As fiscal crises persist throughout the eurozone and bailouts rain down by the billions on member states that would otherwise have faced bankruptcy, there may be ample reason to wonder about the fate of euro. Some American and British commentators, who claim to have regarded the euro as a foolish experiment from the start, blame Germany for creating trade imbalances with the countries that are in trouble. It is only proper that after years of profiting unfairly from the weaknesses of other eurozone members, the Germans are footing the bill of bailing them out. Or is it?
Prominent American economists as Paul Krugman and Simon Johnson were particularly hostile of the EU in the wake of the meltdown in Greece last April. Krugman blamed the “arrogance” of Europe’s political elite that “pushed” the continent into adopting a single currency well before it was ready for such an “experiment.” Deficit spending had nothing to do with it, he argued. If countries as Greece, Portugal and Spain had still had their own currencies, they could have easily remedied their problems through devaluation. But because of the euro, according to Krugman, they “can regain competitiveness only through a slow, grinding process of deflation.”
Johnson similarly lambasted the “European policy elite” which was “completely unprepared,” he alleged, to deal with budget crises. “The incompetence at the level of top European institutions is profound and complete,” wrote Johnson. “The Europeans will not lift a constructive finger.”
If any institution has attempted to enact comprehensive and constructive reform of the eurozone however it is the European Central Bank in Frankfurt. It has quietly but effectively been financing the debt obligations of countries that would otherwise have run into trouble much sooner, including Ireland, and simultaneously recommended automatic sanctions for eurozone members that violate the deficit and debt restrictions of the Stability and Growth Pact.
Ireland’s budget woes, which compelled the EU and the International Monetary Fund to put together a multibillion euro rescue package last week, revived fears of a Europewide debt crisis most recently. While the Irish bailout temporarily soothed investors’ anxieties, the prospect of default in Portugal or even Spain cast further doubt upon the future of the single currency. A meltdown in Spain, which is the eurozone’s fourth largest economy, threatens the very survival of the euro because simply bailing it out would be nigh impossible for the rest of the bloc.
Bearing the brunt of the bailout burden is Germany, Europe’s powerhouse. With relatively low unemployment rates and a steep recovery of exports since the start of this year, Germany is booming — as are its neighbors, highly dependent on their German trade.
While Germany profits from high exports, the United States, which for many years have imported far more than they produced, champion a “restructuring” of world trade. A country as Germany, said Treasury Secretary Timothy Geithner last month, cannot continue to count on the United States “to import more of their goods and services than they [buy] of ours.” The sentiment, though misguided, reflects the export driven growth of the country. In the last ten years, German exports more than doubled, producing a trade surplus of 105 percent in 2009.
Despite the euro and, just as important, the European single market, there has hardly been a difference in Germany’s trade surplus with fellow eurozone members on the one hand and economies outside of the single currency zone on the other. Moreover, there has been no correlation between trade imbalances with Germany and fiscal crises in other eurozone states. The German trade surplus with Belgium, Portugal, Luxembourg and the Netherlands grew most notably between 1999 and 2009. Whereas Portugal is now in financial trouble, the Benelux nations have performed fairly well.
Germany’s trade surplus with Greece doubled in the last ten years but most of that increase occurred when Greece joined the eurozone in 2002. Germany’s trade imbalance with Ireland has been minimal while exports to China, Norway, Poland, Turkey and South Africa skyrocketed in the same period. Denmark, Sweden and the United Kingdom — European Union member states that do not carry the euro — also imported more from Germany than they sold to it.
Europe’s debt crises were never caused by Germany’s success as an export nation. Rather countries as Greece, Ireland, Italy and Portugal could borrow cheaply because of the euro, as long as investors expected the Germans to step in to save the single currency when times got tough. Their expectations were met this year.
Even if bailing out Greece served the interests of German banks which had heavily invested in Greek bonds, the German people are anything but enthusiastic about constantly having to come to their fellow eurozone members’ aid. Chancellor Angela Merkel lost her upper house majority in the wake of the Greek rescue effort and has been pushing for comprehensive reform of European fiscal rules since. Despite strong opposition from other government leaders, Merkel managed to commit the European Council to reform of the Lisbon Treaty in order to penalize countries that plunge too deep into the red.
More stringent budget rules do not address the imbalances that exist between Germany and the other more prosperous economies of the north compared with the slow growth countries in the Mediterranean however. The southern countries must push through reforms in order to boost competitiveness — lowering corporate tax rates, decrease labor costs and prepare their pension and welfare regimes for the twenty-first century. Ireland already is.