Which country is the biggest gainer from the creation of the eurozone? My answer would be Germany. This view is hardly accepted in Germany itself. But such scepticism needs to evaporate. Not only is Germany a beneficiary, but it needs to recognise this far more clearly than now. Only then are Germans likely to support the reforms the eurozone needs.EDITOR'S CHOICEMore from Martin Wolf - Sep-02Martin Wolf's Exchange - Sep-02Economists' Forum - Oct-01The starting point must be that the crisis is not dead, but sleeping. José Manuel Barroso, European Commission president, claimed in his "state of the union" speech on Tuesday that "the economic outlook in the European Union today is better than one year ago, not ... least as a result of our determined action". This is true. But confidence has definitely not been restored (see chart). Further shocks are likely.So why, when confronting those shocks, should Germans accept that they have an overwhelming interest in the success of the eurozone? The immediate answer is that the economy is hugely dependent on exports for demand (see chart). From 2000 to 2008 external demand generated as much as two-thirds of the growth in overall demand for German output. Germany needs both captive markets and a competitive exchange rate. The eurozone has delivered both, to an inordinate degree: the crisis in the periphery has dragged down the value of the euro; and many of Germany's eurozone partners (who absorb two-fifths of its exports - nine times as much as China) are uncompetitive, after a decade of rising relative costs.
The starting point must be that the crisis is not dead, but sleeping. José Manuel Barroso, European Commission president, claimed in his "state of the union" speech on Tuesday that "the economic outlook in the European Union today is better than one year ago, not ... least as a result of our determined action". This is true. But confidence has definitely not been restored (see chart). Further shocks are likely.
So why, when confronting those shocks, should Germans accept that they have an overwhelming interest in the success of the eurozone? The immediate answer is that the economy is hugely dependent on exports for demand (see chart). From 2000 to 2008 external demand generated as much as two-thirds of the growth in overall demand for German output. Germany needs both captive markets and a competitive exchange rate. The eurozone has delivered both, to an inordinate degree: the crisis in the periphery has dragged down the value of the euro; and many of Germany's eurozone partners (who absorb two-fifths of its exports - nine times as much as China) are uncompetitive, after a decade of rising relative costs.
Not for the first time in its history the German people have been irresponsibly misled by a political leadership that seems to have lost any sense of history, any sense of order and stability in Europe, and any sense of Germany's key contributing role to the current crisis. As ever, the mindset of lawyers frames the political debate among a political class that seems inhumanly uneducated in matters of economics. If economic voices are heard at all, it is usually the voice of the Bundesbank. It is a peculiar democracy that expects either its constitutional court or central bank to have the final word of wisdom....Germany likes to see its international competitiveness as the fruit of hard work and productivity. Yet, German productivity growth since 1999 does not stand out. What stands out is wage stagnation. Germany's improved competitiveness was derived from reducing German wages relative to its European partners; the equivalent of a beggar-thy-neighbor devaluation in pre-euro times. The consequences of this strategy have proved disastrous: domestic demand stagnation in Germany, housing bubbles in partner countries with higher inflation, given that the ECB sets one rate that has to fit all. One way or another, the country that runs up trade surpluses must either lend or grant transfers to the deficit countries that make its own surpluses possible. Today, German policymakers refuse to do either. Fooled into believing that beggar-thy-neighbor was the right thing to do, popular demands appear to be just that. One cannot fail to see that insane austerity in the periphery serves to keep the euro low enough so that Germany can now grow on external exports.That is neither what Europe needs nor what the world may reasonably expect from Europe. Sooner or later Europe may have to conclude that Germany is unfit for the euro. Let the Germans have their mark back if they are so keen. Let the new euro-mark rise to US dollars 2 or 2.50, so that the joys of stability are real. Euroland may then regroup around France. With Germany once again proving immature to provide constructive rather than destructive leadership, Europe's fate is in France's hands.
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Germany likes to see its international competitiveness as the fruit of hard work and productivity. Yet, German productivity growth since 1999 does not stand out. What stands out is wage stagnation. Germany's improved competitiveness was derived from reducing German wages relative to its European partners; the equivalent of a beggar-thy-neighbor devaluation in pre-euro times. The consequences of this strategy have proved disastrous: domestic demand stagnation in Germany, housing bubbles in partner countries with higher inflation, given that the ECB sets one rate that has to fit all. One way or another, the country that runs up trade surpluses must either lend or grant transfers to the deficit countries that make its own surpluses possible. Today, German policymakers refuse to do either. Fooled into believing that beggar-thy-neighbor was the right thing to do, popular demands appear to be just that. One cannot fail to see that insane austerity in the periphery serves to keep the euro low enough so that Germany can now grow on external exports.
That is neither what Europe needs nor what the world may reasonably expect from Europe. Sooner or later Europe may have to conclude that Germany is unfit for the euro. Let the Germans have their mark back if they are so keen. Let the new euro-mark rise to US dollars 2 or 2.50, so that the joys of stability are real. Euroland may then regroup around France. With Germany once again proving immature to provide constructive rather than destructive leadership, Europe's fate is in France's hands.
