Analysis originally appeared in the EUobserver 09.12.10.
There was a cheeky cartoon that made the Facebook and Twitter rounds a few days ago, posted by one of the Financial Times’ Alphaville bloggers. It went ‘viral,’ as the social-media consultants think the kids say. Bearing the title “Introducing Greater Germany,” it featured a map of Europe with all the German bits coloured blue.
The entire eurozone was blue.
If you passed over the map with your mouse, a caption popped up: “The area formerly known as the eurozone.”
Perhaps the author was taking a light jab at the good doctor of Berlin’s diagnosis and her decidedly uncomfortable austerity enemas prescribed to the entire euro area, or suggesting that through the EU’s bundesbank-inspired economic strictures, Germany, finally, in its third try at it, had managed to rule most of Europe. But with the euro area teetering on the edge of the precipice, the joke’s gallows humour and scintilla of germanophobia was a bit too much for the commenter that took the nom de plume of ‘Former FT Fan,’ who humptily wrote underneath the Alphaville blog posting: “Unfortunate bigotry from such a respectable publication,” and also for commenter ‘fjmeid,’ who typed: “If that’s supposed to be funny, It’s not.”
These presumably Teutonic commenters lived up to their normally-entirely-unfair po-faced reputation of being unable to fathom British wisecracks, but it might have been commenter ‘Ando’ who came actually closest to comprehending the dilemma facing Europe that on a more serious level underlies the FT’s visual gag when he wrote simply: “Federalism or bust. Which has been the point all along.”
In the early days of the construction of the single currency, it was clear that while monetary union might have been politically saleable, fiscal or certainly political union were not yet remotely anywhere near even approaching the horizon.
But it is also well known that a number of prominent Europeans at the time went on to say that nevertheless, the one will inevitably lead to the others, that the first serious crisis would immediately precipitate deeper integration, because monetary union among a group of states with wildly varying economies is not possible without its more tangibly sovereignty-associated twins.
“Any split in real economic trends would, naturally, exert pressure in the direction of a transfer and social union, or even of a European ‘super-state’,” the then president of the German Bundesbank, Hans Tietmeyer, (famously amongst euro-sceptics) told a group of Danish executives in 1997.
Some eurosceptics argue that the federalists were secretly, knowingly setting a trap, that they were very much conscious of the fact that a crisis such as we are facing today would eventually materialise, compelling a more homogenous, cohesive European structure.
But this is undeserved. If there were any who did really think along these lines, they were vastly outnumbered by those – many federalist ultras among them – who ridiculed the idea that such an event would ever come to pass. Professor Tietmeyer himself actually went on to say in the same speech of the eventuality of a super-state: “You in Denmark – if I understand it correctly – do not want [it], and … we in Germany – I can assure you – do not want [it] either.”
Indeed, in possibly his most retrospectively cringe-worthy statement, as late as February, 2009, European Commission President Jose Manuel Barroso said, and there is no reason to think he did not truly believe this: “The euro is a protection shield against the crisis.”
There is, as always, the traditional European option of just ‘muddling through,’ a strategy that the bloc has always excelled at on an Olympian level, and which many still think is the most likely response to the current crisis. They say austerity may be painful and that it will certainly provoke unexpected and undesirable consequences, but that a rough equilibrium will eventually return and things will then go on much as they have done.
But there are others who say that this crisis is not like others, that the scale of the debts involved are gargantuan and beyond the ability of current structures to deal with. Muddling through is no longer an option. For them, there are really just two alternatives.
It is no exaggeration to ask whether we are living in the last days of the eurozone, or the first days of a United States of Europe.
Where did it all go wrong?
David Marsh is no Basil-Fawlty perfidious germanophobe. A banker with the London and Oxford Markets Capital investment firm, he also worked for ten years in a German consultancy and specialises in British-German business partnerships. He is even a founder of the German-British Forum and a German Order of Merit laureate, awarded for service to Anglo-German relations.
He is also no eurosceptic seig-heil-ing Ukip MEP or arch-Keynesian euro-worrier. On the whole, he favours the idea, arguing that the single currency “has brought, and will continue to bring substantial benefits – economic, political and social – to people and states.”
Yet even for him, as he writes in his magisterial history of the euro, published in 2009 – two years into the economic crisis, he is worried that the euro has created perils that endanger the very existence of the European Union: “Emerging divisions threaten the fifty-year-old process of post-Second World War European unification.”
