Germany has been the principal beneficiary of the euro, and for this reason ought to show solidarity with eurozone members in crisis. Once the eurozone is back on its feet, Germany will be the main beneficiary again. This is the familiar view of Germany’s position in the eurozone, which is simple enough. The truth, alas, it is not.
Those who think that Germany has profited greatly from the euro almost always rest their case on Germany’s export surpluses. The euro created economic stability; it eliminated exchange rate risks; appreciated less than the Deutschmark would have, and thus aided German exports. But has the euro benefited Germany more than other countries?
It is true that between 1998 and 2011, German exports grew by 117%, according to the German Statistical Office. But if the euro was so vital to Germany's external trade, then the increase in exports to eurozone members would have been greater than the increase to other countries. In fact, the reverse is the case.
According to my calculations, based upon the same source, German exports rose most - by 154% - to the rest of the world; by 116% to non-euro EU members; and least of all, 89%, to other eurozone members. In 1998, the eurozone still accounted for 45% of all German exports; in 2011 that share had declined to 39%. These trends are continuing, and the importance of the eurozone countries as markets for German goods and services is falling, not rising. The eurozone remains very important to Germany's export trade, but it is hardly the motor of growth.
It might be objected that the euro benefited Germany more by making German exports more competitive outside the eurozone than by promoting trade within the eurozone. However, the euro has remained strong against the US dollar until very recently, and the dollar is by far the most important currency for international trade. And it is far from clear whether, until very recently, the Deutschmark would have performed much more strongly against other currencies than the euro. Further, demand elasticity for many German exports is not simply a function of price. Germany's exports grew most to non-European economies, and the strongest growth occurred in industries of particular German strength. And finally, Sweden which is outside the eurozone and thus did not benefit from currency stability within nor from alleged low price exports to other markets, recorded export growth which, as a percentage of GDP, significantly surpassed the increase in German exports.
During the euro era, German inward investment also took a marked turn for the worse. Between 1995 and 2008, Germany saved more than most, yet it exhibited the lowest net investment rate of all OECD countries. On average, from 1995 to 2008, 76% of aggregate German savings (private, governmental and corporate) were invested abroad.
As Hans-Werner Sinn of the Ifo Institute has demonstrated, Germany experienced massive capital exports in the years before the eurozone crisis - capital that fueled an unprecedented economic boom in the southern eurozone, especially in real-estate markets there. German capital exports to the Anglo-Saxon countries and France also rose markedly up to about 2008.
Between 1995 (the year when the details for monetary union were finalized) and 2011, Germany had the second-lowest growth rate in GDP among all European countries, according to Eurostat. It might be argued that in the mid-1990s, Germany was experiencing the immediate and most severe aftershocks of reunification. However, growth was equally below the European/EU average for the period 1998 to 2011: Germany grew at the average annual rate of 1.4%, compared to 1.7% for France, 2% for the Netherlands and 1.6% for the eurozone as a whole.
The performance of the German economy seems even less impressive in the wider European and trans-Atlantic context. During the period referred to above, Sweden grew by 2.8%, Britain by 2.1%, and the EU as whole by 1.8%. Germany also lagged significantly behind the United States, which grew at an annualized 2.2%. Over the period from 1998 to 2011, only Japan, Italy, Portugal and Greece performed worse than Germany. This is not the performance of a euro-winner.
Germany's relative economic performance within the eurozone only began to improve in 2006. Nonetheless, its GDP growth rate between 2006 and 2011 remained below that of Sweden and Austria, and broadly in line with the Netherlands, Finland and the United States.
During the first decade of the euro, again according to Eurostat, German unemployment tended to be higher, at times markedly higher, than the eurozone average. It then began to decline to levels well below the eurozone average, although it is rarely noted that it remains significantly higher than the unemployment rate in Austria, the Netherlands, Switzerland and Japan.
Finally, German wages and living standards did not rise for a decade and a half from the mid-1990s, in sharp contrast with southern Europe, Britain, and indeed most of the world except Japan. Until the years before the introduction of the euro living standards in Germany tended to rise in part as a result of the appreciation of the Deutschmark which meant lower import and energy prices: German workers enjoyed good living standards because their salaries denominated in Deutschmarks went further than those of their Italian or French counterparts. To the extent to which the euro appreciated less than the Deutschmark would have done, the effects were probably more damaging to living standard in Germany than they were beneficial to German industry and its competitiveness abroad.
Despite the drum-beat of propaganda about Germany's economic strength, ordinary Germans have not had much economic joy over the past 13 years: as Charles Dumas of the London-based Lombard Street Research Institute has demonstrated, German real personal disposable income per capita rose by just over 7% from 1998 to 2011, compared to growth of 13% for Spain and around 18% for Britain, France, and the US. Except again for Italy, Germany has been lagging behind every other major economy in terms of personal disposable income and consumption. Compared to 1998, when the initial shocks of reunification had already been absorbed, Germany today is a poorer country compared to many EU members than she was then.
Perhaps most importantly of all, at 2.1 trillion euros ($2.65 trillion) or 82% of GDP, Germany's public debt is higher than that of most eurozone countries, although it is lower than France's debt and significantly lower than that of Portugal, Italy, Ireland and Greece. The European Stability Mechanism (ESM) would, on realistic assumptions, increase Germany's exposure to losses in the weaker eurozone economies by around 400 billion euros - in extremis by more than 700 billion euros. If other potential liabilities as an European Central Bank shareholder, additional aid to Greece, Ireland and Spain, and TARGET2 claims against other eurozone central bankers are taken into account, Germany's total exposure would presently reach a sum of close to 1.5 trillion euros, based in part on calculations by the Ifo Institute in Munich. Even if only part of Germany's total claims against other eurozone governments had to be written off, the loss would run into hundreds of billions of euros. Germany's public debt would soon rise to 110% of more of GDP, in a worse-case scenario, well beyond that.
To the extent to which Germany's public finances are in a comparatively less disastrous state than that of other countries, it is due to high taxes, law disposable income and consumption and Germans' frugality. As and when the public finances will deteriorate, it will be as result of the "colossal cost of Kohl" and his misconceived "mad dash" for European monetary union, Chancellor's Schroeder closing both eyes to the obvious swindle preceding Greek admission to the euro, and Merkel's inability to say "no" to her many "faux amis" abroad. With foreign friends like Germany's and political leadership like her own, how would Germany need enemies?
The euro, it seems, bled Germany of capital which then fueled growth in southern Europe until 2008. Until then Germany performed worse than any other country in the eurozone and the EU except Italy. From 2008, it began to perform better, but for the last 15 years Germany has been one of the worst performing economies in northern and central Europe. Germany was the loser, not the winner of the euro.
Since 2006, Germany has benefited, relatively, from the loss of confidence in southern Europe, non-European demand for German goods, and moderately rising internal demand. Those benefits, however, are precarious, and will quickly be eroded and reversed by escalating payments to Portugal, Italy, Ireland, Greece and Spain, with potentially dramatic knock-on effects for public finances, and internal and external demand.
The euro crisis has pushed Germany into an increasingly dominant position in Europe, yet by its own past and current global standards her economic performance during the euro years has weakened, while 13 years of wage restraint without the benefit of currency appreciations has meant that ordinary citizens' welfare has fallen behind that of many countries which were poorer than Germany not too long ago. German politicians and diplomats assure their Western so-called "friends" that they are "prepared to pay, provided the Club Med countries accept the conditions". Sadly, Germany is in no position to pay, and the Club Med countries are incapable of meeting Germany's conditions. German politicians will make their country pay - it will be to Germany's peril, and ultimately to no one's gain.
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