It ain’t no secret that the European Union (EU) is going through tough times. The debt problems of the region have come to light in the past couple of years, revealing severely troubled economies.
Naturally, finance ministers across Europe have stepped into action and have decided to tackle their debt woes with harsh austerity measures. Their approach is in contrast to the way the U.S. has been trying to boost its economy – mainly through tax cuts and bond purchases. You could say that Europe is playing it tight while the U.S. is taking a looser stance.
The problem with the way Europe has been trying to revive the economy is that it puts future growth at risk. The more governments decide to keep their money in their pockets, the less money there is for investments to boost the economy. It’s just like FarmVille yo! If you don’t plant anything now, you’ll have nothing to harvest in the future.
However, EU needs growth to make sure that it doesn’t collapse under debt pressures. Err, I don’t think that that’s not something debt-ridden nations like Greece and Portugal can do right now though. Germany, on the other hand, is doing respectably well, with the economy growing some 4.0% in 2010. This is where it gets complicated.
And so, with its economy showing so much swagger, Germany bears the heaviest burden in making sure that euro zone makes it out of this crisis alive. As Uncle Ben from the Spiderman series said, “With great power comes great responsibility!”
The main problem now is that Germany doesn’t seem to realize this. For one, they have their very own austerity strategy, which couldn’t come at a worse time. As euro zone’s largest economy, cutbacks from them could negatively affect their trading partners.
To make matters worse, the German economy has become more and more dependent on its export industry. While exports growth has spurred its growth, it has also resulted in a large trade surplus to the detriment of other EU members.
You could say that Germany is acting selfishly, though probably not on purpose.
So what exactly is Germany? Is it a bane or a boon? It all depends on how it chooses to act in the future.
Instead of just sticking its tongue out to its overspending neighbors, what Germany needs to do is take a more active role in promoting growth within the ENTIRE union and not just its own economy.
One way to do this is to take a break from pressing for tougher austerity measures and focus instead on stimulating domestic consumption. By shifting its attention to consumer spending, Germany will be able to diversify away from its heavily export-oriented economy. This, in turn, will reduce its vulnerability to external factors and help other euro zone countries reduce their trade deficits by minimizing competition.
Germany must also allow the European Central Bank (ECB) to provide more liquidity either for bailouts, which could mean increasing the amount of the EFSF (European Financial Stability Facility), or buying government bonds. In other words, it’s time to loosen up!
But wait, wouldn’t that only make the EU slide deeper into the debt depths?
Yes, on principle, overspending nations should deal with austerity measures as a consequence. But the reality is that not everyone can take on budget cuts as well as Germany. And herein lies a solution to the euro’s problem which posts another problem altogether: Are the Germans willing to pay the debts of their euro zone homies?
Yikes! That’s a tall price to pay if you ask me. Too bad Germany overlooked the fine print when it signed up for membership in the euro zone: “Til death do us part.”