Greece and the ‘Club Med’ countries are in trouble. The German solution, currently dressed up as a debate about the merits of a European Monetary Fund (EMF), is for all countries to adhere to strict fiscal discipline and slash the public deficit.
The EMF in its present guise is simply another version of the Stability and Growth Pact. This ‘solution’ only works through cutting the real wage and driving down National Income to such a degree that the private sector surplus falls and imports contract drastically; ie, though ‘expenditure cutting’ rather than ‘expenditure switching’. The rub is of course that were a number of Eurozone countries forced to adjust in this way, Germany’s current account surplus would contract.
In this sense, the French Finance Minister’s objection to all eurozone countries becoming ‘more like Germany’ is quite correct. Germany’s export-led growth model depends on restricting domestic demand through wage compression. By definition, it cannot be universalised.
Is there an alternative to the German answer? Keynes proposed a perfectly sensible solution at Bretton Woods in 1944: increasing aggregate demand through the recycling of trade suprluses. See my piece in The Guardian.
#1 by ioana on March 17, 2010 - 2:16 am
et’s not forget that Greece is not Germany as Italy is not Holland or Belgium … They have very different mentalities … So when the Eurozone was created the EU financial powers knew very well that there is no chance that the PIGS ( as they are called by the “experts”) will be able to change their way of living, thinking and change their financial priorities in 5 or 10 years… If I’ll ask my 10 years old cousin she will know that this is pure and simple impossible. As I personally think that those brilliant minds of the Eurozone really knew what they were doing … they were searching for markets and customs exemptions for their own products … Unfortunately this is all the truth… they use PIGS as a simple market share statistic for their products. Now when it’s the Eurozone turn to help they just blame the PIGS … outrageous for a European way of thinking. I was thought to be brave an assume all risks especially if I want to create something more than a monetary union or a “European” market.
#2 by Stevie on March 17, 2010 - 10:16 am
Mme Lagarde n’a pas raison.
You can hardly blame the Germans for being hard working people, producing better goods than the French (and most other people) and limiting labour costs. There’s a reason why German products are that successful. If more Euro countries became more like the Germans it wouldn’t be for the worse. And lets not forget that Germany is also the largest net contributor to the EU budget.
#3 by George Irvin on March 17, 2010 - 1:17 pm
@stevie:
I’m not for a minute saying that the Germans don’t work hard, that their exports are not brilliant, etc. What I’m saying is that the model cannot be generalised. If you look at the trade statistics for Eurozone countries, Germany runs a large surplus roughly equal to the deficit of the club Med countries. One country’s exports are another’s imports. For somebody to run a surplus, somebody else must run a deficit. That the logic, like 2+2=4 (or 2-2=0 if you prefer).
Best/George
#4 by Marcel on March 17, 2010 - 8:21 pm
There will be no Eurozone economic government because we the peoples do not want more integration (yes I’ll take referendums on that).
The Euro made everything dearer for us Dutch anyway. We’d be better off with our own currency, and so would Germany be. Solidarity be damned, it always seems to involve us paying, them getting.
#5 by ioana on March 17, 2010 - 8:51 pm
The Euro was a courageous plan of “more integration” as said above … the only probleem is that the harmonization which is the main current functional mechanism of the nowadays EU and Euro zone doesn’t provide guidelines for a political integration, which wasn’t at all one of the declared goals of the Euro. Unfortunately, as it was insinuated at that time and it is proved these days … there won’t be a currency without a political union…
#6 by Stevie on March 17, 2010 - 10:59 pm
@George Irwin
Thank you for answering, I think I get your point now.
However, in the past, countries like Greece were able to increase their competitiveness by devaluating their currency, but you’re saying this only leads to the same fallacy as not all countries could possibly do the same. Greece has little choice now but to cut wages )and raise the retirement age).
What I’ve meant before is that Germany already is spending its surplus money in defecit countries by means of EU subsidies, but maybe that’s not enough. And I don’t like the idea of forcing Germany (or any other country) even further to support the Club Med. Perhaps it would be better to create appropriate incentives.
I’m sorry if my comment is a bit naive, but I don’t know much about economy.
#7 by Ronald Grünebaum on March 18, 2010 - 11:11 am
I totally disagree with this article. It’s plain nonsense, on various points, and it has a germanophobic undertone.
