Germany and the crisis of the periphery

in Economics by
Merkel with Commission President Barroso (© Council of the European Union)

Germany has played a major role in every discussion revolving around the current Greek budgetary crisis. Not only has the country been singled out as the biggest creditor, and more generally as Europe’s paymaster, but it has also come under severe criticism for enforcing an export driven economic policy that condemns its European partners to negative trade balances with Berlin. It has been argued repeatedly that Germany is therefore at least partly responsible for the problems faced by countries on the periphery of the European Union. Germany’s chancellor, Angela Merkel has forced crisis-hit countries like Greece, but also Italy, Spain, Portugal and Ireland, to impose severe budgetary cuts and introduce reforms aimed at economic modernisation and labour market liberalisation. The results have been mixed, with the Irish economy clearly recovering and also Spain, Italy and Portugal disappearing from the headlines (and off the radar of most commentators and analysts, it seems). Greece on the other hand has remained in the spotlight and with the second bailout package agreed upon in Brussels recently, rumours have surfaced that a third package might be necessary (though, maybe wisely nobody has yet spoken of any rescue actions after this) to keep Greece from defaulting.

Germany has throughout the history of the European project been blamed for trying to shape it in its own image, making it a larger copy of itself. In the economical and financial context this would have meant recreating an overtly export oriented Union. There is no doubt that Germany’s economic success is largely due to its exports as domestic consumption has always lagged behind. It is exactly this issue that has triggered repeated statements that Germany’s successes come at the detriment of its European partners. A look at the statistical data provided by Eurostat actually shows a rather interesting development in Germany’s trade balance.1 The country generally enjoys huge surplus relations with all major Western economies, with France and the United Kingdom being responsible for almost two-thirds of Germany’s intra-EU trade gains, whereas its eastern trade balance is more balanced, with Poland its biggest surplus partner and the Czech Republic being responsible for its biggest trade deficit in the East.

Economic growth “made in Germany”

After a few rather sluggish years, Germany’s economic performance has been very impressive, with a near tripling of its export trade value between 2000 and 2007. In the same time it has generated trade surpluses of 500 per cent outside the EU.2 Are critics right then, when they claim that Germany’s title of the “world export champion” is only possible because its European partners run trade deficits? It would certainly seem so, considering that no other European economy has benefited more from the removal of trade barriers, tariffs and the reduction of exchange rate fluctuations through the introduction of a common currency. All this has made the comparison of prices easier for customers and, combined with the perceived superior quality of goods “Made in Germany”, gives German companies a considerable competitive advantage over their French or British competitors. German automobiles, machinery and pharmaceuticals are among the world’s best and most sought after, explaining its huge trade surpluses.

However, one would assume that European competitors could rival Germany through lower prices for their goods. This though might have been a truism that is no longer valid. German wage moderation in the early 2000s under the Schröder governments,3 accompanied with huge investments in the modernisation of its major industries, has led to a considerable boost in efficiency, resulting primarily in a) faster and increased production and b) lower production costs per unit. Both factors play a crucial role in ensuring that German products remain competitive and cheap enough to ensure large demand abroad.

Germany’s orientation on export, especially within the EU, is not without dangers. Between 2007 and 2009, its intra-EU surplus melted from over €125 bn to around €70bn, whereas its extra-EU trade balance remained almost unscathed by the beginning of the economic crisis. Largely responsible for the slump was lower demand in Spain and Italy, where demand for German goods was lower almost by a half lower than two years earlier!4

Intra-European trade and German demand

What about German intra-EU imports (or arrivals, as the EU jargon has it)? Imports reached an all-time high of almost 520bn euro in 2008 before dropping sharply in the second half of 2008 and afterwards.5 The country’s intra-EU imports are by far exceeding the imports of any other EU country. Spanish and French imports combined are almost equal to German imports, thus claiming that the country is not importing enough from its European neighbours seems to be a bit far fetched. Intra-European arrivals are almost twice as high as extra-European imports (mostly Chinese and American goods)! It is difficult to condemn Germany’s decision to import goods from China or Vietnam if those goods are comparable in quality but cheaper than European products. In a globally operating free market, every market player, regardless of the membership in a regional organisation, will pursue a rational and economically sound policy. Besides, most European majors produce in China, not in Europe, and those products of genuine Chinese origin are often not produced in Europe as the old continent has decided to reinvent itself as a service-oriented economy and has thus closed down most of its manufacturing centres.

