100 Italian Economists Believe Spending Cuts And Competitive Manufacturing Will DESTROY Europe

Pipe Professor

Ambrose Evans-Pritchard at the Telegraph has highlighted a letter signed by 100 Italian economists, denouncing Eurozone austerity efforts.

They argue that austerity measures will tear the Eurozone apart:

Telegraph:

“The grave economic global crisis, and its links to the eurozone crisis, will not be resolved by cutting salaries, pensions, the welfare state, education, research …….. More likely, the `politics of sacrifice’ in Italy and in Europe runs the risk of accentuating the crisis in the end, causing a faster rise in unemployment, of insolvencies and company failures, and could at a certain point compel some countries to leave monetary union.

The letter says that deflationary policies, particularly the German economy's manufacturing competitiveness, are more to blame than profligate government spending.

It blames the crisis on the “deflationary economic policies” of the richer states. “Especially Germany, geared for a long time to holding down salaries in relation to productivity, and to the penetration of foreign markets, gaining European market share for German companies…

They say the policy has led to growing surpluses in Germany, offset by growing debts in Southern Europe. The adjustment mechanism has not only failed. Matters have got worse, and worse.

I love this notion of German salaries being too low. It's quite a laugh when you're sitting in the developing world.

“This is the deeper reason why market traders are betting on a collapse of the eurozone. They can see that as the crisis drags on this will cause tax revenues to fall, making it ever harder to repay debts, whether public or private. Some countries will progressively be pushed out of the eurozone, others will decide to break away to free themselves from a deflationary spiral… It is the risk of widespread defaults and the reconversion of debts into national currencies that is really motivating bets by speculators.

The authors conclude by arguing for full-blown quantitative easing and far less emphasis on spending cuts. Mr. Pritchard ends by explaining that he doesn't believe in the complete view of Paul Krugman, but he agrees with the heart of this letter, and even scolds Germany's austerity efforts:

As for Germany, frankly it is hard to know what to say. It is astonishing that Chancellor Merkel should unveil an €80bn package of fiscal retrenchment without consulting with the rest of Europe. This has raised the bar for everybody else, forcing them into yet further contractionary policies to keep up. Mrs Merkel does not begin to understand the nature of commitment made by Germany when it launched monetary union.

It's pretty wild how one of the Eurozone's most competitive and fiscally-responsible countries is being made the scape goat.

Europeans need to step outside of their own bubble, and think of the region within in international context. You don't create an economically competitive region by over-spending, under-working, and not being cost-competitive. You create a globally competitive region by doing the opposite, ie. by emulating Germany, rather than demonizing it.

Read the full Telegraph piece here >

Join the conversation about this story »