U-turn needed ‘to avert disaster’

The current policies of austerity and structural reforms are a disaster for the eurozone and unless there is a U-turn in policy soon that includes a growth stimulus and some form of eurobond, then there can be no comprehensive solution to the crisis, said Peter Bofinger, who is a member of the influential German Council of Economic Experts.

In a wide-ranging speech to the Institute of International and European Affairs (IIEA) in Dublin, Mr Bofinger argued that the impact of structural reforms on economic growth is overestimated. “Does the opening up of certain professions to competition really lead to growth?”

His position is completely at odds with the German government, which insists that fiscal consolidation and boosting an economy’s competitiveness are the only viable pathway out of this crisis.

The German Council of Economic Experts, similar to the Irish Fiscal Advisory Council, is an independent body that advises the government on economic policy.

The outright monetary transaction (OMT) programme announced by ECB president Mario Draghi last September is insufficient to save the euro. It will ease bank funding and government borrowing costs over the short term, but it will not address the macro economic challenges facing the region, Mr Bofinger said. Most eurozone countries remain mired in recession.

“The breathing space offered by Draghi’s announcement was not used,” he said. The US economy is far healthier than the UK or the EU because Washington injected a stimulus to stoke growth. But in Europe fiscal consolidation has led to excessive spending cuts.

He urged the German government to introduce an across the board 2% wage rise in an effort to stimulate demand. However, in a sign of how much the country is wedded to an export/mercantilist model of growth, this had been opposed by even the trade unions.

He described the decision to ‘bail in’ depositors in Cypriot banks as “dangerous move” that could cause bank runs in other countries. And even though the mood in the creditor nations was implacably opposed to “joint and several liability” there had to be some sort of mutualisation of debt.

In the absence of a centralised fiscal authority and fund, the ECB will have to step into that role. “But what happens if Italy rejects the ECB’s conditions in return for support? Does the euro just fall apart.”

He argued that Germany will only take action to stabilise the euro in the event of an emergency, but the public mood prevents taking any pre-emptive measures.