Tag Archives: Germany

Why Europe Stalls and Drifts

Meltzer 3Dr. Allan H. Meltzer is an American Economist and the Allan H. Meltzer professor of Political Economy at Carnegie Mellon University’s Tepper School of Business. He is the author of a large number of academic papers and books on monetary policy and the Federal Resrve Bank. Dr. Meltzer’s two volume books, “A History of the Federal Reserve”, are considered the most comprehensive history of the central bank.   He is considered one of the world’s foremost experts on the development and application of monetary policy. Currently he is also President of the Mont Pelerin Society.
Dr. Meltzer originated the aphorism “Capitalism without failure is like religion without sin. It doesn’t work.

“The Italian election, like the French election earlier, showed the public in both countries unwilling to continue five years of endless austerity with no program to restore growth. Other elections in troubled countries are likely to produce a similar result.

On a recent visit to Greece, French president Hollande announced that Europe’s decline was over. Would that it were so, but Italian voters were right not to agree. President Hollande urged French companies to invest in Greece. Bad advice. French costs of production are high, but Greek costs are higher. Despite the considerable decline in Greek, Italian, and Spanish real gdp since 2007, adjustment is far from complete.

Before the Italian election, financial markets showed signs of optimism, encouraged by the ECB policy of supporting borrowing country debts, expanding its balance sheet and lowering interest rates. As owners of debt issued by the indebted countries, lenders gain when interest rates fall. But unemployment rates continue to rise in the indebted southern countries, and with the important exception of Germany and a few other northern countries, production and output continue to lag.

The main reason for the lag is not simply low demand or large debts. Production costs—unit labor costs, real wages adjusted for worker productivity—are vastly different in Germany and in the heavily indebted southern countries. When the crisis began, production costs in Greece were about 30 percent higher than in Germany, so Greece produced very little and imported much. Production costs in other heavily indebted countries were 20 to 25 percent higher than in Germany. That’s a big burden to overcome before growth resumes.

Growth will not resume until production costs in the indebted countries decline. That requires either a substantial permanent increase in productivity, a reduction in real wages, or both. Some adjustment has occurred but, alas, much of the change is not permanent. Austerity reduced the number of employed workers, many of them with little skill and low productivity. Gains in measured productivity growth from this source are not permanent changes, so a large part of the reported reductions in unit labor costs are temporary.

Some adjustments have occurred but major cost differences remain. In Greece, the private sector has been forced to adjust, but the Greek government failed to keep its promise to reduce public employment. That will maintain excessive government spending, and deficit targets will not be met on a sustained basis. Large reductions in public sector wages brought the primary deficit down, but redundant public sector workers lower public sector productivity, raise costs, and delay adjustment.

In Italy, the Monti government undertook some reforms, but the government continues to support union and corporate monopolies. And the Italian parliament did not agree to many of Monti’s proposed reductions in government spending. Labor and many product markets remain closed, far from the open, competitive markets needed to increase competition, lower production costs and raise productivity.
After five years of slow growth, high and rising unemployment rates, the prospect rises that voters in other indebted countries will, like the French and Italian voters, reject additional spending reductions, tax increases and more painful deregulation. Europe must find more effective policies that reduce costs of production toward Germany’s. In his recent book, Professor Harold James showed that in the 40 years of negotiations leading to the adoption of a common currency, all of the problems that now beset the Euro-zone were discussed repeatedly. Everyone understood that a common currency required enforceable fiscal and banking rules. That didn’t happen.

Before there was a Euro, countries adjusted misaligned production costs by devaluing or revaluing exchange rates. Fiscal austerity is a poor substitute. It works slowly, if at all, because elected governments are reluctant to implement promises. A majority of voters rebel against years of austerity with no evidence of renewed growth. And politicians are reluctant to adopt deregulation that eliminates state sponsored special privileges. Further, austerity brings out a political opposition that promises to restore growth and end austerity.

For several years, I have proposed a policy that combines growth and fiscal rectitude. Let all the heavily indebted currencies jointly agree to join a weak euro. Let the weak euro float against the stronger northern euro. When the weak euro reduces production costs of the heavily indebted, southern countries by 20 or 25 per cent, the southern countries can rejoin the “hard” euro, if they accept fiscal reforms that are hereafter subject to approval by the Brussels bureaucracy or the northern countries. If they do not accept fiscal restraint, they cannot rejoin the hard euro. A fixed exchange rate or common currency requires limits on fiscal independence.

The Italian election returns sent a message. After five years of decline in living standards, voters oppose more austerity and further restraint without growth. Restoring a sound euro requires policies that restore growth while ending expansionist government policies and heavily regulated labor and product markets.

Allan H. Meltzer is the Allan Meltzer University Professor of Political Economy at the Tepper School, Carnegie Mellon University and Distinguished Visiting Fellow at the Hoover Institution. He is the author of Why Capitalism?, Oxford 2012.


PapandropulosDr. Athanase C. Papandropoulos studied economics, politics and media communication in at the university of Mons, university of Liege and university of Lille. He obtained his PhD in Economics in Mons.

He has become one of the leading European personalities among media people, especially in European and business affairs.

He is International Honorary President since 1998, and Former International President 1992-1998, Association of European Journalists;   Anchorman for financial matters at SBC TV; Editorial consultant at “European Business Review” magazine.


