Summary
Germany Chancellor Merkel is facing a tough economic decision of trying to balance the interest of her country and that of European countries facing an economic crisis. Influential leaders across the world like the Pope are calling on the powerful to help the weak in an attempt to convince Merkel to soften her position and lend more money to countries like Cyprus. The leaders of countries facing crisis think Merkel need to support them and show solidarity with them in their difficult economic situation (MARCUS, 1).
Germany is proposing a variety of austerity policies that cannot gain any political and social support in the struggling countries. Merkel is requesting the nations facing crisis to cut their budget deficit to regain the lost investors’ trust. Other measures include cutting labor costs and welfare expenses. According to Professor Paul de Grauwe, this measures may bring long-term damage to the struggling economies. Despite the unpopularity of the measures in struggling nations Germany nationals are supporting the proposals. This support is the trust they have on Merkel’s ability to safeguard their interest. It is probable that she will ride on this trust to win the next elections (MARCUS, 2).
Her domestic political prosperity will put her at the center of solving the crisis for a prolonged period. That’s why the European Commission president Jose Manuel is encouraging Germany to soften its stand so that the proposed policy may gain social and political support in the struggling countries. This will enable the two parties to the deal to understand each other’s position and come up with a sound resolution. However, since 2010’s Greek bail out the Chancellor has kept her stand on rejecting any plan that makes euro-zone a liability to her nation. Her earlier idea of wanting bond investors to lose money in future bailout backfired because the struggling nation felt the move would discourage investors from lending to the government. Her proposal would have forced investors to observe caution in lending money to the government. This would make it impossible for the countries to borrow beyond their limits.
Merkel looks forward to solving the three causes of the crisis rather than just letting the market control the euro-crisis. One root cause is 2008 crash that pushed countries’ debt to the edge of their financial ability. The second cause is based on banks that took too many risks. The last one is the inability of nations to overhaul their labor market and business regulations to enhance their international competitive edge.
Personal Thoughts
Germany should come up with ways that can help Euro nations to move out of the crisis. The country’s tough stand may not last long because the recession may creep within her borders. This is because Germany has an open economy. The measures taken should encourage the nations to reduce deficits in proportions that will not have a long-term negative effect on the economy. Germany should not carry all the liabilities but should share spoils with the struggling nations. Thus, political leaders of the struggling nations should overhaul the labor market and business regulations to make the countries competitive on the global stage. Besides, they should reduce deficit and welfare at proportions that will not hurt the economy and cause political instability
(Tamo ,1).
The unpopularity of Germany’s proposal will result to the above illustration. The effect of decreasing deficit is reducing the funds available for the government to invest in the economy and stimulate aggregate demand. Thus, decreasing deficit will make the aggregate demand to shift from AD1 to AD2. This will reduce investment and increase unemployment. This policy should not be applied in an economy that is facing recession (Tamo ,1).
References
MARCUS, WALKER. "Inside Merkel’s Bet on the Euro’s Future Classical versus Keynesian
Solutions." WSJ (2013). Web. 9 Apr. 2016.
Tamo. "Honors Government / AP Macroeconomics Class." Honors Government AP
Macroeconomics Class. Jan. 2013. Web. 09 Apr. 2016. <https://sbhshgovapmacro.wordpress.com/category/fiscal-policy
