The German "diktat" and its discontents
The German "diktat" towards austerity is keeping its neighbours afloat. But if Germany changes its mind, all bets are off, and default awaits...
At anti-austerity demos in southern Europe, it has become fashionable to rail against Germany and to brandish posters showing Chancellor Merkel with moustaches à la Hitler.
In a similar mood, France’s ruling party, the Socialist Party, drafted recently a full-fledged manifesto against the German Chancellor, before watering it down under the pressure of Prime Minister Jean-Marc Ayrault.
All these grievances give the impression that the culprit of the euro-zone crisis is no other than Germany’s alleged desire to force its southern European partners to implement austerity policies and structural reforms that impinge on the well-being of the people and on the growth prospects of the zone.
The virulence of the anti-German rhetoric is such that one could wonder why the aggrieved countries do not decide, once and for all, to flout the German “diktat” and refuse austerity outright.
What will happen in that case? Well, the interest rates charged by the markets to the government bonds of the rebelling countries will soar (as they climbed before the European Commission came to their rescue with German-led funding). Unable to pay such high interest rates, those countries will have no option but to default and, eventually, negotiate a debt restructuring with their lenders. Some economists and leading politicians, including Portugal’s former Prime Minister Mario Soares, are advising to do so.
The problem is that the maverick countries will in both cases have a hard time ahead. As soon as they go on default, the markets will be more than reluctant to lend them fresh money, which means that they will hardly be able to run public deficits and, therefore, will have to live within their means. If they seek to negotiate a debt restructuring, their lenders will request them to take measures aimed at restoring equilibrium in the public accounts.
One way or the other, these countries will be obliged to adopt austerity policies and structural reforms, the very measures that protestors accuse Germany of arbitrarily trying to impose.
No wonder that, despite street protests showing derogatory images of Chancellor Merkel, the governments of highly-indebted countries prefer to ask for financial help from euro-zone mechanisms largely financed by Germany, while demanding less stringent conditions and longer time for implementing the policies that they are requested to undertake in return.
Germany is blamed, too, for allegedly being the driving force behind the refusal of the European Central Bank to promote the depreciation of the euro, a refusal that, according to Merkel-bashers, causes harm to the region’s competitiveness.
The truth is that Germany doesn’t see why a stable euro would be detrimental to the euro-zone competitiveness: neither a strong mark in the past nor the euro today has prevented German products from competing successfully in world markets.
The case of neighboring Switzerland validates the stance of Berlin in this regard. Switzerland has a strong currency and, at the same time, ranks number one in terms of international competitiveness according to the latest Global Competitiveness Report. On the other hand, the bumpy history of the late Italian lira shows that currency depreciations are no panacea for boosting durably a country’s competitiveness.
Both the successful experience of Germany and Switzerland and the woes of the Italian lira show that, to win the battle of competitiveness, nothing – and certainly not foreign-exchange tinkering – could possibly make up for the absence of structural reforms, notably the liberalisation of the labour market.
It should be emphasised that there is plenty of room for structural reforms in southern European countries. As a token, out of 142 countries surveyed by the World Economic Forum, Greece and Italy rank 125th and 126th, respectively, in terms of flexibility of hiring and firing.
The third grievance against Germany relates to its refusal to “mutualise” the debt of the euro-zone – a fancy word meaning that Germany is asked to stand guarantor for the sovereign debt of the euro-zone countries.
On which grounds could Mrs. Merkel, or for that matter whoever at her place, ask the German taxpayer to dip into the Bermuda Triangle of the debt contracted by countries over which Germany cannot control the public finances – countries the governments of which have a long tradition of bloated public spending and in which tax collection is whimsical at best?
Germany has in its hands the possibility of ceasing to fund assistance to countries in financial distress. It can even go back to its Deutsche mark. Until now, it has deemed that the cost of disbursing billions of euros in assistance is lower than the risk (political and economic) of letting the euro-zone crash. But if the aid required reached unaffordable magnitudes (which would happen, for instance, if France fell prey of financial markets) or if demands addressed to Berlin proved to be unacceptable to the German taxpayer (cf. debt mutualisation), then Germany could change course and abandon the euro-zone countries to their sad fate.
A newly-born party named Alternative for Germany (AfD) is pushing in that direction – proposing even to abandon the euro. True, AfD is a long way from becoming a majority party. But its political platform responds to anxieties shared by large segments of Germany’s public opinion and, accordingly, will have a non-negligible weight in the shaping of the country’s political orientation.
As for Chancellor Merkel, she may well decide to review her stance vis-à-vis the euro-zone once the September parliamentary elections are over.
All bets are off. And some countries might regret should the so much disparaged German “diktat” come to an end.
Fabio Rafael Fiallo is an economist and a former UN official. The author of four books, he writes on issues related to international politics and the world economy
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