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ING: Germany driving shift in European fiscal policy

Evropa

  9:59

The German example of fiscal responsibility has become the global model to follow in the new economic reality

ING’s Mark Cliffe says the Czech Republic is outdoing Germany in some respects foto: © ČESKÁ POZICE, Richard CortésČeská pozice

Germany has a large role to play in the shift that took place in economic policy worldwide during the last year, Mark Cliffe, chief economist of the ING Group, told Czech Position.

He said that there has been a dramatic shift in fiscal policy. “Whereas last year the governments were busily stimulating their economies, indeed seeing their budget deficits rise substantially, we’ve seen a sudden reversal and most governments to a greater or lesser degree are reducing their budget deficits, restraining their public debts,” Cliffe said, adding that this was partly due to the financial markets’ reaction in to the problems in Greece earlier in the year.

The reversal has turned into a policy trend. Germany has been at the forefront of this debate in the European context by pointing out that those countries that have been running too big deficits or having too large debts now need to do something about it on a long-term basis, he said.

Cutting public deficits has become a priority following the reaction of financial markets to the amount of state financial aid pumped into the economy. The trend was further accelerated by the situation in Greece and in Ireland this year. Currently, countries are becoming more aware of what needs to be done financially on a longer-term basis. ‘Germany is also very keen to emphasize its anti-inflationary credentials’

Germany’s position is even further enhanced by its low inflation. “Germany is also very keen to emphasize its anti-inflationary credentials,” Cliffe said. “This is a problem for countries around the world because the Germans have quite low inflation.” In order to compete with Germany, the other European countries must have an even lower inflation or deflation that puts pressure on prices and wages. In this context, the Czech Republic is in a favorable position because its economy is driven by the German export engine.

“The Czech Republic is a very interesting case in point because the Czech Republic has very close economic ties with Germany,” Cliffe said, indicating the amount of foreign direct investment in recent years. “In some ways the Czech Republic is outdoing Germany if you look at what is happening to it public debt, its inflation and indeed even interest rates. And, of course, it has been very successful plugging into Germany’s export success. So whereas the Czech Republic took a big hit last year when world trade weakened substantially, it has recovered strongly largely on the back of exports,”he said.

However, the advantage of neighboring the German powerhouse is also the main source of risk for the Czech economy.

“I think the main risks for the Czech economy will be primarily external,” Cliffe said. “If we see a significant downturn in global activity, and indeed if we saw a particular downturn in Germany, that would obviously be especially bad news for the Czech economy given its openness and its connectedness to Germany.”

A matter of political will

Cliffe noted that to save the eurozone it is necessary to share the burden that has been picked up by tax payers so far with state bond holders. “There is a lot of deep discussion to be had about how to manage this process. We need to see the economy growing, not just in Germany, but across the whole monetary union. Otherwise the union is in jeopardy,” Cliffe said, noting that Germany has been reluctant to assist to the emergence of a transfer union where powerful economic countries inject finances to weaker members. “In the end that might become inevitable,” he said. ‘We need to see the economy growing, not just in Germany, but across the whole monetary union’

One of the first countries that might need the help of such a transfer union is Portugal. Right now, financial markets are anticipating that Portugal is the next on the list that started with Greece and Ireland and might continue with Spain and other large heavily-indebted EU members.

“Certainly the markets are anticipating that Portugal will be next and that it will have to be supported by the European Union. Of course, behind that is the dread fear that if Portugal suffers this fate then Spain is next in line,” Cliffe said.

“And that is a completely different game simply because Spain is a much, much bigger economy with a much bigger debt,” he said. Spain will contend that they have the situation under control, but markets are skeptical and “want to see more action,”he added.

If the need occurs then saving Spain is possible but by no means certain. “If there is a political will to pick up the bill, then sure, it can be done, but that is something that markets right now doubt,” Cliffe said.

Euro: why bother?

In this context it’s hard to understand why the Czech Republic would want to join the eurozone, he observed. “Given the success of the Czech Republic in terms of economic governance you could in purely economic terms ask a question, ‘Why bother?’ There is obviously some degree of flexibility arising from having your own monetary policy and currency. So yes there are some clear benefits in terms of transactions costs, it would certainly be beneficial I think for people actively engages in trade with the eurozone, but those transactions costs have to be set against the loss of flexibility in terms of monetary policy that would inevitably result from joining monetary union,” Cliffe said.

“Of course the other reason for potentially contemplating joining the monetary union is political because, as we discovered, monetary union is ultimately also a political construct and it may be that it’s seen as politically advantageous to be seen as part of the club rather than being outside looking in.”

In the future, conditions for joining the eurozone will probably get tougher. Apart for Estonia there is no apparent timeline for the other CEE countries to join the monetary union. Cliffe said that the external environment will dictate the behavior of governments in CEE with regard to the euro and whether they will fall for the social pressure created around the restrictive fiscal measures or not. ‘Tough political choices will have to be made’

“There were some self-inflicted wounds in terms of excessive credit growth and other policy mistakes, but in general they were victims of a global downturn. Anything that leads to further shocks in the external environment will make life all the harder for these economies. Tough political choices will have to be made in terms of convincing the markets that they are worth being financed,” Cliffe said.

A step east from the turmoil, CEE countries seem better off than the problematic Southern European economies. Cliffe said that in the CEE the stronger countries have been very successful in becoming more open and more globalized. “Part of the solution to Europe’s difficulties will revolve around remaining competitive, whether that is through a relative weak euro or through structural reforms. CEE has made a huge amount of progress compared with the peripheral economies in the eurozone because these have run into difficulties with public debt and competitiveness. That is not in general the problem in CEE. From that perspective, CEE has much brighter prospects for growth than other parts of Europe,” Cliffe concluded.

 

 

 

 

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