And there is one culprit.
“At the heart of the matter is Germany.”
Throughout the EU one regularly hears from politicians, even prime ministers and presidents – often of the French variety – snide remarks that the crisis was born of an American mother. They contend that everything was carrying along tickety-boo until Lehman Brothers, arguing, like an unmasked villain in Scoobie-Doo, that “they would’ve gotten away with it too if it weren’t for those meddling Yanks.”
They are the child who bawls when the wind blows down his house of cards. Or perhaps, to use a more appropriate analogy, the insurance companies, city planners and national disaster-response co-ordinators whose disaster-waiting-to-happen and mangled reaction to Hurricane Katrina in New Orleans they blamed on an Act of God rather than their own greed and abandonment of duty.
The catalyst was certainly the global economic crisis, but the shock to the eurozone system could have come from anywhere, even from within the EU. It does not matter ‘who started it’: The fact remains that there were structural imbalances built in from the beginning, that the euro was built on weak foundations.
Fundamentally, Mr Marsh’s argument is that a single monetary policy, with its one-fixed-exchange-rate-fits-all, blue-and-yellow spangly unitard, is perilous for a group of countries at different stages of development.
A lesser-developed economy lashed together in the same exchange rate as one as developed as Germany will inevitably lose out. Its weaker products, with higher-per-unit labour costs, will be massively over-priced. Meanwhile, the products of Germany’s export-oriented economy appear tremendously competitive throughout the EU.
This has two effects: First it undermines development in the periphery by squeezing out their less productive competitors. Second, it allows the core country’s export surplus to soar, which then convinces German policy-makers there is no need to develop domestic demand, which could begin to soak up the exports from the periphery.
Normally, this could be rectified by currency devaluation, of the late drachma, peso, punt or lira, but again, strapped into the single currency, this option is unavailable.
“Ironically, one of the reasons why so much of Europe favoured the single currency plan when Germany was reunified,” he notes, “was to counter Germany’s forecast resurgence. Merging the previously dominant D-Mark with more fragile currencies was forecast to bring a more healthy European equilibrium.”
Subsuming the Deutschmark, he says, into a new European monetary regime, was supposed to be part of tying a once-again powerful Germany – long France’s brooding and understandable anxiety – into the broader European interest.
But it hasn’t quite worked out as planned.
Germany didn’t adopt the euro, Europe adopted the Deutschmark.
‘How do you criticise success?’
Lord Harrison, of the British House of Lords EU Economic Affairs Sub-committee was in Brussels in November to grill a flock of policy-makers and think-tankers about solutions to the crisis, specifically the question of European ‘economic governance,’ the phrase endorsed at last December’s European Council, the gathering of Europe’s premiers and presidents.
Over drinks in a European-quarter hotel bar, he said that most of his committee’s interviewees, though not all, had concurred that an imbalance of competitiveness within the eurozone is the heart of the matter. But there seem as many definitions of ‘imbalances in competitiveness’ as there are varieties of Belgian beer.
“What do they all mean by ‘competitiveness’? I’ve heard so many differing opinions about this,” he said.
And however much the economic powerhouse of the union may be the root of the problem: “How exactly do you go about criticising Germany for, well, for being successful?”
“And in any case, who would ever have the courage to tell Germany any of this?”
If one only read sections of the financial press, or Germany’s broadsheet-tabloid, Bild – the biggest-selling newspaper in Europe – or even the commission’s own analysis, one could be forgiven for thinking that the country is a shrewd paragon of economic rectitude, probity, efficiency. The fiscal antipode of Grecian fecklessness.
The EU’s Autumn Economic Forecast issued last week salutes how Germany has “recovered remarkably swiftly and vigorously from the crisis, posting six consecutive quarters of above-potential growth.”
The forecast authors, under the supervision of Marco Buti, the grand poobah of the bloc’s Directorate-General for Economic and Financial Affairs, fall over themselves with praise.
“The value of exports is back to pre-crisis levels. Employment growth has been only temporarily dented by the downturn … Germany had not experienced any domestic housing, asset or credit boom prior to the crisis. Moreover, major structural reforms had been carried out in the 2000s, rendering the German labour market more flexible, improving competitiveness and strengthening the profitability of companies.”
If Mary Poppins, a different era’s icon of sobriety, had not laid claim to the strapline before Berlin, the commission would undoubtedly have declared Germany to be “practically perfect in every way.”
