By contrast, France, Italy, Spain and Portugal — cumulatively accounting for nearly half of the euro area economy — are some of the countries that would be devastated by Germany’s groundless advocacy for the euro area’s rising interest rates.
Indeed, in addition to seeking tightening credit conditions, Germany is also putting unrelenting pressure on those countries to rapidly balance their public finances and to bring down their government debt. It all looks like Berlin does not care that a combination of fiscal restraint and rising credit costs would promptly throw half of the monetary union into an intractable recession.
At the moment, France, Italy, Spain and Portugal are facing a daunting task of fiscal consolidation under conditions of weakening aggregate demand. Their budget deficits range from 2.3 percent of GDP (Italy) to 3 percent of GDP (Spain and Portugal), and most of their fiscal progress so far has been made possible by monetary stimulus to economic growth.
The public debt situation is much worse. Their debt-to-GDP ratios at the end of last year were estimated in the range of 115 percent (Spain) to 155 percent (Italy) — a far cry from the 60 percent mandated by the monetary union’s fiscal rules. To keep debt on a steadily declining path, they would have to consistently run large budget surpluses before interest charges on government liabilities. Only Portugal now meets that condition with a primary budget surplus of about 4 percent of GDP. Much smaller primary budget surpluses run by Italy and Spain will hardly make a dent into their massive public sector debt.
What we are seeing now looks like a replay of fiscal austerity that Germany imposed on sinking euro area economies earlier this decade. Berlin, it seems, remains unrepentant that its calamitous “austerity growth model” threw millions of people out of work, and that, as a result, 118 million citizens of the European Union are still at risk of poverty and social exclusion.
Italy will now be the first test case of the euro area fiscal policy run by Germany and its proxies at the EU Commission.