Euro on the Brink
The European Union is a sweet deal for Germany – and the Euro makes that deal even sweeter. Germany isnt like most rich western countries. Proportionately, it has a double-size manufacturing sector. German exports are double that of the UK, triple that of France, and equal to the US, though Germany is only one-quarter its size. And while Germany runs a huge trade surplus, it’s still by far the EU’s biggest importer too.
More than any other nation, Germany depends on the EU’s open borders. And the common currency is a great facilitator of trade, lowering transaction costs and eliminating exchange-rate risks for Eurozone transactions. Given that Germany has the most to gain from a common currency – and the most to lose from its collapse – you’d think Germans would be very careful about keeping their Eurozone partners happy. Think again.
Up until 2008, countries like Greece, Portugal and Spain benefited greatly from the common-currency zone too. The Euro made it easier for foreign banks to extend credit, and as Euros poured in, real estate boomed, building skyrocketed, incomes rose, and tax revenues soared. Spain ran a budget surplus in 2007. But when the music stopped, fannies far outstripped seats. The financial crisis rendered many banks insolvent, so they stopped lending. Given the small size of those countries relative to the enormity of capital flows, their economies crashed. Things were tough all over – but small, developing countries like Greece got it worse.
From the wreckage, two schools of economic policy emerged. One is typified by Ben Bernanke, a scholar of the Great Depression. He, along with Tim Geithner, and ultimately Barack Obama, believed that the government needed to maintain pre-crash spending levels, even if deficits soared. Since consumers were broke and investors were freaked out, the government was the last man standing – to keep the economy going, they reasoned, the government would have to step up as the spender of last resort. Conservatives at the time heavily criticized Bernanke, Geithner and Obama for super-low interest rates, quantitative easing and generous deficit spending, predicting the devaluation of the dollar, increasing unemployment and hyper-inflation.
The other school was made up of fiscal and monetary conservatives, like Angela Merkel. Fearing inflation, they preferred to reduce deficits by slashing government spending, in the hope that the economy would bottom out, and business would pick up again once the recession ran its course. Interest rates were held steady to reduce the risk of inflation and to safeguard the currency. Liberals at the time criticized Merkel and the European Central Bank (ECB) for these policies, predicting that recessions would deepen into depressions, inflation would turn into deflation, and economies would founder for lack of demand.
Countries like Greece werent even free to choose their own course – the realities of the Eurozone meant that Greece had to accept the dictates of the ECB, which is and has been dominated by conservative economists.
Who was right? Six years and seven trillion dollars of debt later, US employment markets are approaching pre-crash levels, budget deficits have shrunk to sustainability, the dollar is at its strongest in years, inflation is at its lowest in a half-century, and the US economy is growing at its fastest pace since before Bush Duh. Meanwhile in Europe austerity has returned the Continent to recession. Unemployment is high, deflation hovers as a constant threat, and the countries that got hid hardest slid into full-fledged depression, with unemployment exceeding 25%, while the Euro has depreciated to its lowest levels in a decade.
It took Greeks seven years of misery to elect a government that shares their disgust with the status quo, and the failed German approach to the crisis. If only Greece had credibly threatened to leave the Eurozone seven years ago, a lot of suffering might have been avoided – Germany might have been coerced to do what was in its own best interest to do: zero out interest rates, and pour money into struggling states to keep their governments spending and their economies afloat – i.e., do what the US did under Obama, Bernanke and Geithner.
Today, it’s less clear what will happen if Greece exits the common currency – the Euro may in fact survive. And that, unfortunately, has emboldened Germany into playing chicken with Greece’s new government, which seems intent either to end current fiscal policies or to resurrect the drachma and go their own way. Germany’s handling of the Great Recession could hardly have been worse – but Germans themselves still have a lot to lose. The demise of the Euro would be a painful blow to Germany and a weak Continental economy.
Conservatives in the past have demonstrated a fearsome inability to learn from experience. Let’s hope, for Europe’s sake, that the dramatic triumph of liberal economic policies will not be lost on European policymakers – and that they will seize on the US example to plot a better course going forward.
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