Just before the Crisis erupted, in April 2010, with Greece falling into the troika’s embrace in May 2010, I had written an article (A New Versailles haunts Europe) to argue that Germany was about to commit the error that the winners’ of World War I had committed by imposing upon Germany the Versailles Treaty. It was a unique Treaty in the history of humanity in the sense that the winners (the ‘strong’) has imposed upon the losers (the ‘weak’) a Treaty which was not only cruel but, in the end, one that backfired on them, turning out to be just as catastrophic for the winners (the ‘strong’) was it was for the losers (the ‘defeated’, the ‘weak’). My fear was that the method Germany seemed ready to utilise in ‘dealing; with Greece would end up being disastrous for Germany itself. This is how I concluded that piece: “In this context, turning countries like Greece into sundrenched wastelands, and forcing the rest of the Eurozone into an even faster debt-deflationary downward spiral, is a most efficient way of undermining Germany’s own economy. Assuming, for argument’s sake, that Greece is getting its just deserts, do the hard working Germans deserve a political elite that quickmarches them straight into economic catastrophe?” It seems that the answer was, tragically, in the affirmative.
Marshall Auerbach has just written an article that seems to confirm this gloomy assessment of the effects of the way Greece was treated by Germany on Germany. Here it is:
TODAY GERMANY IS THE BIG LOSER, NOT GREECE
Germany 1 is the Germany of the Bundesbank: the segment of the country which to this day retains huge phobias about the recurrence of Weimar-style inflation, and an almost theological belief in sound money and a corresponding hatred of inflation. It is the Germany of “sound finances” and “monetary discipline”. In many respects, these Germans are Austrian School style economists to the core. In their heart of hearts, many would probably love to be back on an international gold standard system.
Germany 2 is the internationalist wing of the country, led by Helmut Kohl. Kohl and his successors are probably the foremost exponents of the idea that Europe can rid itself of the “German problem” once and for all if Germany firmly binds itself to a “United States of Europe” and continues to construct institutions that broadly move the EU in this direction. It is questionable whether this vision has survived significantly beyond the tenure of Helmut Kohl himself.
One can see the inherent tension between these two Germanys. Bundesbank Germany would never allow vague, internationalist aspirations to dilute the goal of sound money, low inflation and fiscal discipline. One could envisage most looking askance at the Treaty of Maastricht and the corresponding threats to these ideals.
The point is not to celebrate the German economic model per se, but merely to highlight that for all of the gnashing of teeth and whining about “the cost” to Berlin of perpetually “bailing out” the “profligate periphery”, the reality is that Germany has done exceptionally well out of the euro zone and continues to do so.
“Germany #3” in effect placed the right bet: by locking in chronic devaluers to a currency union (thereby precluding the traditional expedient of currency devaluation to regain export competitiveness), Berlin in effect entrenched Germany’s mercantilist model and consolidated the country’s dominance as the trade superpower of Europe. The benefits are self-evident, given the contrasting data between Germany and the PIIGS.
Of course, one can already hear Germany’s apologists proclaiming that this success is the product of taking “hard decisions” in the earlier part of this century, in particular, the so-called “Hartz reforms”. The Germans have always been obsessed with export competitiveness. In the period before the euro, they would devalue the Deutschmark so that they could increase the sales of their products to their neighbors. Once the Germans lost control of the exchange rate by signing up to the Economic and Monetary Union (EMU), they couldn’t perform this trick anymore. They had to manipulate other “cost” variables in order to sell goods cheaply. So starting in 2002, they focused on wage suppression and cutting into the social safety net for workers through something called the Hartz package of “welfare reforms,” named after Peter Hartz, a key executive from German car manufacturer Volkswagen.
