Published by Prospect – 25 October 2011
The eurozone’s strongest economy—but is it strong enough to save the rest?
Greece and the other countries in the troubled “PIGS” quartet—Portugal, Ireland and Spain—have been the focus of recent debate about the eurozone’s survival. It was, after all, the relative weakness of their economies that exposed the eurozone’s limitations. But the future of Europe will be determined by Germany, not the PIGS.
Because of its relative economic strength, Germany is the place where the real decisions are made in the eurozone—an increasingly undemocratic project. At the same time, Germany’s relative economic weakness is blocking solutions to this protracted debt saga. Although Germany is strong in comparison to the other eurozone members, it is weak relative to its own performance post-reunification in the early 1990s. And it is certainly not strong enough to maintain the living standards of hundreds of millions people in struggling eurozone countries.
Germany’s slowdown began to manifest itself soon after its early 1990s heyday—when productivity levels first exceeded those of the US, and the country ran a significant trade surplus. Output growth fell in real terms from an average of 2.5 per cent in the 1980s to 1.8 per cent in the 1990s. This can’t be solely ascribed to the costs of German reunification. The substantial industries of the former West Germany—cars, machine tools and chemical products—were slowing down too. Germany’s trade surplus had almost disappeared by the end of the 1990s and productivity growth was faltering, so that its per-hour output dropped below US levels again in the early 2000s.
The 1999 eurozone launch came at just the right time for Germany. It created a huge new “home” market for its stuttering manufacturers, boosted by a lower exchange rate than it could have expected with the old Deutsche Mark (DM). Germany also sharpened its competitive edge by keeping wages lower than its competitors. The country’s subsequent export successes—within Europe and then further afield—have helped to compensate for the slowing productivity it shares with other advanced economies.
Although membership of the eurozone did not reverse Germany’s slowdown—real GDP only averaged 1.2 per cent growth between 2001 and 2008—it would have been much worse without the export boom. Some estimate that 80 per cent of GDP growth came from net exports during this period. So while Greece and the other weaker members are often condemned for having leeched off the eurozone with their access to artificially cheap credit, Germany has been just as dependent on the eurozone for its own artificial prosperity.
Now because of its relative weakness, Germany will continue to avoid paying the huge sums needed to keep the eurozone together. But it also fears the costs and disruption of a eurozone collapse. A forced return to its own currency, or even some form of “greater-DM” with a few of its stronger neighbours, would see a significant—some say 40 per cent—loss of exchange rate competitiveness. Such a dip would, in the short term at least, severely undermine its successes in the European market as well as its more recent expansion into the emerging Asian markets.
“Between a rock and a hard place” is the appropriate idiom for Germany’s position. Although the country has the greatest bargaining power in the eurozone, it cannot offer a solution to the mess it has been instrumental in creating.