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Forum Post: Spain and Greece Are Being Forced to Suffer to Save Germany From High Inflation

Posted 8 years ago on Oct. 1, 2012, 4:01 p.m. EST by LeoYo (5909)
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Spain and Greece Are Being Forced to Suffer to Save Germany From High Inflation

Monday, 01 October 2012 10:28 By Dean Baker, Truthout | News Analysis


People in eurozone countries are sleeping in the streets and eating out of dumpsters in increasing numbers due to the callous austerity demands of the now-infamous troika: the European Central Bank, the European Commission and the International Monetary Fund. In both Greece and Spain, tens of thousands of people turned out in the streets for protests against the austerity measures being imposed by their governments. These measures are necessary in order for these governments to stay in the good graces of the troika that controls the rescue funds: the European Central Bank (ECB), the European Commission and the International Monetary Fund. The troika wants to see these countries hitting their budget deficit targets as a condition of being eligible to receive continued to support. The problem with the troika's agenda is that the budget cuts and tax increases they demand as a condition of continued support lead to a further contraction of the economies of Greece, Spain and other crisis countries. When the economies contract, tax collections fall and spending on transfers like unemployment insurance rise. This leads to larger deficits, causing the countries to again fall below the deficit targets.

While imposing austerity demands on the crisis countries might be great sport in Berlin and Brussels (you get to show how tough you are), it is ruining millions of lives in the crisis countries. The New York Times had an article on Spain last week in which it reported the country's 25 percent unemployment rate has pushed many formerly middle-class people to sleeping in the streets and eating out of garbage cans. It reported that many restaurants and grocery stores are now putting locks on their dumpsters to keep people from eating from them. There are similar horror stories in the other crisis countries in the eurozone.

The absurdity of this suffering is that it is entirely preventable. If the ECB was determined as a matter of policy to promote a higher rate of wage growth and inflation in Germany, then it could facilitate the sort of growth that could bring the unemployment rates in Spain, Greece and elsewhere to more normal levels.

The basic story is very simple. As a result of the fact that Germany had strong productivity growth in the last decade, coupled with sharply constrained growth in labor compensation, the price of German goods fell substantially relative to the price of goods produced elsewhere in the eurozone, most notably the current crisis countries.

This divergence in relative prices led the crisis countries to have large trade deficits with Germany. In the last decade, these deficits were supported by lending from German banks. This flow was most important in the cases of Spain and Ireland, where the lending helped to fuel huge housing bubbles.

When the bubbles burst, the lending stopped, but the trade imbalances remained. If a country has a trade imbalance, then it must either have negative private savings, negative public savings (that is, a budget deficit) or some combination. These countries are not going to have negative private savings, since consumption and investment are both being held back by the collapse of the housing market and the economy. This means that as a matter of arithmetic, the large trade deficit will largely correspond to the large budget deficits that upset the troika.

In the short term, the trade deficits and the implied budget deficits will have to be supported by lending from the IMF, the ECB and the various bailout funds they create. The longer-term fix to the situation requires that German prices rise relative to prices in the crisis countries.

The easy way to accomplish this result is to have prices in Germany rise more rapidly, for example, 4-5 percent annual inflation for a number of years. The harder way is the path currently being followed. The hope is that with enough unemployment, wages and prices will eventually drop or at least not rise as rapidly as in Germany, allowing for a return to competitiveness eventually. The costs of going this route are the people going hungry and homeless in Spain and Greece. The cost is a generation of young people being denied the opportunity to start a career. It is a generation of older workers thrown out of the labor force with, at best, a meager pension to support them in a premature retirement. We are talking about tens of millions of lives being ruined, but economists tend to prefer dollars and cents. If we look at the IMF calculations of the output gap in Spain - averaging their 2007 and 2012 estimates of potential gross domestic product (GDP) - the lost output has already been more than 20 percent of GDP. This would correspond to more than $3 trillion in the United States. With little prospect of much improvement on the horizon, the loss in the next four years could easily double this amount. That would imply the equivalent of $25,000 being thrown in the garbage for every man, woman and child in the United States.

Spain and the other eurozone crisis countries are being forced to suffer enormous pain just so Germany doesn't have to see the same sort of inflation rates it experienced in the prosperous 60s. This is close to madness. If there were any justice in the world, people across Europe would grab there pitchforks and go after the flat-earthers with PhDs. Unfortunately, the people who have wreaked so much havoc across the continent will likely continue to call the shots, at least for the foreseeable future.

Copyright, Truthout.


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[-] 1 points by hchc (3297) from Tampa, FL 8 years ago

Italy is starting to realize whats going on....


Excellent piece, and shows that when the public finally has enough, real change can occur.

[-] 1 points by mjbento (74) 8 years ago

There is a way out of this madness.

All bailed out countries must refuse to pay the debt. Enough is enough. If you're a debtor you have to pay your debts within your possiblities not commit yourself to blind austerity from an abject greed creditor that will kill you.

Greece, Spain, Italy, Portugal, Ireland. Time has come. KICK Germany ass. They don't give a sh*t for other European countries, they only care for their nostrils, that's why they will be left alone. Guess what: because of "bad country-students from Southern Europe", Germany will be the only country with euros... What a success! Long live the euro even if it kills our neighbours! Arbeit macht frei, germans! Well done for your solidarity, and excuses!

[-] 1 points by LeoYo (5909) 8 years ago

If any two countries give up the euro, the euro will be finished.

[-] -1 points by yobstreet (-575) 8 years ago

Not any two, if Germany gives up the euro they're done. And that's exactly what they intend to do despite studies which indicate a rise in unemployment and a drop in GDP. It's been highly unpopular from the start because in the initial one for two currency swaps, they were told that utility bills and the like would be adjusted accordingly. But that did not occur; retailers in particular took advantage to only split the difference and the Germans immediately lost up a third of their buying power. I don't see the EU as surviving in light of the added fiscal stress, which Germany could well do without.

[-] 1 points by LeoYo (5909) 8 years ago

I stand by my statement.

[-] 0 points by yobstreet (-575) 8 years ago

There's nothing wrong with your statement; the euro would be finished.

[-] 1 points by hchc (3297) from Tampa, FL 8 years ago

"Unfortunately, the people who have wreaked so much havoc across the continent will likely continue to call the shots, at least for the foreseeable future. "

Exactly. And the people are fine with it. We are gearing up to put the whole system in place again, regardless of how corrupted everyone knows it is.

No demands. No new faces. No new parties. No real involvement by a sizable portion of the population.

[-] -1 points by CitizenofAmerika (-71) 8 years ago

So you are essentially claiming that nazism is at the root of Germany's concerns?