Hamish McRae: Germany acts tough out of weakness not strength

Economics

Share

There will be global action to support the world economy if everything goes pear-shaped, but things are not yet bad enough and, meanwhile, it is up to the Europeans to sort out their act. That's the main message from the G20 summit in Mexico – not quite as high a waffle factor as there might have been, but with the eurozone as the whipping boy for messing up the world economy for everyone else. The dinner was cancelled between President Obama and the heads of the four eurozone countries at the summit, a clear sign of US irritation.

In the absence of any concerted international action, expect individual central banks to try and boost demand in their own economies. Last week, we had the plan by the Bank of England to increase bank lending to commercial companies, while the latest fall in inflation has led to suggestions that there may be another bout of qualitative easing next month. More important, the US Federal Reserve is holding an important two-day policy meeting and may announce plans to boost the economy later today. The idea is that it might borrow more short-term money instead of issuing so much longer-term debt, thereby cutting long-term interest rates more generally. But the Fed, like everyone else, may hold its fire until it knows more about what will happen in Europe.

That is where the spotlight now swings. There will be a EU summit on 28 June, and, meanwhile, the daily deluge of stories about the Greek cabinet, the Italian austerity plan and Spanish 10-year bond rates will continue. The world has come to a pretty pass when we all have to worry about Spanish bond yields: they reached 7.29 per cent yesterday, by the way, which says that Spain will join Greece, Portugal and Ireland in needing a sovereign bailout, not just support for its banks.

If the next couple of weeks follow the usual pattern, they will be dominated by more ill-tempered debate in Europe about the unwillingness of Germany to pay everyone else's bills. Of course, the point will not be made as bluntly as that. It is wrapped up in calls for "solidarity"; in the argument that Germany has benefited from eurozone membership because that has held down the price of its exports; and that German-inspired austerity is hurting Germany itself by damaging the rest of Europe. Its critics say it must be less rigid in its attitudes; the German response is that the rest of Europe must adopt the same discipline as it has done. Eventually, Germany will cave in.

The key person, of course, is Angela Merkel. My feeling is that the pressure on Germany, and, indeed, on her personally, is profoundly unfair. Germany, remember, went into the euro at too high a rate and has spent the past decade scrunching down its costs – at the cost of stagnant consumption and higher unemployment than most of the rest of Europe. Having worked hard to do the right thing, it is now being blamed for urging others to do likewise. Besides, as Mrs Merkel has herself pointed out, though Germany is strong, it is not all-powerful. In a speech ahead of the G20 summit, she said: "... we're also aware that Germany's strength isn't infinite. Not even Germany's forces are unlimited."

She could have put the point even more strongly. Italy's sovereign debts are larger than Germany's. German demographic prospects are among the most negative in Europe: their workforce is already shrinking.

Its many critics see its insistence on tough bailout terms as an unwarranted expression of German strength, as a political failure in fact. Actually, it stems as much from fears about German weakness in the face of the burden of eurozone debts for which it is implicitly already responsible. So this wounded giant will have to carry on signing – reluctantly – the cheques.

The President and the precedent he ought to remember

Another European story is about to unfold: France's radical economic programme. We don't know the details and it may be that the beast will look different when we do, but President Hollande has now a decent majority in parliament, so has the authority to do pretty much what he wants. So there will be more teachers, a cut in the retirement age, an increase in the top rate of tax to 75 per cent and so on.

People will have their own views as to the wisdom of such action and it may well be that Britain will become the principal beneficiary. But the practical question is whether such policies can be sustained. There is a precedent: the government of the last socialist president, François Mitterrand. His initial economic programme in 1981 included a cut in the working week, an increase in holidays and the minimum wage, a wealth tax and so on. The aim was to boost economic growth. It failed, the franc was devalued, and after two years he did an about turn towards austerity with the "tournant de la rigueur".

Might history repeat itself? Well, Hollande was an adviser to Mitterrand, so at least he has form on the matter.

h.mcrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Tradewind Recruitment: English Teacher

Negotiable: Tradewind Recruitment: This post arises as a result of the need to...

Tradewind Recruitment: Class Teacher Required ASAP In Uminster

£120 - £150 per annum: Tradewind Recruitment: I am recruiting on instruction o...

Ashdown Group: Head of Finance - Financial Director - London - £70,000

£70000 per annum: Ashdown Group: Head of Finance - Financial Controller - Fina...

Ashdown Group: Marketing Executive - Wimbledon, SW London

£24000 - £28000 per annum + benefits: Ashdown Group: Marketing Executive - Wim...

Day In a Page

Read Next
 

I’m not sure I fancy any meal that’s been cooked up by a computer

John Walsh
Labour leader Ed Miliband delivers a speech on his party's plans for the NHS, in Sale, on Tuesday  

Why is Miliband fixating on the NHS when he’d be better off focussing on the wealth gap?

Andreas Whittam Smith
Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness
Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

Homeless Veterans appeal

Homeless in Wales can find inspiration from Daniel’s story
Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

Front National family feud?

Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
Pot of gold: tasting the world’s most expensive tea

Pot of gold

Tasting the world’s most expensive tea
10 best wildlife-watching experiences: From hen harriers to porpoises

From hen harriers to porpoises: 10 best wildlife-watching experiences

While many of Britain's birds have flown south for the winter, it's still a great time to get outside for a spot of twitching
Nick Easter: 'I don’t want just to hold tackle bags, I want to be out there'

'I don’t want just to hold tackle bags, I want to be out there'

Nick Easter targeting World Cup place after England recall
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore