There’s been a very distinct change of tone in Europe in the last week or two as the Eurozone crisis has come roaring back into the headlines. The platitudes of ‘European solidarity’ are heard less and less, to be replaced by irritation, bordering on anger, at Germany’s intransigence.
The German establishment, from Angela Merkel to the Bundesbank, is still refusing to budge from their line that the solution to the crisis lies in austerity and reform, in paying off debts and making the rest of the Eurozone more like Germany. Elsewhere, this ‘cure’ is beginning to look suicidal.
President Sarkozy is just the most high profile figure to have turned on Germany. He had a deal with Chancellor Merkel that he would not let the European Central Bank become a political football in his election campaign. He broke that deal on Sunday at a mass rally in the Champs Elysée, blaming the ECB for the absence of growth in the Eurozone. “If the ECB does not support growth, there will not be enough growth” he declared.
In other words, would the ECB please pull its finger out and start behaving like a central bank ought to behave. Could it please give us the sort of monetary stimulus that might get us growing again?
The Federal Reserve and the Bank of England may not have been hugely successful, but at least they have tried, cutting interest rates to near zero and attempting to prime the pumps with successive bouts of Quantitative Easing. The ECB has lent money cheaply to Eurozone banks, but will do no more than that, largely at the insistence of Berlin which is terrified that anything like that would lead to inflation in Germany. But if the southern periphery of the Eurozone are heading towards a very dangerous DE-flation, should Germany be the ECB’s only concern?
The German attitude towards Greece has been pretty ruthless, insisting Greek woes are entirely self-inflicted by a population that will neither work hard nor pay their taxes. It is much harder, though, for them to paint the Spanish as feckless.
Before this crisis broke the Spanish Government’s debts were relatively modest, tax collection was good, the economy pretty competitive. Spain is in trouble now for much the same reason as Ireland: a massive property and construction bubble fuelled by borrowed Euros that were much too cheap. In other words, many of Spain’s problems seem to be directly related to Euro membership, which, many argue, gives the ECB a responsibility step in now.
There is a noticeable and growing frustration in Spain at lectures being given by Berlin, a perception that Germany has done very well in the past decade lending money to other Euro countries with which to buy German goods, and would quite like this trade imbalance to continue. The Spanish are not alone.
The financier George Soros launched an outspoken attack on German policy at the weekend: “The Germans should decide if they want the Euro or not”, he said. “If so, they have to carry out fiscal transfers. If not, they should leave the Eurozone”.
Strong stuff. And by fiscal transfers he means not just lending money to countries in trouble, but giving it, to rectify imbalances, in the same way as money is transferred from California, say, to West Virginia.
There is no particular sign the Germans are listening or are about to change anything. Recent good economic news in Germany has only confirmed the view in Berlin that they are right, and others would do well to emulate rather than criticise.
But there is a logical flaw in their position: not every country can be a surplus country, exporting more than it imports, selling more than it buys. But that seems likely to remain Germany’s position. Expect no new flexibility from German policy makers or central bankers unless and until this crisis gets a very great deal worse.