Comment | Merkel's Euro woes
Angela Merkel’s resounding victory in the recent German election has signaled that South European austerity matched by northern bailouts will still be the rason d’être of Eurozone crisis management. The economic crisis has been publicised as the South Europeans cheating the North European taxpayers. It’s not true, but that’s the delusional narrative which has poisoned policy making.
Take Spain, a country where over half of 18-24 year olds are unemployed. A country enduring deep cuts to government services in order to balance a budget that was thrown off balance by a banking crisis, in turn caused by a property boom that went bust. The main financier of that property boom was German money; growth brings inflation, so the boom raised Spanish wages. In that lies the problem: now the bubble is burst, Spain is left with an economy that is geared towards construction, when it desperately needs to reorient itself towards manufacturing. However, because Spain doesn’t have its own currency, Spanish wages are noncompetitive versus German wages. The only way forward is to endure a prolonged period of unemployment to grind wages down.
There is another path however. If Germany had engaged in fiscal stimulus to maintain full employment, whilst allowing Eurozone inflation to rise, it would have lowered Spanish wages vis-a-vis German wages. It should have happened a long time ago but the moral imperative that irresponsibility shouldn’t be rewarded, intruded; never mind that Spain previously had low government debt. Never mind that the problems came when Spain was forced by the rest of the Eurozone to take on local bank debt – a decision that stopped banks collapsing in Spain, in turn avoiding the collapse of German banks.
That Germany has control over previously autonomous countries is increasingly clear; the UK is hamstrung by euro-scepticism and France is politically scared of treaty change, seeking to protect the horrific CAP. A strong, integrated Eurozone will pose real problems for the European Union. Merkel will engage in a fiscal union within the Eurozone whilst adopting an a la carte approach to the EU. Fine for the UKIP-supporters among us, but what about people like me who believe that the EU amplifies our power abroad rather than undermines it? What about those who believe that the major threats to Europe (drug trafficking, climate change, terrorism) require a pan-European response? Merkel’s tendency towards consensus is helpful in uniting policymakers around an approach, but her lack of resolve in pursuing fiscal union leaves the euro vulnerable. Whilst debt remains the problem of today, every day’s news cycle brings new evidence that austerity Europe has given power to the fringes and undermined representative politics.
If the United Kingdom steps back and allows the European Union to be run for and by Germany in this crucial moment in history, then we will not only disadvantage ourselves but we will be letting down those who are in the grip of a failed economic policy and who are in desperate need of change.