White House warns Europe on Greek showdown – Ambrose Evans-Pritchard – Telegraph

English: President Barack Obama and First Lady...

English: President Barack Obama and First Lady Michelle Obama are welcomed by German Chancellor Angela Merkel and her husband, professor Joachim Sauer, to Rathaus in Baden-Baden, Germany. Deutsch: Bundeskanzlerin Angela Merkel und ihr Ehemann Joachim Sauer begrüßen US-Präsident Barack Obama und seine Frau Michelle Obama beim Staatsempfang auf dem Marktplatz Baden-Baden. (Photo credit: Wikipedia)

This is a must-read article from Ambrose Evans-Pritchard, International Business Editor, at the Telegraph.

via White House warns Europe on Greek showdown – Telegraph.

It is seems that the US government is seriously worried about contagion following Greece being unable to renegotiate with European creditors, in particular Germany. President Obama has expressed similar views in the past, so why should Germany bend to this pressure now, if it has not done so previously?

I have been following the Euro crisis closely for four years. Germany has always acted incrementally, at the last moment, under enormous pressure. The underlying problem is the construct of the Euro, with its 3% fiscal compact. Germany expects other countries to comply with the treaty and live within their budgets. When countries come looking for funding from Europe, the loans have clauses requiring structural reforms as a pre-condition – this is all supervised by the troika of the IMF, the ECB and the European Commission. These conditions have led to draconian austerity, with dire economic, social and political consequences in Southern Europe.

The US supports the structural reforms but argues that strong fiscal stimulation is required as well. Here’s the crux of the problem. Debtor countries can’t create a fiscal boom because of the 3% budget constraint. Meanwhile, creditor countries, led by Germany want a balanced budget, rather than a fiscal boom that will help Europe’s periphery, possibly at Germany’s expense.

There’s another problem, independent countries in difficulty can devalue their currency to improve matters. Within the Euro countries, debtor countries are forced to drive down salaries and wages to achieve the same economic goal.

Perhaps from the perspective of her domestic audience, Germany’s policy has been correct. But from the wider European and global perspective, Germany is blamed for the absence of growth in the World. Germany’s unique economics is called ‘ordoliberalism‘ – it recognizes the historical economic crises that Germany suffered, otherwise favoring neoliberalism but with more protection, but it is strongly against Keynesian stimulation, as deployed by Obama’s government.

The pressure will be on both Greece and Germany to strike a fair deal, with both sides giving a little and being able to sell their positions to their domestic audiences. Perhaps. Germany’s Angela Merkel will be ready to take more risk this time, on the back of her success with Putin in defusing the crisis in Ukraine?

The contagion alternative –  we really don’t want to go there. It is hard to speculate how it might compare to the 2008 financial crisis?









One response

  1. Dr Alf is correct, Germany as Angela Merkel has already said will try and negotiate a compromise.
    This will result in a deal and the Greeks, based on earlier behavior will perhaps default within a year or so and we will be back where we are now.

    President Obama and his White House are always making pronouncements and frequently getting things wrong. Soon President Obama, who is a ‘lame-duck’ and ineffective President, will be gone from office and Europe will have to deal with his successor. We should listen politely to President Obama in this instance and then studiously ignore him until he has something useful to say.

    Europe needs to reform and transform itself economically but I fear that Greece is not yet capable of effecting such reforms and as a potentially corrosive contagion, she needs to be told that it’s ‘sink or swim’ time for staying in the Euro and possibly the EU.

    Whilst I am moved by the plight of Greek children going to school hungry (based on another of Dr Alf’s posts) I am not moved to the point where I want to see more money wasted on Greece as a whole, since all they will do is default in any event and then in true Oliver Twist style say “Please can we have some more”.

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