Unlike the American Henry Ford, who created good, well-paying jobs because he knew that having a secure middle class was essential to having a market for his cars, Peter Hartz regarded the relationship between wages and the economy very differently. In his view, squeezing workers was the way to keep a country “competitive”, which is precisely what his “reforms” did. And it had disastrous consequences for the rest of the eurozone – (See here)
More to the point, Germany benefited from “first mover advantage”: they initiated these reforms in the context of a growing global economy. Demanding such wage repression in the context of a global recession makes such “reform” virtually impossible, to say nothing of the fallacy of composition problems, when all other countries seek to deflate their wages in order to gain the elusive export competitiveness.
All of this is now coming under threat, given the renewed perturbations afflicting the euro zone. Greece’s inconvenient outbreak of democracy has created a new wild card: a new Greek party, Syriza, head of the coalition of the radical left, has vaulted to prominence, It’s new leader Alexis Tsipras, a previously obscure left-wing member of Parliament. led his grouping to second place in the recent national elections with the promise of repudiating the loan agreement Greece’s previous leaders signed in February.
From the birthplace of democracy, then, comes this horrible outbreak of genuine democracy. Naturally, in typical Brussels fashion, eurocrats are decrying this development. They are once again whipping up the “Greece to exit” frenzy and wheeling out all manner of mainstream economists who are issuing the most strident warnings that Greece needs the Euro and will walk the plank if it exits. Their earnest hope is that the new elections will result in the emergence of a new Greek Quisling, who will happily implement the Troika’s incredibly destructive austerity package, reforms which provide no hope of recovery for Athens or the rest of the euro zone.By contrast, Syriza represents a real threat to the current thrust of fiscal policy.
Rule #1 in negotiations: You must demonstrate to your counter-party that you have credible options to walk away from the table/deal. He has, amongst other things, simply pointed out that the Greek state is quite close to a primary surplus. All that is needed are a few small reductions wages and pensions, and the Greek public sector could finance itself for the foreseeable future. Were it to exit the euro, all of a sudden Athens’s problem becomes the eurozone’s problem.
Would a firewall today be any more effective in “cauterising” the Greek wound and preventing the contagion from extending to Portugal, Spain, Italy and then to the core? Tsipras clearly understands this, and he could well be Greece’s next Prime Minister. It would entail massive firepower from the ECB, a “bazooka” that the ECB has hitherto been loath to supply.
Apparently this deposit run and its reflux back into the imperiled banks on the periphery accelerated in the early months of this year before the French and Greek elections. It apparently has accelerated further since.
In effect, the System of European Central Banks is involved in an ever growing and massive bailout exercise which they are not publicly acknowledging.
The German response so far? “Oops. This guy is blackmailing us. What shall we do?” Because Germany as a creditor nation faces huge losses if the entire banking system starts to come under pressure, to say nothing of the end of their vaunted “wirtschaftwunder” as the entire eurozone implodes. Greece, by contrast, has already experienced 5 years of unremitting economic austerity. The country has been virtually reduced to the state of a barter economy. What has it got to lose at this juncture by refusing to roll over to the Troika?
To be sure, the Germans might well say, “Enough is enough” and leave the euro zone (which would probably destroy the currency union). The likely result of a German exit would be a huge surge in the value of the newly reconstituted DM. In effect, then, everybody would devalue against Berlin, shifting the onus for fiscal reflation on to the most vociferous opponent of fiscal activism. Germany would likely have to bail out its banks (particularly the Landesbanken). This might well be more politically palatable than, say, bailing out the Greek banks (at least from the perspective of the German populace), but it would not be without significant short term economic cost for Berlin. And in the interim, the likely currency shock would put an immediate halt to its export machine, as the built-in conferred by the euro zone would be dissipated in the event that Germany reverts to a newly reconstituted DM.
By accounting identity, a fall in Germany’s external surplus would mean a large increase in the budget deficit (unless the private sector begins to expand rapidly, which is doubtful under the scenario described above), so Germany will find itself experiencing much larger budget deficits. It will become a ‘profligate’ if it wishes to mitigate the effects of a collapse in its current account surplus. Quite a reversal in fortune.