France’s finance minister sends tremors through European capitals with a defiant warning that his country would no longer try to meet deficit targets
Eurozone strategy is in tatters after economic recovery ground to a halt across the region and France demanded a radical shift in policy, warning that austerity overkill is driving Europe into a depression.
Growth slumped to zero in the second quarter, with Germany contracting by 0.2pc and France once again stuck at zero. Italy is already in a triple-dip recession.
Yields on 10-year German Bunds fell below 1pc for the first time in history, beneath levels seen during the most extreme episodes of deflation in the 19th century. French yields also touch record lows. Much of the eurozone is replicating the pattern seen in Japan as it slid into a deflation trap in the late 1990s.
It is unclear whether tumbling yields are primarily a warning signal of stagnation ahead or a bet by investors that the European Central Bank will soon be forced to launch quantitative easing, buying government bonds across the board.
Michel Sapin, France’s finance minister, sent tremors through European capitals with a defiant warning that his country would no longer try to meet its deficit targets and would not inflict further damage on its economy by tightening into the downturn. “I refuse to raise taxes to close any budget gaps,” he said.
“What is absolutely necessary is to adjust the pace of deficit reduction to the exceptional situation we are in today. Growth is too weak in Europe and inflation is too low. We must therefore stop reinforcing the causes of this depression,” he told RTL television.
“We must face the figures in front of us with realism. The truth is that, contrary to the forecasts of the International Monetary Fund and the [European] Commission, growth has broken down, both in France and in Europe.”
Germany has so far refused to yield any ground on austerity policies but is increasingly vulnerable. Revised data show that the economy has been far weaker than thought over the past two years, falling into a significant double-dip recession last year. Professor Paul De Grauwe, from the London School of Economics, said: “They are victims of their own folly. Germany needs massive investment in its energy sector and it should be doing it now while it can borrow for almost nothing.”
Mr De Grauwe said EMU elites have misdiagnosed the cause of Europe’s intractable slump, blaming it on lack of reform when it is in reality a “demand crisis” made worse by a debt purge since the financial crisis. “They are doing everything they can to stop recovery taking off, so they should not be surprised if there is, in fact, no take-off,” he said.
Many German economists said one-off factors explained the “sudden stop” in the second quarter but Berlin’s Institute for Economic Research (DIW) warned that deeper forces may be at work, with a risk of recession as Germany suffers the blowback effects from sanctions against Russia. “The economy may shrink again in the third quarter,” it said.
Full article: France rebels against austerity as Europe’s recovery collapses (The Telegraph)