Future bleak for those on eurozone periphery

The eurozone is at an inflection point. The crisis may have abated compared with the daily whirlwind that convulsed both markets and governments up to the middle of last year.

A calmness of sorts was restored in July 2012 when ECB chief Mario Draghi pledged to do “whatever it takes to save the euro”.

Right now the only thing keeping the eurozone together is the ECB. But the resolve shown by Mr Draghi is not going down well in Berlin. A narrative has taken hold in the eurozone’s largest economy that divides the region into the virtuous and the sinners.

In the virtuous corner are the Germans and a few northern European states. From this perspective, the cause of the crisis is a lack of competitiveness in southern European countries. These countries must restore competitiveness through internal devaluation. And only when these countries become more like Germany, can the eurozone grow and prosper.

There are a number of problems with this narrative, not least is that internal devaluation means slashing and burning wages, which further depresses consumption and causes a nosedive in living conditions and general social cohesion.

A less Berlincentric view of the crisis would show that the causes are much more complex and the culpability is more widespread.

The eurozone is a monetary union. The German economic model is based on exports and low domestic consumption. During the first decade of the single currency, recycled German savings made their way to the periphery which fuelled a massive credit bubble. This bubble burst with disastrous consequences in 2008.

The German economy is running a current account surplus of 6%. Yet the main political party, the CDU, and most prominent German economists, are hostile to the idea that this has any damaging consequences for other eurozone members.

Furthermore, the country has done very little to liberalise its services sector — a move that would greatly boost growth across the region. There has also been a chronic shortage of public and private investment in Germany’s infrastructure, which, if addressed, would do wonders for the eurozone. But instead, apparently, everybody should follow the German lead.

But if all eurozone states are busy saving and all wealth creation is set to come from exports, where exactly are the markets that will soak up eurozone exports? Surely, such a ‘beggar my neighbour’ policy would prompt a trade war.

Ms Merkel’s popularity at home is based on unyielding commitment to protect German taxpayers at all costs. Under no circumstances will there be any transfer union or a banking union that enabled the recapitalisation of banks using public funds, even though any economic textbook will say it is impossible to have a monetary union without some sort of fiscal union.

Now German ECB board members are carping at Mr Draghi for lowering the interest rate in an attempt to throw an economic lifeline.

Contrast this to the solidarity shown to Germany over the last century. Indeed, during the early phase of monetary union, interest rates were kept artificially low and German government consistently ran fiscal deficits to restore competitiveness and deal with the aftermath of reunification.

Unless there is a pauline conversion by the new government in Berlin when it takes office next month, it will proceed with the Germanification of the eurozone. It is likely just enough will be done to keep the single currency together. But for those on the periphery, the future will be bleak with a possible debt deflationary spiral looming large.