Read the first part of this post here.
Would the US, Britain, or Japan change policy at the request of foreign powers because the foreign powers were, relatively, not doing as well? I don’t think so, especially if that meant lower support for exporters and industry, stoking inflation, and boosting internal consumption when the economy already has the lowest unemployment rate in Europe.
The villain here is not Germany, but the Euro. Arguably, if Germany left the Euro, one could see some immediate corrective swings occurring. Germany’s new currency would rise dramatically against the “new” Euro, and the remaining Euro countries would benefit from a massive devaluation in their currency, boosting competitiveness.
Unfortunately, there would be no one to fund the hundreds of billions of dodgy loans and outright debt the area is saddled with. Because what is oft overlooked is the fact that Germany has been the largest contributor to the European Stability Fund and the European Central Bank. German guarantees supporting the existing bailout fund amount to €211 billion ($285 billion). The ESM will require a capital contribution from Germany. If the ESM lends its full commitment of €500 billion ($675 billion) and the recipients default, Germany’s liability could be as high as €280 billion ($378 billion).
As the FT points out, the size of these exposures is huge in relation to Germany’s GDP of around €2.5 trillion, and German household assets estimated at €4.7 trillion. Nor is Germany without its own problems. It has substantial levels of its own debt (over 80% of GDP), an ageing population, and deteriorating dependency ratios, to compound its problems.
No wonder Germany suggested taking over the running of the Greek economy early in 2012. They wanted to be sure a major default didn’t start a domino effect that would end at Germany’s doorstep.
The other issue that needs some rebalancing is the statistics on unemployment. Yes, it is high in Spain, but its not as high as it appears. Since the financial crisis, the black economy has been on the rise. I recently spoke with a Spanish industrialist, who explained that many workers are registered for unemployment but also working part-time or even full-time for a lower wage. It’s a way of making ends meet, but it overstates the true level of unemployment quite considerably.
The employment tragedy is more acute among the young coming out of education who can’t get full-time careers off the ground, with a return to growth taking so long, there may be a generation of well-educated young people who lack sufficient experience to ever gain the career for which they trained.
So we take issue with Mr Krugman on this. We don’t dispute that Germany has done well out of the Euro. But it has also done well in its role as anchorman of the Eurozone. A little more inflation and less repression on internal consumption would help fuel growth across Europe, but it’s not clear that German consumers buying more would transform the export prospects of the club med economies.
The real villain of the peace is the Euro, that politically inspired, one-size-fits-all, strait jacket of a currency. It contains highly disparate economies within its folds, ones that really don’t need to be operating under the same fiscal rules as their neighbors. But don’t expect Europe’s politicians (or the US treasury, which is also complaining loudly) to call for a dismantling of the Euro. It’s far easier to take a pop at Germany’s export surpluses, surpluses they would love to face in their own economies.