Germany’s strange parallel universe
Merkel’s plan for euro zone deeply depressing
In the terrifying summer of 2012, the European Central Bank promised to do “whatever it takes” to save the euro. The ECB then announced its Outright Monetary Transaction programme of support for bonds of beleaguered sovereigns. This assuaged the markets’ alarm without any need (so far) to fire a shot in anger. This has given the euro zone time. But it has not solved the underlying problems.
What are those problems? The first is to get out of the current mess. The second is to achieve the reforms needed in the longer run. Ongoing fiscal transfers seem neither desirable nor feasible. But better insurance mechanisms for sovereigns and banks are needed in the long run. Yet all this will be academic if the euro zone does not allow its members to return to economic health over a reasonable time period.
Can that be done? Without a change in Germany’s philosophy the answer is no. As Mr Schäuble’s piece makes quite clear, demand does not appear in the analysis. Yet a large country with a huge structural current account surplus does not just export products. It also exports bankruptcy and unemployment, particularly if the counterpart capital flow consists of short-term debt. That the new macroeconomic imbalances procedure avoids recognising the role of Germany’s shortage of domestic demand is most revealing. The benchmark for concern over a current account surplus is 6 per cent of GDP, regardless of the country’s size. Germany’s average turns out to be 5.9 per cent.
So what is happening? The answer is that the euro zone is trying to become a bigger Germany. A mixture of rising productivity and collapsing demand has driven vulnerable economies into external balance.
Meanwhile, Germany is redirecting its surpluses outside the euro zone. Overall, the shift in the euro zone’s current account balance towards surplus between the fourth quarter of 2008 and the second quarter of 2013 is €340 billion. To the extent that this helps solve the euro zone’s internal problems it does so by exporting bankruptcy elsewhere. This attempt to export its difficulties via beggar-my-neighbour policies is inconsistent with the euro zone’s obligations inside the Group of 20 leading countries.
But it also will not work, for two reasons. First, the euro zone is far too big to achieve export-led growth, as Germany has done. Second, the currency is likely to appreciate still further, thereby squeezing the less competitive economies all over again.
None of this, so far as I can judge, even appears relevant inside Mr Schäuble’s universe. In that universe, pursuit of competitiveness is never recognised for the zero-sum game it is if demand is completely ignored. The euro zone could be a success, but not under such a philosophy. Will it survive? Nobody really knows. Is this how Europe’s most ambitious project should be run? No.
– Copyright The Financial Times Limited 2013