It may seem fair that these countries who are now on the brink of endless austerity should resolve the problems that were ‘self-inflicted’. But the question at the back of most people’s mind is to what extent were these nations duped by Germany and the other northern European countries? The answer is pretty clear! From the launch of the Euro in 1999 until 2007, the period of the credit boom, the ECB held interest rates at an artificially low level and allowed a massive expansion of credit and government indebtedness. This great easing of monetary policy was in support of the German’s need to kick start their economy after a decade of no or low growth – a kind of Abenomics to resolve the issues of reunification. The problem was that this easing for Germany affected the whole Eurozone (the downside of a single currency) to create the credit bubble and eventually the crash, which was triggered by Lehman’s default but systemic in the West. As the Chart below shows that the German economy, since reunification, has been growing a very slow rates as compared to the trend rate of 2% growth from 1973-1990 – this rate has only been achieved once in the period from 1993-2012. It was this desire to reflate the German economy that triggered the policies of monetary easing in the Eurozone and now the consequences of this are plain for all to see.
|Dismal German growth between 1990 - 2005 is the underlining cause of austerity|
Jeroen Dijsselbloem still has his head firmly in the sand and doesn’t believe that Portuguese crisis was in the offing. “I do not expect any problems with Portugal, first because I believe that the political situation will stabilise and secondly because the phasing and timing of Portugal’s programme is proceeding well.” The people of Portugal may think rather differently.
It’s clear now that to avoid an outright crisis of a ‘Pexit’ there will need to be some rethinking in Brussels on the timescales and targets and more importantly on the approach to paying down the governments debts. For my money the countries who benefited most from the monetary easing between 1999 and 2007 should put in place an emergency funding (in addition to the bail out) that achieves the following:
1. Soft loans to resolve the structural element of the deficit which was created by the appalling policies of the EU and the ECB, this amounts to 3% of GDP or about a €8bn annually
2. An unemployment fund that covers the ‘cyclical cost’ of austerity - probably a further €5bn annually
3. Investment in a new industrial strategy to replace those industries that were destroyed by unfair competition from other parts of the EU
Significant measures such as these would go some way to repairing the damage the loose monetary policy at the start of the Euro and be small return for the support given to Germany in its hour of need.