Thursday, March 18, 2010

Deutschland Über Alles

Now that the European Monetary Fund has been ruled out as it would require a new treaty and the agreement of all member states, there are not so many options left for EU action. We should however take the proposals put forward by W. Schäuble, the German Finance Minister seriously. His proposals are the following: any emergency aid for countries with excessive fiscal deficits should be combined with sanctions; suspending voting rights of badly behaving members within the eurogroup; and allowing a member to exit the monetary union, while remaining inside the European Union.

After weeks of discussions on various possible options, Germany has expressed once again an orthodox view on economic policy in the Euro area. There is no other option than reduce fiscal deficits, no matter what this would imply.

M.Wolf (FT 18/03) has provided a thorough analysis of the economic implications for the global economy. He developed three arguments: " first, it will have an overwhelmingly deflationary impact; second, it is unworkable; and, third, it might pave the way for Germany’s exit from the eurozone."I agree with the first two arguments, not the last one.

If weaker countries are forced to reduce sharply their fiscal deficits, this will weaken the entire euro area. But the result would also be fiscal deterioration in Germany and France because of the high degree of economic integration in Europe. France already has a deficit forecast close to 9 per cent of gross domestic product this year. Does Mr Schäuble imagine France could be fined? Surely not. Yet it is not Greek public finances that threaten the stability of the eurozone. The threat is the public finances of big countries. But Germany could not force such countries to reduce their deficits and has no chance of expelling any member it disapproves of from the eurozone. Will the Germany leave the euro area? This is very unlikely: Germany belongs to a currency area with some of its main trade partners.

A disruption of the euro area would indeed be very bad for German manufacturing, and eventually would weaken the German position in the world economy. Perhaps, it is still time to look for other cooperative solutions within the euro area. Greece has threatened to use the IMF as a means of putting pressure on euro area governments -as the Finance ministers agreed on 15 March on the possibility that individual governments would supply Greece with direct, bilateral loans if necessary. European governments are divided on the IMF and on its forms of intervention, but they should, however, show courage and wisdom in proposing genuine European solutions.

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