Nordkapp’s Pablo Díez: “devaluation would be swift, austerity is slow and painful”

By Julia Pastor and Tania Suarez, in Madrid | Pablo Díez, at Nordkapp’s asset management department argues that implementation of austerity as the only measure to sort the crisis out will bring social chaos in Europe. Yet, Díez is unsure about how right Spain’s president  Mariano Rajoy is in rejecting the deficit target of 4.4% this year.

Do you think it would have been ‘suicidal’ to commit Spain to Brussels’ 4.4% public deficit target? What is suicidal is Germany’s recipe to overcome the crisis. Germany aims to solve the crisis on the only basis of austerity and that is not possible. Austerity provokes a consumption slowdown, which in turn generates higher unemployment, which in turn generates revenue declines, which in turn makes very hard to achieve any deficit target. Without economic growth, it is suicidal to only apply austerity. To overcome this crisis, austerity also needs the European Central Bank to inject money at a mega-scale to cover current and future financial holes that exist in the European periphery, mainly. This will not generate as much inflation as Germany believes because the credit destruction is enormous. And in any case, some inflation will be preferable to a complete breakup of the euro.

We see Greece is experiencing increasing unemployment vertical rise (already at 21%) despite bailouts. Eventually, Greek politicians, and later the Portuguese, the Spanish and Italians, will find themselves unable to apply the measures proposed by Germany in the way they have been proposed. So it would be best to face Germany, but not because of the deficit as president Rajoy has, but because of the lack of money creation to devaluate the euro.

In general, the Spanish and foreign press have warmly welcomed the request from Mariano Rajoy to Brussels to ease the deficit target. Why do the markets feel sceptical? In fact, the Spanish risk premium has overtaken Italy’s in recent days… Markets look at the numbers, and do not like it when they spot deficits. It’s natural that they are against a measure like the one that Rajoy has decided. I think the correct move was not fighting over the deficit but over the lack of a serious money printing action. All Europeans should exert pressure on Germany so the European Central Bank behaves like the Fed or the Bank of England.

If Rajoy succeeds, could Spain take on a leadership role among the peripheral countries? Probably, Rajoy will succeed, but he has opened the door to more problems and disunity within Europe. He should have rebelled in coordination with all European leaders against Germany for not printing euros. For example, if the euro were to be at 0.25 per 1 USD, European exporters would create jobs, the economy would be reactivated, capital flows would be restored on our financial markets, etc. It’s all about price and a collapse of the euro would achieve quickly and with little pain what Germany is trying to do slowly and painfully.

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