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Germany

Austerity Is Not Enough: A Different German Recipe To Save The Euro Zone

Op-Ed: To save the euro, the struggling southern countries must tighten their belts and modernize their economies. But the northern euro zone must change too. If Germany jacked up salaries rather than sitting on its export success, it might just set off a

A German worker (giopuo)
A German worker (giopuo)

MUNICH – It is ever more clear that the monetary union requires some kind of political union: without common policies, the states simply drift apart. A single currency can only survive when all governments decide on major issues together. In other words, the monetary union must also be an economic union.

That was a basic fact that, in the euro's first decade, governments ignored. While the Germans were focusing on low salaries and strong exports, the southern Europeans went in for high salaries and kissed goodbye to international competitiveness. The economic models were so different, in fact, that the euro is now in jeopardy of failing altogether. Indeed, both sides have to change their thinking.

Once again, Europe's government leaders met this week in an attempt to rescue the euro. Rightly, German Chancellor Angela Merkel pushed for automatic sanctions against over-indebted countries. Parallel to that, other governments are looking at ways the new bailout fund and the European Central Bank could mobilize more money for the crisis states.

All of that is necessary to keep the euro stable. But it's not enough. When the emergency measures (hopefully) start working, there is still the matter of the different economic models to deal with. The euro is not going to make it if Germany keeps having high trade surpluses and the southern Europeans continue with the gigantic trade deficits that come when you buy more abroad than you can afford.

Risk of recession spiral

Just one example. Trade deficits automatically mean new debt, and that has to be financed, which only increases the problems of over-indebted countries. Former German Chancellor Helmut Schmidt recently made exactly that point, echoing an idea favored by several prominent American economists. The imbalances have to be redressed, or the euro dies.

What that means is this: saving is necessary, but it's not enough. Austerity means that Greeks and Italians will be buying fewer German goods. By the logic of existing economic models, Germans would then have to react by lowering salaries. In the extreme case, the result of that would mean a recession spiral with millions of people out of work, something not altogether different from what Germany experienced under Chancellor Heinrich Brüning – and which accounted in part for Hitler's rise. Before the euro came along, weak states could devalue their currency to help balance the situation, but this path is now barred.

The only possible solution is that both camps change their policies. The southern Europeans need to modernize their economic model, eliminate monopolies, carefully monitor salaries, and invest in export firms. Germany, meanwhile, can't keep using its strength as an excuse to mismanage an economy. At the same time, the Germans have to devote some thought to what an economic model suited to a functioning monetary union actually looks like.

The answer to that is certainly not easy, as Germany isn't only competing with its euro partners, but with Asian boom nations as well. But what the Germans ought to do is raise salaries massively, even more than in the past years. That will help the rest of the euro zone. Millions of Germans, whose incomes have been stagnating for a long time, will reward the move with more consumption.

If Germans were to create more courageous service companies less hindered by bureaucracy they would further diminish the fixation on exports. Right now, ideas like that may seem not only unusual, but even a little provocative. And yet it is crucial that Germany change its way of thinking and develop new economic solutions. For if it persists in reveling in its status as world champion for exports, Germany will bury the monetary union under its own weight.

Read the original story in German

Photo - giopuo

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