1. German exports to other Euro-Zone countries are not exports. They are transactions inside the internal market. Many German products are not even made in Germany. The best example is the Smart car which is actually made in France, but would statistically count as a German product if shipped from Germany. National politicians desperately hang on to a logic of national production when the market reality has surpassed this notion from the 19th century long ago.
Unfortunately, some parts of the population also cling to this notion and call for a renationalisation of the economic policy (obviously also in order to avoid the political union that is inevitable in the long run). This is dangerous nonsense which just shows a lack of historical knowledge. And, frankly, the Dutch obsession with money as pronounced here by Marcel is a collective psychological problem and has little to do with economics. People compare prices in the national currency with prices in euros and forget that 10 years have passed in the meantime.
2. German wages are not too high or too low. They are the result of free bargaining between unions and employers. Does the French Government expect Germany to abandon this system in favour of a dirigiste system that the French don’t even have themselves?
3. German products typically do not sell through price but quality. Should German companies now make products that are just as poor as some French products are? Isn’t Mme Lagarde actually insulting the many French producers who stand their ground in the international markets?
4. It is not true that Germans do not consume. They do just like everybody else in the western world. But they consume differently. They spend for example more on travel than the French do (not necessarily on travel to France which is an expensive country to visit, with some times rather poor service). Has this been factored in? Isn’t it quite arrogant when Mme Lagarde expects all of us to live like the French? The Belgian finance minister already made an appropriate comment on this.
5. The Treaty has its logic. This logic is built on free competition in free markets. Some are good at that, some are not. We all accepted this logic and we must therefore accept the consequences. Not all German regions or companies prosper under this logic (maybe Mme Lagarde could visit the largely de-industrialised eastern parts of Germany), not all French regions or companies fail under this logic.
More particularly, the Greeks should have understood (and certainly did) that their economic model of stealing from the state was doomed when they entered the Euro. They chose denial and are now forced to get out of it somehow. Tough luck.
As an aside: Of course, devaluation of the drachma never really increased Greek competitiveness. It just expropriated those with small savings and no non-monetary assets.
6. I smell the old problem of the French never really having understood the European project. It showed massively in 2005 when the French basically voted against enlargement to the East which had already happened. The mindset of many is still that “Europe” is France, only larger and with the Germans footing the bill. Of course, this model is just as realistic as counting in “ancien franc” which a surprising number of French people still do. I had expected Mme Lagarde to be above this parochialism.
Instead of making the Germans as uncompetitive as the Euro-Zone laggards, these countries should make themselves more attractive to German investment, bringing the money back. Poor service, strikes and whining are not the instruments of choice in this respect.
#8 by Marcel on March 18, 2010 - 11:55 am
@7 (Ronald)
you know why we dutch feel so strongly about it? We too have a large deficit (I believe it is 5 or 6% now, depending on who you want to believe) and with elections in june, it is already clear that the next government will be forced to make deep cuts (of up to 33 billion euros).
How would you propose ‘selling’ it to the dutch people that we also had to pay up to prop up the PIIGS? Especially when the last government has proposed that retirement age should be increased to 67 (it is 59 in Greece).
Latest news is, this morning the national parliament of Netherlands voted to block dutch partitipation on any kind of bailoutplan and has forwarded IMF as the only solution. Unfortunately the EU is undemocratic so our prime minister could theoretically ignore the parliament (as he’s on his way out of office anway) and make another undemocratic shady Brussels backroom deal.
And no, it isn’t a good idea to let the Euro ‘parliament’ vote on it, since the countries that would also like to be ‘bailed’ out together have lots of votes, and EU federalists usually waste no opportunity to further the cause of integration and the destruction of national parliamentary democracy. The EU system has 20 net recipients and 7 net contributors, and the recipients will always vote to keep the contributors ‘contributing’.
You should try and get an idea just how widespread and deep anti-EU sentiment is now here in Netherlands, since they ignored our referendum vote and passes the treaty anyway (despite a specific electoral promise of another referendum by a majority of parties).
The party is truly over, not just concerning mortgages and all that, but also when it comes to ‘solidarity’ between EU countries. Taxpayers of net contributors are increasingly unwilling to be confronted with increasing budget cuts at home whilst being told it is ‘really necessary’ to hand our money over to those who cheated to get in the eurozone.
The EU itself is to blame for the publics increasing hostility, they insisted on ramming this Lisbon thingy through, and Barroso/Merkel/Sarkozy even strongarmed governments in Sweden, Netherlands, Britain and Portugal to cancel referendums. They have shown their true face througout Lisbon ratification, which is that whatever the voters think, treaties will be passed anyway and integration will continue anyway.
