As the German federal government appears to be both decided and capable to impose its models of economic policy to the rest of the eurozone, we should pose the question what purposes it aims at and in which way it is planning to solve the debt crisis. Of course, it is not entirely sure whether the federal government has any plan at all – but supposing it has, its demands from the other member countries allow the following conclusions on the German strategy for Europe:
The guiding concept of the German reform approach appears to be the mercantilist idea that imports are bad and exports are good. If a country buys many goods from abroad in order to consume them, it has to pay for them, becomes poorer and has to incur debts. If, on the contrary, it sells many goods to other countries, it will get foreign exchange, so it will gain wealth; and, moreover, thanks to the foreign demand its production will rise, so that new jobs are created. Thus, in order to escape from an economic crisis, a country has to increase its exports and lower its imports as much as possible.
For this, the next logical step is to increase the country's "competitiveness". During the last years, the German Agenda 2010 showed how to do this: cutting wages and social benefits, the prices for German products went down, making them more attractive for foreign buyers and raising German exports. At the same time, of course, the purchasing power of German employees decreased, which had negative effects on domestic demand, but also slowed down importations. By this, the export surplus went up, the German economy could emerge from the crisis and unemployment fell sharply. (A similar strategy of growth by low wages and high export surpluses has been followed by the People's Republic of China, so that in 2009 Germany was for the first time after seven years only vice world champion in exports – a fact which was received by the German media with concern and a certain sadness.)
Transferring the German model
Of course, the other side of the coin was that somebody had to buy the products Germany exported. Apart from the US, during the last years this was mainly the euro countries from southern Europe, whose imports were much higher than their exports and which, therefore, had to run into debt. (In the German politicians' and media language: "They lived beyond their means.") As the repayment of these debts is at risk now, the federal government appears to advocate a transfer of its own model of success: if the indebted countries "improve their competitiveness", i.e. lower their wages and social benefits, their importations will decrease and exportations will increase, too, so that they will receive money with which they may pay off their debts.
Of course, the other side of the coin was that somebody had to buy the products Germany exported. Apart from the US, during the last years this was mainly the euro countries from southern Europe, whose imports were much higher than their exports and which, therefore, had to run into debt. (In the German politicians' and media language: "They lived beyond their means.") As the repayment of these debts is at risk now, the federal government appears to advocate a transfer of its own model of success: if the indebted countries "improve their competitiveness", i.e. lower their wages and social benefits, their importations will decrease and exportations will increase, too, so that they will receive money with which they may pay off their debts.
- Increased exports by decreased wages: the solution for the European economic crisis?
This idea sounds well in the first place, but there are two small difficulties about it: Firstly, the eurozone countries can't all have an export surplus among each other. If Portugal starts to import less and export more goods to Germany, that means that Germany will import more and export less. Sure, this would settle the current imbalances, but at the same time it would destroy the valuable German foreign trade surpluses. For the strategy to work as a model of growth for the entire eurozone, we have to take into account the rest of the world, too: if from now on, all countries in Europe only want to export and not to import, these exports logically have to go to countries outside Europe. The eurozone is supposed to become for the globe what Germany has been for the eurozone.
This proposal sounds somewhat absurd at first sight, as China is also following an export strategy, the US are as heavily indebted as Southern Europe, and anyway the plan can't be to end up reproducing the previous European imbalances on a global scale, just in order to see one day a repetition of today's European debt crisis on a global scale. However, one could start to acquire a taste for the idea if you consider that emerging countries like Brasil and India will probably have a higher economic growth than the EU during the next years or decades. It could thus make sense for them to incur debts now in order to buy European products – and to pay back these debts in the future, when they will have caught up economically (and the Europeans won't unable to produce as much as before due to the demographic change).
The second difficulty
So is this the German strategy for Europe? It could be so nice – if there wasn't the second difficulty. This one consists in the fact that a mercantilist export strategy as the one described here just doesn't work under the conditions of a functioning system of freely convertible currencies. In particular, if the products of one country become cheaper and therefore the demand from abroad is increasing, the demand for this country's currency in which these products are traded will also increase; by the increasing demand for the currency the exchange rate will rise, which will also increase the price of the products until economic equilibrium is restored. Under normal circumstances, "internal devaluation" (cutting wages) is automatically followed by external appreciation, destroying all competitive advantages.
So is this the German strategy for Europe? It could be so nice – if there wasn't the second difficulty. This one consists in the fact that a mercantilist export strategy as the one described here just doesn't work under the conditions of a functioning system of freely convertible currencies. In particular, if the products of one country become cheaper and therefore the demand from abroad is increasing, the demand for this country's currency in which these products are traded will also increase; by the increasing demand for the currency the exchange rate will rise, which will also increase the price of the products until economic equilibrium is restored. Under normal circumstances, "internal devaluation" (cutting wages) is automatically followed by external appreciation, destroying all competitive advantages.
Therefore, the mercantilist export strategy works only if you restrict the adjustment of exchange rates and maintain the value of your own currency artificially low. China is doing this in an obvious and somewhat coarse way by restrictions on the movement of capital. But also the German currency has been undervalued during the last years: not only made the Monetary Union the adjustment of exchange rates between Germany and the Southern European countries impossible; also the German export increases towards the rest of the world were balanced by the imports of the other European countries. Instead of a soaring deutschmark Germany had a widely stable euro – and it's only because of this that after 2003 it could increase its exports so much that they overcompensated for the lack of domestic demand. But if the eurozone as a whole is going to adapt the German model, this trick won't work any more, and rising exchange rates of the euro will thwart the expected growth of exports.
So what is the sense of the growth-by-wage-reduction strategy for Southern Europe? Of course, even if the export surpluses to extra-European countries fail to appear, it will still correct the imbalances inside Europe: Germany will import some more goods, Portugal will export some more goods, so that some more money will go from Germany to Portugal, enabling Portugal to pay back its debts. But we could have the same effect by increasing wages and social benefits in Germany. In this case, too, Germans would buy more, while the demand for German products in other European countries would decrease; the only difference being that the euro would depreciate, not appreciate in order to bring the trade balance of the eurozone as a whole towards the rest of the world back into balance. But contrary to the current strategy in Southern Europe, a wage increase in Germany would probably not provoke any general strikes – and it would not be associated with the deflationary risk which general wage reductions and the consequent drop of European domestic demand bring about.
After all, it appears, everything is just a matter of redistribution. The main profiteers of an increase of wages and social benefits in Germany are workers and unemployed people; the main profiteers of cuts in wages and social benefits in Southern Europe are the holders of capital. The plan to overcome the euro crisis thus presents itself as a simple political question of left and right, in which the German federal government is using its role of the most important payer in order to push the eurozone towards the right – instead of leaving such a decision to a European Parliament whose members have been elected by the European citizens and may also be voted out of office by them.
Image: Pedro Simões from Lisboa, Portugal [CC-BY-2.0], via Wikimedia Commons
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