Did tight-fisted budget policies in Germany help make the eurozone crisis deeper and more difficult for struggling bailout countries like Greece and Portugal?
That appears to be the conclusions of a study by a top European Commission economist that was published online Monday – but then quickly taken down by EU officials.
Our eagle-eyed friend and rival Nikos Chrysoloras, Brussels correspondent for the Greek daily Kathimerini, was able to download the report and note its findings before the link went dark (Nikos kindly provided Brussels Blog a copy, which we’ve posted here).
Shortly after being contacted by Brussels Blog, officials said they would republish the 28-page study, titled “Fiscal consolidation and spillovers in the Euro area periphery and core”, once a few charts were fixed. And as Brussels Blog was writing this post, it was indeed republished here.
Still, the paper’s day-long disappearance looks suspicious given the hard-hitting nature of its findings. For some, they may not be surprising. Many economists have argued that it was the simultaneous austerity undertaken by nearly all eurozone countries over the course of the crisis that pushed the bloc into a deeper recession than predicted, hitting Greece and other weak economies particularly hard.
But coming from the European Commission’s economic and financial affairs directorate – which was responsible for helping administer Greek and Portuguese bailouts as well as provide semi-mandatory policy advice to other eurozone economies – the criticism of Berlin is unexpected, to say the least.
The paper, written by veteran economist Jan in ‘t Veld, makes clear that the author believed Germany had plenty of room to spend a little more on infrastructure and other investments during the last three years, noting it had “a larger fiscal space” than weaker eurozone countries during the crisis as well as “record low borrowing costs due to a ‘flight to safety’.”
But instead of spending to spur growth that could have spilled over into bailout countries, which “had little options other than to embark on the sizable consolidation they have undertaken”, Germany instead decided to cut its spending, making it more difficult for Greece, Portugal and Spain to turn their economies around:
One way for [bailout countries] to grow out of their debts would have been external growth. Their current account adjustment could have been supported by simultaneous changes in euro area countries that feature large current account surpluses. Yet, the symmetry of the fiscal adjustments in all euro area countries at the same time has hampered this adjustment, with negative spillovers of consolidations in Germany and other core euro area countries further aggravating growth in deficit countries. These negative spillovers have made adjustment in the periphery harder, and have further exacerbated the temporary worsening of debt-to-GDP ratios in programme and vulnerable countries.
The study emphasizes that spending by Germany and other healthy eurozone economies would not have provided “a miracle cure for deficit countries”, noting that short-term stimulus would not have brought the kind of wholesale adjustment many of these economies needed. Still, the criticism of Berlin is clear and pointed:
The degree of consolidations in Germany and other core countries was in contrast to the financial space these countries had in the crisis…. Yet in the drive to consolidate public finances, government investment has been reduced, with major infrastructure investment plans scrapped and backlogs in deferred maintenance building up. Instead, low interest rates could have been locked-in to finance an increase in public spending, by bringing forward public infrastructure projects which should, even when debt-financed, have a higher rate of return. This holds for Germany but also for other core euro area countries like the Netherlands, Finland and Austria, hit by double-dip recessions and which could benefit from a stimulus in productive spending.
It may not be the full-throated mea culpa offered by the International Monetary Fund earlier this year. It is not even a criticism of the austerity imposed on bailout countries, which the study says was necessary. But it’s a pretty tough-worded criticism of the economic policies of the eurozone’s most important player during the height of crisis.
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