The Eurozone’s German Problem
Philippe Legrain
The
eurozone has a German problem. Germany’s beggar-thy-neighbor policies
and the broader crisis response that the country has led have proved
disastrous. Seven years after the start of the crisis, the eurozone
economy is faring worse than Europe did during the Great Depression of
the 1930s. The German government’s efforts to crush Greece and force it
to abandon the single currency have destabilized the monetary union. As
long as German Chancellor Angela Merkel’s administration continues to
abuse its dominant position as creditor-in-chief to advance its narrow
interests, the eurozone cannot thrive – and may not survive.
Germany’s
immense current-account surplus – the excess savings generated by
suppressing wages to subsidize exports – has been both a cause of the
eurozone crisis and an obstacle to resolving it. Before the crisis, it
fueled German banks’ bad lending to southern Europe and Ireland. Now
that Germany’s annual surplus – which has grown to €233 billion ($255
billion), approaching 8% of GDP –
is no longer being recycled in southern Europe, the country’s depressed
domestic demand is exporting deflation, deepening the eurozone’s debt
woes.
Germany’s
external surplus clearly falls afoul of eurozone rules on dangerous
imbalances. But, by leaning on the European Commission, Merkel’s
government has obtained a free pass. This makes a mockery of its claim
to champion the eurozone as a rules-based club. In fact, Germany breaks
rules with impunity, changes them to suit its needs, or even invents
them at will.
Indeed,
even as it pushes others to reform, Germany has ignored the
Commission’s recommendations. As a condition of the new eurozone loan
program, Germany is forcing Greece to raise its pension age – while it
lowers its own. It is insisting that Greek shops open on Sundays, even
though German ones do not. Corporatism, it seems, is to be stamped out
elsewhere, but protected at home.
Beyond
refusing to adjust its economy, Germany has pushed the costs of the
crisis onto others. In order to rescue the country’s banks from their
bad lending decisions, Merkel breached the Maastricht Treaty’s
“no-bailout” rule, which bans member governments from financing their
peers, and forced European taxpayers to lend to an insolvent Greece.
Likewise, loans by eurozone governments to Ireland, Portugal, and Spain
primarily bailed out insolvent local banks – and thus their German
creditors.
To
make matters worse, in exchange for these loans, Merkel obtained much
greater control over all eurozone governments’ budgets through a
demand-sapping, democracy-constraining fiscal straitjacket: tougher
eurozone rules and a fiscal compact.
Germany’s
clout has resulted in a eurozone banking union that is full of holes
and applied asymmetrically. The country’s Sparkassen – savings banks
with a collective balance sheet of some €1 trillion ($1.1 trillion) –
are outside the European Central Bank’s supervisory control, while
thinly capitalized mega-banks, such as Deutsche Bank, and the country’s
rotten state-owned regional lenders have obtained an implausibly clean
bill of health.
The
one rule of the eurozone that is meant to be sacrosanct is the
irrevocability of membership. There is no treaty provision for an exit,
because the monetary union is conceived as a step toward a political
union – and it would otherwise degenerate into a dangerously rigid and
unstable fixed-exchange-rate regime. Germany has not only trampled on
this rule; its finance minister, Wolfgang Schäuble,
recently invented a new one – that debt relief is forbidden in the
eurozone – to justify his outrageous behavior toward Greece.
As a result, Greece’s membership in the eurozone – and by extension that of all other members – is now contingent on submission to the German government.
It is as if the United States unilaterally decided that NATO’s
principle of collective defense was now conditional on doing whatever
the American government dictated.
The
eurozone desperately needs mainstream alternatives to this lopsided
“Berlin Consensus,” in which creditors’ interests come first and Germany
dominates everyone else. Merkelism is causing economic stagnation,
political polarization, and nasty nationalism. France, Italy, and
Europeans of all political stripes need to stand up for other visions of what the eurozone should be.
One
option would be greater federalism. Common political institutions,
accountable to voters across the eurozone, would provide a democratic
fiscal counterpart to the ECB and help cage German power. But increasing
animosity among eurozone member states, and the erosion of support for
European integration in both creditor and debtor countries, means
greater federalism is politically unfeasible – and potentially even
dangerous.
A
better option would be to move toward a more flexible eurozone, in
which elected national representatives have a greater say. With the
no-bailout rule restored, governments would have more space to pursue
countercyclical policies and respond to voters’ changing priorities.
To
make such a system credible, a mechanism for restructuring the debt of
insolvent governments would be created. This, together with reform of
the rules covering the capitalization of banks – which incorrectly treat
all sovereign debt as risk-free and do not cap banks’ holdings of it –
would enable markets, not Germany, to rein in truly excessive borrowing.
Ideally, the ECB would also be given a mandate to act as a lender of
last resort for illiquid but solvent governments. Such changes could
garner broad support – and would serve Germany’s own interests.
The
eurozone’s members are trapped in a miserable marriage, dominated by
Germany. But fear is not enough to hold a relationship together forever.
Unless Merkel comes to her senses, she will eventually destroy it.
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