The Financial Times’ Martin Wolf has regularly argued that Germany is a key at-fault party in the problems plaguing the European Union… and especially the current disarray over the euro. In his opinion, Germany has suppressed consumption and created an excess of German supply… and has left other eurozone countries, because they are locked into the monetary union and cannot depreciate, without any competitive recourse.
His suggestion? Well, Germans are supposed to work less — note that they are already working 25% less than Americans — and consume more.
We can examine the argument from the FT:
“A discussion of internal eurozone demand and imbalances is not one German policymakers wish to have. So long as that is the case, the prospect for the ‘improved economic co-ordination’ mentioned in the Council statement is nil. Worse, Germany does wish to see a sharp move by its partners towards smaller fiscal deficits. The eurozone, the world’s second largest economy, would then be on its way to being a big Germany, with chronically weak internal demand. Germany and other similar economies might find a way out through increased exports to emerging countries. For its structurally weaker partners – especially those burdened by uncompetitive costs – the result would be years of stagnation, at best. Is this to be the vaunted ‘stability’?
“The project of monetary union confronts a huge challenge. It has no easy way of resolving the Greek crisis. But the bigger issue is that the eurozone will not work as Germany wishes. As I have argued previously, the eurozone can become Germanic only by exporting huge excess supply or pushing large parts of the eurozone economy into prolonged slump, or, more likely, both. Germany could be Germany because others were not. If the eurozone itself became Germany, I cannot see how it would work.”
Increasingly, the common currency is serving to better reveal just how uncompetitive the periphery of the European Union is. For decades, weaker European economies were able to use currency depreciation to disguise the fact… by hiding behind silent pay decreases in order to avoid politically-charged backlashes.
This is no longer possible in the current environment. The single currency combined with the recent financial crises has revealed the mess that’s for so long been swept under the rug. US policy makers could stand to benefit from a good look at the European “losers.” The lessons taught by financial indiscretion are painful to live through.
You can visit the Financial Times to consider this perspective on why Germany cannot be a model for the eurozone.