20 May 2012

How much blame does Germany deserve?

It's very easy to forget how rosy the European economy looked in 2000 when the Euro was born and 2001 when Greece was admitted.

Every country in the EU, including Britain, was experiencing strong growth. The fringe countries on the periphery - Ireland, Portugal, Spain and Greece - growth was astronomical.

Of course, everybody knew the construction boom in these countries would cool and may even burst. But nobody really foresaw the sheer idiocy of the banks and the how US consumer debt would swamp the whole world's financial systems.

Greece was a small country with a fraction of Eurozone GDP. Any normal recession in the future could be handled. But the sheer scale of this recession just wasn't foresaw.

It is very easy for accountants to write some numbers and say publuc spending needs drastic cuts and more tax increases for the only people who pay them - the bottom 90% of people. But the vast social unrest and consequences are not being assessed.

These debts have accumulated over 30 years of weak financial regulation. It will take a similar timescale to put right. Also inequality cannot be ignored. It is well known that when inequality reaches high levels, financial crashes usually follow.

In short, investors become fewer and wield more power and wealth. They skew government policy in their favour and increasingly chase a fast buck. As the majorities' spending power decreases, it becomes more difficult to sell mass products, R&D falls and loans to the poorest to continue to consume bridge the gap until the inevitable collapse.

When Germany and France etc designed the Euro, they did try to place strict limits on government debt. But they ignored consumer debt and it was far too easy for all nations individually to bend the rules and cheat to please their national electorates when elections loomed. Supranational parliaments like in Brussels/Strasbourg were too weak and EU decision making in general was undemocratic and too nation based. This will have to change and there will also have to be aggreement on how to deal with the regions and countries of the Euro that fail to compete.

Fiscal transfers within countries that compensate their own poorer regions are many times the EU budget. Germans and Greeks will have to find a common cause and migration and fiscal transfers will have to be bigger between countries. There also needs to be recognition that migration between countries with different languages is far harder than between say, US states. For that reason the Euro has to be seen as a long term project of political integration and Germany will have to give generously in the short-term, it would have been naive to think anything else. I am confident that Germany will or has already decided this course of action. The benefits will be huge for Euro members and mark my words smug Euroskeptics will have once again left Britain trailing in Europe's wake.

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