When discussing the German role in the euro-crisis these days in Berlin, relevant policy makers usually argue that Germany is willing to do all what it will take to save the euro. When guest from abroad raise their eyebrows (as they might have perceived the German position differently before), German representatives are quick to add that, however, the crisis countries have to do first what is in their power to overcome their problems. Only when full efforts have been made, Germany can be expected to pitch in. Needless to say, that the partners’ efforts so far are seen as insufficient.
This position fits nicely into the narrative that we Germans have undertaken very comprehensive and painful reforms in the 2000s and that the current good economic situation in Germany is the reward for these struggles. Implicit to this narrative is that Greece, Spain or Portugal have just not made similar efforts yet and can be expected to do much more before they ask for more support.
While this narrative is very popular here in Berlin, a look into economic data shows that it is highly questionable. Compared to the adjustments already made in Greece, Portugal, Ireland or Spain, the consolidation and reform efforts in Germany actually look laughable.
Let us first look at fiscal consolidation. According to current data from the OECD, Germany has violated the 3-percent-threshold of the Stability and Growth Pact from 2001 onwards with a peak in its deficit-to-GDP ratio of 4.1 percent in 2003. The deficit then fell and Germany recorded a roughly balanced budget for 2007. However, measuring efforts of fiscal consolidation usually is not done looking at the headline deficit as this data is distorted by the influence of the business cycle (a strong upturn can give you good headline figures even if you have structural problems – see Spain prior to the crisis) and by one-off effects such as privatization proceeds. Instead, economists usually look at the structural deficit.
According to the data on “underlying budget balances” (adjusted for the business cycle and one-offs) from the OECD, Germany has reduced the structural deficit from a peak of 3.5 percent of GDP in 2002 to 0.6 percent in 2007, a total reduction of 2.9 percentage points or about 0.6 percentage points annually.
This actually is laughable compared to what Greece has gone through: According to the OECD, Athen’s structural deficit has been 12.8 percent of GDP in 2009 and 1.8 percent in 2011. This translates to an average annual reduction of almost 6 percentage points. Or in other words: In one year Greece consolidated about twice as much as the Germans did over half a decade.
The story is similar for Portugal and Spain: Spain’s structural deficit is set to fall from 9.5 percent in 2009 to 1.9 percent in 2012, Portugal's from 9.5 in 2010 to 2.2 in 2012. Just from 2010 to 2011, each of these countries consolidated more than Germany in its five years of consolidation.
A similar point holds for wage restraint: According to data from the EU commission, from 2002 to 2007, real wages per employee in Germany fell by 3.3 percent or an average annual 0.7 percent. In Greece, real wages from 2009 to 2011 fell by 13 percent. Again, Greece corrected real wages in one year twice as much as the Germans did over half a decade of “painful reforms”. In Portugal, real wages fell by 10 percent over two years, in Spain by 7 percent over three years – all far in excess of the German achievements.
These extreme austerity and adjustment measures might explain why the euro crisis has deepened over the past months. Current economic research by the investment bank Goldman Sachs hints that there is a speed-limit of consolidation above which further budget cuts just produce a deeper recession, but not less debt.
The problem so far has not been unwillingness by the Greek, Spaniards or Portuguese to correct their budget problems. Instead, the problem has been that growth projections have proved to be grossly overoptimistic in the wake of budget cuts. As we see in the figures on the structural deficits, this is the real reason for the fiscal troubles these countries are in now.
So, what would have happened if the rest of the euro-area had been “a little more German”? Well, judging by the empirics of German adjustment of the past decade, this would have implied a much more pragmatic interpretation of the European fiscal rules and hence a much softer, slower and more growth friendly consolidation path. It is very likely that countries such as Spain or Portugal would have prevented the deep recessions they are now in (Germany managed to get through its consolidation with “only” several years of stagnation, not a deep recession) and we might have averted a full-blown banking crisis in Spain (German banks also had problems in the 2000s and a full-blown recession certainly would have pushed some of them over the edge).
Unfortunately, the German government does not seem to allow the rest of Europe to do as the Germans did. Instead, they are forced to conduct the unfortunate experiment of as-brutal-as-possible austerity without compromise – with the sorry outcomes we are now observing all over Europe.
15th June 2012 at 09:06pm
Germany made its reforms at a time when the rest of the Eurozone was experiencing a so far unknown acceleration of standards of living that became possible because of the cheap money they could then borrow at the financial markets. In the first half of the last decade, they consumed their Euro dividend that they are missing now.
Some writers talk about the dividend that Germany receives because of cheap borrowing at the financial markets because of the crisis. Especially the “club med” countries had to pay sometimes more than double digit interest rates before the Euro was introduced. So the benefitted from the introduction of the Euro more than Germany ever did. Today, they benefit from the ECB target 2 system that allows them unlimited borrowing from Germany for free and with offering any securities. The German target 2 balance approaches fastly the 700 billion limit! Thus, Germany helps to finance their consumption which is still higher than they actually can afford. And still, there are writers that want to make Germans believe that it is in their own interest to keep the Euro wheel turning. If they run out of economic argument, the come back to the ultimate but obsolete argument that Germany has a special responsibility for saving the Euro (while Euro and EU are sometimes mixed up by some) because of the war. This is the talk of the political class in Germany, too, and it is politically correct but not accepted any more by the German people. I can seriously backfire as Joschka Fischer had to experience recently.
