low­ing its own eco­nomic model of low debt and low govern­ment spend­ing, to­gether with high ex­ports, it has far ex­ceeded growth in most other Eu­ro­zone coun­tries. Ger­many en­joys vir­tu­ally full em­ploy­ment, steady eco­nomic growth and sta­bil­ity.

Other economies in the Eu­ro­zone which have been vir­tu­ally forced to fol­low this model (Spain, Italy, Por­tu­gal, Greece) have had just the op­po­site ex­pe­ri­ence, low growth and high un­em­ploy­ment.

The con­ver­gence of economies that the Eu­ro­zone was ex­pected to de­liver has not hap­pened. Quite the re­verse. There is a great and grow­ing di­ver­sity. The dif­fer­ences and con­trast be­tween rich and poor, lenders and debtors, is not merely di­vi­sive, it un­der­mines the feel­ing of unity which formed the foun­da­tion of the EU in its early years and threat­ens to de­stroy it. Is it pos­si­ble that the struc­ture of the Eu­ro­zone, hav­ing elim­i­nated many bar­ri­ers be­tween coun­tries and in­sti­tuted a com­mon cur­rency, is it­self con­tribut­ing to this di­ver­sity in growth and pros­per­ity? Yes, it’s pos­si­ble.

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