Austerity's End Could Bring Additional German Turmoil
By Staff News & Analysis - March 02, 2013

The age of austerity is ending … Whisper it softly, but the age of government austerity is ending. It may seem an odd week to say this, what with the U.S. government preparing for indiscriminate budget cuts, a new fiscal crisis apparently brewing in Europe after the Italian election and David Cameron promising to "go further and faster in reducing the deficit" after the downgrade of Britain's credit. But politics is sometimes a looking-glass world, in which things are the opposite of what they seem. – AnatoleKaletsky/Reuters

Dominant Social Theme: Eurocrats were only kidding about austerity. We'll just inflate our way out of this mess.

Free-Market Analysis: This interesting Reuters editorial that seems to reaffirm what has recently been reported in Der Spiegel (see related article, this issue). As we have read other analyses regarding the "end of austerity," we wonder if this begins to constitute a kind of sub-dominant social theme.

Is Brussels backing away from austerity? If the top Eurocrats that have pushed so hard for it are now finding it impossible to implement, then we begin to ask underlying questions once more: Who pays for European insolvency?

The obvious answer is the Germans. And this confirms what we have been arguing for the past several years. The Germans are not so much the "leaders" of Europe as they are the victims of it. Ms. Merkel may not want a Euro-crisis before German elections but she may get another one after them. Here's more from the editorial:

After the clear majority[of Italian voters] voted for politicians explicitly campaigning against austerity and what they presented as German economic bullying, further budget cuts or labor reforms in Italy are now off the agenda, if only because they would be literally impossible to implement. If Angela Merkel demands further budget cuts, tax hikes or labor reforms as a condition for supporting Italy's membership of the euro, a majority of voters have given an unequivocal clear answer: Basta, enough is enough.

Most Italians would rather leave the euro than accept any further austerity – and if Italy left the euro, total break up of the single currency would follow with an inevitability that might not apply if the country exiting were Greece, Portugal or even Spain. Merkel surely understands this, and she is determined to avoid a catastrophic euro crisis just before her own election in Germany on Sept. 22.

She is therefore almost certain to heed Italian voters' refusal to accept further tax hikes, budget cuts or labor reforms. From now on, the European Central Bank will have to offer its support to Italy without any tough pre-conditions.

This is a fairly important declaration from a columnist who follows what goes on in Europe and is presumably close to the action and the players. We are being informed that a decision may have been made by the Brussels crowd to monetize their dilemma. When in doubt … print.

The editorial goes on to claim that a certain logic is driving European events, and that an ECB easing regarding Italy could soon "spread across the eurozone – and at that point the ECB would be able to offer effectively unconditional guarantees of financial support for all members of the eurozone, while Merkel and German voters turn a blind eye."

This is where we lose the plot. European convulsions have centered around the German reluctance to accept the inflationary impact of Southern Europe's profligacy. If austerity is failing and the money presses are turned on, the country that will experience the cost of inflation is … Germany.

We have closed the circle, it seems. We return to the roots of the dilemma and the reason that Southern has been pressed so fiercely: Either the South pays or the Germans do.

And the Germans don't want to.

The solution is oh-so-simple. Allow individual countries to inflate at their own rates and print currency according to their own needs. This is not a real solution but probably the best that can be managed within the current fiat environment.

The trouble with this solution is that it would entail the demise of the euro. And this is something that Europe's centralizing bureaucrats will not tolerate. Money Power, lurking behind all this, is intent on preserving the euro as a way station apparently to a global currency.

The political turmoil that roils the Eurozone is like a disease of some sort. Rid yourself of it in one area and it turns up elsewhere. Brussels' Eurocrats may have decided that monetizing sovereign failures is preferable to allowing Europe's biggest (insolvent) banks to shoulder them. But in doing so, they are surely going to face once again German resistance to the price inflation that will be the result of this policy.

After Thoughts

German refusal to accept price inflation as the result of Southern European actions caused the initial austerity dilemma. It seems no solution has actually been found. And if not, then the Age of Austerity may not be so much subsiding as just entering a new phase.

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