Germany Losing the High Moral Ground

June 27, 2012

The nearly three-year-old euro debt and banking crisis is a regional crisis within a global financial crisis that first broke out two years earlier.  The stresses of the Great Recession exposed shortcomings in the European Economic and Monetary Union that must be fixed if the arrangement is to persevere.  Until recently, Germany occupied the moral high ground in political negotiations with the euro area’s so-called peripheral members.  Industrious, hard-working, self-sacrificing, and skilled Germans were depicted favorably against their peripheral counterparts, who were called lazy, dishonest, and undisciplined.  The tendency to differentiate northern Europe from southern Europe in terms of the character of the peoples was and continues to be captured in the use of the racist acronym PIIGS for the eurozone subset of Portugal, Italy, Ireland, Greece and Spain, all of whom except Italy have now requested assistance packages from the eurogroup and the IMF.

In the recent more acute stage of the European crisis, Germany’s claim to the right moral stuff has been losing sympathy and credibility.  World opinion increasingly considers Germany to be obstructionist in the effort to resolve the crisis and sees Berlin’s unqualified endorsement of austerity as unreasonable and cruel.  An analysis from Eduardo Porter in the business section of today’s New York Times casts the tough, uncompromising language from Chancellor Angela Merkel and other German authorities as a bargaining ploy to get the greatest possible policy concessions from the peripheral governments.  It is very significant that German officials must view the French government as adversarial rather than a close ally in this debate.  At the end of the day, Porter predicts, Germany will agree to whatever it takes to avert a breakup of the common currency area because keeping EMU intact is overwhelmingly in Germany’s own self interest.

As German voters and politicians alike maintain, their position asks from the peripherals nothing more than what Germany itself undertook to regain competitiveness after the shocks of reunification with East Germany in 1990 at an uncompetitive 1-for-1 exchange of D-marks for Ostmarks.  The parities that bound Europe’s national currencies into the euro were also uncompetitive for Germany from a purchasing power parity standpoint. 

While Germany suffered through a long period of sub-trend growth, devaluing internally via the suppression of wages and unit labor costs, the economy did not in fact undergo the wrenching contraction of GDP and jobs that Europe’s peripheral economies have been experiencing more recently.  From 1992 through 1998, German GDP grew 1.35% per annum, and the expansion rate over the sixteen years from 1992 through 2007 averaged 1.5% per year.  GDP fell in just two of those years, dropping 1.0% in 1993 and 0.4% in 2003.  In the years 2008-2012, it looks like Greek GDP will drop each year and by 3.75% or more per annum on balance.  GDP in the other four peripherals is likely to record average per annum declines of 1.9% in Ireland, 1.3% in Portugal, 1.2% in Italy, and 0.8% in Spain.  In harmonized terms reported by Eurostat, the jobless rate now is at 24.3% in Spain, 21.9% in Greece, 15.2% in Portugal,  and 14.2% in Ireland.  All are higher than the level last decade at which German joblessness crested.  The harmonized German rate is currently 5.4%, and the 6.7% unemployment rate according to Germany’s Federal statistical Office is down from 8.2% three years ago.

The landscape for austerity has become much more hostile than when Germany did it.  Germany’s self-imposed restraint occurred at a time when demand in the rest of Europe and the world economy was expanding much more robustly than now.  Germany was one country applying the brakes when other nations were in stimulative stances.  Fiscal policies are being trimmed everywhere now, even by Germany, and consumers also deleveraging in a synchronized way, too.  It will take decades, if not a lifetime, for the peripheral nations to regain competitiveness in the fashion that Germany was able to do, and no society has the patience for such a cost stretching so long.  It’s natural for opinion to sour toward Germany’s insistence on such painful one-sided medicine and Berlin’s refusal to share the adjustment burden as EMU is transformed into an institution whose sustainability investors can believe in.  Collective hostility toward Germany moreover easily gets tangled up in a 20th century history that saw the world pay enormously not once, but twice, for Germany’s aggressive behavior.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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