Global Policy Forum

Europe Needs its Own IMF

Tensions between Northern and Southern Europe as to the cause of the Euro crisis have overshadowed the heart of the matter. German tendencies towards blaming the Mediterranean states for low productivity have resulted in the role of the European Central Bank in the deterioration of the Euro being vastly overlooked. This article argues that the European Central Bank, having maintained low interest rates to a generate property market boom, is primarily to blame for the current state of the Euro. Furthermore, for the Euro to be successful, the European Central Bank has to be concerned with more than just inflation.

By Miguel Boyer

March 29, 2011

Among the main difficulties in fighting the crisis in the eurozone has been the belief, particularly widespread in Germany, that the principal culprit is the lack of budgetary rigour and low productivity of Mediterranean countries. Thus attention is diverted from the real causes of the crisis, namely the European Central Bank (ECB) following in the footsteps of the American Federal Reserve, maintaining low interest rates that generate property market bubbles, and the ease with which the private banks (Spanish, German, French and others) financed the property boom throughout the eurozone. The Spanish experience shows that these ideas don't work.

Spain entered the monetary union having complied with the Maastricht requirements. Germany and France didn't, and yet they didn't receive the kind of penalty proposed by ECB president Jean-Claude Trichet. In the following years, Spain had public deficits lower than 1%. From 2005 to 2007, Spain even had budgetary surpluses, while the eurozone showed deficits of -3% to -1%.

Spanish sovereign debt was, and continues to be, the lowest of the large European countries in terms of percentage of the GDP (64%). Thanks to that fact and in spite of attacks from speculators and the downgrading by the rating agencies, the cost of debt servicing is just 2% of the GDP, compared with 2.4% in Germany, 2.6% in France and 4.6% in Italy.

The low productivity of Spanish workers has been much commented upon, yet the most commonly cited figures are from a period of huge immigration and booming construction industry (1996-2001). What most analysts ignore is that during this period the productivity by those in work in Spain was actually higher than the eurozone average for the years 1981-1990 and 2001-10. The hourly productivity rate in 2009 was between that of Germany and that of Italy. Even more telling is that the actual growth rate of Spanish exports averaged 6.1% between 1997 and 2010: rather more than Germany's 5.3%.

Faced with attacks on the Spanish sovereign debt, the government has had to respond with the most severe package of measures in recent decades: tax increases, cuts in civil servants' salaries, a reduction in the public deficit generated by the crisis, a new permanent labour contract with reduced entitlements, retirement at the age of 67 instead of 65, and a reduction in the number of savings banks from 47 to 17.

The response to the crisis by the most powerful countries in the eurozone has been totally inadequate, above all due to Germany's reluctance to help out the countries most affected by the crisis, keeping its citizens convinced that such actions would be rewarding irresponsible southerners at the cost of the "virtuous" north.

Successive German governments have not been able to explain to their citizens that the creation of the euro constitutes an excellent deal for the country, a deal by means of which their exports have grown from 24% of GDP in 1995 to 46% in 2010 while those of France, Italy and Spain have stayed level at 26%. Therefore, when sheer common sense dictates the need to strengthen the stability fund, it has had to be adorned with lessons and "penalties".

The creation of the monetary union did not address the fact that imbalances between such varied economies would need some entity similar to the International Monetary Fund. Created in 1944 at Bretton Woods, the IMF combined the intellects of Keynes and White with the generosity of the US, and provided a mechanism that granted loans at bearable interest rates to help countries in difficulties without introducing Germanic penalty concepts.

The crisis has shown that the European Central Bank has to be concerned about more than inflation. The creation of a group of macroeconomic co-ordinators that advise governments on problems such as property market bubbles is vital. Furthermore, there is a clear need for a European rating agency that does not have vested interests in the ratings and can counteract the actions of the current oligopoly.

The brand new euro pact, economic stability fund and plan for competitiveness have – waffle and soundbites aside – come up with some ideas that are worth pursuing. The most important idea, especially for countries with inflationary tendencies, is that we have to find a reasonable balance between salaries, productivity and prices, which requires agreements between unions and businesses that can be adapted to the circumstances of each company.


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