December 20th 2014


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Articles from this issue:

VICTORIAN STATE ELECTION What Victoria's new Labor government has in store

CANBERRA OBSERVED Can the Abbott government turn it around?

EDITORIAL A Christmas reflection

MARRIAGE The love that brings new life into the world

RELIGIOUS PERSECUTION Beijing fury as Christians outnumber communists in China

RELIGION The G20 Interfaith Summit

NATIONAL AFFAIRS Greens' bid to ban toys that 'reinforce gender stereotypes'

ENERGY The politics of falling oil prices

ECONOMIC AFFAIRS EU economies locked into long-term low growth

CULTURE Investigating the year gone, for the year to come

LETTERS

BOOK REVIEW Biography shows the power of family

BOOK REVIEW British espionage and the German threat

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ECONOMIC AFFAIRS
EU economies locked into long-term low growth


by Colin Teese

News Weekly, December 20, 2014

Regular News Weekly readers will be aware of this writer’s views about the problems of Europe. Now it’s time for an update. 

German Chancellor

Angela Merkel

As time passes, more emerges to help explain the continuing strange behaviour of those operating the economic and political levers of the European Union. In practice, we are talking about the power elites of Germany and the European Commission. (The latter, based in Brussels, was set up as the bureaucracy to serve the EU.) 

This unelected agency, with German support, now charts the direction of the European integration experiment. Though its original purpose is now largely forgotten, European integration began with the noblest of intentions soon after the end of World War II. 

Based upon the principle of international cooperation, as enshrined in the then newly-formed United Nations, the project’s purpose was to keep Europe safe from the disastrous military conflicts which had afflicted it every 25 or so years. 

At the time, the problems associated with trying to bring Europe together were painted over as something to be addressed later. In fact, full-scale integration never sat well with the idea of sovereign governments. It was easily managed when only six countries (five in western Europe, and Italy) agreed to form a customs union called the European Economic Community (EEC). 

Under this arrangement the six member-states of the EEC agreed that they would collectively decide on common trade policies, which would be administered by the Brussels bureaucracy. 

This was always seen to be the first step in a much more ambitious project — certainly by the commission in Brussels. Moreover, they were prepared to confront the problems of national sovereignty and management as more countries were added to the project. 

Problems began with enlargement from the original six relatively homogeneous group of nations (Germany, France, Belgium, Netherlands, Luxembourg and Italy). 

Wolfgang Münchau

With each enlargement came greater diversity — cultural, political and economic. The EEC commission never seemed to understand the impediment these problems posed for enlargement and ultimate union. Accordingly, it pressed on with its plan for ever wider and deeper integration. 

In retrospect, the efforts in 1990 to conclude the Maastricht Treaty were a step too far. It was significant that the European Community then became the European Union. 

However, the serious intent of the Maastricht Treaty was to push harder towards one Europe. A customs union was being nudged towards full economic and political union — a United States of Europe. Maastricht was binding EU nations to policies which undermined their capacity to manage their own economic and financial affairs. 

Sovereignty was further encroached upon by those Maastricht signatories, who also agreed to adopt a common currency. 

The dangerous assumption behind Maastricht, which ultimately proved defining, was that all the euro economies could be managed with the same set of economic prescriptions. 

Committed to this flawed policy, member-states, in the pursuit of what Brussels labelled “fiscal responsibility”, agreed to limit their budget deficits to no more than 3 per cent of their annual national output of goods and services (GDP).

Outside Europe, cautious observers were worried. Most were concerned about the common currency, the euro. Could a common currency precede political union? And political union was not on any revealed agenda. 

Surprisingly though, few economic commentators then or since questioned the economic wisdom of trying to control budget deficits across the member-states. 

Currency and budget management were equally important. Trying to squeeze all of Europe into a single cultural, regional, geographic, political and economic straightjacket was incompatible with the idea of national sovereignty and was an obvious policy mistake — especially in the face of so much obvious diversity. 

As it turned out, all ultimately defaulted on the budgetary target prescribed by the Maastricht Treaty — including Germany, which, along with the EU commission, had been one of the architects of the policy. 

The push for a common currency was no less flawed. 

Tied to unrealistic government spending limitations, and without a national currency, eurozone member-countries were compelled to borrow from private banks at commercial interest rates. Many quickly ran up huge debts (some private, some government) in order to keep their economies moving. 

There was no shortage of willing lenders in northern and western Europe, especially as, under the terms of Maastricht, governments were required to guarantee bank lending while having no control over banks’ lending practices.