Currently, there is a lot of discussion going on in various web fora on the Euro crisis. If you want to learn more the general feeling of Germans have towards the Euro and the introduction of the New German Mark, I recommend to read the comments on a topical article in the Handelsblatt (in German): http://www.handelsblatt.com/meinung/kolumnen/kurz-und-schmerzhaft/zschaber-zuendelt-eine-neue-deutsche-mark-ist-keine-loesung/v_detail_tab_comments/6751472.html?commentSort=chrono
I have been following the coverage of the ECFR on the Euro crisis and the views and recommendations as to Germany. I have to say that I will no longer do so as I cannot take theblogs and articles of the ECFR as a serious and inspiring source anymore. The views of Dullien, Gerot and Klau are dogmatic, one-sided and “post-democratic”. The persistance of the Euro is a dogma to them. I have the feeling that they pursue other interests than to serve the “European idea”. A lot of arguing in favor of Germany paying back, showing solidarity, German leadership (meaning: paying), a considerable lack of economic understanding and analysis why the Euro zone cannot work. The perspective is the one of a political scientist. The economic focus is mostly on how to optimise bail-out mechanisms and to bind the Euro countries together in an irreversible way, to the detriment of Germany and the few competitive economies in the Euro-Zone. Again and again, it is underlined how much Germany benefits from the Euro. But are they aware that the flip side of the coin of the German benefits of the Euro are the problems of its partners we have to find a solution for? Germany exports a lot to the Euro-Zone but German surpluses are the deficits of its partners. The permanent benefits for the German export oriented economy are the best argument why the Euro zone in its current shape is not sustainable. Euro politicians and EU “elites” want to make the citizens believe that they can make water flow uphill. They are afraid of admitting that the “Euro” project, “their” project (not wanted by the average German) is a failure and that we need to take a step back and rethink the “Euro” project. It is simply not true that this should not be possible. This reminds me of a sentence of Walter Ulbrich, the leader of the GDR in the Sixties who said “Vorwärts immer, rückwärts nimmer” (Always move forward, never backwards). As a currency, the Euro is too expensive for most of the Euro-zone economies. Their industrial sector has lost its competitiveness on global markets. France and Italy used to have trade surpluses - before they had the Euro.
For the ECFR, the Euro is a dogma. It has to be defended at all price and you try to influence decision makers accordingly. Your analysis and recommendations are one-sided and promote ideas of the anglo-saxon financial oligarchy. I guess that this is also where the ECFR finance comes from. In doing so, you either do not understand that you are an admittedly sophisticated “propaganda” tool for “specific” interests or you do it purposefully (Ms. Guerot, of course, the NY investment bankers are in favor of Germany paying for the Euro - not because they love the success of the European integration or Europe would be close to their hearts but because they profit considerably of the current situation! And they are certainly happy that you deliver the message for them.). Your commitment to secure the survival of the Euro also does not have much to do with concerns for the peaceful and democratic development of our continent. Europe is an idea in the heads of the peoples. They have to support it, to feel it, become enthusiastic about growing together and living in one house that was built over the decades. The European integration was not ripe to have a common currency and it neither is today. The Euro has created a European prison for the peoples that share this currency. The failure of the EU political leaders to step back, to correct a mistake in a sustainable and appropriate way gives rise to nationalism, hatred and poverty. Nonetheless, you advocate the perpetuation of mistakes to the detriment of the European peoples and even against their will – to the benefit of the financial sector. Today, the EU is afraid of its citizens who will suffer severe losses in terms of standard of living and stability.
This is why I will no longer follow your blogs and articles. The Euro is doomed. You should know it. The Euro was a project of an internationalist “elite” (Trilateral commission, Bilderberger). Why do you keep on defending it while it becomes obvious that it endangers the peaceful development of our continent? In organisational theory, one approach in understanding the behavior of people is to look at who is a resource for whom (resource in the sense that this someone may offer you an advantage like a scientific, political or business career, reputation, promotion etc). I wonder whom you consider to be your resources in the sense of this theory? Is it Mr. Soros? Who?
16th June 2012 at 12:06pm
The above article focuses almost entirely on adjustments to the net fiscal balance, either overall or the structural component. Greece and the others have had to make more dramatic reductions than did Germany, because they started from a worse position with regard to excessive government spending.
The real issue is the lack of labour market flexibility and internal competitiion in countries like Greece. “The Economist” newspaper has frequently written about these failings. While Germany is not a paragon of virtue (it still has excessive restrictions on retail shop opening hours) it made major improvements with the Hartz reforms. It is this type of change that Greece and the other keeps resisting, although with the Monti and Rajoy governments in Italy and Spain there are signs of change. These countries need to copy Germany in this respect.
30th October 2012 at 02:10pm
Portugal’s from 9.5 in 2010 to 2.2 in 2012. Just from 2010 to 2011, each of these countries consolidated more than Germany in its five years of consolidation.
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