When Wolfgang Schauble talks, Europe listens because it has to. As Finance Minister of the continent's biggest and strongest economy, the man has considerable credibility and clout. The 17-country euro zone would be toast without Germany's sponsorship of the bailouts of Greece, Ireland and Portugal.
The problem is that Mr. Schauble now and again comes up with some pretty strange ideas. A few of them, if adopted, might make a bad situation worse.
Take his rant last year in the Financial Times, where he suggested that countries that take emergency liquidity aid from a European fund should be hit with "monetary penalties" as punishment for their fiscal sins. Never mind that countries barrelling toward bankruptcy might lack the financial wherewithal to pay a fat fine. In the same column, he urged euro zone countries to adhere to the stability and growth pact, which compels all 17 members to limit their budget deficits to 3 per cent of gross domestic product. Nice idea, except Germany itself considered the SGP overly restrictive in the middle of the last decade and conveniently ignored it.
Mr. Schauble was back at it this week, again using the FT as his bully pulpit. What's apparently bothering him this time is waning enthusiasm for deficit-busting austerity programs. Every euro zone country has one in place and some of them are painful, triggering mass protests in Greece, Italy, Spain and other countries where finance ministers' axes are coated in blood. Mr. Schauble said that it is "an indisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare."
That is true in Greece's case, though corruption, tax evasion and job protection at any cost can take equal blame for killing the economy. That is not true of Ireland, Portugal and Spain, whose debt levels were admirably low before the 2008 financial crisis hit. Spain's sins – a housing boom gone mad – were epic; but piling up debt was not one of them. Spain's national-debt-to-GDP ratio is still less than Germany's.
The minister then goes on to express doubt that "fiscal consolidation, a smaller public sector and more flexible labour markets could undermine demand in these countries in the short term.
"I am not convinced that this is a foregone conclusion. … An increase in consumer and investor confidence and a shortening of unemployment lines will in the medium term cancel out any short-term dip in consumption."
Tell that to Ireland. The Irish, like the Spanish, did not have a debt problem. What the Irish had was a banking crisis created by reckless mortgage lending and a collapsed housing market. Ireland knew it was in trouble even before Lehman Brothers imploded in September, 2008. The country went into economic-repair mode, followed by severe austerity programs.
The result? The unemployment rate, now at 14.4 per cent or almost triple the precrisis level, keeps rising while consumer confidence keeps going in the opposite direction. So much for Mr. Schauble's idea that confidence and jobs will coming roaring back in the medium term. Perhaps his definition of "medium" is a decade or longer.
His main message is that the route to salvation is austerity and lots of it, combined with measures to make economies more flexible. But is it? Endless retrenchment for the sake of deficit reduction seems to be backfiring. According to Deutsche Bank's economists, overall euro zone growth is expected to fall to a mere 0.8 per cent next year from 1.7 per cent in 2011. Greece and Portugal remain mired in recession and Italy and Ireland are flat-lining. As European growth slows, so does Germany. In 2010, it grew by 3.6 per cent. Next year's figure will be less than a quarter of that figure.
Yet Mr. Schauble wants more public frugality, even as consumers are saving more, leading to the double-whammy effect – less government spending and less consumer spending. The outcome is lesser economies.
Sept. 15 marks the third anniversary of the Lehman Bros. collapse. Bank bailouts, interest rate cuts, money printing, economic stimulus and the like prevented an outright global depression. Within a year, the markets had bounced back, but the overall economic recovery has been slow, thanks to zombie banks, high oil prices, faltering house values and the surging European sovereign debt crisis.
The talk now is of a dreaded double-dip recession. Economists are not convinced one will come, but they do agree that the odds of a significant slowdown have increased alarmingly in recent months. Rigorous austerity programs can only boost those odds.
Still, the premier European finance minister is calling for more austerity, not less. If he gets his wishes, an unemployment crisis may be the result. If there's anything more dangerous than a debt crisis, it is millions of angry, jobless people with protest on their minds.
Eric Reguly