The Eurogroup of eurozone finance ministers is struggling to agree on a
macroeconomically significant coordinated fiscal response to the
enormous recessionary effects of the COVID-19 pandemic. The result, I
fear, will be heroic announcements heralding impressive numbers that
disguise the irrelevance and timidity of the agreed policies.
The first indication of this comes from the recent announcement of the
German government’s financial aid package to the private sector. While
the international media referred to it as a €550 billion ($600 billion)
bazooka, close inspection suggests it is no more than a water pistol.Comprising
tax deferments and large credit lines, the German package reveals a
serious misunderstanding of the nature of the crisis.
And it is the same
misunderstanding that turbocharged the euro crisis a decade ago. Now,
as then, companies and households are facing insolvency, not
illiquidity. To arrest the crisis, governments must go “all in” with
stupendous fiscal expansion. But that is exactly what the German package
was meant to avoid.
Finance ministers from countries in deeper economic trouble than Germany
(for example, Italy and Greece) will undoubtedly try to push for the
necessary fiscal expansion. But they will hit the brick wall of
opposition from the German finance minister and his loyal supporters
within the Eurogroup.
Soon the “southerners” will fold their tent, their
acquiescence sealing yet another fiscally insignificant Eurogroup
package that the oncoming recession will steamroll.How can I be so sure?
Because I’ve been there. I represented Greece at the Eurogroup meetings
in 2015, where the defeat of our government’s desperate struggle to
avoid more loans at the expense of deeper recession was decided. The
methodical manner in which those Eurogroup meetings closed down any
avenue to a rational debate on the appropriate fiscal policies holds the
key to understanding why the Eurogroup will also fail to mount an
effective fiscal defense against the pandemic-induced shock.
One insight
from those crucial Eurogroup meetings five years ago stands out: any
finance minister from a struggling country who dares oppose the Berlin
line, or to propose solutions that benefit the majority of Europeans
rather than the financial sector, is in for a hard ride.
Read more at: Europe Is Unprepared for the COVID-19 Recession by Yanis Varoufakis - Project Syndicate