This time the situation is indeed very serious. A new party made its appearance in German politics and is composed of economists, lawyers and Christian Democrat politicians who believe in the dissolution of the euro area before this, they say, breaks Germany. The new party will be called «Alternative for Germany» and its basic philosophy is the exit of Germany from the euro zone and return to the Deutschmark, or another currency involving The Netherlands, Austria, Finland and any other country shares the German positions on competitiveness, fiscal discipline and reduce government borrowing.
«Joining the euro zone and the adoption of the single European currency proved fatal mistakes, that undermine prosperity. The old parties, not only do not understand the mistakes they made, but continue to grow», said Hans-Olaf Henkel, former president of the Association of German Industries and well-known europhile. «In my professional life I made the serious mistake some years ago supporting the euro», adds the German industrialist, who has a strong influence on German political and economic lives.
«Our exit from the euro is now imperative. Differences between North and South is the cancer of Europe, which self-destructs. The Mediterranean countries can maintain the euro to devalue and try to deal with their debts. May be so subsided threat of bankruptcy for these countries», says professor Bernd Luque, who is also a leading member of the new party. «When we see the Italians vote for Bepe Grillo and ignore their massive debt and to deal with it, we do not understand why German taxpayers should tend a helping hand», says the German economist Kurt Hetzel, member of the new party. «The Italian elections demonstrate the real risks for the euro. To the extent that the repayment of excessive debts of Southern Europe depends on political decisions of their peoples and electoral choices, something is not clear», argues Horst Keller, journalist, commentator on German television channel ZDF. Moreover, recent poll conducted on behalf of the channel shows that 69% of Germans believe that the euro is disastrous for the economy and 49% favor the exit of Germany from the euro zone.

Based on these political developments in Germany, many European observers point out that, on the one hand, Europe has embarked on a very slippery slope and, on the other hand, the German chancellor Mrs. A.Merkel elections next September is now facing very seriously the specter of defeat. This is because the new party can achieve an electoral score of around 10%, which mainly comes from the Christian Democrat area. Therefore, there may be quite a messy political situation in Germany after the September elections. The Social Democrats could be the first party again, but without the ability to form a majority government. «The Social Democrats, in Agenda 2010 managed to strengthen the German economy by making reforms that ultimately cost them power. Under these circumstances, the return to power would lead to even more reforms», says journalist A.Frouktman.
The latter clearly hinted the former Social Democrat chancellor Gerhard Schroeder, who, in an interview to the newspaper Bildt, said that in the new and highly competitive world, Germany should maintain its position, for the benefit not only of the people but also of Europe. These words of the ex-chancellor –who, in essence, the Agenda 2010 is the man who created the conditions for the high flights of the German economy– mean much, in our opinion. Essentially, we have reason to conclude that, with respect to fiscal discipline and political management of the public debt, Germany is not going to put too much water in the glass of wine. Moreover, the trend of the euro is doubtful, if the European Union decides to go ahead to the economic union, after ten years of monetary inflation.

So, if Germany quits the euro zone, who will give loans to the vociferous populists of the South?

Mind the gap (North and South Europe)

Alexis Papachelas (2)Mr. Alexis Papachelas is a guest editorial writer to The Business Thinker. He is currently the Executive Editor of the long standing and highly respected daily Greek newspaper “Kathimerini”.


The Cyprus crisis is deepening the cultural gap between the north and south of Europe abruptly and dangerously.

Here in the south, we feel a confirmation of the stereotype of Germans and Finns as being rigid and obsessive and playing the game according to the toughest of terms.

Up there in the north, the stereotype of southerners as being incapable of facing up to reality and clinging in vain to their lifestyles and a generous state funded by foreign money is taking deeper root.

The European project has been derailed by the first big crisis, obviously because it was designed with only the good days in mind. The chasm between south and north is hard to bridge because, thankfully, we are all democracies.

As impending German elections push Chancellor Angela Merkel to take a more extreme position, the vote in Italy and public opinion polls elsewhere show that anti-systemic forces are gaining ground.

It will take a lot of hard work and some visionary leadership – which as yet is nowhere to be seen – to salvage the ambitious European project, whose main objective was to refute the lessons of history that see the continent either at war or in the grips of a major crisis every 40 years or so.

Greece, however, is a particular case, a country that since its birth has been torn by the dilemma of whether historically, culturally and politically it belongs to the East or West.

In Greece, as is the case in Cyprus, serious crises tend to activate deep rifts within society. We have always had and continue to have the usual groupings: those who want the privileges of the Western club of nations but on softer terms tailored to our Eastern proclivities; those who wrongly believe that we should shed our national traits in the blender of Euro homogeneity; and those who want us to maintain our particular characteristics within the context of Europe and to become a profoundly Greek yet modern European nation.

But, emotion and history aside, the debate of where Greece lies in the greater scheme of things and where Europe is heading should be based on specific ideas. Accusing everyone treading the current path of treason is nothing to go on.

We all love our nation and we will give our support to alternative propositions that protect the nation’s interests – at least as far as these alternative paths are well thought out and not based on dreams of geopolitical and other oases that are ultimately nothing more than mirages in the desert where Greece and Cyprus currently find themselves.