Saturday, March 27, 2010

The Euro Crisis Seen from Berlin

Jess Smee reports in the Spiegel Online International that Merkel's Greece Deal 'Betrays the Concept of Europe' (March 27). He quotes the Financial Times Deutschland analysis:

"This compromise puts the Greek patient out of danger, for now. But at the same time there is a new arrival in intensive care: the European currency union. And its plight will be passed on to a working group, or, in other words, it will be more or less ignored."

"Regardless of whether the euro group helps Greece directly or whether member states opt for bilaterally coordinated loans, the Stability Pact has been made obsolete. The so-called no-bailout clause in the Maastricht Treaty is formulated with such clarity, its intention so obvious, that as soon as a euro zone member is given financial help, it will represent a violation both in word and spirit of that treaty. It is possible to consciously decide to break the rules if a situation demands it, such as in the case of Greece. But then, at the same time, you have to hammer out new mechanisms to ensure the stability of the euro -- but this issue has been buried in a workgroup."

He also mentions the conservative Die Welt that writes:

"To be sure, Greece has violated the letter of the Maastricht Treaty, thereby jeopardizing the euro. But Germany has also gone against the spirit of the treaty -- thus endangering Europe. The strong man strategy currently being pursued does not only block the road to further European integration, it also threatens to destroy decades of progress towards integration".

"To restore the competitiveness which Spain and Greece have lost compared to Germany since the introduction of the euro, wages there would have to fall by about 20 percent. And to have a state deficit of up to 3 percent by 2013 would mean each one would have to put up with a (cumulative) reduction of gross domestic product by about 15 percent. No population would want to put up with such changes for three years."

"There are surely better solutions than simply shoveling money from north to south. But Berlin is not even open to discussion -- instead it simply refuses to acknowledge that Germany itself is part of the problem too."

Is the "German export machine" -- as The Economist puts it -- responsible for the economic decline of Greece, Spain and Portugal, as well as for France's problems? The question is well explained, always in the Spiegel Online (March 22).

"The campaign against what The Economist called the German "export machine" gathered speed last week. Representatives of the southern EU countries, in particular, held the Germans partly responsible for the

Some economists, including United Nations Conference on Trade and Development (UNCTAD) chief economist Heiner Flassbeck, agree. The Germans, they argue, cause problems for their neighbors with the practice of "wage dumping."
From 2000 to 2008, unit labor costs in Greece -- and, similarly, in Portugal and Italy -- increased by 26 percent, compared with a 17-percent average increase throughout the euro zone. In Germany, however, wages increased by only a marginal 3 percent.

This created an enormous competitive advantage for the Germans, and Flassbeck isn't the only critic who says so. Peter Bofinger, a member of the federal government's council of experts, said in a SPIEGEL debate: "We were far too one-sided in emphasizing exports, while the Irish, the Greeks and the Spaniards focused much too heavily on their domestic demand."

My opinion: it is difficult to ask Germany to reduce its exports, as well as to criticize the country for being economically "too virtuous". The real source of the problem comes from the initial nominal exchange rate "frozen" into the euro when created in 1999, that gave an excessive competitive advantage to the German exports over its neighbors. And since then, real exchange rates (that is the relative evolution of wages and prices in member countries) have been diverging in a way that has increased that competitive advantage even more.

The cause of the problem is not Germany by itself: it is the system of "definitively fixed" nominal exchange rates, that is the euro, which is unbearable in the medium term when national macroeconomic trends diverge, which they do and will continue to do in the future. Trying to force different countries to balance their trade balance through policy induced variations in their rate of growth cannot succeed any more than forcing them to respect a common budget deficit norm (the now defunct growth and stability pact). It would consist in adopting a distorting policy ( a trade balance artificial target) to compensate for a previous distortion-creating policy of fixing (at a disequilibrium level) the nominal exchange rates. It is pure nonsense.

It follows that the real debate is about the impossibility of a "single currency-multiple state" system in a non optimal currency area. The sooner the impossibility is recognized, the better for consumers and citizens.

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