ECB will keep the euro area economy afloat

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You can take that to the bank while safely ignoring those who don't want the European Central Bank (ECB) to do its job.

The largest annual meeting of finance and central bank officials held in Washington last week identified the euro area as the weakest segment of the world economy. That gathering called for measures of support to prevent nearly one-fifth of global output from sliding into recession of (ex-ante) unknowable amplitude and duration.

Sadly, the euro area countries that can – and should – heed this call won't do anything.

But there is nothing new there. That will fit an old pattern of trade adjustment within the euro area: Trade surplus countries refuse to get off their export gravy train in order to stimulate domestic demand, leaving the entire burden of economic stabilization to countries forced to act to stem job losses, economic decline and social unrest.

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Never mind that this runs counter the rules of international monetary system. No surplus country has ever paid any attention to adjustment obligations that are equally valid for surplus and deficit economies. Germany, for example, has systematically ignored these rules, never shying away from criticizing trade deficit countries about their alleged economic mismanagement.

French want solidarity, Germans want exports

The German Chancellor Merkel thought probably the same thing last Wednesday (October 8) as the French President Hollande called, during the EU job summit in Milan, Italy, on surplus countries to stimulate their domestic demand.

She must have said that the French would never learn, even though they, and the rest of Europe, were forewarned a long time ago. Indeed, the German export-driven growth strategy has been clear to its trade partners ever since they signed up for the customs union with Germany, enshrined in the Treaty of Rome on March 25, 1957.

Since then, only once did the French go toe-to-toe with Germany when, tired of German hectoring, the former French President Jacques Chirac ordered an end to French devaluations in 1987 and kept the franc-deutsche mark exchange rate constant until both currencies merged into the euro 13 years later.

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During that time, the frequent joke in the financial community was that "France was out-'Germanying' the Germans." And that's what happened. As the policy of the "strong franc" gave way to the euro, the rate of growth of the French economy was more than double that in Germany; the French current account surplus (sic) was 3.2 percent of gross domestic product (GDP), while Germany ran a current account deficit of 1.3 percent of GDP.

The sad part is that France currently has an increasing current account deficit of about 1.4 percent of GDP under conditions of rising unemployment and stagnant economy. But Germany is boasting a world-beating current account surplus of some $280 billion, or about 7 percent of GDP.

No wonder Germany was brushing off international demands in Washington to stimulate private consumption and investments so that its euro partners can sell more goods and services to break out of the stagnation-recession spiral.

The question is: Are the Germans right to keep pushing on euro area fiscal austerity, politically difficult structural reforms and inappropriate ECB policies while living off the rest of the world?

The old sage of German politics, the former Chancellor Helmut Schmidt, would say "no." He is urging the German government to show some sensitivity to the fact that Germany's surpluses are other countries' deficits, and that German history should counsel against throwing Berlin's weight around Europe.

Germany: We are fine, thank you

That is falling on deaf ears. Advised to step up much needed infrastructure investments, the German finance minister was saying last week in Washington that, first, such investments have to be identified, and then the problem is how to finance them, because it is out of the question to mess around with the German budget balance. In other words: Forget the stimulus, I don't even want to talk about it.

And then, his colleague, the president of the German central bank, is reported by the German media as having said (also in Washington) that the economy was "in good shape and needed no special support." According to him, the German economy was even experiencing "capacity strains," implying that any upward demand pressures would lead to inflation.

Now, he is talking about the German economy falling at an annualized rate of 0.6 percent in the second quarter. Since then, there has been no improvement in Germany's domestic demand conditions. During the two months of July and August, industrial production fell at an annual rate of 1.7 percent, while retail sales languished at a rate of 0.4 percent. Even German exports are falling.

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With these numbers, it really takes some chutzpah to claim that the German economy is experiencing capacity pressures – especially since the recent weakness must have amplified the country's output gap, estimated at about 1 percent in 2013.

Investment thoughts

The ECB's leadership knows all this. Run-ins with German representatives on the ECB's governing council are nothing new -- two German members resigned in the past three years.

There is also nothing new about a Europe tearing itself apart in regional disputes and growing north-south and east-west disagreements.

In spite of all that, the ECB will hold the fort as long as there is political will to maintain the monetary union. So far, there are no indications that anybody wants out.

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Don't underestimate the ECB's ability and determination to support the euro area economy through monetary instruments and intermediation techniques that are within its mandate. We may well see new, original and creative stimulus measures in the months ahead.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.