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Bratislava EU talkfest will ignore pain in Club Med economies

Kefallonia, Greece.
Athanasios Gioumpasis | Getty Images
Kefallonia, Greece.

With more than 122 million people - 24.1 percent of the EU population - at risk of poverty and social exclusion, and more than 20 million of unemployed, it was just a matter of time before this social and political tragedy overwhelmed the governments of the world's second-largest economic system.

Mercifully, that time is nigh.

Greece and ungovernable Spain, struggling with jobless rates of 23.5 percent and 20 percent, respectively, are saying enough is enough.

Beppe Grillo, the standup comedian and the founder of Italy's opposition Five Star Movement (M5S) is going from strength to strength, screaming "basta" and "onesta" (honesty), while pillorying Germany's misguided austerity diktat and joining the Northern League's (Lega Nord) call to exit the EU. M5S is now polling at 30.6 percent, slightly ahead of the governing Democratic Party's 29.8 percent.

With an astonishing appeal to both left- and right-wing voters, Grillini could derail Italy's next month referendum on constitutional changes. That would bring M5S a step closer to power, after they won 19 of the 20 mayoral elections last June, including Rome and Turin.

France is facing similar challenges. The governing Socialists are in deep trouble ahead of next May's elections for their alleged submission to Germany, and their inability to stimulate faster growth and employment creation.

Club Med wants growth and jobs

So, here is a plot. Taking a cue from the Visegrad Group's (Poland, Hungary, Czech Republic and Slovakia) repeated condemnations of the EU's immigration and security policies, the leaders of France, Italy and Greece were joined on September 9 by Spain, Portugal, Cyprus and Malta for an EUMED meeting in Athens, Greece, to prepare the EU summit in Bratislava, Slovakia, on September 16.

The EUMED countries have issued the Athens Declaration, focusing on policies to promote growth and employment. Problems of immigration, security and European unity are also mentioned, but the accent is clearly on stimulating demand and output to relieve growing socio-political instabilities in this region.

Setting aside the EU's very real and permanent north-south and east-west centrifugal tensions, the question is whether there are any chances that the appeal of these seven countries will be heeded at the time when the EU's future is a central theme of the Bratislava meeting next Friday.

I have serious doubts about that.

Germany and its likeminded northern followers will fight tooth and nail to squash this southern dig. But Germany will lose. Investors, therefore, should base their strategies on the prospect that the EUMED will ignore German austerity obsessions and its stubborn will to command. Led by France and Italy, the EUMED will be equally determined to do all they can to relieve human suffering and to stave off brewing social unrests.

So, let's start with France.

The hard-pressed French Socialist government has already announced that there will be income tax cuts and maybe also lower non-wage labor costs. Taken along with criticism of the German-dictated fiscal "stability pact," this implies that Paris will leave the budget compliance (or an outright scrapping of the "stability pact") to the next government, which will take the helm in May 2017. The view that this is a desperate vote-grabbing is correct, but it is also partisan and simplistic. The same policy intent is put forward by the whole spectrum of right-wing and extreme-left parties, with an ominously accusing finger pointed at Germany.

In ECB we trust

Italy's main opposition party is no less anti-German, while the governing Democratic Party is focusing on a stimulus package that Berlin does not like.

With a budget deficit slightly below 3 percent of GDP, Italy has more room than France to implement a modest fiscal easing while staying close to the euro area rules. And Rome is determined to use any policy space, and then some, to rev up a quasi-stagnant economy and to keep reducing an unemployment rate of nearly 12 percent.

Spain is a special case; its caretaker government will continue to have a virtual dispensation from the euro area budgetary compliance. At any rate, Madrid has repeatedly overshot the deficit limit of 3 percent of GDP. This year and next will be no exception, because the likely budget gap will end up in the 4.0-4.5 percent range.

What will Germany do?

Persistent rumors in the German media have it that Berlin may grudgingly concede a modest tax cut. With a budget surplus somewhere between 0.5 and 1 percent of GDP, there is plenty of room for an expansionary fiscal policy.

Apart from that, as a country running the largest trade surplus in the world ($310 billion, or more than 8 percent of GDP), and virtually no inflation, it should be stimulating its domestic demand to avoid destabilizing the monetary union with excessive trade imbalances. According to that rule of international trade adjustment, Germany should have cut taxes and stimulated domestic demand a long time ago, because its public sector accounts had been virtually balanced since 2012.

But if there is a tax cut, it will clearly look like a profoundly political gesture of vote-grabbing. The position of the governing Christian Democratic Union (CDU) is increasingly difficult in the run-up to general elections in September 2017. And more than half of the German electorate does not want the current head of government to stand for the fourth term.

In view of this, investors might wish to do what the ECB does: Pay no attention to German criticism of the euro area monetary policy. That criticism will probably be stepped up now, despite the fact that the government is getting ten-year loans at an interest rate of 0.01 percent.

And there is more to German benefits from the ECB's largesse. German budget experts estimate that the country saved 122 billion euros ($137.2 billion) on debt interest charges between 2008 and 2015 thanks to ECB's appropriately easy policies. Over that period, compliments of the ECB, Germany's net debt interest payments have halved from 2.3 percent to 1.2 percent of GDP.

No wonder that the German Green Party's deputy shouted, during last week's parliamentary debate, that the "ECB's President Mario Draghi has done more with his low interest rates for the budget balance than [German Finance Minister] Wolfgang Schäuble."

When will Germans stop suing and vilifying Dr. Draghi for these good and loyal services?

Investment thoughts

Loosening fiscal policies and a continuation of exceptionally easy credit conditions is exactly what is needed to support faster growth of demand, output and employment in the euro area and in the rest of the European Union.

The latest ECB data (July) show that the annual growth rate of bank loans to businesses and households is slightly below 2 percent, but that is still double the numbers at the beginning of the year. So, yes, the ECB is connecting with the real economy. A lighter tax burden will also leave more income to consumers to raise the demand for money and outlays on goods and services.

A cheer for the euro area, the ECB and the euro? Definitely, yes. (Ignore the noise coming out of the beautiful Bratislava next Friday. With a heavy heart, this Europhile sees the EU on a road to perdition.)

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