International pressure on Germany to surrender its commitment to austerity is mounting. The International Monetary Fund warned this week that if there isn’t a more interventionist economic policy in Europe, its debt crisis could undermine growth globally.
According to the Fund’s managing director, Christine Lagarde, “Resorting to across the board, across the continent, without differentiation, budgetary cuts will only add to recessionary pressures.”
The leaders of France and Italy agree that Europe needs less budget cuts and a bigger bailout fund — i.e., more German money — as well as joint bond issuance to stave off the specter of the currency union’s collapse.
“With the right set of measures, the worst can definitively be avoided and the recovery can be put back on track,” the IMF’s chief economist said on Tuesday. “These measures can be taken, need to be taken, and need to be taken urgently.”
What are those measures? “Sustaining adjustment, containing deleveraging and providing more liquidity and monetary accommodation,” according to the organization’s latest World Economic Outlook report. In layman’s terms, that’s fiscal stimulus, bank bailouts and printing money.
None of those is particularly popular in Germany nor in the other Northern European Union member states, including Finland and the Netherlands, which, probably not coincidentally, are also the only eurozone countries whose creditworthiness is still rated AAA by all three major American rating agencies.
In these countries, there is mounting public opposition to “transfer union,” the notion that the peripheral euro countries should be bailed out, permanently, by the stronger core.
Where Europe’s weaker economies would rather avoid painful economic reforms and inflate their way out of debt, in the north, there is a belief that only improved competitiveness and balanced budgets will allow the continent to grow out of the crisis.
Such high levels of debt as were amassed in the years preceding the downturn may require a contraction and bank deleveraging to restore business confidence. If austerity is to succeed, banks which loaned endlessly to bankrupt countries like Greece and Italy will have to write off part of their outstanding loans and especially public-sector workers in Europe’s periphery would need to accept further pay and pension cuts.
Neither is willing to take their losses. The notion that they won’t have to is perpetuated by political leaders and the IMF when they insist that a recession isn’t necessary to level the investment distortions that were caused by artificially low interest rates and the assumption that if a eurozone country were ever to teeter on the brink of default, Germany would bail it out.
Throughout the crisis, Germany has been extremely reluctant to save the highly indebted nations in the south from default. Perhaps the only reason it has is because German banks, too, are exposed to Greek debt. The coming weeks could prove a test for German resolve if Greece once again faces bankruptcy while markedly little progress toward fiscal consolidations has been made. The question is how much longer Germany is willing to pay before it can’t anymore?