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Is Germany saving Greece or saving itself?

Published in Business Spectator (Melbourne), 16 June 2011
http://www.businessspectator.com.au/bs.nsf/Article/Euro-currency-credit-crisis-eurozone-Germany-Greec-pd20110615-HU2GS?OpenDocument

Having spent the last few weeks in Germany, I returned to Australia more puzzled than ever about the country in which I grew up. Germany has never been a nation that was easy to understand. Nor has it ever been a nation at ease with itself. But in its present state it has become a country overflowing with contradictions.

On the one hand, the German economy is booming. Economic growth was 3.6 per cent last year and is forecast to stay well above the 3 per cent mark this year. Unemployment is falling and public finances are improving. Within Europe, Germany is currently showing the best economic performance.

On the other hand, the Germans I met were remarkably pessimistic about their country. In fact, I failed to meet a single person who on balance had more positive than negative things to say about Germany’s state of affairs.

Of course, the Germans tend to view the world in unfavourable colours. A German glass is always half empty when it is still full to anybody else. But even discounting for the degree of gloom built into the German mindset, it was astonishing how downbeat the mood was.

Journalist friends of mine were bemoaning the decline of the press. The country’s iconic news magazine Der Spiegel was only clinging on to its celebrated circulation of 1 million thanks to heavily subsidised subscriptions, one of them told me. A former East German civil rights activist complained to me that Germany’s political culture resembled more and more that of Soviet East Germany. And another friend, who is a paediatrician, despairs about the lack of German language skills of her Turkish patients and their parents. Yet she was quick to add that without Turkish children she would soon be unemployed.

However, the best illustration of Germany’s confused mindset is its relationship to the euro currency. After more than a decade of monetary union, it is safe to say that the Germans have failed to develop a love affair with the euro. It is still a far cry from the affection heaped onto their old deutschmark. The prospect of having to provide billions for the stabilisation of fellow eurozone countries like Greece and Portugal does little to change this.

On the other hand, there is still a widespread unwillingness to reconsider the project of monetary union. And this has nothing to do with any enthusiasm for the great pan-European project of ever closer union because there is no such thing in Germany. It is rather an often unacknowledged understanding that Germany is benefitting from the euro after all – especially from its weakness.

I came across this most clearly in a meeting I had with the personal advisor to one of Germany’s most important politicians. As we discussed the eurozone periphery’s crisis, we soon agreed that there were severe flaws in the euro’s construction which made it very unlikely that the currency would ever work well for the entire continent. However, the advisor maintained that as a political symbol of the EU the euro was essential. More importantly though, the amounts Germany had to provide for Greece & Co. were easily affordable considering the advantages Germany reaps from eurozone membership, not least through the trade it facilitates.

As an admission of Germany’s real interests, this was quite frank. But it’s a pity that such statements are usually only made behind closed doors. And it shows that German support for the euro may amount to little more than neo-mercantilism.

An analysis recently published by economics consultancy Asianomics confirms this view. The report entitled ‘The Future of the Eurozone: Where does this end?’ revealed how a weak euro exchange rate has made German exports hyper-competitive while failing to lift exports from periphery countries.

In order to estimate how large the structural differences are within Europe, Asianomics calculated euro exchange rates needed to balance the current accounts of different European countries. The results were telling: “For Germany to have a balanced current account (as opposed to its present current account surplus), the euro needs to be traded at $US2.35. In other words, given the structural conditions of the German economy, the euro is far too cheap, or very competitive, depending on your point of view. In contrast, the euro has to get as low as $US0.31 in order for Greece to have a chance of achieving a balanced current account. Thus the euro is like a straitjacket that fits no one in the eurozone.”

These figures explain why German politicians fear nothing more than a break-up of the eurozone. Apart from the inevitable repercussions for the global financial system, any scenario in which weaker eurozone countries departed from monetary union – let alone a scenario in which Germany itself pulled out – would inevitably have an impact on Germany’s exchange rate. It would appreciate substantially and thus undermine its export-dependent economy upon which much of Germany’s recent economic performance is built. No wonder then that German politicians still prefer to pay for Greece, Portugal and other struggling countries, however grudgingly.

Unfortunately, the current German strategy to keep the eurozone together at all costs is extremely short-sighted. It leaves countries like Greece and Portugal permanently dependent on German transfer payments while burdening German taxpayers with enormous liabilities and risks. All of that for the dubious benefit of prolonging and amplifying existing trade imbalances within Europe.

When I pointed out to the advisor that the German government’s policies effectively turned Greece into one big welfare recipient, the answer I got was little more than a ‘Yes, that’s true, but we can still afford it’.

It is becoming clearer by the day that the great euro adventure is a failed experiment. However, there are no easy ways out for any of the participants. Germany believes it cannot leave without destroying its exports. Greece fears an exit from the eurozone would bankrupt its banks and shut it out of capital markets for years. And for the European Union, the end of the euro would be synonymous with the failure of its project of closer integration.

And yet, everybody knows that the current period of muddling through the euro’s blatant contradictions cannot go on for much longer. Perhaps this also explains why few Germans really have confidence in their country’s current economic performance. The risks that accompany Germany’s export-led boom are too large to overlook.

If this is the mood in Europe’s economic powerhouse, one dare not think how it must feel in the streets of Lisbon or Athens.

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