Growing opposition to German policies on growth
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.