Timothy Garton Ash has a very conciliatory piece in the New York Review of Books on The New German Question. This gave me an opportunity to revisit my December 20, 2011 blog What does Germany want (and why she can’t have it)? in a letter to the editors I wrote last Sunday:
To the editors:
Timothy Garton Ash (NYR, August 15, 2013) has given a very judicious and balanced account of Germany’s dilemma at the eye of the Euro storm. And as a non-economist he should be especially commended for touching all of the relevant economic bases.
In the end, however, he stops just short of connecting all of the dots, preferring to concentrate on the admittedly important governance issues, and fails to draw the inevitable conclusion, namely, that the two cornerstones of Germany’s highly successful economic model are incompatible with the survival of the Eurozone and the welfare of its other members.
These cornerstones are, first, Germany’s well-known principled refusal, or shall we say, grudging and last-minute minimal capitulation, to a certain amount of mutualization of risk (Eurobonds, banking union) necessary to overcome the centrifugal tendencies inherent in an incomplete currency zone such as the Euro (see the work of the London School of Economics’ Paul de Grauwe for an exposition of this self-destructive tendency, as well as George Soros in these pages). The European Central Bank’s President Mario Draghi has had to unilaterally (although probably with Merkel’s implicit acquiescence) step into the breach with his OMT “whatever it takes” program to effect a “perils of Pauline” rescue. While Draghi plugged the rapidly eroding dike of Euro collapse last summer with the use of only his thumb, so to speak (expending no funds whatsoever in support of peripheral creditworthiness), the Bundesbank, spearheaded by its resolute President Jens Weidmann, in the venerable German tradition of Heinrich von Kleist’s overrighteous avenger Michael Kohlhaas, has still seen fit to take the ECB to the German Constitutional Court to challenge the compatibility of OMT with the ECB’s mandate. As Garton Ash rightfully point out, many Germans are still obsessed with the 1923 hyperinflation rather than the much more relevant 1931/2 Brüning austerity episode of their own tragic history.
Even more important, it seems to me, is Germany’s attachment to the second cornerstone – running 6% current account surpluses year after year in the name of “competitiveness.” Everyone is in favor of “competitiveness,” whatever that means, but current accounts are globally a zero sum game. If the rest of the Eurozone becoming more like Germany means that the entire Eurozone should run 6% current account surpluses with the rest of the world, we are in real trouble. Not only will the other major trading partners (US, UK, China, Japan, the developing world) never accept this, it is really a form of beggar-thy-neighbor policy because it pushes the necessity of generating effective demand for full employment unto the shoulders of others. Remember, Germany re-attained its much admired “competitiveness” since 2000 for the most part (though not exclusively) by forcing its real wages to grow more slowly than its productivity, lowering its consumption share to a level incompatible with long-term macroeconomic stability. This is not something every nation can indulge in (even China) without triggering a collapse of global effective demand – the US (or Spain, Ireland, Portugal and Greece for that matter) cannot play consumer of last resort forever. That this is really the heart of contemporary Germany’s economic DNA comes out clearly in Jens Weidmann’s 2012 speech at the Bank for International Settlements.
There are few apparent solutions to this inner-European current accounts imbalance short of Euro breakup, reevaluations and default. The present austerity and “internal devaluation” policy of the European Commission attempts to right the deficits of the debtor Euro periphery by slashing government spending (including on education, infrastructure and R&D) and lowering wages by means of mass unemployment levels not seen since the 1930s (all the time swinging the censer of nebulous “structural reforms”), while hopefully leaving the surpluses of the core countries and the stability of their banks untouched. While after a period of immense social misery this could restore “real exchange rate” export competitiveness, it is more likely to undermine than enhance their technological competitiveness and human capital in the long run (not to mention encourage the emigration of their best and brightest). Or the core could recycle its surpluses with unending bailouts (the “Transferunion” Germans so rightly fear, in the worst case just creating more Italian Mezzogiornos), or, on a more positive note, by investing in an EU Marshall plan. And finally, the core, primarily Germany, could lower its current account surplus by increasing domestic consumption via higher wages, and raising internal investment, thereby sucking in imports from the rest of the Eurozone. An astute policy of a weak Euro would even allow Germany’s competitiveness with respect to the rest of the world to remain unchanged while this mutually beneficial rebalancing took place.
However, the fetish of the strong DM has been replaced by the idolatry of Germany’s Euro current account surplus. And while Germany has done quite well with this policy, it still has not sunk in that it is fundamentally incompatible with the survival of a healthy Eurozone. Even the Netherlands (not to mention France), a core Eurocore state, is being forced to abandon the austerity ship. Germany’s present stance, even if light years better than its Wilhelminian and Hitlerian precedents, is essentially predatory, masquerading as housewifely morality. Unfortunately, no amount of tinkering with EU governance will succeed until these fundamental issues are addressed.
