Currency Thoughts

Germany’s Responsibility for the Euro Crisis

September 12, 2011

German officials and citizens have assumed the high moral ground since the start of the euro debt crisis in the autumn of 2009.  One can easily imagine their ire at learning that governments like Greece not only far exceeded agreed ceilings on fiscal deficits and debt in a chronic way since joining the European Economic and Monetary Union in January 2001 but fudged their fiscal data to secure membership in the group and to understate their on-going excesses thereafter.  While Germany engaged in years of self-administered deep austerity to restore competitiveness in the early years of the common currency experiment, the peripheral economies lived the high life, benefiting from much lower interest rates than they had under the prior monetary system.  Over twelve years from 1999 to and including 2010, German real GDP expanded only 15.4% or 1.2% per annum, less than half as much as the expansion rates of 2.6% per annum in Greece, 2.5% per annum in Spain or even the annualized pace of 1.5% in France and Italy.

Germans are incensed that a number of promises thought to have been enshrined in the Maastricht Treaty laying out the euro’s ground rules are not being honored.  Foremost, the taxpayers were to bear no obligation to bail out other members in fiscal trouble.  Economic and monetary union was explicitly intended not to constitute a transfer union, as the reunification of Germany itself in 1990 had entailed.  Nor was the European Central Bank envisioned to become a buyer or seller of member sovereign debt.  Contractual obligations must be met as written.  How seriously Germans feel betrayed was underscored by the resignations of former Bundesbank President and the early heir-apparent leader of the ECB, Axel Weber, and then of Juergen Stark, Germany’s representative on the ECB Executive Board.

Alas, the assignment of moral blame is not so simple as Germans would have everyone else believe.  Did Germany not fail to honor post-WW1 promises to which its political leaders had agreed and then proceed to subject the world to violence of such unimaginable extreme as to set the standard against which all later geopolitical internal tyrannies and atrocities against other lands will be measured? 

One result of the Second World War was the decision to divide the nation in two, and so it would remain for forty-five years.  A split country was how the “German problem” was contained.  Similar terms are not used to describe other nations in the region.  There is no French problem, no Italian problem, no Danish problem, or Portuguese problem.  People do not even speak of a “Greek problem” per se but rather a euro debt crisis in which Greece has been the largest offender and an inevitable default candidate.

A common European currency was a bad economic idea legislated hastily for political reasons as a quid pro quo for permitting German reunification in 1990 after the East German and other East European communist regimes collapsed.  Germany won acceptance for fusing its western and eastern halves by agreeing to tether its more powerful reincarnation to the rest of Europe — monetarily by sharing a common currency and politically by accepting the concept of “economic union”, which implied a degree of shared fiscal authority.  No procedure for leaving EMU was put into the Maastricht Treaty in part to ensure that one or two powerful members could not strong arm others into an undesirable exit. 

Germany’s leadership understood the fiscal risks in advance.  That’s why they insisted upon a Stability and Growth Pact (SGP) with penalties to be imposed on nations with a deficit exceeding 3% of GDP or debt above 60% of GDP at times that do not involve circumstances that warrant rare exception.  However, Berlin itself trampled on that safeguard long before the Great Recession.  From 2002 through 2005, Germany violated the deficit standard but teamed up with France, another delinquent economy, to skirt any penalty by using their combined large voting share determined by economic size.  In March 2005, the SGP was formally watered down and rendered useless.  ECB President Trichet alludes to this piece of hypocrisy at almost every monthly press conference. 

Germany also exceeds the SGP’s debt ceiling of 60%.  Such was at 83.2% of GDP in 2010, up from 64.9% in 2007.  While the Greek debt ratio last year of 142.8% was much higher, Germany had a higher relative debt than France or even Spain.  Moreover, Greece represents just 2.5% of euro area GDP versus Germany’s 27.1% share.  With Germany being nearly 11 times more significant to Euroland than Greece, its 83.2% debt ratio is arguably as troublesome as Greece’s 142.8% ratio.

Despite the years of slow German economic growth, EMU’s largest member has been among the greatest beneficiaries of the union.  Germany has enjoyed lower price inflation than when German interest rate levels were set by its own national central bank.  German competitiveness is more secure than before because its European neighbors cannot depreciate their currencies against Germany’s money.  Monetary integration also gave German banks a lucrative backyard for doing business with seemingly less exchange rate risk.  All of that has blown up in their face with the prospect of a Greek default, and so Chancellor Merkel has fought tooth and nail to avoid any agreed write-down of their loans to Greece and other peripherals. 

Present German political and business leaders are clearly less committed to European integration than their predecessors were in 1990 when the ill-fated bargain of German unification at the price of a common European currency was made.  It’s kind of late for second thoughts.  If Germans epitomized by their finance minister are now ready to promote the option of having peripheral nations leave EMU, they should also be receptive to the notion of re-dividing their own country.  Of course, that’s not going to happen, but I believe West Germany, Europe and the world would be a safer and more prosperous place if the two-part proposition of 1990 had been rejected then after consideration. 

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: EMU, Germany, Greece

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