The wrong answer to the wrong question
Gisela Stuart Die Welt - 06 May 2010
Economic and Monetary Union (EMU) is in crisis, but its true nature is not properly understood. The people of Germany need to be clear where they are being led by politicians, who themselves seem not to have grasped the core of the problem, which the remedies put forward last week-end, do not address.
The central issue is not one of public finance, though Greece and several other countries have been profligate, but what happens when competitiveness is lost and how it can be regained inside a monetary union. In essence, what is being proposed for Greece is two-thirds of a “traditional” IMF package – cuts in expenditure and increased taxes – without the third- currency depreciation.
In EMU a so-called “internal depreciation” has to replace the currency depreciation that offers Britain a way out of its difficulties, but given the predicament of Greece (and several other countries in EMU) this is a misleadingly polite phrase for “debt deflation”. The programme being recommended to Greece, will crush output, increase unemployment and private sector default, further reducing government revenues and making public sector default and national bankruptcy more, not less likely.
Some people in Germany seem to think that if only other countries were like Germany everything would be fine. In some respects that may be true, but by definition not every country can have a trade surplus and when Germany regained its own lost competitiveness (which was far less serious than that of Greece, Spain and the others today) in the late 1990s and early part of this century it was not only through its own efforts, but also at the expense of others.
At the time, the ECB set interest rates very low to help Germany and the consequent weakness of the euro assisted its exports in non-EMU countries, but the rates were too low for a number of other countries in EMU and this led to accelerating inflation, which benefited Germany’s price competitiveness and set off a credit boom, which increased demand for German goods elsewhere in EMU. Despite this, the domestic squeeze that was imposed on the German economy prevented budget consolidation and in 2005, Germany had to be “pardoned” by Ecofin for missing its targets.
Greece, Portugal and Spain are in far worse positions than Germany was then. Within the existing monetary arrangements, there are only two “solutions” to the current mess. First, is a continuous transfer of funds from the current account surplus counties (in effect the German-bloc). A one-off payment (even if spread over three years) will not work: it would have to be an annual payment in perpetuity, on lines similar to the transfers from west to east Germany after unification. The scale of these would be huge, possibly euro 35-40bn a year for Greece alone (and much larger if similar arrangements had to be made for other countries). This would wreck Germany’s own economy and public finances. The second “solution” would be a massive devaluation of the euro. A small devaluation would not be enough for Greece and the others (though it would help Germany), but the necessary scale of depreciation, would set off very high inflation in Germany. For obvious reasons, neither of those “solutions” will happen, or if they did would involve economic, financial (and possibly political) disaster in Germany.
There is no example in history when a country has got out of difficulties like those of Greece without devaluation and/or default. If Greece and the other “Club-Med” countries were to default and leave EMU it would have huge implications for the banking system in Germany and elsewhere, a default by Spain would probably wreck Germany’s which might have to be nationalised. The least bad option would be for the German bloc to leave EMU. Germany’s banks might still have to recapitalised, but it would be less costly doing it directly than it would indirectly by trying to “rescue” Greece. However there is no way out of this mess that will not be painful for all countries within EMU as well as the wider world.
EMU was a political project imposed on unenthusiastic electorates by political leaders in a hurry. However, it was based on some very bad economics and ultimately bad economics leads to bad politics which we are beginning to see. The political leaders of EMU and IMF have concocted a scheme that may provide a breathing space, but contrary to Alan Greenspan’s belief, a problem postponed is not a problem solved.
© Die Welt