To demand from Germany to import more from this European neighbours is thus somewhat naïve and populist. The country will continue to be both Europe’s biggest importer and exporter, both in intra- and extra-EU trade, but in order to boost German demand for European goods two factors need to be met: Germany’s domestic consumption needs to pick up; an issue consecutive governments have struggled with as German consumer demand remains at satisfactory high but not very high levels with the exception of the holidays,6 especially Christmas and New Year’s; and its European partners need to offer a portfolio of products Germany currently imports from elsewhere. Though this might seem like a reasonable proposal, it actually creates new risks, especially if the smaller economies orient their economic output too much in line with current and projected German demand. Any proper diversification of target markets will create the risk of over-dependence and potential economic meltdowns if demand in Germany would suddenly collapse.

And yet Germany can be blamed

Lambasting Germany for pursuing a positive trade balance, regardless of its rather low domestic demand, is hardly justifiable. Any country will strive to generate trade surpluses, creating the impossible situation that another country will thus eventually have to run a trade deficit.

However, there is enough Germany can be blamed for. Chancellor Angela Merkel is steering the European Union without any vision or plan, often advocating policies that are driven by domestic pressure – such as the German Energiewende – without coordination with its European partners.7 (This is of course a phenomenon witnessed in every member state, though other governments have more often taken their chances with Europe, such as the late Slovak government of Iveta Radicova that linked its future to the parliament’s backing of the expansion of the euro rescue fund in late 2011.8) Berlin’s reaction to the euro-crisis was one of “wait and see”,9 and even now the country is lacking any plan that might consolidate Greece properly. As long as it seemed that austerity measures would satisfy the German population’s demand for retribution and budget cuts would suffice to consolidate them, Berlin pushed for them. Once it became apparent that austerity alone was not going to save Greece, even though austerity combined with a bailout for Portugal had done just that, Merkel suddenly found herself in a quagmire. In the prelude to the second Greek bailout, voices grew louder that Germany should scrutinize and possibly push for a Greek exit from the eurozone.10 Even though the government has repeatedly reaffirmed that Greece should remain in the eurozone, the country has so far failed to offer any real solutions how to help weaker economies on the periphery of the EU.11 Only recently have European leaders understood that austerity alone cannot consolidate debt-ridden economies and the focus has been shifted from crisis management to growth development, though concrete measures have yet to be agreed upon.

Merkel puts Germany first and fails to lead Europe

Angela Merkel has failed to endorse Europe in a similar way her predecessors Gerhard Schröder and Helmut Kohl have done. Her focus has always been more inwards, concentrating on Germany and its position in Europe and the world.12 Whereas Kohl and to some extent also Schröder linked Germany’s future to Europe, Merkel seems to have performed a U-turn that now links Europe first with Germany. That Europe’s future lies in German hands is Berlin’s new message. If Germany is to remain an integral and dominant force in the EU, it wants to shape it more in accordance with its own principles. The German-style debt brake that Spain has introduced to its constitution and Italy has recently embraced,13 and the fiscal pact that most EU member states have recently signed up to during the EU summit in early march are examples of German attempts to control developments in Europe.14

Germany might be the engine that drives Europe’s economy, but it no longer is the driver of integration unless such development suits it. The main reason for this might be that with the common currency and the internal market, Germany has achieved those targets that might have been most crucial for its export oriented economy. Other issues, such as a common defence policy remain of lesser importance for Germany. Where necessary, Berlin will seek a European solution, otherwise, as was the case with its Nord Stream deal with Russia, it will go alone at it or in cooperation with France.
A vocal advocate at times of democratic rule and human rights, Berlin has nonetheless shied away from joining Britain and France in the campaign against Muammar Gaddafi in Libya;15 some might say in line with its pacifist foreign policy since World War II, though others will claim that Merkel refused to send troops to Libya or deploy the air force because the German population would have opposed such a move. The chancellor soon learnt the lesson of how powerful dissent can be: after the painful electoral defeats following the Fukushima disaster (March 11, 2011), Merkel had single-handedly decided to undo the undoing of the nuclear phase out agreed on by the Schröder government a few years earlier. Furthermore, German companies had less to win in Libya than British or French ones – especially those involved in the natural gas and oil exploitation business, giving Germany’s government a strong incentive to remain on the sidelines.

