Monday, April 16, 2012

Useless European austerity

By Sergio Cesaratto*

The European financial crisis is not over, it has just begun. In the long run, the Greek tragedy will appear just as one minor episode. It is not difficult for the Argentineans to understand the origin of this crisis, as I shall shortly explain, although they will still be surprised as to why one of the richest regions in the world and a world reference for growth with social fairness is committing suicide by adopting austerity measures that aggravate, rather than solve, the crisis.

The European Monetary Union (EMU) was born out of a French political design of linking for good the post-unification German destiny to Western Europe. The greater Germany would have otherwise looked East - as the facto it has anyway later done by becoming the manufacturing hub of Central and Eastern Europe where it has decentralized her low-value added productions. By participating in the EMU, Italy and the other Southern countries aimed to import the German fiscal, monetary and labor discipline.

The American economists alerted the Europeans that the EMU was not an “optimal currency area”, too heterogeneous, economically, culturally and linguistically. The European elites cried about an U.S. plot to avoid the birth of a new international currency along the dollar. Be as it may, what happened during the EMU from 1999 and 2008 is a story that the Argentinean public, mutatis mutandis, can well understand. Financial liberalization and exchange rates fixed for good led to huge financial flows from the European “core” (Germany, The Netherlands, Austria, Finland) to the “periphery” (mainly to Spain, Greece, Ireland). France and Italy do not strictly belong to either group - the Italian manufacturing sector is second only to Germany and this marks the main difference between Italy and Spain. The capital flows generated a construction boom in Spain and Ireland and encouraged government profligacy in Greece. This led to an ephemeral growth in these countries accompanied by a relatively high inflation and consequent lose of competitiveness. Their foreign accounts became negative and they accumulated a huge foreign debt mainly with Germany.

Asymmetrically, from the late 19990s under the social-democrat Chancellor Schroeder, Germany adopted a mercantilist policy of wage and fiscal moderation and of labour flexibility. So Germany was, on the one hand, compressing domestic demand and inflation and, on the other hand, financing aggregate demand in the periphery. This became the débouché for the German export-led model. The only problem is that the periphery accumulated a huge foreign debt without being able to get eventually out from the imbalances by devaluating the national currency, as Argentina did in 2001 or Italy did in a similar situation in 1992, after the imbalances created by the European Monetary System in the 1980s.

In late 2009, after the explosion of the American financial crisis and the discovery that the Greek centre-right government (a good friend and client of Angela Merkel) had concealed the true level of the public debt, the financial market begun to have doubts about the solvency of the peripheral economies. The crisis affected Greece, Ireland, the Portugal in 2010, and the fourth and third largest EMU economies, Spain and Italy (and marginally Belgium and even France), in 2011. As a consequence of the fall in the fiscal revenues and of the public bail out of the banking sector in countries like Ireland and Spain, the private debt problem became also a public debt problem. (The huge Italian public debt was much older and sustainable, but for a country used to defend her manufacturing competitiveness by devaluing the lira, the EMU was a clear disaster, so markets begun to doubt also about the Italian solvency).

The European reaction has always been characterized by being systematically “too little, too late”. European emergency funds have been created to avoid the default of the peripheral governments. There is a problem, however: a conspicuous part of the cash comes from the same countries that need support, a vicious circle. Against the German will, the European Central Bank (ECB) has timidly intervened to sustain the periphery sovereign debts, but just in order to avoid a sudden collapse of the EMU and not to keep at sustainable levels the interest rates on those debts (both the two German members of the top board of the ECB resigned in protest during 2011). The Germans oppose that the ECB acts as the lender of last resort for States and banks, the main reason why central banks have been created. The idea of a central bank that democratically cooperates with fiscal policy has, for instance, informed the recent Argentinean reform of the central bank.

Indeed German’s leaders, both the ruling Christian Democrats and the opposition Social-democrats, consciously or not, share a wrong diagnosis of the European crisis. In the name of a non-existing inflation fear they oppose a firm action of the ECB to calm down the markets acting as the ultimate guarantor/warrantor of the peripheral sovereign debts. Moreover Germany has imposed fiscal austerity measures on the periphery with the wrong argument that fiscal profligacy was responsible of the crisis. The result is that the economic situation is getting worse, while the social situation is deteriorating.

Germany likely hopes to outlive in spite of the fall of the European periphery markets, by looking at the emerging economies’ markets. The only effective action has been taken in December 2011 by the President of the ECB Mario Draghi, again with the German opposition, by lending European banks 1 trillion Euros at an interest rate of 1% for three years expecting that part of this money to be used to sustain government bonds. The operation brought some short-term relief, but now peripheral banks are even more plenty of domestic treasury bonds, a not very reassuring situation given that the underlying imbalances that generated the crisis are still there and the confidence on sovereign solvency is, as the result of the austerity measures, getting worse, as shown by Greece, Portugal and Spain.

European countries are in Kafkian situation: damned if they stay, damned if they leave. On the one hand, a Euro-break would likely leave the global financial system devastated, given that any indebted country will in practice default at the same time, Italy included. On the other hand Germany opposes the most reasonable solution: let the ECB to sustain the European sovereign debt; support domestic demand in Germany by letting wages and fiscal spending to grow; implement a great European Marshall plan for the periphery financed by issuing Eurobonds.

As I said at the beginning, this is the sad final of a beautiful European story of building a reasonably fair and efficient society. Perhaps once things get worse, including in Germany, the failure of the austerity policies might lead to more progressive actions. This would not compensate, however, the useless suffering that the present policies are imposing on millions of Europeans. Pressure by the U.S. and by the emerging countries on Germany to assume regional and global leadership and not to behave like small Switzerland would clearly be helpful.

*Published originally in Spanish in Página12 (Thanks to Sergio Cesaratto for providing the English version).


  1. Fijate qué curioso como la "teoría del despilfarro" con la que se crucifica a Grecia en las versiones oficiales de la crisis, acá en la versión de Casaratto se mantiene intacta. Los griegos siguen mantiendo una buena parte de la culpa de lo que están padeciendo.

  2. Hola Diego. No es correcta tu interpretación. Todo lo que dice es que en el único caso en que el déficit era relevante y hubo gasto público antes de la crisis fue en Grecia. Eso no quiere decir que fue la causa de la crisis. La cause sigue siendo para Cesaratto el déficit en cuenta corriente. Si el BCE comprara un poco de deuda griega, ni ellos, ni los otros estarían en este agujero.

  3. Sobre el "problema fiscal" griego, creo que el siguiente link tira a la basura cualquier comportamiento "populista", "derrochador", "demagógico" del gobierno griego. Miren ustedes mismos.

    1. Gracias por el link. Más allá del hecho que buena parte del gasto haya sido militar en Grecia, es importante dejar claro que el problema no fue fiscal (y lo mismo dice Sergio). Otro paper que se puede consultar acá


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