Yves here. Mathew’s post describes the political and ideological dynamics that continue to drive failed austerity policies in Europe. But even more important, it also explains why Europe, and German leaders like Angela Merkel have fallen in line with the US and are escalating the conflict with Russia over Ukraine. As we’ve discussed, they’ve convinced themselves that Russia will suffer from the economic sanctions imposed by the US and EU before Russia can play its energy card. And some analysts further believe that Russia would not dare restrict gas supplies to Europe, that it cannot afford to lose the income.
By Mathew D. Rose, a freelance journalist in Berlin
That the financial policy dictated by Germany for the Euro Group of Nations following the Great Recession is a failure is probably clear to everyone – with the exception of the Germans and their political sycophants in the EU.
The most recent economic figures are ghastly. Secular stagnation seems no longer a threat, but reality. The next European recession, as well as deflation, lurks round the corner. For the Germans however, their policy is beyond reproach. At fault is not their programme of austerity in a demand side crisis, but the unwillingness of the prodigal and undisciplined Southern Europeans to follow the rules as proscribed by Germany strictly to the letter– oh yes, and economists.
As past winners of the Nobel Prize in Economics met last month in Germany to discuss current developments in their field, Ms. Merkel lectured them. She began by raising the question of why the economic sciences in the past several years of crisis have been so egregiously wrong in predicting or describing economic reality. Were the underlying economic theories wrong, or were leaders listening to the wrong people, she queried.
One economist who Ms Merkel was certainly not listening to on that day was Joseph Stiglitz, also attending the event, and his scathing criticism of her economic policies. His optimism, that Ms. Merkel would question her failed policy, was most likely misplaced.
Following four years of economic malaise due to an austerity regimen in the Eurozone
Ms. Merkel should be mulling over Mr. Stiglitz’s comments. However, her remarks before the economists made obvious that she is imperturbable in her dogmatism. The Bundeskanzler must further feel her policy has been vindicated by a budget surplus in the first half of the year for the first time in almost a quarter of a century. This result, which according to proponents of austerity should be increasing confidence and therewith an increase in investment, has been the opposite. Investment in the private sector, well under the European average for years, sank once again in the second quarter of this year. German GDP also declined.
The cause of the Eurozone’s interminable crisis, according to Ms. Merkel, is the refusal of some nations (meaning the likes of Italy and France) to embrace the German model of austerity and structural reform. Despite Germany’s persistent efforts to force the rest of Europe to adopt its economic policy into law or agreements, many nations simply have remained intransigent, especially with regards to deficit spending in the face of horrific unemployment comparable to the Great Depression. Worst still, lamented Ms. Merkel, “We have very little, if any, possibility of sanctioning those countries that break the rules”, although this did not hinder the EU from removing democratically elected governments who did not properly comprehend the German Economic New Order in the recent past.
Even as Germany slips back into recession, others are to blame: those in the EU who lack the moral resolve and discipline of the Germans. This attitude is nothing new in Germany. During the Third Reich, as the Soviet troops began their inexorable advance westwards, Hitler did not question his own strategy and decisions, but blamed the German people for not being sufficiently strong or sufficiently ready for sacrifice. His solution was the destruction of Germany – Götterdämmerung. Many Southern Europeans, especially the young unemployed, must feel this has already begun in here.
German hubris in Ukraine is further complicating the economic situation in the EU. Led by Germany, the EU embarked on a foreign adventure in Ukraine, a nation that was leading a politically and economically neutral existence between the West and Russia, to draw it into the orbit of the EU and NATO. The Germans meddled in Ukrainian domestic affairs, supporting the boxer Vitali Klitschko as a new political leader for that nation. Things went terribly wrong and a further oligarch has been elected president, while Klitschko received the post of mayor of the capital, Kiev.
Oddly, no one in Germany’s foreign ministry had considered that Russia might react as it had done in Georgia a few years ago, intervening militarily. Should the inevitable occur, as it did, the European nations have cut back their military spending so prodigiously to reduce their deficits, that they no longer possess a military deterrent against Russian military aggression. The EU is now completely reliant upon US military might.
Nonetheless, German media declared victory over Russia months ago. Purportedly Russia could not survive the financial and trade restrictions imposed by NATO and its allies – despite warnings that trade restrictions, if at all effective, need years to have significant consequences. Report after report appeared in German media describing a moribund Russian economy deteriorating dramatically. Finland’s Prime Minister Alexander Stubb put it very diplomatically recently when he observed that the “jury is still out” on whether sanctions had worked.
Germany is Russia’s biggest trade partner in the EU, a fact that German media belittles. Trade with Russia was portrayed as negligible, except for gas imports, which the Russians would never tamper with, due to their dependency on its export. The Russians are not only still standing, but in July retaliated with trade restrictions upon agricultural products from the EU. Things have suddenly taken on a new dimension, as the EU is mobilising funds to support hard-hit farmers. This is a further burden in addition to providing Ukraine’s oligarchs with funds to keep them in power and prevent their country going bankrupt – and enabling Ukraine to purchase weapons from EU member states.
Maybe Germany or any other individual EU nation is not in the least dependent upon trade with Russia, but added together it does seem to be having an exponential effect, more serious than expected.
Another aspect being ignored is the amount of money spent by Russians within the EU, especially for luxury goods. For the past couple of years I have heard more Russian than German when visiting Berlin’s luxury department store KaDeWe. Already hit by the downturn in sales of such products in China, another major market is being negatively affected by the conflict.
Russians area also significant investors in equities, property and banks in the EU. Should Putin introduce capital controls or force Russian citizens to repatriate this money, it could have further repercussions for European finances and economies.
Putin, like Tsar Nicholas I and Stalin before him, knows that the winter is often Russia’s best ally. If global warming does not come to the aid of the EU, this winter could be especially eventful for the EU. Should the Russians decide to use energy as a strategic weapon, Ms Merkel should be at least be pleased: higher energy bills would increase the anaemic inflation rate in the EU.
Oddly enough, the figure of hope for the Eurozone seems to be the President of the European Central Bank, Mario Draghi, a neo-liberal and supporter of austerity. At the beginning of the year Mr. Draghi was explaining to journalists that he saw no deflation in the Eurozone, claiming “a rising confidence in the Eurozone” would pull the economies of the member states out of their doldrums. By June he had recognised the danger of deflation and rolled out a raft of desultory-measures., which have solely succeeded in driving down the Euro against the dollar, much to the satisfaction of Germany.
Mr. Draghi, who dares not antagonise his masters in Berlin, keeps trying his amazing trick of two years ago claiming he would do whatever it takes to preserve the Euro, while knowing full well he could not deliver on his promise. In the last couple of months he has repeatedly claimed that he is prepared to intervene forcefully in the current deflation crisis using “all the available instruments”. However, what instruments Mr. Draghi has available is determined by Germany. This fact was made clear by Germany’s finance minister, Wolfgang Schäuble, who declared that he does not believe the ECB has tools to deal with inflation.
On Thursday, when the ECB policymakers meet to determine the ECB’s September policy, we shall all find out whether Mr. Draghi and the ECB control its policy or Germany does.