German myopia puts euro at risk

German economist Jurgen Stark, a former board member of the ECB, had an opinion piece in the Financial Times on Thursday that was self-serving and myopic.

The thrust of the article was that the problems besetting the eurozone are exclusively a consequence of profligacy and corruption among periphery countries. The only solution is to be virtuous and fiscally responsible like Germany. There is some truth in what Mr Stark has to say. But the piece is much more interesting for what he does not say.

After both world wars in the last century, respective German governments lobbied hard and were granted debt forgiveness on the basis that lumbering any country with unsustainable debt obligations created the potential for a very destabilising backlash.

Indeed, Germany was the biggest serial defaulter of the 20th century. Moreover, Berlin ran a fiscal deficit during the entire period in the early and mid-2000s that the ‘Hartz reforms’ were being implemented.

These labour market reforms combined with other structural reforms were aimed at breathing life into a very weak economy.

The ECB also did its bit for Germany by keeping interest rates at low levels for a protracted period. The result was to cause massive asset price inflation in periphery eurozone countries.

German financial institutions played their part in stoking property bubbles, particularly in Ireland and Spain. However, German chancellor Angela Merkel and finance minister Wolfgang Schauble have been very prescriptive about what should be done since the crisis erupted: restore fiscal rectitude at the same time as implementing structural reforms and absolutely no debt forgiveness.

Berlin has also opposed more aggressive ECB action aimed at preventing the region collapsing into a debt deflationary spiral.

It is difficult to discern whether the German government realise the country is part of a monetary union.

If Germany had followed its own advice for much of the last century and the early part of the last decade, it would now be an economic wasteland. Yet this is a narrative that is conveniently ignored. But then again, the eurozone has to learn how to pay its way.

The Greek economy is not in crisis because of imposed austerity policies. Tax dodging, chronically low levels of competitiveness and fiddling the national accounts among other factors caused Greece to lose its economic sovereignty.

The Commission, as well as the other Eurozone member states, are right to insist Athens proceeds with painful but very necessary reforms.

It is highly likely that a deal will be hammered out over the coming weeks that will keep Greece in the euro. But the bigger question remains: what level of solidarity should be provided to assist member states as they look to restructure their economies?

As it stands, populist far left and far right parties are emerging throughout the eurozone.

The euro has survived thus far because 11th-hour patchwork solutions were cobbled together at the dizzying number of adhoc EU summits convened over the past six years. But success was predicated at all times on all parties wanting to maintain monetary union.

What happens when an anti-immigrant, anti EU party, such as Le Front National in France, form a government. It will be much harder to achieve the compromise needed to stave off the euro’s day of reckoning.

The best scenario for the future of the euro is that the combined effects of the ECB’s €1.1trn quantitative easing programme and the EU Commission’s €315bn investment programme triggers a bout of sustained growth in the eurozone.

This enables the political centre to re-establish its grip on power. Member states then agree to move to closer fiscal and political integration that ensures the monetary union prospers over the longer term. This seems unlikely. Instead the policy of muddling through will be maintained.

As long as unemployment and debt remain at elevated levels and growth is constrained, then political unrest will keep fomenting. One thing is for sure, there will be plenty more subplots before the great eurozone denouement is reached.