On how the reputation of Germany may go the way of the IMF
Published by MartinVarsavsky.net in Economy with No Comments
I wonder what many wonder, and that is whether Angela Merkel’s insistence with austerity is wise. I think that what Southern Europe needs is not to reduce the overall level of spending. Doing so it risks to make the economy shrink and budget deficits expand without end in sight. What we need to do instead is to keep the level of spending and investment but change its nature. We have to tweak with the economy, not kill the economy. Focus on what works, kill what slows us down.
I agree that in the South of Europe there was a lack of reform and a great deal of waste. In Greece, Italy, Spain, Portugal a lot of privileges were given to people who did not deserve them, growth was built on credit, and the economies collapsed as a result. There was and there is corruption in most of Southern Europe, more than in the North, and many white elephants were built, airports that are not used, high speed train lines that are not needed.
But a drastic stop to a lot of economic activity without reasonable alternatives to generate growth will only exacerbate the problem. This is happening in Spain right now. We are cutting spending, we are not focusing on intelligent credit creation and we are making many viable businesses suffer or die of credit starvation. We need to create emergency credit lines for all businesses who are hiring. We have to find the pockets of growth and support them. We can’t indiscriminately cut spending.We have to move workers from dying industries to growing industries, we have to reeducate the population for the globalized economy of this century. The challenges of evolving from an industrialized economy to a service economy are not new, but now we have to deal with the challenges of evolving from the service economy to the digital economy. None of these problems are financial or monetary, they are real and require real intervention. Fiscal tightening is akin to chemotherapy, we can’t kill all cells because some are bad. We have to have a smart bullet approach to economic intervention. Which if you think about it this is what Germany did to itself. Because Germany is making the same mistake as the large shareholders of the IMF did. They applied for themselves much more elaborate and detailed growth policies that worked and ask Latin America to implement simplistic, “chemo” type policies. The results were disastrous.
Germany is doing to Southern Europe what the IMF did to Latin America for decades and this is dangerous for Germany and Southern Europe. In Latin America by preaching austerity at all cost the IMF created failed policies and a decade of stagnation. Moreover as its failure became apparent the IMF ended up being mostly hated by Latin Americans and around the world. Germany could end up in the same spot. This would be sad because in the end we all know that Germany means well, it is just applying the wrong economic model as the IMF did. The USA, closely associated with the IMF lost most of Latin America sympathy in the last 15 years. It is sad to see how many Latin Americans now think that China is a better country and economic model than USA and have emulated China with regimes such as that of Venezuela, Nicaragua, Ecuador and Bolivia. Same could happen to Germany and the German model if it insists in implementing wrong policies. The European Union could fall apart and Southern Europe could end up experimenting with populist political regimes that only make the whole situation for Europe much worse.
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Francisco Romero on February 1, 2012 ·
Great points. I wonder how to avoid creating a big, ugly mess in the process of saving the EU and the Euro.
Moral hazard is the danger to beat, but who is going to get up and promise ” blood,msweat and tears” this time?
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Mark Cheshire on January 31, 2012 ·
You are absolutely right about the parallels with the IMF and Latin America. But it is one thing to agree, and quite another to implement a policy change. The three challenges I see to changing the policy:
1) Germany suffered through more than a decade of painful restructuring after the reunification. Remember the headlines from late 90’s about the “sick man of Europe”. Since they did not receive cash subsidies to make it through to better times, I think the population questions why other countries cannot accept that they may have a decade of austerity ahead of them. I think they can swallow this pill if necessary.
2) Even if the cash is made available – how to make sure that it funds the right growth initiatives? After all that was the purpose of EU fund transfers over the last couple of decades. Unfortunately living in Spain I do not see any improvement to try to improve the allocation of funds. Too much money continues to be wasted on public spending, and the savings are made in the areas which make the least sense (like healthcare and education)
3) Germany wants to ensure that once and for all the problem of moral hazard is eliminated. How to implement the restructuring so that poorly run countries do not receive a “get out of jail free” card, and then go back to the bad old ways?