A blinding light terraced Paul to the ground, transforming a zealous persecutor of the Church of God into a Saint. Olli Rehn’s conversion to Keynesianism will not ensure him a safe place in heaven, as you might imagine. Not even much compassion as critics express scorn for his sheer ignorance of the great British economist’s core message, while deficit zero-tolerance pundits feel deeply betrayed.
Yet something is moving in the EU. Those who up to now advocated doses of further austerity to cure Euro zone ailments, start faltering at the huge damage inflicted on the economy. While formidable efforts to redress public finances have been achieved, prospects look dismal in months to come. There is a growing sentiment that going down the austerity road will lead us nowhere, except to a deeply rooted recession.
The Economy Commissioner presses now those countries disposing of ample room to increase their demand to make an effort. Idle warnings, as Germany well entrenched in an electoral year won’t move a single inch. Voters there are far more attracted by a balanced budget and a strong Euro, than by trying to solve their neighbours’ worries. Ms Merkel made it crystal clear with her dubious reference to others melting like the snow for the sake of preserving orthodoxy.
Would it make much difference should Germany increase its home demand? It seems rather questionable. The real hurdle Euro zone is confronted with is its appalling governance. While monetary policy only cares about price stability in the midst of a severe recession, fiscal neutrality is enshrined as the only plausible way of avoiding undue interference. While safeguarding against inflationary bouts, this model inevitably leads to sluggish growth performance. Its shortcomings also induce a greater instability than was foreseen.
Even since the Greek debt crisis unravelled, investors have lost faith in the Euro as a rock-solid currency. Lack of unbending support from partners led Athens to restructure its debt. Thus, no public debt can be considered to be a hundred per cent sure. Even if the ECB promises to buy large chunks of troubled countries liabilities, subject to strict conditioning, this arms’ length involvement looks far less reassuring that other Central banks’ pledge to buy as many gilts as the market might sell.
Just compare the Euro largely diverging risk premiums with the petty interest rates other deficit-ridden countries manage to keep. No wonder they can offer their enterprises and households a good reason for financing investment and consumption. So long as the Euro zone doesn’t overcome this blatant shortcoming all conversions to Keynesianism could prove of limited use.