By CHRIS GRAEME chris.graeme@theresidentgroup.com
A top Portuguese economist has suggested that Germany should leave the Euro because it is keeping the currency artificially too strong for its struggling southern European neighbours.
This was the opinion voiced by Vítor Bento, an economist and advisor to the Portuguese Government last week, who was addressing businessmen at the American Club in Lisbon.
Rather than suggesting that the so-called PIGS (Portugal, Italy, Greece and Spain) should consider leaving the Euro until they put their deficit houses in order, the economist suggested that Germany was “justifiably unhappy” at the prospect of having to bail out countries with serious budget deficits.
“The ideal solution for the crisis, given that the German economy is maintaining the Euro at a high level, would be for her to temporarily leave the currency and return to the Mark,” he said, adding that since this was “improbable”, each country would have to make its own internal adjustments, namely through budgetary and public service cuts and public sector salary cuts.
“The problem with the Euro Club is that, theoretically, all members are equal but some are more equal than others and others earn more than others,” he said.
The economist, who mentioned that Germany naturally had an aversion to the threat of debt and inflation following the turbulent years of the early 1930s, was referring to reports circulating in May and June that some German politicians and economists believed that Germany should return to the Deutsche Mark eliminating the Euro as the country’s currency.
However, German Chancellor Angela Merkel said last month that “the problems of the European Union are problems that have to be shared and solved by all” while opponents of the plan have suggested that the move would cause serious implications around the world.
Vítor Bento said that Germany was a nation that feared inflation for “good historical reasons” and that the country placed a particularly high priority on price stability.
However, as long as Germany remains in the European Economic and Monetary Union (EMU) with the Euro as its currency, Germany may not be able to control inflation, particularly if the current Greek crisis is followed by financial market meltdowns in Spain and Portugal.
“For as long as it is in the EMU, Germany may have no choice but to bail out countries that have been running up budget deficits – and neither has it the political will or financial capacity to do so for long,” he warned.
Turning to the Portuguese case, Vítor Bento’s recipe for getting out of the crisis was “far from easy” and would require greater levels of savings at both Government and consumer levels, which implied less consumer spending while, at the same time, upping exports of transactional goods and increasing productivity.
But he warned that if investment was cut too much, the country risked entering a prolonged and sustained depression.
“Whatever happens, financial adjustments in Portugal in the short-term will be necessarily violent,” he said, adding that either the Government can do it now internally or face outside action from the IMF and EU as has been the case with Greece.
“There’s no quick fix easy way out of this crisis and the longer we keep putting things off the more violent and sustained the remedy will have to be,” he stressed, criticising what he called the Government’s current “incoherent Stability and Growth Pact programme plans”.
