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The euro crisis may soon be over. This is what German Finance Minister Schäuble thinks and his view is finding an echo among a growing community in the financial markets. But is it true?
For Chancellor Merkel and her followers, we are experiencing a debt crisis caused by irresponsible fiscal policies. Their remedy is therefore a “debt brake” and harsh austerity measures. It is not always clear, however, who was irresponsible. Sometimes it is claimed that southern Member States used the low interest rates after joining the euro in order to borrow massively. At other times, lack of fiscal consolidation after the crisis is blamed.
The Greek case is a dramatic example for Europe’s misguided policies: Each and every driver of demand has been down, except net exports (and they are only positive because of the drop in imports). Under these circumstances, it is impossible for Greece – or any other state – to reduce deficits or public debt.
What is the solution? The economic policies imposed by Chancellor Merkel and her conservative base on the rest of Europe are an autobahn to disaster. They are causing a new recession in the euro area and will undermine confidence by financial markets again when it becomes clear that new output losses are further deteriorating public finances. No doubt structural reforms are needed to improve the growth potential in southern European Member States. Mario Monti has courageously embarked on this road in Italy. But unless demand is restored to levels where the potential is realised, these policies will not produce the results and promises of today. Debt will increase further, unemployment will shoot up even more and ultimately the European Union will disappear.
Time is running out. There is only one way out of Europe’s difficulties: Mrs Merkel must follow the example of Silvio Berlusconi and resign.