And the Song Remains the Same

In an apparent effort to stick it to Greece it looks like the northern members of the euro zone are now making a huge effort to make Greece an example.  It seems as if the Greeks have just about had it and are prepared to call the Germans bluff.  I don't care what the finance ministers say, severe austerity is not the answer.  Cutting spending at a time when there is a recession is not the solution to the problem.  A cut in spending will affect GDP in a huge way thus decreasing the denominator in the debt to GDP ratio.  This seems to be the magic ratio that the Germans are so infatuated with but decreasing debt at a rate which is much slower than the rate at which GDP is dropping is a recipe for disaster.  Sure eventually the country will have no debt but by that time the aforementioned country will have reached third world status.

The austerity applied to Greece has not worked, in Portugal it's not working, in England it's not working, in Spain it won't work, and in Italy it won't work either.  In order to get out of this mess the EU needs to address the main problem within it's borders which is that there is a huge current account deficit in the southern countries while the north runs a huge current account surplus.  Germany doesn't want to disrupt this balance because things are good in Germany.  Inflation is low, and prices are competitive when compared to wages. Being the largest economy in the euro zone it can get it's way as evidenced by the absurd move by the ECB to raise rates in the face of a recession in most of Europe last year.  The solution to this problem is an increase in inflation in the northern European economies that are running a surplus while the southern countries need to reign in inflation.  The problem with this is that the Germans view inflation as the plague.  The alternative to this is having the southern countries deflate prices which could become a much larger economic problem than inflation is when the time comes to bring policy back to one of moderate inflation.

In addition to controlling prices, the southern states need to become more friendly to job producing industries.  Relax taxes and regulation within their boarders in order to invite companies to open up factories.  This can't happen when Germany is demanding tax increases in an effort to curb deficits.  What needs to occur is that the EU should be pushing for pro-growth policies which will help decrease the debt to GDP ratio in a way which will spare the people of the European Union the travesty of taking a huge step back economically.  Greece's days of partying at the expense of others is over but instead of beating up it's little brother maybe Germany should help it and the rest of the southern members by spreading the wealth and promoting pro growth policies for all while allowing prices to rise a bit within it's boarders in an effort to bring the Euro zone back into equilibrium.