The International Dimension of the Debate on the Euro Crisis

The current process of globalisation intensified worldwide social relations and linked distant localities in such a way that local happenings are shaped by events occurring many miles away and vice versa.

It enables major increase in worldwide trade and exchanges in an increasingly open, integrated, and borderless international economy. As a result, there has been remarkable growth in such trade and exchanges, not only in traditional international trade in goods and services, but also in exchanges of, among other things, currencies in capital movements. Thus, the world economy is now highly interconnected.
Therefore, it is imperative that any financial and economic crisis happening in any part of the world, its impact will have global or international dimensions. By the same token, the impact of the euro crisis in the eurozone of the European Union has already felt by the rest of the world and caused intensified debate concerning its causes and possible solutions.
The leading actors in this ensuing debate are Germany and countries of the eurozone such as Greece and Spain which are highly affected by the current euro crisis. In Germany, it was the deliberately over-the-top tabloid “Bild” that famously took the lead in lecturing the Greeks on Greek vice and German virtue. Since the impact of the euro crisis is global or international in nature, in the United States, New York Times’ award winning columnist Thomas Friedman adopted essentially the same tone and underlying “analysis.”  Friedman in a column he wrote last year asked whether Greeks become Germans, suggesting that this was the only way the crisis could be resolved.
The crisis in the eurozone has led to friction between Germany (the North) and quite a few of its European neighbours (the South). A lot of attention has been paid to people in Greece, Italy and Spain resenting German-imposed austerity. But the biggest divergence is arguably across the Channel and across the Atlantic. Plenty of policy makers, analysts and financial market players in the United Kingdom and the United States think that Germany is destroying the euro. The Germans think they are saving it. Clearly, however, they both can’t be right. Katinka Barysch, deputy director of the Centre for European Reform, believes that this perception gap is obscuring what the eurozone really needs which is a weaker euro in which Germany can’t provide.
The question which can follow the above argument is that, how can that be? Martin Wolf of the Financial Times argues that the eurozone is now on a journey towards break-up that Germany shows little will to alter. And George Soros, the New-York-based billionaire investor-philanthropist, adds that Germany’s current policies are leading to a prolonged depression, political and social conflicts, and an eventual breakup not only of the euro but also of the European Union.
Although neither the United Kingdom nor the United States is in the eurozone area, the two countries are home to the world’s financial markets. So what Martin Wolf and George Soros say matters because it shapes investors’ views. Apparently, the big question in the minds of many investors is just why the Germans not get it. One reason for the divergence in perceptions is that the economic going in Germany has been so good in relation to other countries in the eurozone.
According to the latest economic data of the European Union, since the start of the euro crisis in 2010, the German economy has grown by over 7%, while much of the rest of Europe has stagnated or been mired in recession. Greece’s economy has contracted by an average 17% in just three years. Unemployment in Germany is at record lows, while one quarter of Spain’s labour force is out of work which is now one of the largest unemployment rates in the world.
These huge discrepancies in economic performance translate into very different assessments of the situation. As the people clearly manifested, the Germans and other Northerners are gradually becoming more cheerful, whereas the Southern half of Europe is sinking into more gloom.
The May 2012 Global Attitude survey of PEW showed that just 6% of French and Italians felt that economic conditions were good in their countries. In Greece, the number of economic optimists is now statistically insignificant while Germany, a whopping 73% are upbeat about their economy. In this regard, people tend to project their assessment of their national conditions to the rest of Europe. One-third of Germans say that the European economy is doing just fine. But only 7% of Britons share this assessment, while 85% think the EU economy is doing badly.
Against this background of utterly un-Germanic cheerfulness, it can be hard for German politicians to convey the sense of urgency that would be needed to push through the radical measures that Martin Wolf and George Soros are advocating. The Germans, however, not only fail to grasp how pressing the situation is, they are also confused about what it is actually costing them.
According to financial and economic media analysts, the German media often do not distinguish between losses already incurred (which is so far only what Germany’s state-controlled banks lost when Greece wrote down parts of its debt this year), potential losses (for example, if Greece or Portugal cannot repay loans that are guaranteed by the German government), current risks (such as those stemming from the ballooning “target” imbalances within the European system of central banks that would perhaps, or perhaps not, materialize if the eurozone broke up), and potential future risks (for example, those related to a future pan-European guarantee for bank deposits).
From the above analysis, it is possible to assume that in the German mind, it all adds up to an enormous bill that already surpasses the country’s capacity to pay. Sure, efforts to rescue the euro are complex and complicated, but German politicians could do a better job of explaining what is at stake to their voters. Perhaps even more important than the perception gap are the disagreements about how to solve the crisis. American and British commentators as well as many people in the troubled eurozone countries want Germany to agree to Eurobonds, or some other scheme to mutualise the debt of the countries that share the single currency.
As financial analysts predicted, this will not happen at least not any time soon. It is clearly evident that no mainstream political party in Germany is talking about Eurobonds. The powerful constitutional court has ruled them unconstitutional and a majority of German voters rejects the idea. What is true is that, the repeated calls for this measure, especially coming from people who are not even in the euro, is starting to annoy the Germans. The one thing that everyone including the German government agrees on is that Germany needs to grow faster.
As the genesis of the euro crisis and the rescue efforts asserted, it is true that intra-eurozone “imbalances” played a big part in causing the crisis. In the decade before the crisis, the Germans saved lots and kept wages down. And Germany’s excess savings helped to fuel unsustainable consumption in Greece and inflate real-estate bubbles in Ireland and Spain. There, wages went up. German companies sold lots of cars and machine tools to the frothy economies at Europe’s periphery. This helped drag Germany’s economy out of stagnation, but it left the southern countries with unaffordable external deficits.
Now that the bubbles have burst, the entire burden of adjustment is on the countries and peoples in the South. But the troubling question is that, how are Spain, Greece and Italy to grow their way out of trouble if they cannot export more to Germany, the EU’s biggest economy? Germany runs an external surplus bigger than China’s. Noted economists suggested that there are, of course, things that Germany could and should do to boost internal demand. For example, it should cut payroll taxes, help more women find rewarding jobs, and open up markets for services. Higher demand in Germany, however, will not necessarily solve the euro crisis.
As Zsolt Darvas of Bruegel, the Brussels-based Think Tank, has recently pointed out, misalignment in intra-eurozone real exchange rates which reflect divergences in labour costs have largely been corrected. And so have the ensuing deficits and surpluses. Spain used to have the biggest trade deficit with the other eurozone countries, and Germany the biggest surplus. Both have been shrinking towards zero lately.
According to the latest financial data of the European Union, it is worth noting that last year just 7% of Germany’s external surplus came from trade with other eurozone countries. Out of it, the 23%, this is a three-time larger share, came from trade with non-euro countries in the EU such as Britain, Poland and Denmark, while the 70% which is ten times more came from selling stuff outside Europe.
In other words, if Germany grows a little faster, it will not quickly fix the situation in the so-called periphery. The impact on Spain or Greece will be small. According to the financial analysts, what would probably help Spain, Italy and Greece more is a weaker euro, which would allow them to export more to the rest of the world. The German government, however, cannot influence the external value of the euro. It is only the European Central Bank which can potentially do that.
The point here is not to defend or criticize Germany’s euro policies. People have done that extensively and brilliantly elsewhere. What is worrying is that the euro debates in Germany and in the Anglo-Saxon world are too far apart. In the final analysis, the underlying anger and misunderstandings will make it harder to find a resolution to the crisis. It is time to bridge the perception gap.