Cause and Effect in European Politics and Law

Merkel's measures

Ralitsa Kovacheva, June 8, 2010

Now it's Germany's turn to announce spending cuts and it made it in the German way - 80 billion euros. The objective is reduction of the fiscal deficit, which is expected to reach 5 percent of GDP this year, to the limit of 3 percent, according to the Stability and Growth Pact.

The austerity measures include cuts in subsidies for parents, 10,000 government job cuts over four years, and higher taxes on nuclear power.

"Germany has an outstanding chance to set a good example", said Mrs Merkel, quoted by BBC.

Merkel's measures, however, caused a split of opinion. At the meeting of the G20 ministers of finance a few days ago, the American Treasury Secretary Timothy Geithner expressed the concerns of many countries in the Group, that the restrictive measures imposed in Europe to deal with large budgetary deficits put recovery at risk. According to many economists, the great challenge to Germany would be encouraging domestic consumption because otherwise the budgetary measures will only stimulate its already high trade surplus.

At the same time, as the Financial Times writes in a comment, the big problem of the euro area is that banks were not subjected to auspicious stress tests, like in the U.S. Similar opinion expressed a few days ago the former Belgian Prime Minister, now leader of the Liberal Democrats in the European Parliament, Guy Verhofstadt. Eurozone finances are channelled through banks, not securitised like in the US, the newspaper writes. “Germany, rather than admitting the state of its banks, rescues Greece to bail them out on the sly, at the cost of stoking popular outrage. The longer leaders suppress how bad things are, the worse the outcome.”

The lack of transparency is the biggest problem in Europe, FT columnist Wolfgang Münchau says. According to him, it was the uncertainty surrounding the rescue mechanism agreed among the eurozone countries (the so called Special Purpose Vehicle) that has caused distrust in the markets. “The market panic would never have arisen if the ECB had provided details of its bond purchases, or if European finance ministers had clearly communicated which elements of the SPV had been agreed and which had not. In the absence of details, people assume the worst. Last week they did.”

Transparency is not something in which the EU, and the ECB in particular, excel, wrote Münchau without saving sarcasm and predicted: “My impression is that the current discussions in Brussels and Frankfurt are primarily about Brussels and Frankfurt, not about providing sustainable solutions. For that to happen, we need – and probably will get – a much, much bigger crisis.”

Monday marked a new market bottom for the single European currency, and finance analysts from the London City spelled the collapse of the euro area within the next 5 years. It is now obvious that to prevent this, the European countries and institutions, led by their leaders, must pay a high price - that of truth.