“Growth or austerity” and other questions on the problems of Europe

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"Wir Deutsche fürchten Gott, aber sonst nichts auf der Welt!" Bismarck
“Wir Deutsche fürchten Gott, aber sonst nichts auf der Welt!” Bismarck

When one question becomes many

When I started writing this article, I wanted to offer some views on the debate “growth or austerity?”

As I started collecting material, I realized that there are many more questions.

I therefore opted to expand on the questions, using the french aproach of “problématique”: La problématique est la présentation d’un problème sous différents aspects. Problematic is the presentation of the various aspects of a problem.

Europe is in deep crisis. The European Commission has slashed its growth forecasts for the eurozone, and now believes the single currency region will not return to growth this year.

In its Winter Forecasts, the EC predicted that eurozone GDP wouldshrink by 0.3% during 2013, not manage the 0.1% growth pencilled in previously.

The EC warned that Europe’s unemployment crisis was a desperately serious problem.

Greece is bankrupt, but kept in the Eurozone until the September 2013 elections give a new legitimacy to the patchwork disastrous fiscal austerity measures. The 2013 forecast calls for a 4.4% contraction of the economy, in the 6th year of consecutive contraction. Official unemployment is above 27%. The country is locked into a hopeless situation thanks to a program of fiscal austerity and has no choixes left.

Spain cannot recover from the real estate disaster it has experienced, but also from the structural unemployment that is now over 25%.

Italy is the only country of the European south that appears to still have a choice or more left. Whether this happens will depend largely on the results of the 24 February parliamentary elections.

In the north the situation is not good either. Germany’s growth – and Germany is the strongest of them all – in 2013 will be restricted to 0,5%.

The French services sector shrank in February 2013 at its fastest rate in nearly four years, suggesting it is far from a turnaround. Le Monde and Le Point reported that the commission’s economic experts have reduced their forecast for France’s economic growth this year to 0.1% from 0.4%.

The new French President, Mr. Hollande has been a huge disappointment so far. He was elected on a platform of pushing forward a European policy of growth. Until now though he seems to be totally overwhelmed by the recession in the French economy and the might of Germany.

I could not possibly claim that I can grasp the full magnitude and intensity of the problems.

But I would like to pose some questions, using a framework of already expressed views.

The framework comrises eight components. I will quote each one of them, and then pose some questions and offer comments.

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The framework as patchwork

Component 1: In a “Spiegel” magazine article (1) dedicated to the philosopher Juergen Habermas, we read.

“Zur Verfassung Europas” (“On Europe’s Constitution”) is the name of his new book, which is basically a long essay in which he describes how the essence of our democracy has changed under the pressure of the crisis and the frenzy of the markets. Habermas says that power has slipped from the hands of the people and shifted to bodies of questionable democratic legitimacy, such as the European Council. Basically, he suggests, the technocrats have long since staged a quiet coup d’état…. He sees a Europe in which states are driven by the markets, in which the EU exerts massive influence on the formation of new governments in Italy and Greece, and in which what he so passionately defends and loves about Europe has been simply turned on its head.

HA1: “States are driven by the markets”. Are “markets” a singular entity? 

HA2: ” Power has shifted to bodies of questionable democratic legitimacy”. Power does not shift by itself. Who are responsible for this shift?

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Component 2: Ivan Krastev in his 2012 article (2) Europe’s Democracy Paradox wrote

Let us state the matter directly: The real crisis in Europe is not a financial/economic one, but a much deeper social/political crisis, of which the financial/economic dimension is just a symptom. That deeper crisis has formed not just because there is a democracy deficit between the center and the parts of the European Union, or because current European leaders are less devoted to genuine federal union than their predecessors. It has formed because of a cumulatively dramatic transformation of the very character of Europe’s liberal democratic regimes. The European Union cannot be saved by its citizens because there is no European demos, but neither can it survive much longer as an elite project because the crisis has sharply escalated the process of dismantling the elite-guided democracies in Europe themselves’

KR1: “…there is no European demos”. Has there ever been one? Or is it the intensity of the crisis that brings this gap so forcefully forward?

