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Germany and France are in crisis: Is the next global financial crisis brewing?

Germany and France are in crisis: Is the next global financial crisis brewing?

By: Larry Elliott / The Guardian
Translation: Telegrafi.com

Things are not going quite according to [UK finance minister] Rachel Reeves' plan. The economy has contracted for the past two months and inflation is proving difficult to tame. Labour's first budget - in more than 14 years - received a cold reception. But, everything is relative; at least the minister had no problems getting her measures through Parliament, which cannot be said for Emmanuel Macron in France. And if opposition MPs in Westminster were to seek a vote of no confidence, Labour's large majority would save it from the defeat German Chancellor Olaf Scholz suffered earlier this week.

In Germany and France, support for far-right and far-left parties is growing, and it's not hard to see why. A crisis that affected the peripheral countries of the eurozone 15 years ago – Greece, Portugal and Ireland – has now reached the heart of the single currency area. Let's be clear: France is not the new Greece. The European Central Bank would likely step in to buy French bonds in the event of a full-scale speculative attack and is now better prepared to do so than during the last crisis.


However, there are signs of history repeating itself. The global financial crisis that erupted in 2008 did not come out of nowhere, and there were many warning signs in the 90s – from Mexico to Thailand, from South Korea to Russia – of trouble to come. Despite these red flags, few thought the crisis would spread to the world's largest economy, the US, until it was too late. Even now, red flags are flying. It matters if Scholzi faces the risk of being ousted as chancellor in February's snap election, and it matters if Macron can only pass an interim budget in Parliament. These are not small storms; they are signs of a great storm to come.

The problem for the two big eurozone countries is that they have almost stagnant economies, alongside generous social welfare systems that date back to the post-war decades – when growth was still strong. Low levels of unemployment provided tax revenue to pay for pensions and other benefits. The "fertility boom" generation meant there were too many workers for every retiree. The US covered most of Europe's defense spending during the Cold War, enabling European governments to prioritize welfare spending. But these favorable conditions no longer exist. The birth rate has fallen and the "baby boomers" are aging. Europe is being forced to spend more on its defense in the face of the threat posed by Russia.

Most important of all, the rate of economic growth has fallen sharply. Germany's economy is no bigger now than it was before the start of the coronavirus pandemic five years ago; in the same period, France's economy grew by an average of less than one percent per year. Stagnant living standards lead to disgruntled voters, as Scholz found out the hard way. Weak growth also means governments are struggling to balance budgets, bringing pressure to cut benefits and raise taxes. As Macron is now experiencing, this approach is not well received by the public.

The Eurozone was not meant to end up like this. The rationale for creating the common currency, when it emerged a quarter of a century ago, was to lead to faster economic growth and narrow the gap in living standards with the US. In fact, the opposite has happened: growth rates have been weak and the gap with the US has widened.

The flaws in the planning of the euro were clear from the start: it was a one-size-fits-all approach for countries with different needs, while it was based on neoliberal principles that low inflation and balanced budgets would bring growth bigger. The lack of a common fiscal policy to redistribute resources from richer to poorer eurozone countries has not helped either.

The failure of the euro to deliver the expected results has had significant consequences. First, slow growth has made member states more conservative and resistant to change. Europe has lacked the dynamism of the US and has long relied on old industries. This is especially true for Germany, which has been incredibly slow to enter the digital age and recognize the threat to its fossil fuel-based car industry. Second, while there has been some recognition of the need for change, it is not clear whether this change will actually occur.

Mario Draghi's recent report on Europe's lack of competitiveness is a typical example. The study clearly identified the problems: lack of investment and the need for Europe to get out of the "medium technology trap", where it is stuck producing goods such as cars. But Draghi offered very few solutions that would make a real difference.

It is one of the curiosities of Europe's recent economic history that every step towards closer union – the creation of the common market in 1985 and the launch of the euro in 1999 – has been followed by weaker economic performance. The explanation given for the disappointing results is not that the integration process has gone too far, but that it has not gone far enough. No wonder Draghi says the cure for Europe's lack of competitiveness is top-down, across the EU, but his conclusion flies in the face of the facts. The idea of ​​"more Europe" has been tried - even tested almost to the point of destruction. Voters are abandoning the major parties. Maybe it's time to try "less Europe" - before it's too late. /Telegraph/

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