Germany seems determined to make Germans of us all when it comes to economic issues, as if it, and similar northern European states, has been a model of economic virtue over the last decade or so, while the rest of us were profligate wasters. But the truth is a bit more complex.
Well, let’s not forget that it was the Germans and the French who were the first to break the Maastricht rules on excessive government budget deficits. We in Ireland never did that until our banking crisis — largely funded by our banks borrowing from German and French banks who did not see our economy as a credit risk either — blew up our public finances. The Germans might have been annoyed with the way we were spending our money — the ambassador to Ireland in 2007 had quite a cut off at us about the level of public sector wages and the number of new cars we were buying — but they had little or nothing to say about the unsustainability of our tax base, dependent as it was on property and construction related revenues.
But let’s leave that hypocrisy aside and ask the question: what benefits and riches did the Germans get from membership of the euro over the last decade? (There’s a reason for asking this: if the Germans profited massively from the upside why should they be allowed to escape the costs of providing for the downside?) So here are a few uncomfortable facts that the whining Germans should be reminded of:
1. Most economists agree that Germany’s real exchange rate is about 40% below what it would be if it still used the deutschmark.
2. This confers enormous advantages to its exporters, with 40% of German exports going to the eurozone with 20% for the rest of the European Union.
3. In some respects Germany resembles China, which has used an undervalued currency to undercut competitors, thereby accumulating a massive trade surplus.
4. Nearly 3m jobs in Germany depend on exports to the eurozone while 4.4m depend on exports to the EU as a whole.
5. McKinsey management consultants attributed two-thirds of German growth in the last 10 years to the euro’s introduction.
6. Since the euro was introduced, German carmakers such as Daimler, BMW and Volkswagen have saved between €300m-€500m annually on transaction costs because of the removal of old currency risks. (The German ambassador may have complained about our new car fleet but much of the money went back to the German manufacturers).
7. There are many other high end German manufacturing industries that have benefited from the weak euro, keeping jobs that otherwise might have migrated to Asia.
8. Since the crisis began in 2008 Germany has benefited from massive inflows of investment. The German government, which refuses to introduce Eurobonds, which would be loans raised in common by the members of the eurozone for distribution among member States, is benefiting from excessively cheap borrowing costs as Germany is treated by investors as a European safe-haven.
9. Germany is benefiting from what is called the “depression of yields”, caused by money flowing to Germany as a safe haven, and it has been estimated that this could cut Germany’s debt servicing costs by up to €30bn between now and 2016.
Admittedly, Germany did get some things right from about 2003 onwards. It focused on keeping labour costs down to increase competitiveness, with the assistance of the trade union movement. It did not encourage speculative spending at home. People saved, even if the money was then lent abroad. But some experts believe that the Germans are giving excessive credence to this element of their current economic strength without giving enough credit to the euro effects from which it benefited.
Look at what the highly respected economist Paul Krugman has had to say about the Germans earlier this month in the New York Times: “Germany believes that its successful adjustment was the result of its own virtue, but in reality it was successful in large part because of an inflationary boom in the rest of Europe. And here’s the thing: the Germans are now demanding that the European periphery replicate its achievement (and actually surpass it, because the required adjustment is much bigger) without providing a comparably favourable environment — they’re demanding that Spain and others do what they never did, which is deflate their way to competitiveness.”
When Germany had its own much loved currency, it found it very difficult to engineer what is called a “competitive devaluation” (something that we did in 1986 and 1993 to tremendously beneficial effect when we had our own independent currency). Previously in Germany the worth of any reductions in wages or prices that it achieved tended to be wiped out by increases in the value of its currency. For a country very committed to keeping inflation low and a strong currency, it was difficult to deliver a competitive devaluation through monetary policy. But once the exchange rate was fixed, as it was by the introduction of the euro, an opportunity provided itself: a combination of control on labour costs and the inflation that was generated in some of the periphery countries allowed Germany a reduction in unit labour costs and growth via expansion of exports.
What this means is that Germany benefited from the euro in a way that was not expected at the time when it was launched: by allowing an increase in its competitiveness relative to the other euro members. Now Germany wants the rest of Europe to live up to the tighter budgets (that it eventually subscribed to from 2003 onwards) but without the currency advantages that it benefited from.
Admittedly, Germany has taken on substantial obligations in a bid to stabilise the common currency. It has lent Greece about €15bn, as a so-called bilateral loan as part of the 2010 first bailout, but the chances of getting all of that back must be slim.
Germany has guaranteed €211bn of the €700bn-plus amount placed in the European Financial Stability Facility, which is to be replaced by the European Stability Mechanism this July. In addition to being equipped with guarantees, the ESM will also hold about €80bn in cash contributions from eurozone member states (including us, with money we’ll have to borrow to fund it). In other words, real money is going to be changing hands, with about €22bn of it coming from Germany alone. The extent of the European crisis means that this money may have to be produced very quickly and that the Germans too will have to borrow it. Germany, as one of the principal owners of the ECB, has good reason not to agree with debt write-offs for the banks, as it would incur a bill of potentially tens of billions in losses if the ECB has to write off debts to the likes of Ireland, the bill for keeping our bust banks afloat.
So it is complex and multi-faceted. It is easy to see why the German public does not want to foot the bill for the euro going wrong. But let’s not forget how much the euro has contributed to the existing great wealth in that country.
* Matt Cooper’s book How Ireland Really Went Bust is now available in paperback.