…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%.
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.