Europe in Transition: Support Wanes for Germany’s Austerity Policy

During the March 2014 German Marshall Fund Brussels Forum as Italy’s Foreign Minister, the newly appointed EU Chief for Foreign Affairs, Federica Mogherini, agreed with Goldman Sachs International Advisors Chairman and former World Bank president, Robert Zoellick, that Europe needs to work together as a community in the face of escalating security threats from within and outside of Europe. This political and security assessment is applicable to Europe’s on-going economic crisis as support across Europe wanes for Germany’s austerity policy.

Since the 2008 global recession and European financial crisis, Eurozone members, under the regulations of the European Central Bank (ECB), have been working within the German austerity framework to address economic decline, but calls for changing the framework are taking root in the face of contracting manufacturing in France and Greece—although Ireland, Spain, the Netherlands, as well as Germany’s manufacturing sectors are expanding boding well for their respective gross domestic product (GDP)—declining consumer prices in Italy leading to the country’s third economic slump since 2008, the remaining 18.4 million out of work in the Eurozone, and an overall European Union unemployment rate holding firm at 10.2 percent according to July 2014 Eurostat figures. These economic woes and growing admonishments from anti-German policy politicians including recently sacked French Economy Minister Arnaud Monteburg and his left-wing allies may motivate a policy shift in the Eurozone area. Monteburg, like France’s Front National party president Marie Le Pen and Italy’s former Prime Minister Silvio Berlusconi, advocates for greater budget flexibility and fiscal reflation policies similar to the new agenda outlined in ECB Chairman Mario Draghi’s speech at the annual Central Bank Symposium in Jackson Hole, Wyoming on 22 August 2014. In his speech, Drahgi, espoused that all three arrows – referencing Japan’s Prime Minister Shinzo Abe’s economic strategy – are becoming feasible in Europe. He relayed that the ECB is leaning towards a more growth-oriented monetary policy, and that the European Commission is willing to interpret its fiscal rules more flexibly with the agreement that EU member states are promising to undertake more structural reforms domestically.

Both the ECB Chairman and the International Monetary Fund (IMF) Managing Director Christine Lagarde, believe that sequencing monetary, fiscal, and structural reforms correctly is key to getting Europe out of its economic slump. The order of policy implementation is critical as in the case of Japan having weathered a decade of recession. Misguided sequencing has been a root cause of European economic malaise according to leading economists who are following the Eurozone crisis. Russian-born economist Anatole Kaletsky points out that monetary expansion is more effective if it is combined with fiscal stimulus either through temporary tax cuts or injections of public spending. If monetary expansion is contradicted by premature fiscal consolidation, both policies can be doomed to failure he says. He further contends that structural reforms are very slow to act and can’t guarantee growth in the short-term. The reforms should be viewed as complimentary to macroeconomic policy and not as a pre-condition for monetary and fiscal expansion. In the recent past, the European Commission and German government policy demanded that tax cuts come after major reductions in fiscal spending, Kaletsky, advocates that spending reductions should come at the end of the reform process instead of being front-loaded ahead of tax cuts.

Although Germany has in the past refused to discuss any loosening of the EU budget rules, and doesn’t accept the economic logic of sequencing shared by Japan, the IMF, United States, China, and other major economies, Germany’s Finance Minister Wolfgang Schaeuble, publicly announced recently in a news interview at the Medef business leaders’ conference near Paris, that he agrees wholly with Mario Draghi’s appeals for Eurozone member states to compliment monetary policy with structural reforms to boost competitiveness and resolve the on-going debt crisis. Pressure for economic policy change is mounting from French President Francois Hollande, Italy’s new Prime Minister Matteo Renzi, and Spain’s Prime Minister Mariano Rajoy whom all face challenges to their leadership with half of their respective adult populations below the age of 25 are jobless according to the latest EU figures on unemployment. Subsequently, Germany’s overall economy is weakening too due to the recession in France and Southern Europe as well as EU sanctions against Russia, making the Federal Republic less adamant about imposing its austerity policy across the continent as it once practiced so doggedly.