Another week, another conference about the euro. This time it was in Singapore. Nevertheless, it was Germany that was uppermost in my mind, not least because several Singaporeans asked me why Germany doesn’t leave the euro.
By Roger Bootle
7:35PM BST 07 Oct 2012
Last week I gave the political explanation. This week I am going to discuss the economic aspect.
From the formation of the euro in 1999 to now, German unit labour costs have hardly risen.
Since costs have continued rising briskly elsewhere, Germany has gained competitiveness enormously. The result is now a surplus of exports over imports of about 6pc of GDP. It is this surplus – and the associated income and jobs – that defenders of the status quo say would be threatened without the euro.
But there is a catch. Germany has supplied BMWs to southern Europe and they have given it IOUs in return. Will those IOUs ever be honoured? That is the problem with trying to grow through unbalanced trade. In the end, your trade partners need something to pay you with.
Not that the German economy has been a stonking success during the euro’s existence. Its average growth rate has been only 1.4pc, below the UK’s – and below Spain’s and Ireland’s. The explanation is clear. Whereas consumer spending has grown by about 30pc in America and the UK, in Germany it has grown by only 10pc. The reason is that over the last 13 years, German workers’ average real incomes have fallen by 4pc. The very success in keeping costs down has also kept pay down.
To listen to some German businessmen singing the praises of the euro, you could be forgiven for thinking that life must have been hell beforehand. In fact, it was just the opposite. It was under the deutschemark that Germany achieved its “economic miracle”. True, there was a persistent tendency for the deutschemark to rise. But Germany still tended to run a current account surplus, albeit smaller than today – less than 1pc of GDP, on average, between 1970 and 1998. Meanwhile, consumer spending grew by 2.5pc per annum.
It was the same Germans then as now. They were well trained, good at engineering – and good at keeping costs down. The difference is that the rising deutschemark prevented these admirable qualities from resulting in a massive trade surplus – and ensured that German workers got a good deal of the spoils.
What’s more, the flipside of the rising currency for Germany was a tendency for those countries which are now peripheral euro members to undergo periodic bouts of currency weakness. They were the same then as now – rather bad at keeping costs down and not as successful as the Germans at manufacturing. But their weak currencies kept them in the game and ensured that they enjoyed decent growth of exports as well as consumption. The result was that they had something with which to pay for imports from Germany.
If, one way or another, the link between Germany and the southern euro member countries is broken, for Germany this would not be a trip into the unknown so much as a return to the days of the deutschemark. By reducing the domestic price of exports and imports, a stronger currency would transfer income from producers to consumers. The result would be increased consumption.
Admittedly, there might still be a net loss of aggregate demand. In that case it would fall to the German government to stimulate it. For all its anti-Keynesian rhetoric, in 2010 the German government enacted the largest fiscal stimulus of any advanced country. And the current budget deficit of about 1pc of GDP is low enough to permit some stimulatory action now. On top of this there are structural reforms which could help to increase consumer spending, including the relaxation of restrictions on credit.
I know that devaluation is not a magic cure. It won’t cure fundamental structural ills or transform your country overnight into a brilliant manufacturer. But what has gone wrong between Germany and the peripheral members of the eurozone is not a “real” phenomenon of this sort. Contrary to much German propaganda, Germany’s success in keeping down unit labour costs is not due to rapid productivity growth. In fact, during the euro period its productivity growth has been rather low – lower than Greece’s.
Rather, its success has been due to tight control of wages. In other words, what Germany has done relative to its trading partners is to stage an internal devaluation. In the end, though, this will have achieved little for Germany because a large chunk of the customer base will not be able to pay.
To operate a successful monetary union, Germany must merge only with countries which are able to keep their costs in step with hers. That is not the position in the eurozone today. The suspicions of my Singaporean interlocutors were right: if Germany left the euro, not only would the peripheral countries be better off, but so also would Germany.
Roger Bootle is managing director of Capital Economics