The decision by the European Central Bank to cut interest rates to 0.25% last week is proof that the much-trumpted economic recovery in the Eurozone is, at best, very fragile. Inflation across the Eurozone member states has fallen to 0.7%. Although it would be marvellous if our inflation was this low, the 0.7% figure is an average across all member states, and some countries, notably Greece, are seeing deflation beginning to take a grip. This isn't such good news, for if people expect prices to fall further, they delay their spending, this causing further economic contraction, which is the last thing the beleaguered Greek economy needs at the moment.
The ECB can hardly push interest rates any lower, and even this move is unlikely to do much to address the basic problem of the chronic uncompetitiveness of the Southern European nations. However, the Germans are showing very little sympathy for Club Med - accusing them of being lazy and reluctant to make the sweeping changes to their labour markets which would make them more competitive. Club Med, for its part, is fed up with the austerity measures which is being forced on them. While the so-called "troika" - the European Commission, the European Central Bank and the International Monetary Fund, is the official body dealing with the terms of the bailouts that Greece and Portugal were given, unofficially, the view from down south is that it is Germany pulling the strings. For the Germans, any attempt at loosening monetary policy is viewed with strong suspicion out of fear that it will generate inflation.
What? with Eurozone inflation so low? German inflation has been higher than that of Greece, but even so, it has stayed under 2% all year, coming in at 1.24% in October - the most recent month for which figures are available. Yes, but Germans have long memories. Anyone who has collected stamps may have come across these incredibly high-valued German stamps, like the one above, which is for 10 million marks. As a child, even knowing little about exchange rates and so on, it struck me that 10 million marks must be an awful lot of money. You could send an elephant through the post for that much, surely?
Well, no. Germany's hyperinflation of 1923 was so bad that a loaf of bread cost over a million marks. People would go shopping with wheelbarrows full of banknotes just to buy basic commodities. 1923 may seem a long time ago, but German memories do go back a long way. 1923 has bequeathed a strong determination among the Germans of 2013 that inflation must be kept under tight control, so any hint that inflaton should be allowed to rise in Germany to help struggling Club Med is viewed with horror in Berlin and Frankfurt.
Consequentially, the crisis drags on. Neither side seems willing to budge. while unemployment rises higher and higher in Club Med. Over 60% of young people are now out of work in Greece, and figures are little better in Spain, but the political leadership in these countries doesn't want to pick a fight with Angela Merkel.
You don't need a crystal ball to see what happens next, for the process has already begun. Voters are turning away in disgust from the established parties. As I mentioned in an earlier post, there is widespread concern in Brussels that next May will see the election of the most Eurosceptic "parliament" ever, with all manner of protest parties likely to do well. This has a bearing on the debate about UK withdrawal. If the Eurozone remains paralysed next May, it will be harder to achieve the sort of reform demanded by the "mainstream" club med politicians in the face of new voices calling for a complete breakup of the Eurozone. Indeed, the sort of "tinkering at the edge" reforms with which David Cameron hopes to fob off the UK electorate will be harder to achieve, as the debate will heat up over issues like immigration. Furthermore, Marine le Pen's Front National leans in a protectionist direction, which will hamper the further opening up of trade to "complete the single market" as demanded by our government. In short, as long as Germany sticks to its guns, the worse the paralysis will get , the more stroppy the European Parliament will be after 2014, the more the national politicians will find themselves pulled in all different directions under pressure from populist parties and the harder it will therefore be for Cameron to come up with any meaningful deal agreed by the other 27 member states. Cameron will never support UK withdrawal under any circumstances, but in the face of a bickering paralysed EU, the UK electorate are all the more likely to take a different view.
The ECB can hardly push interest rates any lower, and even this move is unlikely to do much to address the basic problem of the chronic uncompetitiveness of the Southern European nations. However, the Germans are showing very little sympathy for Club Med - accusing them of being lazy and reluctant to make the sweeping changes to their labour markets which would make them more competitive. Club Med, for its part, is fed up with the austerity measures which is being forced on them. While the so-called "troika" - the European Commission, the European Central Bank and the International Monetary Fund, is the official body dealing with the terms of the bailouts that Greece and Portugal were given, unofficially, the view from down south is that it is Germany pulling the strings. For the Germans, any attempt at loosening monetary policy is viewed with strong suspicion out of fear that it will generate inflation.
What? with Eurozone inflation so low? German inflation has been higher than that of Greece, but even so, it has stayed under 2% all year, coming in at 1.24% in October - the most recent month for which figures are available. Yes, but Germans have long memories. Anyone who has collected stamps may have come across these incredibly high-valued German stamps, like the one above, which is for 10 million marks. As a child, even knowing little about exchange rates and so on, it struck me that 10 million marks must be an awful lot of money. You could send an elephant through the post for that much, surely?
Well, no. Germany's hyperinflation of 1923 was so bad that a loaf of bread cost over a million marks. People would go shopping with wheelbarrows full of banknotes just to buy basic commodities. 1923 may seem a long time ago, but German memories do go back a long way. 1923 has bequeathed a strong determination among the Germans of 2013 that inflation must be kept under tight control, so any hint that inflaton should be allowed to rise in Germany to help struggling Club Med is viewed with horror in Berlin and Frankfurt.
Consequentially, the crisis drags on. Neither side seems willing to budge. while unemployment rises higher and higher in Club Med. Over 60% of young people are now out of work in Greece, and figures are little better in Spain, but the political leadership in these countries doesn't want to pick a fight with Angela Merkel.
You don't need a crystal ball to see what happens next, for the process has already begun. Voters are turning away in disgust from the established parties. As I mentioned in an earlier post, there is widespread concern in Brussels that next May will see the election of the most Eurosceptic "parliament" ever, with all manner of protest parties likely to do well. This has a bearing on the debate about UK withdrawal. If the Eurozone remains paralysed next May, it will be harder to achieve the sort of reform demanded by the "mainstream" club med politicians in the face of new voices calling for a complete breakup of the Eurozone. Indeed, the sort of "tinkering at the edge" reforms with which David Cameron hopes to fob off the UK electorate will be harder to achieve, as the debate will heat up over issues like immigration. Furthermore, Marine le Pen's Front National leans in a protectionist direction, which will hamper the further opening up of trade to "complete the single market" as demanded by our government. In short, as long as Germany sticks to its guns, the worse the paralysis will get , the more stroppy the European Parliament will be after 2014, the more the national politicians will find themselves pulled in all different directions under pressure from populist parties and the harder it will therefore be for Cameron to come up with any meaningful deal agreed by the other 27 member states. Cameron will never support UK withdrawal under any circumstances, but in the face of a bickering paralysed EU, the UK electorate are all the more likely to take a different view.