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Merkel and IMF: Budget cuts - Austerian Germany with Misleading Economic Means for Europe’s Future

Germany’s efficency and house wife mentality in European and international economic relations seems first of all (starting already with Helmut Kohl’s 2nd term during the late 80ies) economically asymetrically motivated by its own interest, but more than that it ransoms obviously an underlying segregation process within Europe, which is to expect to aggrevate continiously by future similar biassed social and fiscal means.

Chancellor Merkel showed during the lattest Euro-Zone meetings and at the G8/G20 in Toronto no endeavours, which could send any signal of hope, to find a way out of this multilateral disequilibrium. The austerian IMF course is a part of the German consolidation strategy which has similarly to be followed by the other Euro-Zone members. Referring to this see more details in the article. Here an excerpt.

oanth - muc - 20100727

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The excerpt is taken from an article by Paolo Manasse,
Professor of Macroeconomics and International Economic Policy at the University of Bologna

published 20100724 on vox.eu.org

Clipped from www.voxeu.org

Budget cuts across Europe: Coordination or diktat?

Paolo Manasse
24 July 2010

Despite the lack of formal mechanisms for fiscal coordination across Europe, this column suggests that the planned exit strategy seems to support convergence among European countries aiming to cut deficits. Yet it argues that the budget cuts do not reflect the unemployment situation of member countries and appear inspired by Germany’s fiscal orthodoxy.

Predictably, the recent G7/G20 summits in Canada sanctioned a compromise. On one side was the US-backed position that the fiscal stimulus should not be removed too prematurely and kill the recovery, on the other the EU-backed requirement that markets ought to be reassured on Europeans’ solvency (see Baldwin and Gros 2010 for the Eurozone). 

Many observers have noted the “European” position, which focuses on fiscal discipline, mainly reflects the economic interests of Germany, a country that in recent years has witnessed strong gains in competitiveness and has managed to maintain a large external surplus in 2010 without compromising fiscal discipline (the debt ratio is currently at 79.6% and the primary budget at -3.5% of GDP). While German output fell by almost 5% between 2009 and 2010, the unemployment rate has actually dropped. It is therefore understandable that Germany, in order to stimulate the economy, would rather rely on productivity gains and on the depreciation of the euro, rather than footing the bill of fellow Europeans’ stimuli (and possible defaults).
In order to set a “good example”, the government of Angela Merkel recently introduced a constitutional rule requiring, from 2016, the federal structural deficit not to exceed 0.35% GDP, and constraining the German states to run balanced budgets. Similarly, budget “cuts” are on the agenda almost everywhere in Europe. The fiscal exit strategies differ from country to country, in terms of their size, their implementation horizon, their composition (spending cuts versus revenue increases), the nature of short- or long-term savings they generate, and the degree of institutional reforms that accompany them. Table 1 describes the size of budget cuts in relation to GDP of different national programmes for the period 2010-2015.

They range from the large adjustment’s of France, Greece, Portugal, Spain, and the UK, to the modest cuts of Austria, Hungary, Italy, the Netherlands, and Slovakia (Ireland made large cuts prior to 2010 and therefore these do not appear fully in table). 

Coordination or diktat?

These adjustment programmes pose an important question about fiscal policy in the Eurozone. To what extent are national policies the result of “policy coordination” in Europe and therefore meet, at least in part, “European” interests? Or do they obey the diktats of “fiscal dominance” from Germany, possibly under the implicit threat of leaving weak Southerners to their own destiny?

At this juncture, the “exit strategies” should strike a balance between three goals. The first one is the solvency of sovereigns. The second is the need to calibrate the exit strategies so as not to aggravate unemployment, the so-called “internal equilibrium”. The third, “European”, objective is the reduction of current-account imbalances within the Eurozone. Let us consider them in turn.

The solvency of sovereigns

If cuts are intended to ensure solvency, countries with lower primary surpluses should implement stronger manoeuvres. Figure 1 shows, on the y-axis, the magnitude of the cuts announced for 2010-15, and, on the x-axis, the primary balances in 2009. The figure shows that indeed a negative relationship seems to hold. 

Figure 1. Budget cuts in 2010-15 (y-axis) vs. primary balances in 2009 (x-axis), % GDP

Figure 4. Budget cuts in 2010-15 (x-axis) and current-account balance 2009 (y-axis), % GDP

Source: Author’s calculations

Policy coordination or German diktat?

In conclusion, the fiscal exit strategies that the major European countries have planned for 2010-15 seem to respond to the need to ensure the solvency, being related to the levels of deficits and national debts. Despite the lack of formal mechanisms to implement fiscal coordination in the Eurozone, the planned exit strategy seems also consistent with the objective of promoting convergence among European countries, through the reduction of current-account imbalances. Thus, the view that fiscal consolidation in Europe merely responds to the interests of Germany seems excessive. Yet, the evidence also suggests that consolidation efforts do not reflect the unemployment situation of member countries, and appear inspired by a fiscal orthodoxy of Teutonic branding.

References

Baldwin, Richard and Daniel Gros (2010), New eBook: Completing the Eurozone rescue: What more needs to be done?, A VoxEU.org Publication, 17 June.
Read more at www.voxeu.org
 

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