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Pacta Sunt Servanta (Not) & the Greek Presidency

Pacta Sunt Servanta (Not) & the Greek Presidency

There are immoral challenges, such as the twin fiscal and trade deficits that Greece is facing, despite the primary surplus achieved. And there are problems that everyone would love to have, such as the German trade surplus, which so far appears “ethically neutral.”

As everyone knows, because Portugal, Ireland, Greece and Spain cannot devalue their currency, the periphery had to undergo painful “internal devaluation,” so as to align itself with the Maastricht criteria. It was a painful process, but pacta sunt servanda. Of course the need of the European Central Bank to keep cohesion in the Eurozone means low interest rates for as long as deflation rather than inflation is the overarching threat. This policy makes sense in the periphery, perhaps even in core countries such as the Netherlands and France, but not for Germany. Alas, the fact of the matter is this: Germany has a surplus that is well beyond what the Treaty of Maastricht envisages.

For years, Tea Party mavericks in the US accused China of artificially holding its currency at a depreciated exchange rate; fingers in Washington are now pointed at Germany, which does not operate in what most trade experts would call “a level-playing-field.” The German surplus was 260 billion dollars in 2013, while China’s “merely” 195. Of course, neither decreasing exports nor an appreciation of currency is possible in this context. The way forward is a policy of “internal appreciation” or, alternatively, “European redistribution.”

The first policy track of “internal appreciation” entails increasing wages and/or social security contributions in Germany. This would have a direct effect in domestic consumption. Even if the imports generated by this envisaged consumption boom would not necessarily translate into direct increase of exports for the troubled periphery, indirectly, the periphery would benefit. More purchasing power would almost certainly increase tourism and would weaken the Euro, which is a welcome prospect from Paris to Madrid and from Athens to Dublin. Surely, if Eurocovery entails “structural reforms,” this means rebalancing rather than French and Italian adjustment alone.

As Keynes noted, fiscal consolidation should be taking place in the context of growth, even if this was not an option for Greece, Ireland and Portugal. Now, an enduring and prolonged one-way trajectory of internal devaluation seems to be exhausting political capital and threaten social cohesion. So, the balance must shift to growth strategies or it will unequivocally tilt. Commissioner Rhen recently noted that around a third of the German current account surplus can be explained by returns on assets accumulated abroad in the years before the crisis, when excess savings in Germany and other core countries were “redistributed” throughout the Eurozone in the form of investment; one should note that that was no redistribution; it was investment. Moreover, Commissioner Rhen fails to note that some of this “returning capital” is not in fact returning, but constitutes capital flight from markets that assess Germany as being the most fiscally safe member state in a Eurozone where “exit” and “bail-in” have been popular buzzwords. A comparable capital flight caused Switzerland to peg its currency to the Euro, a policy described as the “nuclear option.”

In truth, there are no “successful” (hence moral) and “unsuccessful” (hence immoral) set of countries. There is a flawed monetary architecture. The two sets of countries, their relative growth or stagnation, is interrelated. Rebalancing is the common objective. Policy alignment is not rebalancing; it is alignment.

Nonetheless, one has to concur with Commissioner Rhen that this fleeing and/or returning capital did not boost productivity-enhancing investment in Germany, which is needed for European growth, which is a common objective for all sets and subsets of Eurozone members. And as the Troika is not about to visit Berlin to demand increases in pensions, social contributions and wages, or to place high targets for public investment, or to demand inflation of 1-2% more than the Eurozone average, someone must still call spade a spade. Calling spade a spade is not going to happen because, apparently, the “structural weaknesses” of Europe is epitomized by the observation that we have 7% of the global population, 25% of the global GDP and 50% of global welfare spending. This was once called the European Social Model and was regarded the reason we do have the share of global GDP we now enjoy. But, this notion is now passé.

However, something has to give in the “pacta sunt servanda” spirit. The Maastricht Treaty does envision structural measures for any country whose surplus exceeded 4%. The German surplus stands now at 7,3% and the forecast for 2014 is 7,4%. One answer is investment, which is not redistribution per se, but does stimulates employment that as we all used to admit, when we were all Keynsians, is the type of expenditure with the biggest multiplier. For instance, investment in energy infrastructure is clearly and badly needed in Germany, especially as energy-intensive manufacturers are feeling the heat of the twin objective to move away from nuclear and fossil based power. A thought would be to invest in European infrastructure, such as the mythical and largely abandoned Helios project, that is, if project development could keep pace with unfolding crises.

Ultimately, this kind of investment resonates with the need to address “structural imbalances” that have little to do with merit or sin. Opting for investment, which is more politically realistic, would in essence constitute a form of European “regional redistribution,” which is very much needed in order to address imbalances in any and every economy with a common market and currency. After all, it was an insistence on labor intensive infrastructural projects that helped uplift the US and European economies from the precedent Great Depression of the 1930s. But, this must be European investment, not German.

This is an important discussion, which should be held prior to the European elections and, hence, during the Greek Presidency. Alas, to the benefit of Euroskeptics in the South and in fear of Euroskeptics in the North, this discussion is not likely to take place. But, it must. If we are to maintain the European project on track, redistribution should be a “strategic option” rather than “a concession,” let alone a so called “charitable handout.” Alternatively, pacts will frail and increasingly be less served. In this EMU community of ours we are, inevitably, more than the sum of our parts. This is a lesson not learned.

 Άρθρο στo «European Parliament Today», 09/02/2014

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