Europe and the Debate in Germany

In a telling leading editorial, the Zeit, Germany’s biggest and most important weekly newspaper, praises Merkel for making Europe more German. After the others had only wanted our money up to now, now the idea were to create a European economic government, give up decision-making powers to Europe and in return force everyone else to adhere to German standards. Europe is becoming more German. Simply because this path promises a happy end.

In short, the Zeit takes and defends the archetypical German position during the Eurozone crisis that is dominated by the belief that Germany innocuously – if maybe a bit naively because of its adherence to rules and regulations – was led into the trap that the Eurozone has become by its rule-bending Southern member states (Greece, Portugal, Spain…). And now we’re supposed to pay for them! If Europe is to become like Germany then, the nation-state version of an upstanding citizen who pays his taxes, works hard and saves for his retirement, the euro will be saved. Countries will only have to balance their budgets, lower their wages, extend their retirement age and it’ll be smooth sailing from there.

There is something wrong with this picture of course. Yet, let’s first see what the German government is actually proposing. According to the FAZ the idea – developed in cooperation with the French is to coordinate policy on six items. Namely the idea is to end wage indexing, adjust the pension systems to demographics, harmonise taxes, introduce a debt brake and an anti-crisis mechanism for banks, finally higher labour mobility. This package were to assure higher competitiveness of the Eurozone as a whole.

Now, let’s ignore for a second the fact that no sanctions are attached to these coordination efforts, that some of them would actually raise taxes (Ireland) and arguably lower competitiveness (which is a faulty concept anyway, but we’ll get to that in a second), and that finally this is a first step towards a European economic government pushed by a German government that would not be caught dead admitting just that. We’ll focus instead on the inherent impossibility of the (popular) German position, which the above-quoted Zeit editorial mimics.

The Economist recently praised the modern German Wirtschaftswunder. Yet note on whom they place at least part of the sustained surge in German production (and the exports that they are going towards): The euro also provided a bonanza, thanks to (unsustainable) demand in places like Spain and Greece. In other words, the Eurozone countries (which make up for more than 60% of German exports) , the ones that spent more money that they had, wasted it buying our stuff and in that way financed our jobs and our low budget deficit. So much for the innocuous Germany being led to the brink of disaster by its worthless friends.

This dirty little secret, which in the German discussion is at best glossed over at worst simply ignored, leads to the big, looming problem of Europe becoming like Germany. Quite simply, it’s impossible. The German growth model, the low budget deficit, the high employment rates and so on and forth, are based on low domestic wage increases and a highly efficient export production aka external demand. The model that Germany prescribes for the rest of Europe would thus also have to be based on high external demand, yet where is said demand supposed to be coming from? Japan? Mired in a deflationary environment for almost two decades by now? The US? Where the economy is picking up yet without employment numbers rising and the domestic market far from where it once was? China then. They’d better get ready to start consuming a massive amount of Mozzarella, Wine et al.

As the Economist, this traditional harbinger of liberal and interventionist thought, puts it: If every European country followed that [the German] example it would be a recipe for a slump. Yet, that’s what the German government is proposing and apart from infeasible isolationism and a general sense of injustice being done to a hard-working people, it is the only option even discussed in Germany today. The media debate on Europe in Germany lacks a proper understanding of the inter-linkage of events and trends that is astounding to say the least. The ignorance, which even authors of supposedly high-brow publications showcase, is horrifying.