With Greek debt negotiations reaching a critical point, it may be time for a reminder that there are more problems within the eurozone than just southern European debt. Austerity rightly remains firmly in the headlines, but looking beyond the struggles in Athens reveals that economic changes may be needed further north. Indeed, while the new Greek government awaits the next round of Eurogroup talks it is time to look again at the colossal German current account surplus and ask why Germany feels able to call for structural change in Greece when it refuses to address the imbalances in its own economy.
Any economics student knows that running a persistent current account surplus may not always be wise. Under normal circumstances, this can cause exchange rate appreciation or imply weak domestic demand. Within a currency union however, we may think that exchange rate appreciation should not be a factor, with all eurozone economies theoretically sharing a similar macroeconomic basis from which to pursue competitiveness in exports. However, Germany has long pursued policies designed to boost the competitiveness of its manufacturing sector that have resulted in years of wage restraint and excessively restrained fiscal policy. Germany’s low relative unit-labour costs in particular have given it a competitive edge over its eurozone partners. This type of imbalance should in theory be avoided by the ECB’s requirement that national wage trends should follow a norm equal to national productivity growth plus the agreed eurozone inflation rate. Germany, however, not only misses this norm by the widest margin, but does so in a downward direction. Germany’s relative lower production costs make its goods artificially cheap and thus make it an aggressive exporter within the European common market. German goods crowd out those from other countries such as Greece, Italy or Spain.
But that’s not all. Germany’s current account surplus and exports outside the EU have in recent years not been offset by large current account deficits of its eurozone neighbours. This appreciated the value of the euro, which then impacted on demand for goods from Germany’s (relatively) less competitive southern European partners. With the recent fall of the euro against the dollar and the pound this issue is somewhat off the immediate agenda, but it has been a factor in European industry over recent years.
Germany’s domestic demand is weak and is in part related to its low relative wage increases. This adds to eurozone deflation fears and is compounded by the country’s conservative fiscal policy. Deflation is a cause for concern all round as it pushes up real interest rates and increases the burden of debt experienced by the southern European states. As inflation falls, the level of primary budget surplus required to fulfil debt obligations rises. A spiral of austerity therefore threatens to spin out of control.
So, for all the rhetoric about Greek structural adjustments, where are the talks relating to German trade imbalances? Why are the media not more vocal in calling for more expansionary German fiscal policy and wage appreciation in order to balance its economy and level the eurozone playing field? We all know that Germany has an ingrained fear of (hyper)inflation and in many ways they are right, since the aftermath of the first world war demonstrated its severe consequences beyond doubt. As Lenin rightly said, ‘the surest way to destroy a nation is to debauch its currency’. However, as part of a currency union Germany has an obligation to act in the collective interest and this implies addressing its artificially induced competitiveness.
But at the root of this problem is one of ideology. Germany prides itself on the strength and competitiveness of its economy and urges other countries to follow its example. But low relative wages are not something to be desired by many countries and low domestic demand is nothing to aspire to. Greece and others need an environment where they can make structural adjustments to their economies that are tailor-made to their own economic and cultural fabrics. Much of the talk in the media calls for a fiscal union to support the currency union but this would once again be dominated by the larger Eurozone economies. Yes, it would create the possibility of making fiscal transfers within the EU so that richer national economies would be able to support weaker ones in the interest of union stability but would this actually happen? Also, would anyone actually want this to happen, bearing in mind the additional loss of national sovereignty it would bring?
For several years the single currency was welcomed as an opportunity to break down national barriers and move towards a more economically and socially interconnected world. But the crisis years of austerity and the Troika have eroded much of the support and enthusiasm for a wider European ‘state’. The economic, sociological and political heritages of the different EU nations are vast and there is burgeoning discontent about the subjugation of national sovereignty to EU policy.
So what does this mean for the people of Greece, Spain and other southern European states who are increasingly vocal in their opposition to current policies? For Greece, continued austerity and a high primary budget surplus seem unsustainable and the Greek people have voted for change. Is it fair to ask then if it is hypocrisy that Germany can impose this system on the Greek people when it won’t address its own structural issues that have exacerbated the problem? The war of words between Athens and Berlin has so far encompassed debt, morality and repayment of war loans. But the US Treasury, the IMF and the EC have all voiced their concerns of what is often said to be Germany’s ‘beggar thy neighbour’ trade policy, and it cannot be long before this hits the headlines once again in the context of the current debate.
It may also be worth noting that if Greece is ultimately forced out of the eurozone, the consequent financial and political contagion could threaten the existence of the euro itself. If this were to happen, and Germany were to revert to the mark, its currency could quickly appreciate in nominal terms vis-à-vis its former eurozone partners and its competitive edge would be quickly lost. This may still be a long way off as politicians fight to shore up the eurozone defences and integrity, but it is a reminder that there is more to European discord than just sovereign debt. No doubt Alexis Tsipras and Yanis Varoufakis have not been slow to bring this up behind closed doors. Whether anyone is listening, however, remains to be seen.
Image courtesy of Chris Joseph