Juan Laborda – How Southern Europe has Financed Germany and the Netherlands

Southern Europe, since the creation of the euro, has been financing Northern Europe. And they’ll want to stick it to us again using Covid-19 as an excuse.

Juan Laborda teaches Financial Economics at the University of Carlos III and Money and Banking, Syracuse University (Madrid)

Originally published in Spanish at vozpopuli

Translated and edited by BRAVE NEW EUROPE

Angela Merkel en el Bundestag

I am tired of putting up with discussions, advice, and economic and/or moral recommendations from those who claim to have common sense – undoubtedly the least common of the senses. All of this is adorned with that little word, “demanded”. When the elites demand “State responsibility”, this refers to the political parties which are there to defend their interests. Those who label themselves as representatives of state responsibility, also call themselves patriotic, yet are those who at the first opportunity are all too eager sell their nation to the highest bidder – our history is full of them. It is hilarious to see how those who used such a heavy hand against Quim Torra’s and his troops’ Catalonian independence ambitions now show an attitude of obsequiousness, even shame, embellished with a feeling of inferiority, in the face of the racist comments about Southern Europeans made by Mark Rutte or the Jeroem Dijsselbloem, or Angela Merkel herself.

As the economist Paul De Grauwe recently pointed out, “each and every one of these politicians maintains anti-Spanish, anti-Italian and, in general, anti-Latin and peripheral country prejudices. They are convinced that with their savings they are financing the Spanish fiesta and the Italian chaos”. The worst thing is to see that in our country the political and media right accepts this diktat without even a cursory analysis of what is being said. I say the same to all of them: they have no idea what they are talking about. It is exactly the opposite, Southern Europe, since the creation of the euro, has been financing Northern Europe. And they will want to preserve this status quo following Covid 19.

That is why it is sad to see how our politicians, since the Great Recession, have not even been able to use the vast literature and studies that corroborate my claim. That is why it is sad to read in our media, especially certain Madrid-based press, the necessity of an immense austerity plan that awaits us just around the corner. But the saddest thing is to corroborate how class interests take precedence over our well-being as a society. Honestly, I am no personal financial interests and I don’t give a damn about the opinions of our tin patriots. But I do care about the truth, and that is why I demand that our government dares to take bold steps to protect the incomes of Spanish families and prevent the devastation of small and medium-sized enterprises (SMEs).

If we have suffered a pandemic and extreme confinement, why should we have to tighten our belts and cut back on our welfare state? But what is the paranoia of those who think that is where our future lies? Until now the Eurozone has only offered Spain to go into debt more or less including conditions. As Paul De Grauwe points out, “We should not accept it. We must push to use our monetary sovereignty as Europeans and our common currency to avoid another recession… We must proceed like Britain, where the Bank of England simply gives the money the government needs to support its people without generating it. The central bank prints money and with it covers the necessary expenditure that the pandemic forces the government to make.” Do you tin patriots understand that? Do you understand that at all? Or are the British dangerous social communists as well? But let’s dispel the myths.

Problem of competitiveness

Richard Koo, in mid 2012, published an excellent article under the suggestive title “The entire crisis in Europe started with a big ECB bailout of Germany”. Read it “Tin Patriots”. According to Koo, the so-called “competitiveness problem” of the southern European countries was the result of an over-expansive monetary policy of the ECB back in 2002. The ultimate aim of this was to stimulate the economy so that Germany did not have to expand its growth via fiscal policy. However, the impact on domestic demand in Germany was zero, as it is in a balance sheet recession. On the contrary, it accelerated and inflated to unprecedented levels the financial bubbles in the periphery, especially in the real estate sector, which boosted German imports, rescuing the Teutonic country from the fears caused by the bursting of the technological bubble, from which the southern European countries certainly did not benefit. Thus the Southern European nations had to bear the burden of the false fiscal policy created by the Maastricht criteria limiting fiscal deficits at 3%.

