Will Germany Sink Europe?
BERLIN—Germany, uniquely, is prospering while the rest of Europe sinks deeper into recession. And the recession is substantially the result of the very austerity that Chancellor Angela Merkel is imposing on the other member nations of the European Union.
Why is Germany spared? One good reason and two bad ones.
The good reason is that Germany promotes manufacturing, with sensible training and technology policies. Its industries have partnerships with effective unions. So Germany’s huge export surplus means that it can have tight budget policies at home and still have plenty of good jobs.
A bad reason is that the same euro that is overvalued for Greece is undervalued for Germany. So Germany benefits from a tacit subsidy—an artificially cheap currency, which makes its exports cheap. The second bad reason is that as capital flees from weak economies, it comes to Germany, leaving Germans with artificially low interest rates—another subsidy at the expense of its neighbors.
But even Germany’s economy is beginning to slow, as its customers go deeper into recession. About 40 percent of German exports go to the rest of Europe.
The question that people here is asking is whether Chancellor Merkel can be persuaded to change her austerity demands before the entire European project collapses.
The timing will be very tight, since Merkel is not likely to alter her views until Europe is about to go off a cliff, and that may be too late. Think of the catcher in a trapeze act, who has a less than a second to grab her tumbling partner before the partner falls to the ground.
The Germans favor tight budgets not just because the memory of the 1923 hyper-inflation makes the culture inflation-phobic. It’s also the case that the 1990 re-unification with communist East Germany cost something like two trillion dollars, increasing deficits and causing the German Central Bank to raise interest rates to guard against inflation.
In 2009, even the opposition Social Democrats joined in supporting a constitutional amendment known as the debt-brake (schuldenbremse), requiring a balanced budget. Budget balance here is tantamount to virtue, and deficits are considered living in sin.
Thus, when the Greeks required a bailout in 2010 after hedge funds began speculating against their government bonds, Merkel initially refused, then relented but only on condition that Greece agree to a stringent austerity plan. As a consequence of deep austerity in a deep recession, Greece will lose a staggering 25 percent of its GDP in four years.
Just to hammer the point home, last year Merkel sponsored a fiscal pact to be approved by the EU’s member nations, providing sanctions for nations that failed to keep their deficits and debts within narrow limits. As a condition of receiving emergency aid, nations were required to sign the pact.
In effect, she created a self-annihilating system like one of those novelty machines where you turn the device on, and then a hand comes out and turns it off. The bail-out funds help Greece survive, and then the austerity program kills the Greek economy.
Now events have turned critical for the rest of Europe.