01 March 2012

Stewart Fleming: Every crisis has a silver lining

Fleming comments in European Voice that if the Greek crisis is now contained, if firewalls against contagion are being put into place, and if sovereign debtors' commitments to economic reforms are realised, then the careful sequencing of Germany's medium-term crisis management policy could be bearing fruit.

Europe has ducked two potentially crippling economic body-blows in the past few weeks. A looming funding crisis in the banking system was defused by the decision taken in December by Mario Draghi, the president of the European Central Bank (ECB), to offer banks hundreds of billions of euros on cheap three-year loans. The second threat was a disorderly Greek sovereign-debt crisis.

Then there is Germany. A robust German upswing would raise some difficult economic policy puzzles for Berlin. How will Chancellor Angela Merkel's government respond to emerging labour shortages and rising wage demands? Will she need to start taking fiscal or macro-prudential regulatory action to curb a worrying housing bubble?

And what will the ECB do when faced with another challenge to its one-size-fits-all monetary policy? It can scarcely raise interest rates in the middle of a eurozone slowdown, just because of a recovery in Germany.

But if Germany, which accounts for 27 per cent of the eurozone's GDP, can lead a Europe-wide recovery, that is very positive news indeed. It helps to explain why Draghi hinted last week, in an interview with the Frankfurter Allgemeine Zeitung newspaper, that the central bank is not about to cut interest rates. He is right, whatever the Americans say.

[Commissioner] Rehn, who expects the emerging European recession to be mild, could have accentuated this and other positives. Instead, his presentation last week reflected the excessive reliance of the Commission's department for economic and monetary affairs on economic modelling. Once again it is underestimating the positive impact on financial-market-driven economies of what John Maynard Keynes called “animal spirits”.

After the unexpected summer slump, these are now on the rise, not just because the banking crisis has been contained, but also because of other good news, including evidence that the always astonishing US economy is on the mend and that financial market pressures on Italy and Spain have eased.

With the exception of Poland, other big EU countries are still struggling, especially France, Spain, the United Kingdom and – of course – Italy. The battle against government deficits continues and is a contractionary economic force. Banks are still far from healthy: a festering wound that could yet turn very nasty.

Signs of Germany's rising self-confidence surfaced last week. In an unguarded moment caught on an open microphone, Wolfgang Schäuble, Germany's staunchly pro-EU finance minister, was overheard reassuring Portugal's finance minister, Vítor Gaspar, that his country could expect more financial support from the eurozone.

If the Greek crisis is now contained, if firewalls against contagion are being put into place, and if sovereign debtors' commitments to economic reforms are realised, then the careful sequencing of Germany's medium-term crisis management policy could be bearing fruit. The German government could soon be in a strong position to offer more than just verbal reassurances to its troubled eurozone partners.

Full article (EV subscription required)

© European Voice