“Germany, Greece and Europe are playing the game of chicken, the one we remember in the film 'Rebel Without a Cause'. In this game, two subjects throw themselves at XNUMX per hour against a wall. Whoever brakes first is the chicken and the other wins the race. But going on like this there is the risk that both the euro and the European Union will crash into that wall”. Sergio De Nardis, chief economist of Nomisma, uses game theory to photograph the current situation. Unfortunately, however, what we are seeing is not a fiction, it is a real story and the future of many millions of people is at stake. Nomisma has been studying possible recovery strategies for Italy in recent weeks, but in this context every economic reflection gives way to a finance that dominates the scene and holds the bank.
Professor what can be done to get out of this situation?
Unfortunately, this game lacks a superior coordinator to prevent disasters. The markets today react very quickly to measures they consider insufficient and late, such as the one for Spanish banks. This is a buffer intervention, expected and due, which leaves the entire context unchanged and does not solve the knots of the euro's weakness. It takes more than that to convince them. First the banking union with deposit insurance, then the fiscal union, i.e. Eurobonds and then the mechanisms that bring Europe into balance. Today, Germany has a trade surplus compared to other European countries which have a trade deficit and only the deficit countries are paying the price. A rebalancing of this situation is essential.
How can it be done?
We need to reduce the deflationary policies that have been going on for years, because they produce depressed economies and unemployment, especially among the young and the long-term unemployed. Today the EU inflation average is 2% and is the result of 3% in Germany and 0% in countries such as Italy, Spain, Greece, Portugal or Ireland. Germany should accept 4% inflation, which is not culturally easy for Germans to digest, so that other countries go up to 1% and the European average stays at 3% for a few years.
Does Germany benefit from this situation?
The Germans have two advantages. The first arrived together with the euro and is the fixed exchange rate. In the current context, the Deutsche Mark would appreciate against other European currencies and competing countries would enjoy competitive devaluation. Instead we are all in the same coin and our hands are tied. There is no doubt that after unification Germany made a series of right choices, because in the aftermath of the fall of the wall it was the sick man of Europe. You put a lot of effort, focusing on manufacturing and created a wealth that did not distribute on wages. It is true that these are higher than ours, but they are lower than they could be if workers were given a productivity bonus. There is evidently an agreement with the social partners on this point. Added to this situation is the huge advantage of a weak currency, the euro, which boosts German exports.
This analysis also shows that the end of the euro would hurt Germany…
Yes indeed. But the population does not realize this, the German citizen does not look beyond the current phase. Although Germany, if the euro ended, would also pay the pledge with the banks, because it is exposed to Greece, Spain and Italy.
So what?
So she plays the game of chicken, takes us to the abyss, convinced that we can always save ourselves before we fall. This, she thinks, forces us to those virtuous behaviors that we otherwise don't respect. In reality, the only country that has not respected its commitments is Greece, which has altered its accounts. We performed quite well and up until 2007 we even managed to improve the debt/GDP ratio, perhaps less than we could have, but we did it. Then came the world crisis and the debt started to grow again.
In short, Germany would be a strict mother, but still a mother?
But even mothers can make mistakes, there can be a point of no return in this game and the ground can collapse under our feet, when the German mother doesn't expect it or can't do anything anymore. On the other hand, there are those who think that Merkel sees only the electoral horizon and does not pose any other problems than the growth of internal consensus.
Back to square one, what can be done?
There is another question we must ask: why did the markets attack Spain, which has a lower debt-to-GDP ratio than Britain? Because the British are out of the euro and the central bank can print money. Speculators are not betting on the pound, because Britain can put liquidity on the market. All it takes is a threat of a liquidity issue for the speculators to withdraw. The most important thing to do then, in addition to what I have already said, is a change in the role of the ECB, which becomes lender of last resort. The ECB must set itself the goal of lowering interest rates in Spain and Italy and buying bonds on the secondary market. It has already done so, but always as an exceptional measure, not to be repeated. Instead it must be normal behavior so that traders know that speculating on those stocks is not profitable.
How much would you bet on the euro?
It's difficult to answer. The heart more than the head leads me to believe in the euro. It is an observation, because all my savings are here, in the classic BTPs, therefore, in my heart, I want to believe that he will make it.
