All the alternatives to eurozone ‘austerity’ involve redistributing more of Germany’s wealth to its neighbours. Giving the European Central Bank the power to act as lender of last resort to eurozone governments without limit will, via the new money created to do so, result in higher inflation in Germany. Schemes for debt mutualisation which propose to spread the debt of various eurozone countries among all members will be a boon for those with above average debt, like Greece, but less so for those with below average debt, like Germany.
Not surprisingly the Germans have been reluctant to embrace these schemes. Appeals to some shared European sense of identity have failed as this identity was a fiction in the first place. Another approach has been to mutter that Germany owes its neighbours because of the war. This approach has likewise failed as today’s Germans quite reasonably don’t feel the need to atone for what their grandfathers did.
But there is a more subtle, economically based argument that, partially at least, lays the blame for the euro crisis at Germany’s door. If this argument can be accepted then surely it is reasonable to expect Germany to cough up a bit?
The argument runs like this: with the assistance of Germany’s trade unions during the 2000s the Berlin government was able to hold down German wages. As a result German unit labour costs fell making German goods relatively cheaper than those produced elsewhere. As Philipp Bagus writes “Since the introduction of the Euro, Germany’s competitiveness, as measured by the indicator based on unit labor costs provided by the ECB, increased 13.7 percent from the time of the Euro’s introduction up until 2010. In the same period, Greece, Ireland, Spain, and Italy lost in competitiveness, 11.3, 9.1, 11.2, and 9.4 percent respectively”
The Germans were looking to sell and the PIIGS with their new, low, eurozone interest rates, were able to borrow the money to buy. Germany was, in effect, selling more than it was buying and lending the savings to PIIGS so they could afford to keep buying. Goods and loans flooded out of Germany and IOU’s flooded in. This showed up in the trade figures with Germany running a huge surplus offset by deficits around the Mediterranean.
By this theory Germany’s artificially depressed wages and consumption to some extent necessitated offsetting borrowing and consumption elsewhere. If Germany had allowed its labour costs to rise, so the theory goes, Germans would have consumed and imported more and PIIGS would have consumed and imported less.
It follows from this argument that Germany ought to let its wages rise which would have two effects: it would make the PIIGS more competitive by default and it would increase German consumption spending some of which, presumably, would be spent on goods or services produced in the PIIGS.
It is the same argument (most popular in the US) that is often made to lay the blame for the current mess at China’s door. If only the Chinese government would let the Chinese people consume more of the awesome output of the Chinese economy then American consumers wouldn’t have to assume this onerous burden on their behalf. The unsustainable debt and over consumption of the British, Americans, and PIIGS is necessary to balance out the saving and under consumption of the Chinese and Germans.
How valid is this theory? To some extent it reflects a prejudice against saving. In the current Keynesian climate saving is a dirty word; a reduction of the aggregate demand which supposedly drives the economy. But looking past this prejudice saving is vital to our economy. Without it there is no capital and without that there is no capitalism.
We must also remember that saving is simply an act of deferred consumption, an addition to tomorrow’s aggregate demand (conversely borrowing is the act of pulling tomorrow’s aggregate demand into today so the next time you hear someone wondering where all the demand went point them to 2000 to 2007 when the British public and government went on a borrowing binge). Few people save simply to admire their stack of fivers; they wish to spend tomorrow.
So as long as it reflects the actual preferences of economic agents, saving is a good thing. Here is the big difference between Germany and China. Whereas, in China, the full apparatus of totalitarian government exists to force its people to restrain their consumption (not that I support the Savings Glut Hypothesis) the same cannot be said of Germany. For all their cosy corporatism the German government and trade unions do not have the same sway over German workers as China’s Communist Party does over Chinese ones. That is not to say that they have none, but rather to suggest that German savings represent to a fair degree the preferences of Germans themselves.
The problem instead lies with what happened to these savings. Rather than funding investment which would yield an income in the future much of it was spent on current consumption and speculation in assets. In Spain and Ireland this flood of German savings produced a construction boom, in Greece it funded a ridiculously generous welfare state, and all over it funded a boom in retail spending.
For this the borrowers in the PIIGS and the banks in core eurozone countries who lent to them are to blame. But so, also, are the architects of a system which led both borrowers and bankers to believe (and we still wait to find out exactly how reasonable this belief was) that they would be bailed out by Germany if they ever got into trouble.
If the bankers and PIIGS want to keep accessing the wealth of German workers, the technical economic argument over trade imbalances might not fair any better than calling it modern day reparations.
This article originally appeared at The Commentator