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Ailing Eurozone can learn from Britain

Barely a year ago they told us that the Eurozone was at its strongest and that Britain had stepped into the jaws of Brexit and would become the sick man of Europe again

By: N. Peter Kramer - Posted: Tuesday, February 5, 2019

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The paradox is, that the EU hates one of its members having a budget deficit of 2 percent of GDP (Italy) but is totally fine with another member having a surplus of the same size (Germany). Is starving your country of money any less egregious than borrowing to spend?  A parallel can be made with how the European Central Bank manages monetary policies. The ECB keeps, in contrast with for instance the Bank of England and the FED in the US (under pressure of President Trump), interest rates higher than they would be for fear of allowing inflation above the ceiling of 2 percent.
The paradox is, that the EU hates one of its members having a budget deficit of 2 percent of GDP (Italy) but is totally fine with another member having a surplus of the same size (Germany). Is starving your country of money any less egregious than borrowing to spend? A parallel can be made with how the European Central Bank manages monetary policies. The ECB keeps, in contrast with for instance the Bank of England and the FED in the US (under pressure of President Trump), interest rates higher than they would be for fear of allowing inflation above the ceiling of 2 percent.

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By N. Peter Kramer

Barely a year ago they told us that the Eurozone was at its strongest and that Britain had stepped into the jaws of Brexit and would become the sick man of Europe again.

But look now: Italy slipped into recession late last year, the first recession in a mayor EU memberstate in half a decade that will unlikely be the last one. Germany may avoid the two successive quarters of contraction that technically constitutes a recession but it is facing the weakest six months of economic growth since 2012. 

France’s economy rebounded in the final quarter of 2018 but the outlook for all three nations looks insipid, to say the least. And the UK? It is hardly roaring but definitely growing at faster rate than most of the Eurozone countries. Why?

There are parochial explanations for some of the weakness. Italy’s anti-establishment government has been battling over the scale of its planned budget deficit. France is confronting its gilets jaunes, to keep them calm the government has to make an enormous dent in the country’s GDP. 

And Germany? Despite being so close to recession German’s government cannot bear to give up its dominant economic obsession: generating a budget surplus.

Not long ago the ambition was to hit ‘black zero’ point, at which enough taxes were generated to fund its spending. But later Germany has gone one step further, generating a budget surplus equivalent to about 2 per cent of the GDP. 

The paradox is, that the EU hates one of its members having a budget deficit of 2 percent of GDP (Italy) but is totally fine with another member having a surplus of the same size (Germany). Is starving your country of money any less egregious than borrowing to spend?

A parallel can be made with how the European Central Bank manages monetary policies. The ECB keeps, in contrast with for instance the Bank of England and the FED in the US (under pressure of President Trump), interest rates higher than they would be for fear of allowing inflation above the ceiling of 2 percent.

Fear of deficits, fear of inflation. There are good reasons that the EU errs on the side of caution. But there is a choice. If Germany cut taxes and spent more, on infrastructure for instance, it and the rest of the Eurozone could rebound.

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