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Dec 4, 2011

Is Germany Saving the Euro?

One of the most dangerous fallacies of our time is that austerity will spur growth. Wait, I’m not a neo –Keynes. The notion austerity will grow growth is just a pretext European politicians use to appease the people when their countries are in the process of painful structural adjustment programs.
It makes their economy more competitive in the long run, although it’s at the expense of near and medium growth. As I like to say, they still need to spend at the end of the day, after adjustment programs are finished.
For most European countries, the debt-to GDP ratio is very large. They need to cut first and spend later. The woes in Eurozone are caused by its politicians.  The politicians promise they will offer carrots to voter once they are elected. After being elected, they deliver the promises to get more vote ballots.
As one can notice, the social welfare is too generous. Subsidies, early retirement age, longer vocations, to name a few, have been contributing to high debt.  Most politicians have been doing this for a long time. As time passes by, the economy becomes less competitive and the debt turns unsustainable. When the crisis hit, they chose to cut first. It’s putting a drag on global economic recovery. 
If there were a coordinated effort to urge countries to spend altogether, we may have got out of this mess. Chancellor Merkel recently made it clear she wants a fiscal union. It’s a really, really a good idea. More stricter and binding rules for all countries belong to Eurozone.  I believe the main motivation behind a fiscal union is the fear of the breakup of Eurozone.
If the fiscal rules are not strict and binding, the debt will continue to grow. It will explode at some point. Yeah, the rich countries could bail the debt-hit-countries out. But its policy is not always working and fast enough. And each country is refrained from printing money. So, the only solution is to default and devalue.  The bottom line is Eurozone breakup, if the nothing is done.
Good idea. But I’m not sure if it comes at the right time. Mrs. Merkel offers no quick fixes on current crises. She said it likes a marathon. It will take years to solve the crisis. Everyone, save Germany, is exhausted and can’t continue to run a marathon anymore. If the economy doesn’t grow for too long, some countries may choose to default and devalue too. 
I think Germany really needs to soften the position. Some of the austerity measures should be lifted to give modest growth a chance. It would reduce the backlash against the measures and of course Germany itself. Fiscal union is a good idea. At the same time,  Time is running out too fast.
Countries interested in fiscal union must do something to make sure they have enough time to get it done.  Lifting some austerity measures is just a suggestion. I’m not familiar with Eurozone. I think they can do more than that.  Patients being sick need to take some rest to prepare for another long journey. Yes and No, I’m not sure if Germany is saving the Euro.  The media will unfold it anytime soon.