The ECB's good work should shame incompetent euro area politicians
Dr. Michael Ivanovitch
Updated
France, Italy and Spain apparently have nothing to say about Germany’s refusal to support the euro area economy with looser fiscal policies and decreases in its growth-stifling trade surpluses.
Washington also keeps silent as Germany endangers a quarter of its exports to Europe, while pocketing a $70 billion surplus on its U.S. goods trade.
The European Central Bank is entirely carrying the burden of the euro area economic stabilization.
Eleven years after the onset of the epochal financial crisis, followed by the Great Recession, the European Central Bank is still trying to hold the monetary union from drowning in another cycle of rising unemployment, poverty and civil unrest.
Those rushing to ascribe that to the lack of instruments for economic policy coordination are wrong.
The euro area has a de facto economic government in the form of the Eurogroup, a forum of finance ministers. For eight years, until October 2017, the group was chaired by Wolfgang Schäuble, Germany former finance minister who oversaw the Greece debacle and the long years of fiscal austerity in recession-ridden euro area economies.
Under German leadership, slashing the government spending became the order of the day. Eventually, that calamity morphed into a cruel joke known as the austerity growth model: A sharp contraction of public sector expenditures and a regime of liberal hiring and firing sold to true believers as structural labor market reforms.
France has been under relentless German pressures to apply that oxymoronic growth model. Paris duly followed with some fiscal austerity and a lot of harsh labor market deregulations, combined, most recently, with ill-fated gasoline taxes.
The EU must change
Now, all France has to show for that is a civil unrest, five months of continuing and violent demonstrations, a rush to douse the fires with increased public spending and a hasty recall of gasoline taxes. That's an estimated 10 billion euro cost to the public treasury, with disruptions to economic activity, higher budget deficits and question marks about the country's business and investment environment.
Italy is another example. To get back at a newly elected Europhobic Italian government last year, the EU Commission opposed an eminently reasonable and mildly reflationary fiscal package proposed by Rome. Under threats of sanctions and other reprimands from the Commission, Italy was forced to scale back its public spending and cut the budget deficit down.
Predictably, an already weak Italian economy promptly sank into a deepening recession during the second half of last year. But, oblivious to the logical outcome of the imposed fiscal austerity, the EU Commission is now warning the Italian government that the sinking economic growth would lead to overshooting the budget deficit target decreed by the Commission itself.
That's an intolerably absurd situation. The lunacy, however, could go further: One might soon see the Commission's orders cut deeper into the public spending of Italy's declining economy.
Adding Spain and Portugal to France and Italy, one gets exactly half of the euro area where demand management is crippled by binding fiscal constraints. That group's budget deficits are in the range of 1.5 to 3.5 percent of GDP, and their gross public debt goes from 115 percent of GDP to 153 percent of GDP .
Surplus countries should be growth leaders
Each of those countries are currently experiencing a slowing demand, output and employment, and all of them need strong support to economic activity.
Where can that come from? Excluding the fiscal policy, there are only two sources: Low credit costs and rising export sales.
The ECB is doing all it can with abundant credit flows and a zero percent interest rate — to the horror of its German critics.
But, acting alone, the monetary policy cannot do it all. Bank lending to households is stuck at modest annual growth rates of 3 percent to 3.5 percent. Such a subdued demand for money is partly a result of high unemployment in Spain (13.9 percent), Italy (10.7 percent), France (8.8 percent) and Portugal (6.3 percent) — and the lingering uncertainties about the extent, and duration, of the growth slowdown and dimming prospects for job creation.
The upshot is that volumes of retail trade in the three months to February showed no monthly growth in France, Spain and Portugal. That's a bad omen for household consumption, the pillar of economic activity in the interest-rate sensitive segment of aggregate demand.
Exports could help, but that would require that the other half of the monetary union — with budget and trade surpluses — steps up public spending and tax cuts to stimulate domestic demand. That would expand export markets within the euro area and beyond, where hard-pressed deficit countries could sell some of their goods and services.
But Germany has ruled that out. Anticipating calls for looser fiscal policies and a decreased reliance on its mercantilist policies, Germany served notice that it would continue to run budget surpluses, and that U.S. President Donald Trump should be told that German trade surpluses are just the way it is.
Washington, of course, should not take that, because it violates the letter and the spirit of the G-7 and G-20 policy recommendations. On top of that, Germany's refusal to support the euro area growth puts in danger a quarter of U.S. exports to Europe, while Berlin pockets $70 billion on its U.S. goods trade.
The International Monetary Fund and the Organization for Economic Cooperation and Development should also stop whining about the weakening world economy and call out — naming names — the trade and budget surplus countries to exercise an effective policy coordination.
Investment thoughts
With Germany refusing to budge from its budget surpluses and to stop syphoning out 160 billion euro of purchasing power from its EU trade partners, the ECB is left to pick up the pieces in a policy mix that keeps fiscal policy as a virtually frozen instrument of demand management.
It's a sad European spectacle, where tongue-tied France, Italy and Spain are accepting the brunt of totally uncooperative German economic policies. They don't hesitate to pour scorn on the Trump administration, but they keep looking up to Washington to get Germany off their backs.
Their main ally, however, is the ECB because its monetary policy carries the entire burden of economic stabilization in a highly integrated free-trading area representing about one-fifth of the world economy.
All that could radically change, though. Next November, the ECB may well get a new boss who, after a calamitous fiscal austerity, seems set to teach a lesson about unyielding, hard-money policies.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.