However, the basic problem of the European Union is deeper, since its origins it was tailor-made for Germany. On the one hand, the entry of southern Europe into the Euro, with the consent of its own elites, ended up destroying our industrial sector which was not prepared for the free market (see the analyses of Professor Ha-Joon Chang on the myths of contemporary capitalism). But that is not all. To this day, Germany still does not want to reduce its current account surpluses through policies that facilitate greater consumption by its citizens. Nor did it want to assume the consequences of the risks of its banking sector after the 2008 financial crisis . These banks had channelled German savings into activities and assets without carrying out corresponding risk analyses, forcing the Spanish and Irish, for example, to later rescue them by socialising German bank losses. To top it all off, Germany is still not taking on a fiscal union that would involve a process of mutualisation of debts within Europe and not imposing a resolution mechanism in bank rescues at the expense taxpayers, as was the case in 2008, instead being paid by the creditors who were responsible for the crisis.

The euro, in short, and in contrast to what is generally assumed, has in reality meant a subsidy from southern Europe to Germany, by transforming itself into a mere creditor-debtor relationship. This was corroborated in 2019 in a research article, “20 years of the Euro: Winners and losers”, by economists attached to the German “think-tank” Centre for European Policy. Using an original quantitative procedure, a synthetic control method, aimed at evaluating the impact of public policies, the authors formulated and responded to the following question: What would the GDP per capita of a specific euro zone nation be if that country had not introduced the euro? The results obtained show that Germany is by far the country that has gained the most from the introduction of the euro: almost 1.9 trillion euros between 1999 and 2017. This is equivalent to around EUR 23 000 per inhabitant. For the rest, only the Netherlands has benefited substantially from the introduction of the euro. In contrast, it has bled the southern European countries, especially Italy, France, and Portugal, and, to a lesser extent, Belgium and Spain.

Stop talking nonsense

The European Monetary Union (EMU) has been a defective system since its inception. Previous reports (Werner, 1970; MacDougall, 1977) warning of the need for a federal fiscal authority and the dangers of leaving everything in the hands of a Central Bank, as a non-constituent part of the government, and establishing, in this context, fixed exchange rates between the member states, were ignored.

Alternatives exist to solve the current chaos, which were revealed by the glaring errors of public management during the Great Recession (bailout of the banking system that unnecessarily transformed a huge private debt into public debt). Firstly, the establishment of a true political and economic federation, but the great differences between European nations make this highly unlikely. The last episode, the shameful interference of the German Constitutional Court, and the refusal to mutualise debt. In a second alternative, the ECB could use its currency issuance capacity to finance the fiscal deficits of the member states so that they could promote growth and employment in their national economies without encountering the restrictions that the private bond markets place on their spending. The ECB has left open a similar, albeit more tortuous, mechanism, the Pandemic Emergency Purchase Programme (PEPP) , without conditions. Let us use it. And if under some pretext this solution is not possible for us, we are left with only one alternative, the option of exiting from the euro. If necessary, we will have to launch it. Can you imagine who Germany and Holland will export to if their exchange rate increases 40%? Not even the neighbour on the opposite corner!

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  1. It’s a wonder the Euro countries on the southern periphery did not leave the Eurozone ages ago. If, for instance, Italy, Greece and Spain were to leave forthwith, it would serve the culprits, Germany and the Netherlands, apparently, just right. Indeed, it would mean huge adjustments to be made in the North, and initially these culprits would do everything to keep their exchange rates low, that is, in cooperation with the leftover Eurozone countries. Economically, financially and politically, to leave the Eurozone would have only advantages for the countries struggling to borrow at low rates. It’s so obvious, it must happen sooner or later by dint of facts which cannot be wished away.

  2. Dear Juan Laborda,

    I really appreciated your text but I can’t find De Grauwe’s work from which you have selected the above quotes. Could you please point me to it? Thank you.

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