Meanwhile, the prodigal son in this parable, Greece, does not help itself any with its incompetent and corrupt state. The narrative rings true in the heads of many northern Europeans, whose recollections of holiday frustrations and baksheesh contrast with experiences of German automotive marvels and litter-free streets.
The way the story has been told feels more than plausible.
However, both accounts depend more on stereotype than reality.
As Costas Lapavitsas, a Greek economist with the University of London, recently pointed out: “The largest economy of the eurozone has been marked by slow growth, poor domestic demand, weak investment, high unemployment and miniscule productivity gains. The only area in which Germany has excelled is exports, where it has chalked up large surpluses.”
Crucially, while pressure on wages have been applied across Europe for years, the situation in Germany has been acute in this regard, as the professor notes, with wages barely rising in real terms for a full 15 years, as the country has been unique in Europe in its ability to discipline its workforce and outsource to an effectively union-free eastern Germany and the cheap labour markets of the former Soviet bloc.
Meanwhile, however messy the Greek state, overspending did not cause the crisis because Greece did not overspend.
If we compare the country’s spending alongside that of other EU states, we find that total government spending as a percentage of GDP is thoroughly average.
According to research from tax and monetary policy specialists Michael Linden and Sabina Dewan of the Center for American Progress, a left-leaning think-tank, even taking into the country’s latterly revealed fibbing about its government accounts, over the last 10 years, ‘prodigal’ Greece has consistently spent less as a proportion of GDP than the EU as a whole. From 2001 to 2007, the period of the last economic cycle, Athens averaged an annual government spend of 44.6 percent of GDP while the EU taken together forked out 46.6 percent.
Crucially, ‘prudent’ Germany actually disbursed 46.7 percent on average over the same period.
“Greece’s location [is] in the middle of the pack on spending,” they wrote in May at the height of the Greek crisis. How middle-of-the-pack? “Precisely in the centre of all EU countries, with 13 countries spending more, and 13 countries spending less.”
Where Greece is not quite so plain vanilla, though, is in tax collection.
The two researchers go on to point out that in 2009, the country collected only 36.9 percent of GDP in government revenues, compared to an EU total of 43.9 percent. Athens’ anorexic tax collection ranks seventh from the bottom out of the 27 member states, alongside, as it happens, Spain and Ireland. As a Cypriot economist, Stavros Tombazos of the University of Cyprus, has also made clear, Greek taxation on capital is only half that imposed on capital in the eurozone.
Greece doesn’t overspend. It undertaxes.
What the country has never been able to come to grips with is its Sumo-wrestler-sized shadow economy and gargantuan illicit financial flows. The US authors note that reports suggest that as much as a quarter of the country’s GDP comes from its underground economy.
It is true that the Greek government was more expansionary than other peripheral countries such as Ireland and Spain, and the country continues to lavish billions on military expenditure. (In passing, it is noteworthy that EU demands for austerity make no emphasis on drastic cuts to arms spending either in Greece or in Portugal, another state that has a predilection for going shopping in the great Franco-German Weapons-R-Us maxi-mart)
Public deficits did consistently exceed the three-percent eurozone limbo-stick maximum, but, leaving aside purchases of German submarines, this had a positive effect on growth. This is reflected in the composition of debt: In Greece, the ratio between public and private debt is more balanced. In Spain meanwhile, where the government did not rack up such a bill, growth was instead driven largely by the housing bubble.
At the same time, the so-called PIIGS economies (Portugal, Ireland, Italy, Greece and Spain), despite their varying fiscal policies and differing debt mix, were still all constrained in terms of public spending by the rigid discipline of the stability and growth pact, whatever the occasional flouting of the rules.
They only saw a massive leap in public debt after the crisis washed up in Europe from American shores. European banks trembled, having speculated on mortgage-backed securities, and EU governments bailed them out, underwriting them to the tune of €4.5 trillion (according to commission estimates), atop a recession in which government revenues declined and expenditures on welfare – the famous European ‘automatic stabilisers’ soared.
What pushed government accounts so far into the red had nothing to do with public sector profligacy but was in fact due to a result of a wholesale transfer of private, speculative debt on the part of banks and developers to the public purse.
Austerity is being imposed now not to pay off spending on social welfare, but to pay back the gambling debts of the bankers.
This is the first of a four-part in-depth look at the eurozone crisis. To read the other articles in the series, please visit the following links:
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