Germany’s formula isn’t eurocrisis’ solution

Angela Merkel JM Barroso

The Daily Telegraph‘s Ambrose Evans-Prichard has written an excellent piece about Greece, in which he says: “These nations will remain trapped in slump and mass unemployment until they take matters into their own hands from a debtors cartel, confront the head-on gunboat creditors from a position of strength, and dictate the outcome. But first they have to defenestrate out their own cowed elites.”

Indeed, Greece, with inestimable help from the Troika, will by year end reach a public debt rate of 176% per GDP. It has suffered a 25% economic contraction since 2007, and it will fall a further 5% in 2013. The situation is grotesque: no one admits the debt cannot be repaid, and the burden increases year after year for German taxpayers.

The only solution for Greece–even though neither politicians nor citizens seem aware of it–is to default and devalue. Five years ago, simple depreciation could have possibly been sufficient: it would have made exports cheaper abroad and pushed up investment returns, all of which attracts foreign capital.

This would also be useful for, let’s say, Spain, of course. Spanish exports would rise quicker than they are doing know through a painful internal adjustment. Bluntly put, too, one wonders how fast many of the now empty flats would be sold. And the recovery of the internal demand would turn private investment more profitable, and capital would be more affordable.

But today, much more would be required. The depreciation should be more intense than in 2008, which means a higher contraction in income levels and higher uncertainty. The question, though, isn’t if it’s too late but if we’ll be in even a worse situation in five years time.

The past years tell us that in 2018 Europe will be lucky to suffer today’s recession. To really tackle the state of our economies, Brussels should admit that most countries cannot repay their debts with the current anti-crisis plans, and that while Portugal or Greece can be rescued, other major economies of the Eurozone are too important to let them fall. The euro authorities apply little sticking plasters to hide the reality of falling incomes and rising unemployment. The currency union needs more if it is to survive.

Internal reforms are the cure-for-everything option. But when it is imposed without any cushion, societies rebel against it and sections of the political and economic systems that have profited from collusion of interests join the confusion to impede real change. Foreign investment stays then far from their economies, which stall and lose steam without remedy. Someone explains to us how merely copying German mechanisms of restructure would in any way address the rest of the Eurozone members’ troubles, please.

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://

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