Tuesday

22nd May 2018

Italy chastises Germany for handling of euro crisis

  • Italy had strong words for the way Germany is handling the crisis (Photo: Wayne Lam (Ramius))

A German finance ministry official caused a stir at a Brussels conference by urging deficit countries to "become ants" rather than profligate "grasshoppers," in response to criticism by Italy's Prime Minister Mario Monti that Berlin is too slow in helping troubled euro-countries.

"More money is not the solution. We need to repair the lack of competitiveness in the eurozone, which is only feasible through reforms, investments in innovation and building up a stable legal framework," Thomas Steffen, a director general in the German ministry of finance said on Thursday (31 May) during the Brussels Economic Forum, a conference organised by the European Commission.

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In reply to Monti, who spoke during the same event via videolink, Steffen suggested that Italy and other southern countries are just like East Germany during the re-unification process: "What we did was we spent a lot of money, investments, built a legal framework only to learn a very simple thing: there is no button to push to create growth."

Monti during his speech acknowledged that his country has accumulated a high level of debt, which he labelled as "sins of the past", but insisted that Germany's reluctance to stop contagion from other troubled countries to Italy is driving up borrowing costs in an unfair manner.

"I know there is the argument that unless there is pressure from the markets, governments will not do the effort of structural reforms. But the more months go by with society submitted to this strong effort without seeing any objective indication from markets this is an effort worth doing, obviously there will be a backlash sooner or later," the Italian premier said.

"Germany should really reflect deeply but quickly about these aspects," he warned, or else risk having its culture of fiscal discipline undermined.

Monti also pleaded for more public investments and said the whole paradigm that state expenditure is bad under any circumstance and has to be kept in strict limits is "biased" and should be rethought.

Grasshoppers and ants

But the German official disagreed.

In his bid to illustrate the German stance on things financial, Steffen recalled a fable written by Jean de La Fontaine in the 17th century "about the grasshopper that enjoyed summer, spending a lot of money" and then having no food in winter, while the ant, "not enjoying the summer but preparing for winter, had simply the better concept in place."

"Maybe we should all become ants rather than grasshoppers," the German official said.

One French economist from Harvard University, Philippe Aghion, retorted that La Fontaine also had a fable about an oak despising the "flexibility" of the bamboo. But during a storm, the "stable" oak breaks while the bamboo resists. To which Steffen replied: "It was not German oak."

Lucio Pench, an Italian EU commission official, also pointed out an "important problem" in Steffen's metaphor: that lenders in a market economy cannot pile up food and sit on it waiting for the winter, but rather accumulate guarantees from producers or borrowing countries that they will pay back.

"So there is also a self-interest for the debtor to pay, not just a matter of solidarity," he said.

A Greek commission official, visibly disturbed by the comparison, said she would probably be called one of the "grasshoppers," but her and her fellow nationals were hard working "ants" as well.

Another economist in the audience challenged Steffen on the matter, pointing out that not all countries in Europe can run surpluses and be as competitive as Germany.

"Yes, it's true we cannot have only surplus countries. But the current processes in Germany leading to higher wages could mean that Germany will become less competitive while others are catching up. The basic point about the grasshopper was whether we should be short or long-term oriented," Steffen argued.

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