Gerald Silverberg
Vienna, Austria
To the editors:
Timothy Garton Ash (NYR, August 15, 2013) has given a very judicious and balanced account of Germany’s dilemma at the eye of the Euro storm. And as a non-economist he should be especially commended for touching all of the relevant economic bases.
In the end, however, he stops just short of connecting all of the dots, preferring to concentrate on the admittedly important governance issues, and fails to draw the inevitable conclusion, namely, that the two cornerstones of Germany’s highly successful economic model are incompatible with the survival of the Eurozone and the welfare of its other members.
These cornerstones are, first, Germany’s well-known principled refusal, or shall we say, grudging and last-minute minimal capitulation, to a certain amount of mutualization of risk (Eurobonds, banking union) necessary to overcome the centrifugal tendencies inherent in an incomplete currency zone such as the Euro (see the work of the London School of Economics’ Paul de Grauwe for an exposition of this self-destructive tendency, as well as George Soros in these pages). The European Central Bank’s President Mario Draghi has had to unilaterally (although probably with Merkel’s implicit acquiescence) step into the breach with his OMT “whatever it takes” program to effect a “perils of Pauline” rescue. While Draghi plugged the rapidly eroding dike of Euro collapse last summer with the use of only his thumb, so to speak (expending no funds whatsoever in support of peripheral creditworthiness), the Bundesbank, spearheaded by its resolute President Jens Weidmann, in the venerable German tradition of Heinrich von Kleist’s overrighteous avenger Michael Kohlhaas, has still seen fit to take the ECB to the German Constitutional Court to challenge the compatibility of OMT with the ECB’s mandate. As Garton Ash rightfully point out, many Germans are still obsessed with the 1923 hyperinflation rather than the much more relevant 1931/2 Brüning austerity episode of their own tragic history.
Even more important, it seems to me, is Germany’s attachment to the second cornerstone – running 6% current account surpluses year after year in the name of “competitiveness.” Everyone is in favor of “competitiveness,” whatever that means, but current accounts are globally a zero sum game. If the rest of the Eurozone becoming more like Germany means that the entire Eurozone should run 6% current account surpluses with the rest of the world, we are in real trouble. Not only will the other major trading partners (US, UK, China, Japan, the developing world) never accept this, it is really a form of beggar-thy-neighbor policy because it pushes the necessity of generating effective demand for full employment unto the shoulders of others. Remember, Germany re-attained its much admired “competitiveness” since 2000 for the most part (though not exclusively) by forcing its real wages to grow more slowly than its productivity, lowering its consumption share to a level incompatible with long-term macroeconomic stability. This is not something every nation can indulge in (even China) without triggering a collapse of global effective demand – the US (or Spain, Ireland, Portugal and Greece for that matter) cannot play consumer of last resort forever. That this is really the heart of contemporary Germany’s economic DNA comes out clearly in Jens Weidmann’s 2012 speech at the Bank for International Settlements.
There are few apparent solutions to this inner-European current accounts imbalance short of Euro breakup, reevaluations and default. The present austerity and “internal devaluation” policy of the European Commission attempts to right the deficits of the debtor Euro periphery by slashing government spending (including on education, infrastructure and R&D) and lowering wages by means of mass unemployment levels not seen since the 1930s (all the time swinging the censer of nebulous “structural reforms”), while hopefully leaving the surpluses of the core countries and the stability of their banks untouched. While after a period of immense social misery this could restore “real exchange rate” export competitiveness, it is more likely to undermine than enhance their technological competitiveness and human capital in the long run (not to mention encourage the emigration of their best and brightest). Or the core could recycle its surpluses with unending bailouts (the “Transferunion” Germans so rightly fear, in the worst case just creating more Italian Mezzogiornos), or, on a more positive note, by investing in an EU Marshall plan. And finally, the core, primarily Germany, could lower its current account surplus by increasing domestic consumption via higher wages, and raising internal investment, thereby sucking in imports from the rest of the Eurozone. An astute policy of a weak Euro would even allow Germany’s competitiveness with respect to the rest of the world to remain unchanged while this mutually beneficial rebalancing took place.
However, the fetish of the strong DM has been replaced by the idolatry of Germany’s Euro current account surplus. And while Germany has done quite well with this policy, it still has not sunk in that it is fundamentally incompatible with the survival of a healthy Eurozone. Even the Netherlands (not to mention France), a core Eurocore state, is being forced to abandon the austerity ship. Germany’s present stance, even if light years better than its Wilhelminian and Hitlerian precedents, is essentially predatory, masquerading as housewifely morality. Unfortunately, no amount of tinkering with EU governance will succeed until these fundamental issues are addressed.
Gerald Silverberg
Vienna, Austria
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