Euros entered circulation on January 1, 2002, and for six years, they were practically growing on trees in southern Europe. But the bubble got pricked. Since then, the monetary union has been in crisis—almost half of its existence! Until late last year, when it was decided that the worst was over, that the problems had been solved. But now, confidence in the future of the monetary union is weaker than ever. And this time, there is a hue of resignation in Germany.
The Federal Association of German Banks (BdB), not normally given to pessimism, is worried. During the bi-annual economic forecast on Wednesday (slide show and speeches), Stefan Schilbe, chairman of the Committee for Economic and Monetary Policies, described 2013 as an “economically difficult and bumpy year.” The Eurozone would see “more or less stagnation,” spread unevenly between countries. For Germany, he forecast growth of only 0.7% in 2013—after a “the collapse” in the fourth quarter that had been “surprisingly steep.”
The largest threat: the election results in Italy. The top three parties distanced themselves from, or outright attacked, the reform and austerity policies that Prime Minister Mario Monti, Germany’s hand-picked and now deposed point man, had implemented. And that, Schilbe said, ignited “new uncertainties” about “the future of the European monetary union.”
Under this uncertainty, companies would be less inclined to make investments and contribute to growth. He saw other threats as well: deficit targets for 2013 were moving out of reach in some countries. The fiscal problems in the US were “piling up ever higher.” And then there were the “side effects of expansionary monetary policies,” among them: risks to price stability, the formation of bubbles, and “an escalating currency war.”
“The past few days added new uncertainties,” echoed Hans-Joachim Massenberg, Member of the Executive Board, during his part of the presentation. The belief before the elections in Italy that the debt crisis had been overcome proved “deceptive,” he said. But it would be wrong “to give in to panic.”
There had been signs of progress, he said, including in Italy where the deficit had dropped below 3% of GDP. Economic reforms needed time. Confidence in the future of the monetary union could only be strengthened if fundamental efforts were undertaken toward more stability and competitiveness. Austerity all the way through. “Turning around would be fatal,” he said—fatal for the monetary union.
Then he plowed into monetary policy, how different groups expected to solve the crisis through a prolonged phase of negative real yields—”a hidden and creeping asset tax” that is politically easy to push through. But he warned that “grave problems” would arise from them that could counteract any seeming benefits in overcoming the debt crisis.”
The longer this period of extremely low interest rates continued, the greater the danger of directing capital into the wrong channels and assessing risk incorrectly, he said. Investors and savers who wanted to safeguard the real value of their assets could do so only by exposing themselves to large risks. This would boost “the formation of new bubbles and imbalances that can in the end only lead to a new financial crisis.”
Pension funds and life insurers that had to reach a minimum yield would get into particular trouble. To counter the problems, regulatory restrictions would have to be softened. And investors would therefore “be forced to take on higher risks.”
Low interest rates caused other problems: They eliminated the incentive for countries to reduce deficits. And low returns could hinder investments in the real economy and therefore impact future growth. Thus, Eurozone governments should “under no circumstances seek this seemingly easy path” to reduce the debt burden. “We must not underestimate the risks of these policies,” he added.
Neither the BdB nor the speakers represent Germany, or the German government. But their emphasis on “staying the course” by pursuing reforms is part of the German solution. Consistent austerity all the way through. Or else, “the future of the European monetary union” would be at risk. Because the rift between the countries would be too wide.
Their response to the Italian election results—including the word “panic,” albeit in an encouragement not to—has a hue of resignation now visible elsewhere as well: that the days of the monetary union in its current form—given the resistance to austerity in some countries and their need to devalue the currency instead—might be numbered.
And in Italy, they’ve had it. Former Italian senator Sergio De Gregorio confirmed that he’d received €3 million in 2006 from Silvio Berlusconi. “Of course I took the money,” he said. It brought Berlusconi back to power. Seeing this sort of thing on a daily basis, 8.7 million Italians voted for Beppe Grillo’s 5-Star movement. It wasn’t enough to govern, but it was enough to give the political establishment conniptions. And show that anger and frustration finally count. Read…. Fear of Nuremberg Trials For Corrupt Italian Politicians.