When, as some had predicted, the whole thing went badly out of shape, Brussels and Berlin quickly fashioned their excuses. The calamity that emerged was said to be entirely the fault of reckless spending by lazy southern Europeans, happy to live on debt provided by the industrious north.

Conveniently overlooked was the fact that southern European debt (private and public) had been financed by northern and western European banks. These institutions, knowing that the southern governments were required to guarantee bank loans, were quite unconcerned about the supposed profligate habits of lazy southerners.

Germany was prominent among the guilty, since their banks were financing a lucrative export business to the south.

What brought matters to a head was the fact that, in quick succession, Greece, Spain, Portugal and Italy — and, for good measure, Ireland — were unable to pay their accumulated debts. 

Who then would pay for the bank losses? Not the countries in which the northern and western banks were located — their governments refused to compensate their banks.

The debt was pushed back onto the debtor countries, which were forced into austerity economics so as to accumulate the savings necessary to pay off their debts. Such policies of course could not, and cannot, work. Yet they are still being enforced with disastrous deflationary effects upon the entire European economy. 

What was the better approach? 

The banks should have been bailed out — largely by the countries standing behind them. And the indebted countries should have left the eurozone, which, for the moment, should have been confined to the stronger northern and western European member-states of the EU. The southern economies, still in the EU, though with their own currencies, would have been able to restructure back to a better state of economic health. 

Had that course been followed, the EU could by now be back on the road to steady growth, and with the European integration project, perhaps set back, but still intact.

That path wasn’t followed for two reasons. First, in the short term, the northern and western economies would have been harmed. The new smaller eurozone would have seen its currency rise substantially as the indebted countries left the euro. Exports would have suffered. 

The second reason is that the EU commission in Brussels was determined to keep the eurozone intact. With the help of Germany it was able to threaten the indebted countries with dire consequences if they left and to force them to accept destabilising and socially disruptive “austerity economics” in the process. 

Had the better course been followed, it is safe to say that, after a relatively short-term period of painful adjustments, all of Europe would be back on a path of steady growth and prosperity. 

Instead, Europe seems to be locked into a long-term, low-growth predicament — all of this in order to ensure that the Maastricht Treaty provisions imposing German-type economic management upon the European Union could be held intact. 

Fiscal and monetary policy in Europe has been so distorted by fundamental policy mistakes that the future of the entire European integration project must now be called into question. 

If it fails, German and Brussels intransigence will share equal blame. Both, it seems, want to remake the whole of Europe in a German image, in the belief, apparently, that Germany provides the only credible economic model for a united Europe. 

There are so many holes in this reasoning that one hardly knows where to begin one’s criticism. Rather than try, one is tempted to draw upon the opinions of perhaps the most reliable commentator on EU affairs, Wolfgang Münchau, writing in London’s Financial Times (November 16, 2014).

We all know that Germany’s experience with hyper-inflation after World War I leads them still to conclude that every economic malaise has its origins in fiscal indiscipline. That wasn’t even true of Germany in the 1920s — but that’s another story.

Münchau knows that. Moreover, he does not accept the dogma that a reasonably-sized open economy such as Germany, committed to the virtues of current account surpluses, can manage a large closed economy such as the eurozone. 

He goes further. He suggests that the success of Germany may not be well understood. Is there really something special about German economic management? Maybe German success is attributable to a combination of technology, high skills and some really good companies, rather than to economic policy.

Against this background he believes that it is misguided for Germany and the EU commission in Brussels to try to impose German economic orthodoxy on the rest of the single currency block. In his own words, “It is hard to think of a doctrine that is more ill-suited to a monetary union with such diverse legal traditions, political systems and economic conditions than this one.” 

Notwithstanding that, he is convinced that Germany and the EU commission won’t give up trying. 

Given all this, Münchau concludes that the economic costs of this kind of crisis resolution will be “extremely large”. 

But Münchau is letting the EU off lightly. It could be much worse than that. He passes over the possibility of the EU breaking up — perhaps because the Financial Times, in which his article appears, expresses firm support for the European integration project. 

Nevertheless, break-up is a strong possibility unless Europe comes up with a plan to write off the debts and restart growth. 

Colin Teese is a former deputy secretary of the Department of Trade. 

 

Reference

Wolfgang Münchau, “The wacky economics of Germany’s parallel universe”, Financial Times (UK), November 16, 2014.
URL: www.ft.com/cms/s/0/e257ed96-6b2c-11e4-be68-00144feabdc0.html




























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