Expect the same to happen with Turkish accession, Brussels is already planning on how to get around the electorates to push Turkey in against our wishes.
If the federalists had wanted political union, they should have done so in the 1950′s. Now its too late and we are no longer willing. Todays EU is the solution to the problems of 50 years ago.
#9 by George Irvin on March 18, 2010 - 12:01 pm
@Stevie:
There’s nothing to apologise about. I apreciate your intellectual interest in reading and commenting. But I would simply add that the problem of trade imbalances is an old and serious one (eg, China and the USA). Like Germany, China needs to boost its domestic demand and get away from the export-led growth strategy.
@Ronald:
I’m not Germanophobic in the least; indeed, I’m strongly European and pro-euro. But your long comment suggests you don’t know much about economics. Many German, French, Italian and other exports are ‘produced in other countries’; what counts is where the net foreign exchange export reciepts end up. Within the eurozone, exports don’t cease to be exports just because they are intra-trade. Exactly the same logic holds for the dollar zone (including intra-US trade). When New York earns a surplus, the New York Federal Reserve bank is happy—but it’s the responsibility of the US Treasury to make sure that intra-US flows don’t become too unbalanced, and that is done by effecting compensating transfers from federal to state level. That’s why Eurozone economic governance is needed.
George
#10 by BetterWorld Now on March 18, 2010 - 7:56 pm
Are the German banks really as stable as they are claiming to be?
We in Ireland were told for years by an alliance of bankers and politicians that our banks were “stress tested” and “well capitalised”. We believed them.
The Germans (and the rest of the true believers) still believe the lies of their politicians and their bankers. Belief may not be enough: the reality may be very different.
German public debt is currently running at 71.1% of GDP, it is 65.8% in Ireland and 54.3% in Spain. Of these countries, only Germany has yet to declare the losses in its private property investment portfolio, most of which resides in the unstable new democracies of Eastern Europe (unlike both Spain and Ireland where the property bubble was mainly domestic).
There is a major banking crisis out there for anyone who cares to look, but no one dares to do so. It is conveniently hidden by national boundaries and differing accounting and reporting standards. Significant portions of this external debt is to places that don’t even come up to the basic Enron accounting standard; Bulgaria and Rumania come to mind.
The crisis of German bank lending to eastern Europe is the great unspoken threat to European capitalism. It is more than enough to sink the Euro. Ignoring it won’t make it go away, but it might buy the Germans enough time to put structures in place whereby that debt will be shared by all Eurozone countries.
#11 by DG on March 18, 2010 - 11:32 pm
There is nothing wrong with the economic analysis but the likelihood of the recommendations being adopted is nil. There is no onus on creditor countries to change. All the adjustment falls on the debtor countries. As this adjustment requires them to reduce their level of consumption, the export surplus of the creditor countries will slowly disappear. All will be poorer as a result. In short, a deflationary policy forced by short-sighted German politicians will have foreseeable results.
What the graph in the second post by George Irvin demonstrates is that the dramatic increase in the German export surplus coincides with the period of the 2010 Strategy introduced by Schroeder, a major plank of which was the quite savage compression of wage levels (practically no increase over the period). The SPD is busy trying to draw a veil over its responsibility as it begins to discover that the various reforms – known as Harz IV – have given rise to a major increase in poverty levels in Germany. Indeed, the provisions have been struck down by the German Constitutional Court and, surprise, surprise, the SPD is now in favour of a statutory minimum wage of 8.50 euros an hour (the absence of which leads to an hourly rate of between 3 and 4 euros, half of that of countries such as Italy and Spain).
The “free bargaining” to which Ronald Gruenebaum refers covers only those with a skilled job in, you guessed, export-led industries. This is a corporatist approach. Germany (with Austria) has failed to allow free movement of labour to the new countries of Eastern Europe until 2012. At the same time, it operates a quota system for the recruitment of skilled labour from these countries. Alternatively, it outsources much of its manufacturing to these countries where labour costs are lower. Heads, Germany wins; tails, Germany wins.
This is a policy leading directly into a dead end, especially given the very skewed population pyramid with a population that is actually falling and aging rapidly.
There is, of course, much to admire in the German economic model and all other countries should imitate what there is to admire. But they cannot follow the same export-dependent policy because this is an impossibility. Not all countries can run an export surplus at the same time.
