Germany’s euro-zone bind
Whichever way you look at it, Germany is in a bit of a quandry.
For the past 11 years, since the launch of the euro single currency, Europe’s biggest economy has enjoyed steady current account surpluses as it has exported its manufactured goods around the world, while keeping labour costs down and productivity steady at home.
Its economic growth may not have been stunning in recent years, but it has experienced none of the huge budget-deficit and debt problems of its euro zone partners, particularly those in southern Europe such as Spain, Greece, Portugal and Italy. And it has none of the nagging competitiveness issues that all those countries also face.
Essentially it has a modern, open economy and has pursued steady, prudent economic management.
So when Greece’s debt crisis exploded — leaving the euro zone with effectively three choices: have Greece leave the euro, let Greece default, or bail Greece out — Germany was none too thrilled about any of them. Least of all, though, did it want to bail Greece out, believing that it wasn’t up to hard-working German taxpayers to pay off Greece’s debts when the country had spent the best part of a decade spending at will and doing nothing to overhaul its economy.
Alas Berlin, the heartbeat of the euro zone, naturally ended up having to be a central part of Athens’ bailout. And what’s more, the biggest contributor to the $1 trillion rescue package the IMF and European Union put together to prevent Greece’s problems spreading throughout the euro zone.
In reply, what Germany won from its euro zone partners — particular the profligate, uncompetitive, southern European ones — was a commitment to overhaul their economies. Greece, Spain and Portugal have basically promised to make changes to their public sector models, raising retirement ages, cutting state payrolls , raising some taxes, slashing spending and improving competitiveness. It’s going to take time and serious commitment, but Germany is hoping the southern European economies will ultimately look a bit more like Germany does.
Except that’s not going to help.
As Simon Tilford, the chief economist of the Centre for European Reform think tank points out, if every economy in the euro zone looked like Germany they would all be expected to run trade surpluses, all have minimal labour cost inflation and all have low domestic consumption.
“It’s a beggar-thy-neighbour strategy,” he said. “If everyone is called upon to cut costs and boost export income, then there’s massive depreciation pressure and a euro-zone-wide slump. It would mean big trouble. It’s a zero-sum game.”
Instead, argues Tilford, Germany needs to acknowledge that it is part of the problem. Unless it ‘rebalances’ its economy — code for raising domestic consumption, which would tend to raise imports and narrow the current account surplus as it stimulates output in Germany’s trading partners — then it is trapped in a relationship inside the euro zone where it can’t both expect its partners to act like it does and hope that the region is going to be economically healthy.
The solution is not in leaving things as they are, or in having the euro zone entirely modelled on Germany. Like the three bears’ porridge, it’s somewhere in between. But there’s little sign that Germany — wounded and irritated by the behaviour of most of the rest of its erstwhile euro-zone partners – will accept that.
“There’s very little acknowledgement of how the structure of the German economy has contributed to this crisis,” said Tilford. “A lasting solution will require significant changes from the Germans in terms of their macroeconomic strategy. But they don’t seem to accept that, and that is worrisome.”