Arnaud Montebourg, France’s economy minister who has just resigned, is quite right. He denounced austerity policies as “absurd” because they had brought about “the most destructive crisis in Europe since 1929” He rightly attacked the Eurozone’s fiscal stance as “the cause of the unnecessary prolongation of the economic crisis and the suffering of the European population”, and he correctly demanded a major change of policy away from “the extreme orthodoxy of the German right”. Montebourg is not the only one who has been railing against the absurdity of counter-productive policies which are relentlessly dragging down the Eurozone into deflation. Renzi, the young Italian prime minister, has rightly been demanding an easing of over-tight fiscal policies and a longer timescale to generate the growth to enable his country to overcome its excessive indebtedness. Italy, like Japan before it, has now endured nearly two decades of falling living standards and in the absence of growth will soon find maintaining its interest payments unsustainable.
Merkel’s policy of endless austerity is wrong, wrong, wrong. Worse than that, it is ruthlessly selfish. The German position, ostensibly coloured by their experience of hyperinflation in 1923, is that any monetary expansion in the Eurozone must be resisted like the devil. Their real motive is that enforcing austerity is an effective weapon for achieving German economic dominance throughout Europe by relegating France and Italy, let alone the southern European rim, to the sidelines as subordinate partners. However, all hope is not yet lost. According to the latest quarterly figures Germany suffered a reduction in its GDP of 0.2%. This is not good news in principle, but the only thing that will chasten the German government out of their arrogant smugness is when Germany itself begins to suffer a serious downturn. Germany’s over-dependence on manufactured exports may now begin to tell against it, and its obsessive fetish with an excessive tight fiscal stance may slowly become untenable.
It might be thought that the woes of the Eurozone have little to do with the UK, though half our exports still depend on Eurozone growth. With UK growth forecast to be 3% this year Britain, as the Tories will endlessly tell us, is doing well, indeed a model for other countries. But arrogance is not just a German problem, it’s Osborne’s too. The signs of cracks in Osborne’s economic facade are already beginning to appear. The official tax receipt figures for July turned out not to be the £50m surplus expected, but a £234m deficit, which takes some explaining if growth is really 3%. Moreover the so-called recovery is heavily weighted in favour of services (predominantly the City of London) and not in manufacturing or construction (the rest of the country). As the recovery steadily implodes next year for lack of demand, the UK will need to learn the lessons of the Eurozone and to stimulate demand either by QE targeted directly on industrial projects, not the banks, or by printing money and a helicopter drop (metaphorically speaking) of a large cheque to all families throughout the UK below the top quartile.