The German elections will not change a thing in the Eurozone

Interview with Italian economist Emiliano Brancaccio

‘As far as austerity is concerned, even after the September elections Germany will not turn the page. The Germans have benefited from the crisis, and even if the Bundesbank itself has reservations about the general direction of European economic policy, Berlin has no interest in changing course.’

So says Emiliano Brancaccio, researcher and professor of Economics at the University of Sannio. A report by the Bundesbank said that Greece will need further aid by the spring of 2014, in a clear, if indirect criticism of the policies of German Chancellor Angela Merkel.

Brancaccio, how do you explain the Bundesbank’s criticism of Merkel?

For about two years a dialectic has developed in Germany where the Bundesbank is skeptical about the effectiveness of European economic policy. The German central bank says it wants more rigor from countries requesting aid to cover their debts, but it appears to be just an excuse, a smokescreen. In reality, the Bundesbank embodies the position of those who harbour growing doubts about the future survival of the euro zone.

Upon what facts do these doubts rest?

From the fact that austerity is missing its targets. During the 2000s, with the approval of the financial markets and the major European banks, Greece was able to accumulate foreign debt of as much as 18% of GDP per annum – and almost never below 10%. At the time, the operators on the financial markets were euphoric, and the creditors were optimistic about the possibility of repaying the loans. Economists who raised the alarm about the unsustainability of those debts were ignored. Now, however, the mood has changed. The creditors now demand that Greece completely changes its position with respect to foreign creditors and starts to immediately pay off its debts. According to its proponents, the policy of “austerity” should serve exactly this purpose: bring down the income and therefore imports of the Greeks, so much to transform the external debt of the country into a surplus. But the data tells us that it is failing .

Why?

The forecasts of the European Commission show that Greece, despite the sacrifices of austerity, will not be able to absorb its foreign debt, either this year or next year: in 2014 it is expected to remain with a foreign deficit of 1.7%. Meanwhile, the country has now reached unemployment rates of 27% in 2013, and it is expected that in 2014 the rate will not fall below 26%. The truth is that, in endorsing the policies of austerity, we are only helping to destroy the Greek economy without being able to reverse its debt exposure to foreign creditors.

Can granting fresh aid to Greece have a positive effect?

Not as it stands. The financing provided by the EU institutions and by the ECB for Greece and other peripheral countries require, as compensation, tremendous austerity policies. But this exchange is contradictory: in fact these policies depress domestic spending and so slash production and incomes in the peripheral countries to such an extent as to render more difficult the recovery of debts.

Why does the Bundesbank, while realizing that EU policies do not work, continue to stand as a bulwark of austerity?

Because it has no interest in changing its line. We must understand that the European crisis is strongly asymmetric. While the peripheral countries, such as Greece, Spain, Portugal, Italy and Ireland have lost – since the crisis began up until today – 6 million jobs, Germany has not been affected to the same degree. Indeed, from 2008 to 2012 in Germany the number of jobs actually increased by 1.5 million. Though it might take note of the fact that austerity will not solve the crisis in Europe, at the same time there is no political reason to think that Germany is willing to change course.

But the collapse of exports in the EU, according to the IMF, will ensure that this year German growth will fall to just 0.3%. Will Germany also start paying the bill [for austerity]?

Without a doubt, the German economy has grown for years on the basis of a mechanism that does not work anymore. International creditors, largely German, financed public and private debt in peripheral countries. These, in turn, used a good part of the loans to import goods from Germany. And this is the mechanism through which, from the birth of the euro, Germany has been able to thrive.

Why has this mechanism broken down?

Because it is an asymmetric mechanism, which feeds imbalances between creditors and debtors. Sooner or later it was bound to explode. Germany is surely concerned that it can no longer rely on it. But we should not delude ourselves that Berlin will give the green light to a season of expansionary policies in Europe. Some commentators hope that after the German elections we can catch a glimpse of a breakthrough. In particular, they hope that Germany finally agrees to buy goods from abroad in order to raise sales and the income of the peripheral countries. On these hopes, I personally remain skeptical. The Germans have never acted as a locomotive of European demand: on the contrary, they have always claimed to be towed by demand from abroad. The crisis affects them too little to think that they will abruptly change strategy.

Interview originally published by ilsussidiario, August 13, 2013. Interview by Peter Vernizzi

Emiliano Brancaccio blog

Translation by Revolting Europe