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Friday, March 27, 2015
- Bolstered by Germany’s strong economy, Berlin has become the unofficial capital of the battered European monetary union.
However the German government’s proposals to solve the sovereign debt crisis, by imposing severe austerity programmes to reduce state deficits and rejecting the distribution of Eurobonds, are coming up against increasing opposition across most of the 17 countries that comprise the Eurozone.
On Jan 9, French president Nicolas Sarkozy was in Berlin to meet German chancellor Angela Merkel and discuss fresh new solutions to the European sovereign debt crisis.
On Jan 11, Italian Prime Minister Mario Monti, in office since November, visited the German capital for the very same purpose but made no secret of his wish to modify the austerity programme, which successive governments have hurled at the crisis with little to no success.
In an interview with the German daily newspaper Die Welt, Monti said that his government has imposed “severe burdens” upon the Italian citizenry by following Berlin’s austerity model, but so far “the European Union has made no concession towards Italy, by way of lower interest rates” for the country’s state bonds.
“If Italian citizens do not see (the immediate) fruits of their austerity efforts, there will be protests against the EU, against Germany, and against the European Central Bank,” Monti warned. “There are already signs of these protests.”
For instance, Germany, which has a sovereign debt of some 2.1 trillion Euros, pays extremely low interest rates for new debt bonds. Earlier in January, the interest rates for new German debt bonds were negative, meaning that investors were willing to pay Germany for taking out fresh loans.
In contrast, Italy, the third largest economy in the Eurozone, has a total debt of less than two trillion Euros but is forced to pay interest rates of well over six percent.
These high interest rates increase the state’s financial burden, especially considering that Italy has to refinance debts worth at least 170 billion Euros this year.
The burden is worsened by the fact that Italy is facing a terrible recession, caused by the global economic downturn and deepened by the austerity measures implemented by the government in 2011.
In its newest Economic Outlook, the Organisation for Economic Cooperation and Development (OECD) warned last November that Italian “output is set to decline well into 2012, and thereafter the recovery is projected to be weak.”
Besides Italy, the OECD estimates that Greece and Portugal, both member states of the EU and each battling severe recessions, record high unemployment and growing poverty rates, have particularly bleak forecasts for the coming year. The OECD also predicts that the French and Irish economies are set to stagnate in 2012.
The report further warned that growth in the whole Eurozone “has stalled as confidence has weakened and financial conditions have deteriorated as a result of the sovereign debt crisis… Fiscal consolidation and adjustment of private sector balance sheets will continue to restrain demand growth. Unemployment will begin to rise again and there will be a wide margin of spare capacity.”
In other words: Short- and medium-term economic policies should aim at stimulating the economy, rather than throttling it with austerity measures. According to Monti, “The Eurozone needs a common policy to promote economic growth.”
Numerous economists share this viewpoint. Carsten Colombier, a researcher on international finance at the German University of Cologne, said, “the rigorous austerity policies applied so far have failed to stabilise the Eurozone.”
Colombier told IPS that the austerity programmes applied in Greece, Spain, Portugal and Italy “are counterproductive. Some public spending, especially in infrastructure and in education, expand chances for economic growth,” and thus improve state income and reduce public deficits and sovereign debt.
The austerity programmes imposed in the Mediterranean member countries, characterised by deep cuts in public spending, have led to a worsening of the short-term economic perspectives and of state revenues and even threaten to provoke a “prolonged recessive phase,” Colombier added.
Other economists have taken to echoing the words of renowned British economist John Maynard Keynes to condemn present Eurozone policies.
“Keynes said back in 1937, ‘The boom, not the slump, is the right time for austerity at the Treasury’,” Gerhard Leithäuser, professor emeritus of international economics at the German university of Bremen, told IPS.
“The austerity measures the Eurozone is applying to solve the sovereign debt crisis are (ill)-timed,” Leithäuser said. “Instead of stimulating growth, they are reinforcing the recession, and thus aggravating the task of governments, which is to improve state revenues to fight against deficits and debt.”
As proof of Leithäuser’s view, the new German economic indicators suggest that even this strong economy is nose-diving into recession.
According to the newest figures by the German federal bureau of statistics, the German economy grew by three percent in 2011. However, the strongest growth phase took place between January and June. By the year’s last quarter, the German economy shrank by 0.25 percent.
OECD estimates predict that the German economy will grow only 0.6 percent this year.
To guard against this predictable slowdown, many economists are urging the German government to finally give up its opposition to the ‘Eurobonds’, debt certificates issued by the Eurozone at a unified interest rate, which help to reduce borrowing costs for the bloc as a whole.
Jakob von Weizsäcker, senior fellow at the Brussels-based Bruegel Institute for economic policy and widely considered one of the inventors of Eurobonds, sees the latter as “a fundamental device to solve the Euro crisis.”
“They offer the chance to break away from the mechanical European crisis management of the past 18 months, which has for too long failed to stop speculation and only races to keep up with financial markets,” von Weizsäcker said.