Already in 1994 Germany’s current finance minister, and then-home secretary, Wolfgang Schäuble had spoken about a core-Europe.16 Till today Schäuble has remained the only politician in the government of Angela Merkel who has repeatedly spoken about the future of the EU. The position Merkel holds in the debate on the EU’s next 20 years or so remains vague. Whether she supports a core-Europe and thus a multi-speed integration (based on the pattern set by Schengen and the common currency) or if she has any other vision for Europe – not even the geographical boundaries of her Europe are clear, though Turkey can be clearly singled out as standing outside of it – is unclear.17 Without a committed and devoted European ruling Germany, one cannot expect the country to steer Europe into its future.

If you want to blame Germany for something, blame its leaders for their lack of enthusiasm about Europe, for the country’s lack of vision for the EU and its reluctance to lead the Union, but forget about its trade balance. Blame Germany for having broken the rules of the Growth and Stability Pact in the early 2000s, accuse it of reviewing a basically old idea with the new fiscal pact and you will find agreement, but be aware that without Germany, the EU would be in an even worse situation.

Show 17 footnotes

  1. Eurostat: External and intra-EU trade – statistical yearbook (1958-2009)
    http://www.epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-GI-10-002/EN/KS-GI-10-002-EN.PDF.
  2. 2Federal Statistical Office of Germany
    http://www.destatis.de/.
  3. Agenda 2010:
    http://en.wikipedia.org/wiki/Agenda_2010.
  4. Check the Federal Statistical Office of Germany’s “trade relations compass”:
    http://ims.destatis.de/aussenhandel/.
  5. Eurostat: External and intra-EU trade – statistical yearbook (1958-2009)
    http://www.epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-GI-10-002/EN/KS-GI-10-002-EN.PDF.
  6. Germany’s low wages caused euro crisis, says report, January 24, 2012 http://mobile.globalpost.com/dispatch/news/regions/europe/germany/120124/germany-s-low-wages-caused-euro-crisis-says-report and International Labour Office (ILO): Global Employment Trends 2012
    http://www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms_171571.pdf.
  7. Germany to Phase Out Nuclear Power by 2022, May 30, 2011 http://www.spiegel.de/international/germany/0,1518,765594,00.html.
  8. Slovakia Rejects Euro Bailout, October 11, 2011
    http://www.nytimes.com/2011/10/12/world/europe/slovak-leader-vows-to-resign-if-bailout-vote-fails.html?_r=1&pagewanted=all.
  9. Sikorski: German inaction scarier than Germans in action, November 29, 2011 http://www.economist.com/node/21540683.
  10. Euro stability more important than Greece, says Angela Merkel, November 3, 2011
    http://www.guardian.co.uk/business/2011/nov/03/euro-stability-more-important-greece.
  11. Wolfgang’s woes, February 20, 2012 http://www.economist.com/blogs/charlemagne/2012/02/germany-and-greece.
  12. Chancellor Merkel’s Dangerous Lack of Passion For Europe, July 18, 2011 http://www.spiegel.de/international/europe/0,1518,775085,00.html.
  13. Tie your hands, please, December 10, 2011
    http://www.economist.com/node/21541459.
  14. Czechs abandon EU fiscal pact, for now, January 31, 2012
    http://euobserver.com/19/115080.
  15. Germany defends opposition to Libya air strikes, March 21, 2011
    http://www.reuters.com/article/2011/03/21/libya-eu-idUSLDE72K1Z420110321
  16. Überlegungen zur europäischen Politik (Thoughts concerning European politics), September 1, 1994 http://www.cducsu.de/upload/schaeublelamers94.pdf.
  17. Turkey’s EU bid overshadows Angela Merkel visit, March 29, 2010
    http://news.bbc.co.uk/2/hi/8592170.stm.

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