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Friday, 22 June 2012

2012.06.22 12:33:58 MONEY TALKS: Blame Germany

--Germany is blamed for the current euro-zone crisis

--It is also said to be the source of the euro zone's problems in the
first place

--But the reality is that there is no political solution that can cure
the euro zone's flaws


By Alen Mattich


When all else fails, blame Germany.

Germany has been taking considerable heat for its 'intransigence' on
measures that would supposedly save the euro. It says nein to European
Central Bank buying of sovereign debt. Nein to the ECB inflating the
periphery into competitiveness. Nein to massive fiscal transfers from
the core to the periphery. Nein to wholesale debt forgiveness. Nein.
Nein. Nein.

These issues are well known. But now Germany is also being blamed for
getting Spain, Ireland, Portugal, Greece and Italy into the mess
they're in.

Richard Koo, a Nomura economist and expert on Japan's debt deflation
and balance-sheet recessions, has argued that Germany's
post-unification struggles through the 1990s and the early years of
the euro's introduction created the environment for the booms that
ultimately crippled economies across the single currency's periphery.

That's because after the euphoria of reunification and in the wake of
the tech and telecom bust, which hit Germany particularly hard,
Germans were left with considerable bills and a stagnating economy.
The government couldn't provide sufficient stimulus because of the 3%
Maastricht limit on fiscal deficits (though Germany ended up breaching
it anyway, just not by enough).

So what happened instead? The ECB kept interest rates low to suit the
German economy. Unfortunately, that triggered an investment boom
across the periphery and housing bubbles. Along the way, the countries
along the euro zone's fringes ran large trade deficits, which were
filled by German exports. And selling stuff to the periphery was what
at long last lifted the German economy out of the doldrums.

Had Germany been allowed to use fiscal stimulus, there would have been
no need for excessively easy ECB monetary policy--by one estimate the
ECB's interest rate was around four percentage points below what the
periphery needed during the first half of the decade.

I've long argued that the ECB's current policy, together with the huge
amounts of capital flooding into its banks from fearful depositors and
investors across the periphery, runs the risk of triggering the sort
of boom in Germany that eventually went pop in Spain and Ireland.

But Germany could--as before it, Spain and Ireland could have done
too--use fiscal policy to prevent such a boom. Increasing taxes,
tightening regulations and running budget surpluses would all work to
offset excessively easy monetary policy. Of course, Germany can learn
from Spain's and Ireland's mistakes. But I wouldn't be too quick to
let Spain and Ireland off the hook.

The property bubble was associated with corrupt practices at all
levels of government. Governments failed to take prudent policy
decisions during the good times because they were as drunk on cheap
central-bank money as their voters.

To be sure, if Germany followed the periphery's course, a credit boom
there would wipe away Germany's relative competitive position in short
order, it would reverse Germany's current-account surplus and drive
growth across the periphery.

It would also spare governments from making the sort of painful and
necessary long-term structural changes that have ultimately been
behind the German rebound.

In that way, Europe would see an oscillation between boom at the core
and bust at the periphery followed by bust at the core and boom at the
periphery. What Koo's criticism tells us is what we already know: the
euro zone is ill-formed to maintain economic stability and growth
across the whole region. Could fiscal and political union solve the
problems? In theory, yes. As a practical reality, no.

The European Parliament is not the institution to do it. It is rightly
seen as an unwieldy political trough best suited for transferring
expenses from powerless voters to equally powerless politicians except
in matters of their own comfort and remuneration. The presidency of
the European Union barely qualifies as being democratic. And national
parliaments will be reluctant to hand over yet more sovereignty to
foreigners they've already come to distrust and dislike.

So with no real solutions on hand, Europe's governments will opt for
the second-best choice: Blame Germany.


Write to Alen Mattich at alen.mattich@dowjones.com or on Twitter @AlenMattich


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(END) Dow Jones Newswires

June 22, 2012 06:33 ET (10:33 GMT)

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