#12 by George Irvin on March 20, 2010 - 6:35 pm
@DG: A well-informed and reasonable comment which I welcome. But I am not quite as pessimistic as you. In the long term, the Eurozone must recognise the need to solve its internal structural imbalances (just as those of the world trading system must be solved). The alternative is the breakup of the Eurozone (probably of the EU) and a retreat into the parochial nationalism which charaterised the 1930s. Who in Europe would gain? Certainly not the ‘core’ players.
@Marcel: Yes, NL is running a goverment deficit—but the world recession has resulted is deficits much larger than 6%. You appear to agree with ‘the need for deep cuts’. This is precisely the sort of 1929 economics which turned a US recession into the Great Depression and became a contributing factor to the Second World War. Some of the great Dutch economists (Jan Tinbergen and Marc Blaug to name but two) would I think agree.
#13 by DG on March 21, 2010 - 9:42 pm
@ George Irvin. I am only pessimistic with regard to the idea that a system of federal transfers within the EU will be introduced. I do not think that there is the slightest chance of this happening. Nor do I think that the alternative is the break-up of the Euro Area.
What will happen, in my view, is the usual “muddling through”. German export firms will begin to realise that their markets in Europe are melting like snow, “maxed-out” consumers in economies across Europe will finally accept that there is no such thing as a free lunch, all will wake up the fact that Europe, although it has problems, these fade into insignificance when compared to the problems of the Third World: and the European economy will gradually right itself.
Merkel is at sixes and sevens. She and Schauble have flown more kites in the last few weeks than would ever enter the head of a real statesman (or woman). But what politicians say and what they do are often opposites. Germany is, in fact, running a major budget deficit and and “expansionary” budget policy, at least in German terms.
The euro will survive, not because it is an ideal construct, but because any alternative is worse, not to say disastrous.
#14 by Wim Roffel on March 22, 2010 - 12:36 pm
As Keynes said, the surplus countries should stimulate their economy. So this applies to Germany and China, but certainly not to Greece, Portugal, etc. Those deficit countries have no other option than to restrict their consumption.
The comparison with the Asian crisis is not fair. These Asian countries had currencies that had become overvalued by international speculation. So the solution was easy: devaluation. The temporary deficits that followed would be absorbed by the resuming growth. Greece and co. cannot devalue so they have no other choice than budget cuts. And it is also obvious that they are living far above their means so they will have to adapt sooner or later.
Germany and China will have to consume more. But a budget deficit is only a short term solution for that problem. If you continue it too long you end up with Japan-size government debts without much to show for it. Real consumption growth can only come from less saving: for example by higher wages and less incentives for pension savings.
@Ronald: Germany has followed a policy of competitive devaluation inside the EU. If Germany didn’t have such a trade surplus we would now have a lower euro and the PIGS would face a much smaller problem.
#15 by Ronald Gruenebaum on March 22, 2010 - 11:45 pm
@George
You over-estimate the precision of statistics and numbers (economists do as they have very simplistic models and hardly move beyond linear curves). I did maths occasionally for economists and was shocked about what passes as maths for them.
The 2nd largest economic sector of Greece is shipping (statistically), but almost none of the revenue ends up in Greece. How is that possible?
But we are facing a much bigger debate here: How to run our economies and ultimately our societies? The divide is more related to the Concilium Tridentinum than to Bretton Woods. It’s about accountability and civic sense. Germany may have too much of it, Greece lacks it almost entirely. This is the circle Mr Barroso has to square and, again, he is found wanting and opts for short terms opportunism. This is what worries me far more than sloppy Greek accounting.
P.S. Now that the French regional elections are over, we won’t be hearing much more on this from Mme Lagarde. She knows full well that the French are living a lie: You cannot work 35 hours per week and earn as much as someone working 43 hours (the factual German average) if you have the same input and output parameters.
@Marcel
I am all with you. My take was from the beginning that the Greeks will have even less friends in the Netherlands or in Scandinavia that they have in Germany. Merkel is just doing the dirty work for the rest of the net payers. Pity only that the Dutch are increasingly opting for bashing the EU rather than making it work better. You may wish to remember that the Netherlands manipulated their Euro entry rate just before the Euro arrived in order to gain an advantage against Germany. My hunch is that the Dutch have profited more from the Euro than anybody else after all.
Thanks for reading, anyway.