By Yanis Varoufakis, professor of economics at the University of Athens. Cross posted from his blog
For six decades Germany was being pampered by a hegemonic America that oversaw the write-off of its wartime debts, the reversal of Allied designs to de-industrialise it and, above all else, the constant generation of the global demand which allowed German manufacturers to concentrate on efficiently producing quality, desirable wares.
Having taken all this for granted for too long, Germany’s elites are now finding it conceptually difficult to come to terms with the new ‘normal’:
• A world in which sufficient aggregate demand is no longer maintainable by the United States, or any other single bloc, and in which Germany can no longer take for granted the demand for its goods.
* A world in which there is no room for a Eurozone that operates like an augmented Germany.
Germany’s disciplinarian imposition of the greatest austerity upon the weakest of Europeans, lacking any plan for countering the resulting asymmetrical recession, is a sorry and dangerous leftover of a long-gone world order built by America. It is the result of a mental atrophy caused by a United States acting for too long as the over-protective parent. It will backfire with mathematical precision, causing higher debt-to-income ratios and lower economic dynamism throughout Europe. The time is, therefore, ripe for a Gestalt Shift from an authoritarian to a hegemonic Germany. Europe needs a Germany ready and willing to make this shift and, indeed, so does Germany.
But what would a hegemonic Germany do? It will be worried about something beyond fiscal rectitude and market reforms. It will know that a supply of high quality products does not automatically create its own demand. It will enthusiastically strive to engineer, as America did in the 1950s, a Pan-European Recovery Program that restores demand for the goods that Europe needs.
Should Germany then try to emulate America? Germany does not have the capacity to do what the United States accomplished from 1980 to 2008; that is, to operate as a gigantic vacuum cleaner sucking into its territory other nations’ net exports, at the cost of ever expanding deficits. Nor should German taxpayers be expected to reflate the bubbles that burst in 2008 (in their own banks, in and around the Greek state, in Irish and Spanish real estate markets etc.). Burst bubbles should be allowed to remain… burst. But meanwhile a hegemonic Germany would find ways to channel the huge pools of stagnant savings into productive investments in the Periphery where they shall produce the incomes that must pay down debts and maintain the level of intra-European demand German companies need to remain competitive both within and without Europe.
In a sense, a hegemonic Germany will be playing the role that Washington did in the 1950s, adopting an activist policy to re-balance Europe’s economy through efficient surplus recycling. But how can this be achieved, when Germany cannot afford to unleash a Marshall Plan? What institutions will this recycling require?
Two things are clear: Germany should not rely on the failed nexus between national governments and Brussels, which has been responsible for inefficient and corrupt uses of the EU’s structural funds. Also, it is futile to attempt moving in a federal direction, a move that Europe’s peoples are not ready for and whose glacial pace is certain to be outpaced by the galloping crisis. Is there a third way? Yes, there is.
Germany should take another leaf out of the New Dealers who put it on the road to recovery all those years ago: Europe needs its own New Deal, funded by a new class of public finance instruments. Germany can realise such a Recovery Program centred around the European Investment Bank. The EIB already has a proven track record of creating a liquid market for debt instruments that fund successful projects. In collaboration with, and supported by, the European Central Bank, an EIB-ECB partnership has the capacity to energise mountains of hitherto idle savings on pure banking principles, with minimal involvement of member-states and no need for Treaty changes.
All it will take is a German resolve to shift from panicky authoritarianism to a hegemonic, to an enlightened self-interestedness.