Question:
Discusses about the crisis in Europe along with the actual causes behind this and seeks to evaluate the course of action taken by the German government to fight the crisis?
Answer:
In this article, Schauble discusses about the crisis in Europe along with the actual causes behind this and seeks to evaluate the course of action taken by the German government to fight the crisis. I completely tend to agree with Schauble’s viewpoint regarding that the real cause for this crisis in Europe is lack of confidence by investors owing to loss of economic competitiveness. This is a very valid point which most developed countries failed to understand and appreciate and thus during the crisis their natural response was to enhance the liquidity so as to stimulate demand without addressing the underlying structural deficiencies. Hence most countries tried to focus on the easiest way forward to fight the crisis using Keynesian economics without analysing the proximate causes of the crisis and the way forward so as to ensure that such a crisis doesn’t reoccur.
In this regard the typical response of the nations was to deploy a loose monetary policy to as to flush liquidity along with bailouts to save crumbling but inefficient institutions. As a result of these massive bailouts of domestic companies and institutions, the sovereign debt level soared due to which further borrowing became difficult for the member states. In order to service this debt, further bailout packages had to be designed by various international financial institutions such as ECB (European Central Bank). However these bailout packages came with harsh preconditions particularly regarding austerity measures which faced stiff resistance from citizens and led to political instability in certain nations such as Greece. These austerity measures when implemented also did not help much since they were primarily designed to reduce the fiscal deficit of nations without necessarily bringing the economy back on track. As a result there was a default in the sovereign debt and sustained period of economic recession (Blundell-Wignall).
In this regard, as pointed by Schauble, Germany’s austerity measures were useful as they were not designed solely with the intent of containing deficits or public debt level. Hence the austerity model which was followed in Germany had a basic framework to overcome the structural deficiencies in the economy so as to get back Germany on the growth track and thereby enhance the economic competitiveness. This has not only helped Germany to get out of the crisis backed by robust economic growth but have also helped it to be back on a growth track (Schauble).
Further the above discussion also substantiates the viewpoint expressed by Schauble whereby he raises question about the utility of Keynesian economy in isolation. While liquidity and confidence in the economy are critical factors for growth but these must be backed with removal of structural deficiencies so as to ensure that the growth is broad based and sustained. If this does not take place, then temporary liquidity can lead to asset bubbles and create further economic problems. A case in point is the currency destabilization in the emerging world caused due to the cheap money circulated in the system as a result of quantitative easing. Therefore the nations need to diagnose, analyse the fundamental causes and be proactive in their responses to completely be out of the wood (Nelson, Belkin and Mix).
References
Blundell-Wignall, Adrian. “Solving the Financial and Soverign Debt Crisis in Europe.” OECD Journal: Financial Market Trends (2012): 5-27.
Nelson, Rebacca, et al. “The Eurozone Crisis:Overview and Issues for Congress.” 26 September 2012. Congressional Research Service. 24 April 2015 <https://www.fas.org/sgp/crs/row/R42377.pdf>.
Schauble, Wolfgang. “Wolfgang Schäuble on German Priorities and Eurozone Myths.” 15 April 2015. The New York Times. 24 April 2015 <http://www.nytimes.com/2015/04/16/opinion/wolfgang-schauble-german-priorities-and-eurozone-myths.html?_r=0>.
