Germany is turning EU recovery into recession

19 Oct, 2014 at 14:25 | Posted in Economics, Politics & Society | Comments Off on Germany is turning EU recovery into recession

beppe-grillo.-satira-300x431Beppe Grillo, the comedian-turned-rebel leader of Italian politics, must have laughed heartily. No sooner had he announced to supporters that the euro was “a total disaster” than the currency union was driven to the brink of catastrophe once again.

Grillo launched a campaign in Rome last weekend for a 1 million-strong petition against the euro, saying: “We have to leave the euro as soon as possible and defend the sovereignty of the Italian people from the European Central Bank.”

Hours later markets slumped on news that the 18-member eurozone was probably heading for recession. And there was worse to come. Greece, the trigger for the 2010 euro crisis, saw its borrowing rates soar, putting it back on the “at-risk register”. Investors, already digesting reports of slowing global growth, were also spooked by reports that a row in Brussels over spending caps on France and Italy had turned nasty …

In the wake of the 2008 global financial crisis, voters backed austerity and the euro in expectation of a debt-reducing recovery. But as many Keynesian economists warned, this has proved impossible. More than five years later, there are now plenty of voters willing to call time on the experiment, Grillo among them. And there seems to be no end to austerity-driven low growth in sight. The increasingly hard line taken by Berlin over the need for further reforms in debtor nations such as Greece and Italy – by which it means wage cuts – has worked to turn a recovery into a near recession.

merkelphoneAngela Merkel and her finance minister Wolfgang Schäuble are shaping up to fight all comers over maintaining the 3% budget deficit limit and already-agreed austerity measures.

Even if France and Italy find a fudge to bypass the deficit rule, they will be prevented from embarking on the Marshall Plan each believes is needed to turn their economies around. Hollande wants a EU-wide €300bn stimulus to boost investment and jobs – something that is unlikely to ever get off the ground …

So a rally is likely to be short-lived. Volatility is here to stay. The only answer comes from central bankers, who propose pumping more funds into the financial system to bring down the cost of credit and encourage lending and, hopefully, sustainable growth …

Andy Haldane, the chief economist at the Bank of England, said he was gloomier now than at any time this year. He expects interest rates to stay low until at least next summer.

It’s not a plan with much oomph. Most economists believe the impact of central bank money is waning. Yet without growth and the hope of well-paid jobs for young people, parents across the EU who previously feared for their savings following a euro exit appear ready to consider the potential benefits of a break-up. There is a Grillo in almost every eurozone nation. Now that would bring real volatility.

The Observer

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