KR2: ” …the crisis has sharply escalated the process of dismantling the elite-guided democracies in Europe”. I can see this dismantling of the political system and the corresponding socio-economic elite in Greece. I am not so sure such a dismantling takes place in countries like Germany. In other words, not all countries are alike. We should avoid sweeping generalizations.

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Component 3: Anatole Kaletsky wrote back in the Summer of 2012:

“As financial markets slide toward disaster, scarcely pausing to celebrate the “success” of the Greek election or the deal to recapitalize Spanish banks, the euro project is finally revealing its fatal flaw. One country poses an existential threat to Europe – and it is not Greece, Italy or Spain. Every serious proposal to resolve the euro crisis since 2009 – haircuts for bank bondholders, more realistic fiscal consolidation targets, jointly guaranteed eurobonds, a pan-European bailout fund, quantitative easing by the European Central Bank – has been vetoed by Germany, and this pattern looks likely to be repeated next week. Nobody should be surprised that Germany has become the greatest threat to Europe.

KA1: “…(the existential threat) is not Greece, Italy or Spain”. It could be France, although the author’s point about Germany is in a sense rhetorical.

KA2: “… the euro project is finally revealing its fatal flow”. In an environment without any critical discourse on the problems and issues, it is more likely that sides with opposing views simply throw arguments to each other as stones or bullets. And the most powerful “wins”.

KA3: “…Germany has become the greatest threat to Europe”. See the “in lieu” section at the end of this article.

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Component 4: In a Leader of the Economist in November 2012, we read:

“…Yet it ( incumbent parties and governments being kicked out by the voters) will not happen in the most important election of all in 2013: Germany’s, due in September. The significance of the German election was captured in a cartoon before the Spanish election in November 2011, in which one Spaniard asks another who will run the country afterwards and gets the reply: “Angela Merkel”. Ever since she became German chancellor in 2005, Mrs Merkel has been by far Europe’s most important political leader. In the euro crisis, it has been Mrs Merkel, head of the biggest creditor country, who has ultimately decided what to do and how fast to do it.”

EC1: “…the significance of the German election….” In a recent interview, the Greek Prime Minister, Mr. Samaras indicated that Fall 2013 will be a critical milestone for Greece.

EC2: “In the euro crisis, it has been Mrs Merkel… who has ultimately decided what to do and how fast to do it.” Is there a chance that Mrs. Merkel will change her mind? Or that she will not continue to be the sole decision maker without the eurozone breaking up?

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Component 5: Walter Munchau, the Financial Times columnist was much more specific in his December article on the then Italian Prime Minister Monti. He wrote that Monti’s bubble had burst as he could not stand up to Angela Merkel. In a January 2013 article in the Business Spectator, Munchau wrote:

But Mario Monti, Italy’s prime minister, did not stand up to Angela Merkel. He did not tell the German chancellor that his country’s continued engagement with the single currency would have to depend on a proper banking union with full resolution and deposit insurance capacity; a eurozone bond; and more expansionist economic policies by Berlin. In his interview with the Financial Times last week, Mariano Rajoy, the Spanish prime minister, demanded symmetrical adjustment – again, rather late, since Germany is already planning an austerity budget for 2014. In view of all political decisions already taken, the option of symmetrical adjustment is slowly receding.

WM1: “Monti’s bubble has burst”. After Monti’s government, Italy appears to be much worse off. The technocrat applied to the iota the policy dictated by Berlin. It will be interesting to see the results of the Italian elections.

WM2: “political solutions are needed”. Apparently the politicians of the South like Rajoy are failing to demand these solutions. Berlusconi though, cannot be accused of such failing. Whether I like him or not, is another story. This morning I heard on the radio an interview of one of Berlusconi’s ministers, who mentioned that if the Euro doesn’t work, there is always the Italian lira.

