Is Germany to blame for the euro crisis?

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Should German Prime Minister Angela Merkel, right, be pointing in the mirror? (Photo: Francois Lenoir/REUTERS)

The financial turmoil in the Eurozone is fostering another potentially scary problem that could hamper the resolution of Europe’s debt crisis – smoldering anger towards Germany, the dominant member of the monetary union. Take a look at the venom spewed at Germany by José-Ignacio Torreblanca, head of the Madrid office of the European Council of Foreign Relations, the other day in The Financial Times:

Seeing how the story unfolded in Greece and Ireland and watching the crisis heading for Portugal, it is no wonder that the dominant sentiment in Spain is concern. But more than that, the prevailing feeling is one of frustration with Germany…Spain’s current problems start not at home but rather abroad – in Germany, to be precise…Seen from Spain, it is as if Germany had decided southern Europe was a burden that prevents it from going global and needs to be dumped.

Pretty strong stuff. But it is fair? The fact is that Germany, as the leading economic and political force in the Eurozone, does have to take its share of the blame for the severity of Europe’s debt crisis. Here’s why:

Germany has been at the center of Europe’s mishandling of the euro crisis from the very beginning. Germany is expected to take the lead on policy in the Eurozone, and when dealing with the debt crisis, that leadership has sometimes been lacking. The misplaced reluctance of Chancellor Angela Merkel to support floundering Greece earlier this year allowed the contagion genie out of the bottle and spread the crisis to other weak Eurozone states. More recently, Merkel has been criticized for ushering Ireland into a bailout with her push to transfer some of the costs of Europe’s rescue efforts onto private bondholders. Though a good idea in principle, the proposal, later adopted by the European Union as part of a permanent framework for resolving debt crises, fueled investor concerns about future losses at an incredibly sensitive point in market sentiment. Now that proposal is being blamed for spreading the euro crisis even deeper, to Portugal and perhaps Spain. Here’s what Torreblanca had to say about this issue:

Ms Merkel’s proposal to have investors, and not only citizens, suffer the consequences of their investment decisions is both fair and rational. Yet, as we are seeing, there is a good chance that in real life the eurozone could be killed precisely by this proposal to make it work better. This would be no small irony. But it highlights the extent to which religious zeal has replaced political vision in Germany. As the saying goes: fiat iustitia, pereat mundus (let there be justice, though the world perish).

To be fair to Merkel, she’s only been attempting to resolve the euro crisis in a politically viable manner. Voters in Germany are in no mood to see their taxpayer money shoveled off to bailout the Greeks and Irish, so there is a limit to how far Merkel can go in using German resources to rescue the rest of Europe. Her well-founded reluctance to go around saving everybody is symbolic of a greater European aversion towards bailing out neighbors and interfering too much in their domestic affairs.

At the same time, however, it’s not hard to see why the rest of Europe would resent Germany and its behavior. The issues of contention with Germany run much deeper than Merkel’s recent comments. At the heart of it, there is a feeling that Germany is hoisting the problems of the Eurozone onto its weakest members. Germany’s view on solving the crisis has been based mainly on forcing adjustment in the crisis-hit nations in return for bailout money – it is Ireland, Greece and the other weak economies that got themselves into trouble and now have to dig themselves out of it through some tough structural reform. Though that may be the true, there is still a feeling in Europe that Germany needs to be doing more to get Europe out of crisis. Germany, this thinking goes, needs to change as well if the Eurozone is to return to health.

That’s because Germany’s recent economic success is perceived to be coming (in part) at the expense of its Eurozone neighbors. Germany’s growth is a result of strong exports, and the country runs a giant current account surplus, which the IMF expects to reach more than 6% of GDP this year. Economists, EU officials and policymakers around Europe believe Germany should be taking more aggressive measures to reduce this surplus, by stimulating domestic demand and thus supporting export growth in the rest of Europe. Instead, from the perspective of the rest of Europe, Germany is only too happy to revel in its healthy rebound while imposing years of dire pain onto the citizens of its prostrate, debt-ridden neighbors.

