As the new Greek Finance Minister, Yanis Varoufakis, travels through Europe to set the ball rolling on Greek debt negotiations, now seems like a good time to remind ourselves that there are more problems within the Eurozone than southern European debt. One of the things that stands out from reading the popular media and internet discussions is that debt reduction is a polarising issue. On the one hand are those who recognise the madness in continuing austerity policies and acknowledge that flexibility on publicly held debt is a pre-requisite for recovery. On the other are those who claim that it is morally and financially unacceptable that hard-working northern Europeans should have to continually bail out southern Europeans from a mess that was of their own making.
My aim here is not to rehash the many, many reasons why this type of austerity policies has been proven to be politically, economically and morally bankrupt. Instead, with Varoufakis in Europe, I’m going to bring up Germany’s colossal current account surplus and ask why Germany feels able to call for structural change in Greece when it refuses to address the imbalances in its own economy.
Any A level economics student knows that running a persistent current account surplus may not always be a good idea. Under normal circumstances, a persistent current account surplus can cause exchange rate appreciation or imply weak domestic demand. Within a currency union however, we may think that exchange rate appreciation should not be a factor, with all Eurozone economies theoretically sharing a similar macroeconomic basis from which to pursue competitiveness in exports. However, Germany has pursued policies designed to boost the competitiveness of its manufacturing sector which have resulted in years of wage restraint and excessively restrained fiscal policy. Germany’s low relative unit-labour costs in particular have given it a competitive edge over its Eurozone partners. This type of imbalance should in theory be avoided by the ECB’s requirement that national wage trends should follow a norm equal to national productivity growth plus the agreed Eurozone inflation rate. Germany, however, not only misses this norm by the widest margin but does so in a downward direction. Germany’s relative lower production costs make its goods artificially cheap and thus make it an aggressive exporter within the European common market. German goods crowd out those from other countries such as Greece, Italy or Spain.
But that’s not all. German exports, and the corresponding current account surplus, outside the EU have in recent years not been offset by large current account deficits of its EU neighbours. This appreciated the value of the euro, which then impacted on demand for Eurozone goods from the (relatively) less competitive southern European countries. With the recent fall of the Euro against the Dollar and the Pound this issue is somewhat off the immediate agenda, but it has been a factor in European industry in recent years.
Germany’s domestic demand is weak and is a consequence of the country’s low relative wage increases. This adds to Eurozone deflation fears and is compounded by the country’s conservative fiscal policy. Deflation is a cause for concern all round as it pushes up real interest rates and increases the burden of debt experienced by the southern European states. As inflation falls, the level of primary budget surplus required fulfill debt obligations rises. A spiral of austerity therefore threatens to spin out of control.
So for all the rhetoric about Greek structural adjustments, where are the talks related to German trade imbalances? Why are the media not more vocal in calling for more expansionary German fiscal policy and wage appreciation in order to balance its economy and level the eurozone playing field? We all know that Germany has an ingrained fear of (hyper)inflation and in many ways they are right since the aftermath of the first world war demonstrated its severe consequences beyond doubt. As Lenin rightly said, ‘the surest way to destroy a nation is to debauch its currency’. However, as part of a currency union Germany has an obligation to act in collective interests and this implies addressing its artificially induced competitiveness.
But at the root of this problem is one of ideology. Germany prides itself on the strength and competitiveness of its economy and urges other countries to follow its example. Greece and others want a level playing field where they can make structural adjustments to their economies which are tailor-made to their own economic and cultural fabrics. Low relative wages are not something to be desired by many countries and low domestic demand is nothing to aspire to. Much of the talk in the media calls for a fiscal union to support the currency union but this would once again be dominated by Germany and the larger Eurozone economies. Yes, it would create the possibility of making fiscal transfers within the EU so that richer national economies would be able to support weaker ones in the interest of union stability but would this actually happen? Also, would anyone actually want this to happen, bearing in mind the additional loss of national sovereignty it would bring?
For several years the single currency was welcomed as an opportunity to break down national barriers and move towards a more economically and socially interconnected world. But experience has shown that this is just a vehicle for removing barriers to the market in the name of neoliberalism, and subjugating the rights of individuals to the progress of commerce. The economic, sociological and political heritages of the different EU nations are vast and do not deserve to be swept away by a pan-European bureaucracy guided only by economic indicators. The recent Transatlantic Trade and Investment Partnership – discussed here by George Monbiot – unmasks once and for all the true objectives of the EU project.
So what does this mean for the people of Greece, Spain and other southern European states who are finally striking back against capitalist, market-driven politics? First of all, as I mentioned here, they are in far stronger bargaining positions than usually implied. For Greece, continued austerity and a high primary budget surplus are unsustainable and the Greek people have voted for change. It is a gross hypocrisy that Germany can impose this crushing system on the Greek people when it won’t address its own structural issues that have exacerbated the problem. So if there is no flexibility in the position of troika in relation to Greek debt then the Greeks should call its bluff and threaten to leave the EU. Despite the turmoil that would ensue, they could at least get on the road to rebuilding their nation, without the threats and control of the international neoliberal agenda. But ultimately this will not happen because Germany has as much to lose as Greece. If Greece leaves and contagion spreads, the Eurozone could quickly fall apart. If Germany has to revert back to the Mark its currency could quickly appreciate in nominal terms versus its former Eurozone partners and its competitive edge may quickly be lost. This would be in addition to the wider market and political turmoil that would ensue. So let’s stop pretending that the Troika has a gun to the head of the new Greek government and that the southern Europeans are wholly to blame for this malaise. And let’s hope that Tspiras and Varoufakis stand their ground in negotiations over the next few days. Their actions may be fundamental in trying to build a fairer, socialist model of European society.