Originally published in the Financial Times
At first glance, Germany’s decision not to insist on compulsory participation by private lenders in the latest bail-out of Greece may seem like a defeat for Chancellor Angela Merkel and Europe’s largest economy. But appearances can be deceiving. On another, more important level, Germany came out of the latest round of brinkmanship exactly where it may well have wanted to be – with the common currency intact and Germany able to motor forward.
These are heady days for Germany. With its torrid 6.1 per cent first-quarter growth rate, it leads the field among industrialised nations. While Barack Obama has been exhorting the US to boost its exports, Germany – with just 82m inhabitants – has less vocally remained the world’s second-largest exporter. That has not only generated a huge current account surplus but has contributed two-thirds of Germany’s economic growth over the past decade.
For the first time since 1992, fewer than 3m Germans are unemployed, and inflation – the perennial obsession of the descendants of the Weimar Republic – remains muted. Business people buzz with self-confidence and even a subtler version of the arrogance evident before the integration of East Germany drained $2,000bn from the West and gave rise to the phrase “the sick man of Europe”.
In her approach to the problems of the eurozone’s periphery, Ms Merkel has cleverly triangulated between the antagonism of the populace to bail-outs and the importance to business of doing (almost) whatever it takes to preserve the euro. That the views of the two constituencies diverge should not be a surprise.
For German workers, the current prosperity has come at a price. Beginning in 2003, then-chancellor Gerhard Schröder pushed through a massive “Agenda 2010” reform programme that successfully peeled back the German welfare state (among other things, unemployment benefits were pared to encourage work), relaxed stultifying regulatory practices and created a “grand bargain” with workers.
That complex labour agreement traded lower wage demands for greater job security, achieved in part through “short work”, under which lay-offs were avoided by workers reducing their hours. Government subsidies made up part – but not all – of the lost wages. But even for those not on short work, wages were sacrificed on the altar of competitiveness. All told, real incomes dropped by 4.5 per cent in the past decade, reports the International Labour Organisation. So Germany has been selling more and keeping its citizens employed without the rising standard of living that capitalism provides.
In that context, the opposition of rank-and-file Germans to the bail-outs should not be surprising. Opinion polls regularly show Germans more strongly against helping Greece than the French or Italians. To accommodate that sentiment, Ms Merkel has stood fast on a second, less controversial bail-out requirement: that Greece intensify its efforts at austerity. Meanwhile, in private conversation, most German businessmen argue for a pragmatic emphasis on safeguarding the euro. Some even back transfer payments to ease crushing Greek debt loads. That shouldn’t be surprising either, given the joyride that German exporters have received from the currency, whose value is held down by the poor performance of weaker members. A dissolution of the eurozone would leave German exporters confronted with a far more expensive currency and a less competitive position.
With the euro intact and its members lashed at the hip to Germany, the prospects for Germany’s economy glisten. Over the past decade, German competitiveness (as measured by unit labour costs) has improved by 20 per cent while that of weaker European countries has remained flat. That allows German companies not only to out-compete other eurozone countries in world markets; it also provides German exporters with an advantage when selling into other European markets, where 60 per cent of German exports go.
Like other developed nations, Germany faces tough competition from China and its smaller brethren. But apart from its sensible economic policies, the country benefits from the formidable positioning of its manufacturing sector. It benefits as well from a more intangible factor: underlying discipline and drive for success. With that behind her, Ms Merkel’s influence over eurozone policies will continue to be greater than headline writers sometimes like to acknowledge.