Germany’s Drag on Europe

merkel solitude

In this country, economists still air the view that was fashionable before the crisis, namely that of the “Great Moderation” model, which extols the the virtues of an anti-inflationary policy and market freedom as the best recipe for obtaining the best results.

These results may not please everyone. But as the theory behind this model blames unemployment on those who are in work, then if the jobless rate is 20%, it can’t be less.

A lot of things have happened since. The Anglo-Saxon economists who don’t belong to the great Republican Party, which was formerly Lincoln’s, have now become amazingly sceptical about this model. Everyone thinks it’s necessary to initiate public investment programmes – well thought out and managed of course – to activate private investment, which is catatonic.

Without private investment there is no job creation, no innovation, so productivity declines. But I can tell you that the most eminent economists in Spain have continued to be wrong-footed since before the crisis. They are still clamouring for debt reduction, for a return to austerity, when what is slowly killing Europe is precisely that, the austerity spreading from Germany.

They keep focusing on the Spanish government’s faults when it doesn’t have the leverage to do anything about this; in fact, the best thing it has done is to dupe Brussels and let the deficit slide. That’s why we are growing double the European average.

It’s a joke to see some simians calling for debt reduction and praising growth at the same time, when the latter wouldn’t even exist without the other. And the other still exists thanks to the good relations between Rajoy and Merkel, who is letting things ride because she is not at all keen to have another Greece on her hands, only in this case five times bigger.

Meanwhile, Krugman dissects the nature of the problem in a particularly astute way. Europe has a twofold or two-and-a-half fold problem which can be resumed into one: the German doxa.

The first problem is that Europe is in a situation of deep stagnation from which it believes it has emerged periodically for the last eight years. And then it says: this time, yes, we are definitely doing better than the US! But absolutely nothing is moving, expect for Spain of course. And that’s thanks to a debt/GDP ratio of 150%.

The second problem is that the internal devaluation process is not yet complete, so labour costs are still misaligned within Europe.

And the second and a half problem is that the European banks still have billions of non-profitable assets on their balance sheets so they are in need of capital. And as long as the economy doesn’t pick up, this will have to be given prominence, which means a Dantesque fiscal outlook. Because it has to be said that the bail-in model imposed by Germany instills fear regarding the panic and capital flight it would fuel.

So Europe’s problem is increasingly called Germany, deeply rooted in XIX ideas. But in spite of this, there are those economists who don’t understand anything and continue to say that we are the ones to blame…and for the last eight years, or 24 if we count from the introduction of the euro!



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://