The gift that keeps on taking – Germany and the euro
Germany has been, for many years, a huge net beneficiary of eurozone membership, but there has been a decisive turn in the cost-benefit equation. Do Germans realise that, because the single currency is structurally unworkable, bail-outs to the competitively-disadvantaged southern euro countries are not a temporary phenomenon, but are going to turn into a perpetual life-support system funded, ultimately, by Germany alone?
It is a sign of the times that, just as Alex Salmond’s SNP is wondering whether an independent Scotland could get in to the European Union, many politicians in Westminster are asking themselves if Britain should get out. The Scottish position is a strange one, with EU membership now close to the hearts of nationalists who, not so long ago, craved membership of an “arc of prosperity” which included more non-members (Norway, Iceland) than members (Ireland). Whilst the Irish “Celtic tiger” is now a rug, Norway continues to prosper outside the EU.
In the inner circle of the eurozone, meanwhile, people in countries such as Portugal and Spain are waking up to the reality that the single currency, once a political dream, has become an economic nightmare. Because the euro system provides neither automatic stabilisers nor economic harmonisation in return for exchange rate rigidity, these competitively-disadvantaged nations are being forced into processes of internal devaluation which are as painful as, ultimately, they are futile.
In particular, Greece – which, despite its own profligacy, is also a victim of the system – must wonder quite what kind of blessing euro membership has been, particularly where economic comparisons with Turkey are concerned (see chart).
The country which should really be asking itself tough questions about the euro, however, is not Portugal, Spain or even Greece, but Germany. Germans are unlikely to relish the irony that their country – hitherto a big net beneficiary of the single currency – now faces an interminable process of bailing out the weaker members.
What most Germans may not realise is that the eurozone crisis isn’t (as they are so often told) a temporary problem, imposing one-off costs on German taxpayers. Rather, it is a structural breakdown for which costs can only continue to mount. As we explained in a recent report, the single currency simply doesn’t work. As any economist could have explained before the project even began, monetary and fiscal policy need to work together, so combining a single currency with a multiplicity of budgets was always going to be a recipe for disaster.
So it has proved, most obviously for the southern member countries. Portugal, Spain and others have been victims of a system which has crippled their competitiveness whilst stripping them of the usual – devaluation – solution to such problems.
The country facing the toughest decisions, though, is surely Germany. Hitherto, euro membership has been advantageous for Germans. Competitiveness has improved – which would have been far less likely to have happened under a strong deutschemark – and this has been reflected in enormous trade surpluses.
German voters may or may not lose sleep over the widening imbalances in the Target2 system, but they should be getting very worried indeed about the price-tag attached to eurozone membership. They would worry even more if they realised that there can be no end to the bail-out process, because the central contradiction of the “one currency, multiple budgets” system means that Greece (et al) can never cut their way back to competitiveness. They will be living on a drip-feed, life-support system of bail-outs for as long as the euro system continues in its present form.
This problem is set to become even worse for Germany, because France, which hitherto has shared the German burden, is lurching ever nearer to disaster under the bizarre policies of M. Hollande.
For Germany, membership of the euro is going to be “the gift that keeps on taking”. When that pfennig drops, the Germans are likely to want out.
Free trade, free markets, but not free currencies – the globalisation lie.
Just like the manipulated Yuan, the Euro allowed massive trade imbalances to build up without the exchange rate stabiliser. The imbalances were largely ignored because everybody was apparently benefiting – in reality only a few were.The Lehmans shock toppled the tower of Babel – but it was only a matter of time before something did.
I might argue that for southern Europe, the Euro just temporarily inflated living standards – we are just seeing a reversion to mean. I doubt if Spain, Portugal, Greece exited and devalued whether they would ever see the return of those living standards even with a more competitive currency.
Like the non-Euro UK, they are now largely debt dependent service economies, hooked on government spending and with unaffordable welfare states. In a globalised world they can’t compete for low end manufacturing (without much lower labour costs and hence much lower living standards) and I don’t accept they can re-invent themselves as high end manufacturing nations. What they have is agriculture and tourism (the latter being dependent on European wealth) and not much energy.
If they exit the Euro then I think that by far the most likely outcome would be QE – after all – its recommended by most responsible central bankers in most leading economies. Under the guise of growth strategy they would monetise their deficits to fund their unaffordable states. Combine this with devaluing currencies and current account deficits and I think you have the very real danger of hyper-inflation and a much worse drop in living standards. German welfare might be preferable as long as it lasts.
Ironically of course. Germany does compete in a globalised world and could perhaps escape – but when the pfennig finally drops, it might be too late – her losses to ECB. EFSF etc may be enough to sink her.
I believe the pfennig dropped some time ago amongst hawkish Frankfurt bankers (Jens Weidmann springs to mind as someone who has attempted to apply the brake). My understanding is that Germany is caught between the devil and the deep blue sea – if they were to pull out anytime soon their banks will be exposed to mass-default; if they leave it much longer then the price will be too high to leave. Even within Germany there are signs of a north/south divide with Horst Seehofer making frequent noises.
I am with DaveS in believing that Western Europe is kaputt. The debt-spree of the past 10 years simply papered over the ever-deepening cracks in the underlying structure. Unfortunately we now a situation where many in the West are clients of the State; they also have representation. Without wishing to make a judgement on this situation, turkeys obviously don’t vote for christmas, so I believe we will continue to see attempts to inflate away debt, can kicking, and everything else.
Debra: Agree entirely. Inflation is the next obvious trend, it seems to me. What I find annoying about German politicians (obviously with some exceptions) is that each bail-out is presented to German voters as a one-off event. It isn’t – it’s an ongoing process, created by the faulty design of the euro.
Depending who you mean when you use the term Germans. A sizeable percentage of the populace was always against the Euro and still is. Loosing their Deutschmark was like bereavement to them. The business class was in favour for obvious reasons. The political classes went along with it to facilitate German unification, despite strong reservations from the Bundesbank. The general election in 2013 in Germany will no doubt produce a stable government, most likely in the form of a coalition between SPD and CDU. But the interesting point will be how many votes the Independent candidates (Freie Wähler) will harness, which will campaign on an anti-Euro ticket. Should they gain sufficient voter acceptance, we will have witnessed the start of the end of the European Union in its current form and shape.
The EU was and still is a transfer union, the Euro acted as an accelerant, as suddenly the recipients of transfer payments could also gain access to cheap funds on the wholesale market. Most of these funds will probably never be recovered, because they were squandered on non-productive projects and assets.
The only hope is that countries currently in trouble, including the UK, will enact some structural reform that will produce some results. But I fear the political classes in many countries will not grasp that nettle for a while yet. Things have to get a lot worse, before that will happen.
Perhaps its time to think about what will replace the EU and Euro and how it can be done without too greater interruption or conflict.
Osedax: Indeed, governments often fail to represent general public opinion.
The euro in it’s current form simply cannot work, because it combines one currency with a multiplicity of budgets. This, at the very least, is a recipe for irresponsibility. The euro can only work if there is a single budget, which really means a single government.
So, will people in eurozone countries support the creation of a United States of Europe? Or, more to the point, will they even be given the chance to choose?