Germany is Booming But What of Europe?

With Germany leading much of Northern Europe out of recession, the recovery gap with the south is gradually widening.

While the world’s largest economies, the United States and Japan, are considering renewed stimulus efforts in order to stir an economic recovery, Europe’s powerhouse, Germany, stuck to austerity and export driven growth and it is prospering instead. So much, that a recovery gap between Germany and its satellites on the one hand and the south of Europe on the other is gradually widening.

The German economy grew with a little over 2 percent in the second quarter of this year; the largest level of growth for the country since die Wende. Britain and France, by comparison, grew modestly, respectively with 1.1 and 0.6 percent in the same period.

Unlike the other two major economies of the European Union, Germany, almost from the start of the recession, has been enacting reforms aimed, largely, at safeguarding employment rates. As Nicholas Kulish observed in The New York Times last week, “By paring unemployment benefits, easing rules for hiring and firing, and management and labor’s working together to keep a lid on wages, Germany ensured that it could again export its way to growth with competitive, nimble companies producing the cars and machine tools the world’s economies — emerging and developed alike — demanded.”

In fairness, Germany had an advantage over other leading economies that predated the crisis. Compared with Britain and the United States, Germans largely steered clear of buying homes and cars on credit which prevented something of an American style housing bubble from ever taking shape. Compared with France, Germany has slowly been deunionizing its workforce in recent years while regulations, though abundant, are clear and equally enforced. In general, Germany hardly experienced anything of a crisis atmosphere or mentality which continues to hamper growth in the United States. Instead, as the Financial Times put it:

Many plants are running at full speed again, some companies are expanding capacity and many are rehiring contract workers. Orders in the engineering sector, Germany’s economic backbone that includes industrial giants such as Siemens as well as swaths of midsized family owned companies, shot up by 32 per cent year-on-year in the first six months, following a drop of 38 per cent in the past year.

There are experts, including those at the Financial Times, who warn that the German growth is only likely to slow down for the remainder of the year but this isn’t stopping the Germans from smirking quietly, realizing that they were right not to go with the flow two years ago.

Europe’s uneven recovery has been evident since December of last year when Germany and to a lesser degree France managed to produce modest growth rates while countries in the south of Europe remained mired in recession.

Germany and France pursued very different strategies in response to both the global economic downturn and Europe’s sovereign debt crisis however. Whereas President Nicholas Sarkozy’s policies turned out to be rather disappointing ones, retorting to old school French protectionism instead of pushing for market reforms as promised, Chancellor Angela Merkel has been preaching austerity at the cost of her own party’s popularity. France profited, briefly, from its interventionist approach but in the end, Merkel and her vision won out at June’s G20 summit in Toronto, Canada. Over President Barack Obama’s protest, the largest economies of the world agreed to cut their deficits in half by 2013 there.

Europe, too, has been pondering tougher budget rules for the whole of the eurozone, realizing that fiscal woes in just one or several member states threaten to undermine the stability of the currency as such. France, Italy and Spain, though large European economies, are each still trying to find billions in spending cuts, with mass demonstrations looming. Greece continues to be wrecked with violent protests while the government is desperately trying to curb on entitlement spending. According to Der Spiegel,

The entire country is in the grip of a depression. Everything seems to be going downhill. The spiral is continuing unabated, and there is no clear way out. The worse part, however, is the fact that hardly anyone still hopes that things will improve one day.

Germany, by contrast, is booming and carrying a series of Northern European countries onto a growth path in its tail, including Austria, the Czech Republic and the Netherlands.

This economic division readily translates into political discord. Germany, along with its northern neighbors and Finland, was deeply skeptical of bailing out Greece in the first place when it faced bankruptcy last April. Britain, Germany and the Netherlands opposed the European Commission’s original proposal to raise money on capital markets guaranteed by member states. The British and Dutch complained that it would be tantamount to giving a “blank check” to the EU’s executive. Austria and Finland expressed similar concerns over centralizing too much control in Brussels.

France and Italy, on the other hand, were leading the effort for an all European bailout instead. The two countries wanted to keep the International Monetary Fund (IMF) out, with Italian prime minister Silvio Berlusconi complaining that if Europe failed to deliver on this issue, it had no right to exist at all.

The compromise that was reached in early May proved largely a victory for the northern camp, with many strings attached to Greece’s aid plan, most of them to be enforced by the IMF.

The argument raised against Berlin nowadays is a familiarly misguided one: that its exports are eating off poor South European countries which, as Justice Litle put it at Naked Liberty, have “little to sell Germany in return.” He concludes that “German surpluses become additional deficits for lesser eurozone trading partners” by consequence.

This is zero-sum economic thought aimed at making the Germans feel ashamed for performing so splendidly. Indeed, Litle blames them for pursuing “mercantilist trade policies” which is utter nonsense, of course. He ends up agreeing with the likes of Paul Krugman who, in February, blamed “European arrogance” for enforcing a single currency on part of Europe well before the continent was supposedly “ready” for such an “experiment.” Litle even believes that the euro “was always a currency built on dreams.” The dollar at least has a single country behind it, he attests, rather than sixteen “squabblers.” One needs not engage in any sort of transatlantic ping pong to point out that this assertion is inspired probably more by economic discontent and ignorance about Europe’s common market structure (which, according to Litle, isn’t a union at all) than objective analysis of the EU’s financial stability.

No matter fears of an imminent collapse of the eurozone or the whole of Europe — just because Slovakia won’t pay for Greece’s mistakes? — the countries that are in the European Union today are so economically and politically integrated that to suddenly abandon the project because of a few hiccups along the way is a notion so utterly preposterous that it can only be entertained by commentators with little or no understanding of what the European Union entails.

More practically, the stronger economies of the north, with Germany in the middle, profit so immensely from both the internal market and the common currency that their national interests demand a perpetuation of this process. These are exporters that sell most of their goods to fellow European states. Their financial institutions are invested dearly in the economies of the south. No matter today’s resentment with people who rightfully complain that their tax money is used to bail out Greeks who retire fifteen years ahead of them; the euro is still a success story that no one in their right mind should wish to abolish.