Germany’s strange parallel universe
Merkel’s plan for euro zone deeply depressing
German Minister for Finance Wolfgang talking to Michael Noonan in Brussels. Schäuble laid out the view on which Berlin’s current policy is based with sobering clarity last week. Photograph: Getty Images
Angela Merkel’s remarkable election result confirms her position as the dominant politician in Germany and so also in Europe. It is assumed she will get the euro zone she wants: Germany writ large. That may prove right. Alas, if she does, it is going to be a deeply depressing spectacle.
Wolfgang Schäuble, Germany’s finance minister, laid out the view on which Berlin’s current policy is based, with sobering clarity, in the Financial Times last week. The doomsayers, he argued were wrong. Instead, “the world should rejoice at the positive economic signals the euro zone is sending almost continuously these days”. If depressions and mass unemployment are a success then adjustment in the euro zone is indeed a triumph. Mr Schäuble accuses his critics of living in a “parallel universe”. I am happy to do so rather than live in his.
Ambrose Evans-Pritchard of the Telegraph has provided a colourful rejoinder. Kevin O’Rourke of Oxford and Alan Taylor of the University of California, Davis, offered a sober assessment, concluding that a break-up is not unthinkable.
So where is the euro zone? Its unemployment rate is 12 per cent. Its gross domestic product in the second quarter was 3 per cent below its pre-crisis peak and 13 per cent below its pre-crisis trend.
In the most recent quarter Spain’s GDP was 7.5 per cent below its pre-crisis peak; Portugal’s, 7.6 per cent; Ireland’s, 8.4 per cent; Italy’s, 8.8 per cent; and Greece’s, 23.4 per cent. None of these countries is enjoying a strong recovery. The latest unemployment rate is 12 per cent in Italy; 13.8 per cent in Ireland; 16.5 per cent in Portugal; 26.3 per cent in Spain; and 27.9 per cent in Greece. These would be higher without emigration. Ireland’s plight is a warning: it has long since restored its competitiveness and is running a large current account surplus. Yet its GDP has stagnated for four years.
Similar stagnation may be the fate of others. Why? To understand this, one needs to understand why the parallels drawn by Mr Schäuble between Germany’s reforms in the 2000s and the position of today’s vulnerable countries are absurd.
Germany experienced a mild recession in 2003; today’s vulnerable countries are suffering depressions. Germany’s largest current account deficit was 1.7 per cent of GDP in 2000; those of today’s crisis-hit countries were far larger, with those of Greece, Portugal and Spain more than 10 per cent of GDP. Germany did not have huge debts and had no difficulty in financing itself; today the vulnerable countries have huge debt overhangs and much difficulty in financing themselves.
Before the crisis the world and euro-zone economies generated strong demand for German exports; today’s vulnerable countries are pursuing adjustment in a period of chronically weak demand. In the pre-crisis boom Germany’s partners found it hard to avoid high inflation; in today’s economy Germany has no difficulty keeping its inflation low.
The difficulties confronting the vulnerable euro-zone countries reflect these conditions. They have to improve their competitiveness. But the only one in which nominal wages have fallen substantially is Greece. Elsewhere it is rising productivity that has improved competitiveness. But that is the other side of the coin from the unemployment. Moreover, if prices and wages fell the real burden of debt would rise. High nominal interest rates relative to the growth of nominal incomes also raise the debt burden. All these countries are going to end up with gross public debt at more than 100 per cent of GDP. This will be hard to manage.