Germany’s Unfair Advantage

…and why Germany is a bit like China

A couple of days back, the Telegraph’s excellent economic columnist Ambrose Evans Pritchard ran a piece entitled “German jobs miracle as Latin unemployment soars”.

And indeed we face an extraordinary situation where unemployment figures in Germany are the lowest since reunification twenty years ago, while jobless figures soar in the south.  The Greek unemployment rate is nudging 20%, while Spain’s is well over.  And youth unemployment in Spain is at a catastrophic 50%.

The EU’s efforts on the jobs front pale into insignificance against the scale of the problem, as I reported after my recent visit to Spain.

German Chancellor Angela Merkel loves to play the School Marm, and lecture other countries on why they need to be “more German”.  And indeed she has a point.  The celebrated German work ethic, their discipline, their rigour, have indeed served Germany in good stead, not only in recovering from two world wars in the last century, but also in coping with exceptional challenges of reunification.  It has its engineering expertise, its superb global brands like BMW, its “Mittelstand”, the extensive structure of small-and-medium-sized companies, often family owned, that show huge resilience.

Merkel may seem to have some justification when she insists that all of Europe’s problems could be solved if only other countries could be — well, more German.  If only Greece had the same work ethic, the same tax structures, the same fiscal discipline, then all would be well — wouldn’t it?

Well no.  Not Quite.  Germany has enjoyed a huge unfair advantage which is commented on too rarely — indeed I was tempted to title this piece “Germany’s Dirty Secret”.  And it all comes back to our old friend the €uro.  Germany is in a currency union with far weaker economies.  If monetary union had not taken place, if Greece and Germany had retained their own currencies, then the drachma would have devalued perhaps thirty or forty percent against the D-Mark in this century.

What you get with the €uro is a sort of average exchange rate.  Now you may say that a tiny economy like Greece would hardly affect the average against Germany.  But I’m quoting Greece merely as a proxy for Club Med.  Add in all those other southern states in various stages of economic distress, and the value of the €uro is considerably lower than a German currency would be.

In other words, Germany is benefiting from a currency that is (perhaps) 20% under-valued for Germany, with all the export advantages this brings.  This is the flip-side of the Greek position.  For Greece, the currency is over-valued, which is one reason why they’re being screwed.  Why no one wants to holiday there any more.  I rather suspect that Greek exports of ouzo and retsina are looking pretty sick, too.

So of course the German export machine is in overdrive.  Of course German jobs are going like gangbusters, while half of Spain’s young people are unemployed.  It’s baked into the currency imbalances.

And I’m sorry, Angela, but the other European countries simply can’t be “like Germany”.  Imports and exports are a zero-sum game (though of course trade itself generates wealth).  But a million €uros of exports from one country by definition means a million €uros of imports elsewhere.  That’s not politics or ideology or economics — it’s simple arithmetic.  One country’s export is another country’s import.  So given that much of Germany’s export trade is in the EU, those other countries will have a negative trade balance.  We can’t all have a trade surplus at the same time.

Germany with its undervalued currency has a huge advantage, which it has exploited relentlessly.  And for the losers — bad luck, you guys, but that’s what currency union means.  You should have thought about it earlier.

Which brings us to the comparison with China.  Both Germany and China have benefitted from (arguably) artificially low currencies,.  Both have enjoyed massive export booms, and are sitting on substantial foreign exchange reserves as a result.  China has a trade surplus with the West.  Germany has a trade surplus with the rest of the EU.  And in both cases the huge imbalances will need to be worked out, sooner or later, probably by increased consumption in the surplus countries.

So when Germany brags about its superior performance, remember its unfair advantage.  And if Germany is finally forced to accept fiscal transfers to Club Med to rescue the €uro, perhaps it’s only a fair return to Greece et al for the unfair currency disadvantage they’ve suffered for more than a decade.

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5 Responses to Germany’s Unfair Advantage

  1. sym says:

    I heard this argument about balancing economies by devaluing their currency many times.

    Where I think it gets a little foggy is the underlaying assumption that, when using the same currency, both countries should have comparable incomes and life styles.

    Or that prices need to stay the same. Why can’t the Greeks accept much lower salaries and pensions than their German counterparts, and have lower prices, in euro? No reason really, if you discount the fact that they wish to live above their means.

    Of course they could reform their state, slash public sector spending, slash taxes, work harder and become more competitive. But they won’t, because it’s too hard. It’s easier to spend and borrow, or spend and print.

    Devaluating the currency would be a half-measure. It would effectively slash salaries and prices, because their puchasing power would drop dramatically, but it would also keep the bloated, overly generous public sector and welfare state, at the expense of savers. It’s utterly immoral.

    The problem is not the inflexibilty of the currency. The game is not rigged. The issue is that non-competitive states are ignoring reality and aren’t adjusting their spending policies accordingly because they painted themselves into corners by grossly overspending on public sector and welfare (pensions included), whose dismantling is political suicide.

    The situation is similar here in Britain, and we “fix” it simply by punishing savers and harming growth.

  2. David says:

    So, what you mean is the €uro is for the benefit of the motherland.

  3. No reason in principle why you shouldn’t use years of grinding internal deflation to bring Greece back into line. Perfectly good economics. It’s just that you get the good people of Athens rioting in the streets and burning European and German flags. Your solution is simply undeliverable in political terms in a free society. Which is no doubt why the EU has suspended democracy in Greece and imposed an EU apparatchik as PM.

    • sym says:

      Well I’m happy you nuanced your position.

      We should admit that the fundamental problem is not the inflexibiliy of the currency – but the unsustainability of expenditure. In particular public spending, that’s the root of all evil since it sets the benchmark.

      You say that in a free society a measure as drastic as an actual balancing of the budget is undemocratic and would lead to riots.

      I agree with both points. It would lead to riots when people who got used to be just handed out a lot lose some of it. It’s also the worst democracy produces, a kind of fundamentalist populism in which the voters have discovered they can vote themselves higher salaries, pensions, welfare, cushy public sector jobs etc. You politicians did this, this culture of entitlement, and now I’m not surprised you defend it saying it’s undemocratic and politically impossible to reverse it.

      What I don’t agree with is your use of the word “free”. All this is done at the expense of people like me. I work (never took a break except holidays since I was 19). I save. I was careful to always be financially secure. I use private health care, because the NHS is rubbish, and I will ensure my kids go to a private school, because state schools are rubbish. I don’t expect any other living soul except for my wife to work for me or my kids for free. I don’t take any handouts or benefits in any way. I don’t commit crimes. I put up politely with the rudeness, uselessness and infuriating arrogance of the state bureaucracy. I am in no way a burden on society.

      In exchange for this, under threat of imprisonment, the government confiscates somewhere betwenn 50 to 60% of my family’s income, for an orgy of spending which produces very little benefit to us, and over which I utterly lack any control.

      No Sir, I am not free. I am a serv to the politicians, welfare scroungers and public sector caste. Every time I hear politicians such as yourself talking about devaluating the currency I feel even more robbed, since you want to further empoverish me to give to them. That’s how you balance the books.

      Unlike you, I won’t get an inflation-linked, taxpayer paid pension. Inflation destroys my pension, not yours. You already rob me blind, and you want to rob me some more.

  4. Derek says:

    Sym makes a very good argument, which it is hard to refute, though I would argue that some politicians, including Roger, have spoken out for a smaller state. Most politicians take the easy way out, which is understandable, as opposed to fighting rioters. There is no doubt in my opinion that the Euro has left politicians with no choice but to face the riots, which can noly lead to disaster.

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