Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece
My students have a hard time understanding and mastering the Keynesian, Monetarist and Neoclassical theories of macroeconomics. In this academic year I am going to add a new chapter in the course’s syllabus: the Merkelianism. It is a new theory of macroeconomic policy that combines all the advantages of classic economics but without any of the policy disadvantages: growth and development with negative borrowing cost, a depreciation that increases international competitiveness without an increase in the money supply, inflation or systemic risk and finally securing the dominant position in international markets through foreign “rescue” packages.
Adopting the euro as the common currency in the Eurozone was hailed by politicians, economists and businessmen as an important step towards the ideal of the European economic integration by creating an Optimum Currency Area as it was envisioned by Robert A. Mundell. The new currency was even more successful than many economists thought and it has since become the second, after the dollar, most important reserve currency for central banks and approximately thirty countries are pegging their currencies to the euro. The new currency eliminated exchange risk and minimized transaction costs within Europe, enhancing inter-European trade and the efficient distribution of capital.
Recently, however, this whole structure is shaken. The European debt crisis was dealt by a set of stunned and politically divided European leaders who reacted too little and too late to prevent a crisis or even dampen its effects before it was transformed in a systemic crisis – with one exception: Angela Merkel. The chancellor of Germany imposed her opinions on the rest of Europe by enforcing a strict set of austerity measures for Greece producing the opposite results for Greece’s stability and growth. Any of my students in macroeconomics can assure you that economics provides two sets of policies to avoid or dampen a crisis:
a. an expansionary monetary policy, i.e. an increase in the money supply that will also lead to inflation
b. an expansionary fiscal policy, i.e. an increase in government spending (investment, salaries, consumption, etc.)
The “aid” package for Greece dictates exactly the opposite:
a. there is no increase in money supply as Germany is strongly resisting it,
b. there has been imposed a very dramatic reduction in government spending of any kind: investment, health, education, social benefits, etc.
Thus, the question my students ask confused is why? Why does Germany seems to destabilize the euro? Beyond any conspiracy theory the answer –not surprisingly- comes again from macroeconomics:
- The uncertainty created by the Greek crisis and the danger of contagion depreciates the euro making German exports more competitive in international markets.
- At the same time, this is achieved without any increase in the money supply that would have resulted in the same depreciation but accompanied with inflation hitting Germany as well.
- The so called memorandum of competitiveness that was signed in the height of the Greek crisis last year, prohibits the Eurozone member states to try and attract foreign direct investment by competing with each other by means of lower corporate taxes and/or by financing investment plans for growth through debt. What is the direct impact of this? It preserves the existing status-quo that finds Germany at the top of the EU competitiveness without any possibility for the other member countries to compete in attracting international investment capital.
- The “aid” packages accompanied with a strict memorandum of austerity create for the European peripheral economies a permanent state of dependence from Germany: directly, since without any provision for growth, in a deep recession for Greece, the provided loans are the only means of government revenue.
- Last, but most importantly, the best effect for Germany is that the uncertainty and instability in the Eurozone is translated in a mass selling of government bonds from other European countries and a corresponding increased demand for the now perceived as safer German bunds. This demand for the safe heaven drives their prices up shrinking yields towards zero or even to negative returns!
Thus, by perpetuating this situation, investors agree to pay Germany for the “privilege” to lend their money to the German government! Why wouldn’t chancellor Merkel try to change anything from this setting getting the best from all worlds? Any economics student can assure you of the superiority of Merkelianism as compared to traditional macroeconomic policies.