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Component 6 :Sony Kapoor wrote on 22nd February 2013 in Re-Define’s blog:

Instead of a more relaxed fiscal and monetary policy supporting the structural reforms that were necessary, as we have been suggesting for a long time now, the EU has followed a deeply flawed policy of fiscal contraction. This is the result of the application of a ‘small economy mentality’ (that prevails in the German economic debate) to what is the largest economic area in the world. The current economic policy betrays a level of macroeconomic illiteracy that is shocking for an otherwise well-educated policy-making elite.

Instead of focusing on a 5-10 year strategy and a financially, politically and socially sustainable adjustment path for re-balancing, EU leaders have taken a very short-termist view of policy. At the same time that they rant against the short-termism of financial markets, their own policies have been even more myopic. What may be rational for a small country in the short-run, which is the policy lens they have used, will be self-defeating and irrational for the EU-wide economy over a longer time horizon.

Even narrow questions such as ‘what is the best policy to minimise German tax-payer exposure?’, ‘how can we reduce fiscal deficits and bring debt/GDP ratios under control?’ produce very different answers when considered over a 1-year or a 10-year horizon.

SK1: “the time horizon”. Long-term or short-term?

SK2: “the wrong policy”. Let us for the sake of the argument define as wrong a policy that does not work. Can we safely say that Germany’s policies do not work? We can say it for Greece, Portugal, Spain and Italy.

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Component 7: In their artcle “Germany as Hegemonic Power: The Crisis of European Integration”, Joachim Bischoff , Richard Detje write (11/2012):

New institutions – such as the EFSF und der ESM – were founded outside of the European Union. These mechanisms, as well as the Euro-group, are dominated by the core European countries, and the latter by Germany. This culminates in a change of European power relations: the financial and state-debt crises have led to a shift of power toward Germany as hegemon. Germany is today stronger than it ever has been in the history of European unity. This is mirrored by a relative weakness of France and Great Britain.

Since a generalisation of austerity policies is neither a sustainable nor socially acceptable way out, and Germany as a hegemonic power is increasingly approaching a political dead end, we are going to experience an ongoing intensification of the political contradictions in the next three months. The incubation of authoritarian, personalist forms of rule will advance. So-called technocratic governments are mere transitional forms. This development can only be stopped when popular majorities reject the prospect of such developments and, by dislodging the power of the financial markets, bring into being a through-going process of the reform of national economies.

However, it is not only changes in the relationship between core and periphery, but also the issue of democracy that can call into question the existence of the EU. Since the Union is proceeding in “negating European democracy”, it is dramatically losing acceptance, and demands for “more Euopre” are becoming more unpopular and always less realisable. A stagnation of the European process of integration and possibly also a retransfer of EU competences to the nation-state level can therefore no longer be ruled out.

BD1: “Germany as hegemon”. This hegemony appears to be resting more on the weaknesses of the other “core” European countries like Frnace and England, rather than on acceptance.

BD2: “technocratic governments are mere transitional forms”. This statement is confirmed by the Monti government in Italy and Papademos in Greece.

BD3: “relationships between the core and periphery”. A huge issue that is not going away, rather the opposite.

BD4: “negating European democracy”. Whoever is repsonsible for what is hapening today in Europe, they do not seem to appreciate and value democracy very much.

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Component 8: John Weeks, in his article “A Pact of Folly: Fiscal Madness on the March in Europe”, September 2012, writes:

The economics of the Fiscal Pact is rubbish, enforcing economic mismanagement upon a continent. Bad as the folly of actually forcing and enforcing bad policy might be, a much more serious danger lurks, the consolidation of the German government’s economic and political control over the European Union. It comes as no surprise that the origin the Fiscal Pact is the German government. The same government was the major force behind the austerity policies in Greece, Italy and Spanish. The Fiscal Pact would institutionalize these austerity packages.

One repeatedly reads that the deflationary economic policies of German governments over the last twenty years are a legacy of the hyperinflation of the 1920s. This seems quite dubious to me, not withstanding its repetition. First, it is quite doubtful that any living German can recall an episode that ended 88 years ago. Second, in the late 1920s and early 1930s the number of jobless exceeded six million, which was over 30 percent of the labor force. Why should the hyperinflation trauma persist more than the fear of hyper-unemployment? Third, the implication of this reiterated incantation to fears of hyperinflation is that inflation in Germany since World War II has been extremely low. This is not true.  Through the 1970s consumer price inflation averaged a “raging” five percent in the Federal Republic, and was close to four percent during 1989-1993.