Germany’s attitude has made the nation appear somewhat self-centered and heartless. Here’s how Roger Cohen of The New York Times put it recently:

How shallow, paltry and mean-spirited has this German reaction to the euro crisis been! I don’t recall one word from Merkel about the idea of Europe, about why sacrifices for the euro are consistent with Germany’s moral debt to Europe and stake in its united future. “If the euro fails, then Europe fails,” she says. But what, pray, is Europe to the Frau Bundeskanzlerin? A burden, it seems, a conundrum — anything but an idea.

The view from Germany is quite different, however. Germany believes that it is playing a responsible role in Europe, both in regard to the current crisis and in ensuring the success of the monetary union overall. From the German standpoint, the success of the German economy is a boost to the success of the entire region, which benefits from the German export machine. In other words, a strong Germany is not only good for Germany but good for Europe. I recently discussed these issues with Steffen Kampeter, parliamentary secretary to Germany’s minister of finance, and here’s his view on the matter:

Our imports are growing stronger than our exports. Please do not forget that the Germany economy is contributing growth to those who contribute to our export goods. Our source of competitiveness is not only based in Germany. Eastern Europe and other parts within the euro area are benefiting very directly from German exports. The development we think goes in the right direction. A growing Germany is better for the European Union and the world economy than a Germany that is has a shrinking economic power. That’s the story that has to be told.

The notion, then, that Germany “exports to much” is seen in Berlin as ridiculous, As Germany’s exports rev up, incomes will increase, making Germans bigger consumers of goods from the rest of Europe. Here’s Kampeter again:

Growing exports leads to growing investment and growing investment leads to growing income. Our private demand is growing faster. The classical traditional story is now working in Germany.

Kampeter also stressed Germany’s commitment to making the monetary union successful. More from the interview:

We see the euro as a peace and freedom-keeping mission, not only an economic instrument. We have to do a lot more. We go on with further integration in Europe. We have profited as a country from this integration. We won’t exit the euro. We’ll do everything to stabilize this instrument. It is in our national interests to have a stable euro. We have a responsibility to keep the euro stable.

Simultaneously, though, there is a feeling in Germany it is (to a great degree) up to the weaker economies of Europe to fix their own affairs. Germany believes its economy is emerging out of the Great Recession in a solid position because its policymakers were far-sighted enough to proactively implement tough reforms other, lazier Eurozone nations failed to make. In other words, Germany is rightfully benefiting from its own hard work – now others in Europe have to roll up their sleeves and do the same. Here’s more from Kampeter:

We’ve done a good job over the past 10 years. Our labor market is much more flexible than it was 10 years ago. Our productivity strategies are moving forward. We invested much to become more competitive and to contribute more to global growth.

If one is more competitive than others, then others have to become more competitive. If you are accusing Germany of exporting too much, you’re proposition can only be to export less, to be less competitive. Economically, there is a perception that exporting is not a very bad thing as long as Germany isn’t doing it.

There is some truth to this argument. Over the past decade, Germany did overhaul politically sensitive aspects of its economy to make itself more competitive, which included reforming its unemployment insurance system and increasing labor market flexibility. German unions have also been willing to accept meager wage increases in return for employment guarantees. These are the types of reforms France, Spain, Greece and others are only getting to now. There is real merit, therefore, in the German argument that the rest of Europe has to play catch-up, to make their economies more competitive for their own good and for the future of the euro.

Whatever the reality of Germany’s role in Europe, the apparently growing ire towards the Eurozone’s most important economy doesn’t bode well for the future of the monetary union. As Kampeter points out, the euro is above all part of a political agenda. As the debt crisis unfolds, and countries enjoy fewer and fewer economic benefits from keeping the monetary union together, the prevailing glue could turn out to be political, and to a certain extent, sentimental. Europe will want to maintain the euro in order to keep the dream of a peaceful, democratic and unified Europe alive. If that dream descends into resentful finger-pointing, then the political rationale for the euro could be another victim of the Eurozone’s debt crisis. Therefore, whatever the economic merit of Germany’s handling of the crisis, Berlin can’t ignore the political fallout of its actions if the euro is to survive and thrive.