The contrast between Germany and its European neighbours is awkward, but a strong eurozone needs a strong Germany, writes Mohamed A El-Erian
ON A recent trip to Germany, I was struck by two distinct narratives.
One features a robust German economy with low unemployment, strong finances, and the right competitive position to exploit the most dynamic segments of global demand. The other describes an economy that is encumbered by neverending European debt crises whose perpetrators seek to shift their responsibility — and their financing needs — onto Germany’s pristine balance sheet.
Both narratives are understandable. But they cannot co-exist forever. After all, it is difficult to be a good house in a deteriorating neighbourhood. Either the neighbourhood improves, or the value of the house declines. And it matters a great deal which narrative prevails — for Germany, for Europe, and for the global economy.
Germany today is reaping the benefits of years of responsible domestic economic management. In addition to maintaining sound public finances, German leaders implemented difficult reforms aimed at improving competitiveness, including painful labour-market reforms. As a result, Germany is one of the few advanced economies today.
Yet Germany is also part of a highly challenged neighbourhood, if not its anchor. Its neighbours include countries — most notably on the eurozone’s periphery — that are struggling. They have high overall unemployment and are unable to grow on their own power. In some cases, they also face solvency questions, and are far from achieving the socio-political consensus needed to get their economic houses in order.
This contrast between Germany and its neighbourhood is very awkward. It fuels endless tensions, encourages finger pointing, and promotes a loud and disruptive blame game. And all of this distracts attention from the need to compete in a rapidly changing global economy.
The longer all of this persists, the more it tears at the fabric of European unity. Accordingly, European officials need to progress in three major areas:
* Improve individual countries’ domestic policy mix in a manner that targets debt sustainability through both growth promotion and deficit reduction;
* Enhance the eurozone’s internal financial circuit breakers to reduce the risk of disruptive financial feedback loops and destabilising multiple equilibria;
* Strengthen the eurozone’s institutional underpinnings, as well as its mechanisms for policy coordination and peer review.
None of these steps is easy; and they are certainly not automatic. Moreover, to maximise their effectiveness, they must be implemented simultaneously.
First, Germany must play an even larger role in conducting and coordinating the eurozone’s policy responses. The EU’s institutions still lack the authority and credibility needed to take on this role.
The ECB does not possess the proper structural policy tools, and it has already been forced to bear burdens that, arguably, are beyond its strictly defined mandate. And there is no other economy that comes close to Germany in size, influence, and economic and financial health.
Second, the eurozone, led by a Germany that is working closely with France, needs to clarify decisively what it intends to look like in the medium term. There are two alternatives and the choice is for Europeans alone to make if they are to put behind them the risk of eurozone fragmentation.
On one hand, they can decide to let politics dominate economics. This is not easy for politicians to sell, especially in the core countries, as it would involve large multi-year subsidies to the periphery. Here, however, there is the added difficulty of a potential conflict between regional politics and national democratic processes.
On the other hand, they can decide to allow economics to prevail. Here, eurozone members would collectively opt for a smaller and less imperfect union that includes countries with more similar initial conditions. Again, there is no easy way to do this.
There can be no strong Germany without a stable eurozone; no stable eurozone without a strong Germany; and no global economic stability without both. It is time for Europeans to make the choices that are critical to sustaining and enhancing their historical regional project.
* Mohamed A El-Erian is CEO and co-CIO of PIMCO, and author of When Markets Collide. Copyright: Project Syndicate, 2012.
© Irish Examiner Ltd. All rights reserved