There is a more convincing explanation for the ideology of extreme price stability. It serves the interests of Germany’s capital to manufacture these fears of inflation. Exaggerating the danger of  inflation becomes all the more credible after almost two decades of slowly growing nominal wages.  When pay is not rising we should not be surprised that people notice the impact of prices. In Germany as elsewhere a pay freeze stimulates fears of inflation, whatever may have happened almost a century ago.

The Fiscal Pact would not strengthen or deepen European unity. It would strengthen and deepen German economic domination, first of the euro zone and subsequently of the European Union as a whole. It should be rejected. Save the EU. Say no to the Fiscal Pact.

JW1: “the hyperinflation of the 1920s”. At last, someone has the guts to phrase the obvious. That it is rather ridiculous to call on the Weimar Republic in order to explain or justify Germany’s policies of today.

JW2: “convincing explanation”. I would add arrogance and complete disregard for the perils of the south.

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More questions

Ambrose Evans-Pritchard, “The Telegraph’s” International Business Editor in London, poses some interesting questions in his article of April 2012 “George Soros and the Bundesbank’s Patriotic Putsch

Who is running Germany? Is the Federal Chancellor in charge of the country’s foreign policy and strategic destiny, answering to the Bundestag?

Or is the Bundesbank answering to what it believes to be a higher master – the German constitution and the Basic Law – invoking the rulings of the Verfassungsgericht (Constitutional Court) against the encroachments of EU treaty law (which ultimately has a lower juridical status – indeed – no juridical status at all since it is merely treaty agreement)?

Who here is the legitimate defender of the German sovereign nation, built on the Grundgesetz (Fundamental Law)?

The Economist is more down to earth. In a leader of 22nd February 2013, we read:

But will German resilience be sufficient to pull the rest of the euro area out of the trough? One concern is that the rot has spread from the periphery to the core, in particular to France, the zone’s second biggest economy. The EC expects that French GDP will inch forward by just 0.1% this year after stagnating in 2012; in November it had forecast growth of 0.4% in 2013, following a 0.2% rise last year.

The other gnawing worry is whether public tolerance of economic misery in southern Europe will snap prompting a political rejection of the harsh austerity and unpalatable structural reforms being undertaken to satisfy German demands for keeping the single-currency zone together.  Even if this weekend’s Italian elections deliver a workable government, rising unemployment will limit its freedom of manoeuvre. The Italian jobless rate, which stood at 8.4% in 2011, is forecast to reach 11.6% this year and to carry on rising in 2014 to 12%. The position is even worse in other parts of southern Europe: in Spain it will rise from 25% last year to 26.9% in 2013 and in Portugal from 15.7% to 17.3%. Such grievously high unemployment rates are a political threat to the viability of the euro zone as well as a social tragedy.

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In lieu of a concluding statement

Winston Churchill in a speech broadcast on the BBC on the 1st October 1939, said:

“I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest. It cannot be in accordance with the interest of the safety of Russia that Germany should plant itself upon the shores of the Black Sea, or that it should overrun the Balkan States and subjugate the Slavonic peoples of south eastern Europe,  That would be contrary to the historic life-interests of Russia.”

May I remind the reader that the second World War started on the 3rd September 1939, when Great Britain and France declared war on Hitler’s Germany, following the 1st September 1939 invasion of Poland.

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Sources

(1) Habermas, the Last European: A Philosopher’s Mission to Save the EU, By Georg Diez, Spiegen, 25 November 2011

(2) Europe’s Democracy Paradox, Ivan Krastev, The American Interest, March/April 2012

(3) Can the rest of Europe stand up to Germany? by Anatole Kaletsky,

 Reuters,
20 June, 2012

(4) Wait for Angela, The Economist, 21 November 2012