Is the Eurozone a German Empire?
by Benjamin Studebaker
Given the title, it’s necessary to make a clarification. I support a federal Europe. It’s the only way Europe can regain its ability to make foreign and economic policy independently from the United States, and regain its position as a leading region. However, after running some numbers today, I no longer believe in the Euro as presently constituted. Here’s why.
It’s easy to forget that the Eurozone has only been together since 1999. We like to imagine that the European countries, particularly in the west, are all permanently allies these days. Yet it was only a couple decades ago that the wall fell, that Germany was reunited, and underneath European cooperation lies a balance of power that sets the rules. Only these days, power in Europe does not come from military force (of which most of the European countries possess extraordinarily little), it comes from economic girth. And who is the fattest slug?
Germany. By far:
The European Central Bank, the European equivalent of the Federal Reserve, the determiner of its monetary policy, is head quartered in Germany. The Federal Reserve has a dual mandate–it must both keep unemployment and inflation down. However, the ECB only has one stated objective–inflation control. Why does the ECB not care about unemployment? Because the Germans remember hyperinflation in the early twenties, and fear it far more than they fear unemployment.
Now, since the recession in 2008, unemployment levels in the Eurozone as a whole have continued to climb:
In some countries, like Spain, unemployment vastly exceeds these figures:
However, despite this, it took the ECB until last year to drop its interest rate to anywhere near its minimum level:
Why? Well, if you really dig into the problem in Europe, it’s a matter of competitiveness. Wages in countries like Greece, Italy, Portugal, and Spain have climbed too high relative to wages in say, Germany. This makes goods made in the GIPS too expensive to compete with goods made in Germany, and it has gradually turned these countries, the into net importers, predominately of German exports, as Paul Krugman illustrated:
We see that Germany runs a large surplus, and the GIPS a steep deficit. Closing this gap requires a return to competitiveness in the GIPS, and there are three ways to pursue this:
- Force wages to fall in the GIPS–“internal devaluation”–by strangling economic growth in those countries with austerity. This is current policy.
- Raise wages in Germany by creating inflation through German stimulus spending and low interest rates.
- Abandon the Euro and adopt new currencies of lower value.
If Germany takes up policy #2, the amount that the GIPS would have to cut and the duration of those cuts would be reduced. For their part, the GIPS to this point have gone full throttle at policy #1. No one is currently willing to consider #3. Here you can see Spain’s effort to strangle its own people into accepting lower wages:
And slowly but surely, Spain’s wages are coming down:
But is Germany helping? Where’s that German inflation?
Germany continues to run an inflation rate below 2%, nowhere near what would be necessary to significantly reduce the pain in say, Spain. This is forcing Spain to cut much deeper and for much longer than it otherwise would. Why won’t Germany stimulate?
Well, Germany’s unemployment rate isn’t so bad:
So the result is, Germany doesn’t really care about unemployment in Spain. Germany cares much more about price stability in Germany. And why wouldn’t it? It’s Germany, it’s not Spain. It cares about German interests, not Spanish interests.
The trouble is, European policy is supposed to be about European interests, not German or Spanish interests exclusively. By denying the ECB a dual mandate and by refusing to change spending policy, Germany makes conditions worse in Europe as a whole, and slows down the European recovery.
One could make the argument to Germany that a strong GIPS makes for a stronger Germany in the long-run, but the Germans aren’t buying it. They profited massively from the lack of competitiveness in the GIPS over the last decade. Germany enjoys that current account surplus every bit as much as the GIPS hate their deficits. The trouble is that it doesn’t help Europe as a whole for some countries inside it to economically benefit at the expense of others.
And it’s not just Germany. Germany has friends in the Eurozone, the “core” nations, who have, to this point, consistently supported it. The core nations are essentially all of the French, German, or Dutch-speaking countries in the Eurozone, and together, they command a permanent majority of the power and influence within it, far more than is possessed by the “periphery”, which includes the GIPS:
This means that the core gets a European policy that suits it and it exclusively, at the expense of the periphery.
Political theorist Ronald Dworkin has many ideas I don’t agree with, but one on which we agree is his belief that no government or regime is just unless it shows equal concern for the interests of all of its citizens. Spanish citizens are not German citizens, and Germany is not obliged to care about them. But Spanish citizens are Europeans, and if we are going to have a European government, it must care about Spaniards just as much as it cares about Germans.
The ECB’s board has 4 members from the core to only 2 from the periphery. The ECB’s charter continues to privilege German concerns about inflation over periphery concerns about unemployment. There remains no common fiscal policy, no federal government to carry out stimulus in place of the German government. Over the last 10 years, Germany has taken advantage of the periphery nations, feeding its growth off of their lack of competitiveness. This is not a cooperative system in which all the nations are working together for shared ends. This is a system in which a hegemon, along with a few of its friends in the core, are systematically feeding off of their neighbours, having bamboozled them into believing it is in their own interest to participate.
This is not to blame Germany–any country, in Germany’s position of power, would act in the way that Germany is acting. The fault is the structure of the EU and the Eurozone. Europeans refuse to federalise in order to preserve their sovereignty, but in refusing to federalise, they deny themselves an impartial federal arbitrator and instead commit themselves to submitting to Germany. It is as if there were no federal US government, so California dictated how all the other states would operate. This is why the United States has a national government, and it’s why it has a senate that does not privilege any of the states, great or small, in representation. The Europeans have two options:
- Dissolve the Euro and return to independent currencies of lower value, eliminating the competitiveness gap (option #3 from before).
- Commit to a federal United States of Europe with an independent, sovereign regional government to design policy with the interests of all Europeans in mind.
Sooner or later, Europe will have to choose.
Benjamin Studebaker 
I have to say, I believe Europe is likely to veer towards the United States of Europe option. In essence, they have already begun travelling in that direction with the Lisbon Treaty.
Not sure it will be popular with all nations though. Great Britain in particular is likely to have serious problems with accepting it.
You’re certainly right about that. A lot of European countries seem unable to recognise that the alternative to federalism is not policy independence, it’s German hegemony. Since German reunification, that has been the only alternative.
Perhaps the biggest question is how they will get to the end goal of a USE type set-up.
Will we some countries opting in, and other opting out like we saw with the Euro? That would only add to the confusion…
I would anticipate that some countries would attempt an opt-out, but it would not be in their interest to do so–any European country that did not join a USE would inevitably be dominated by it, as the Latin American countries are dominated by the USA.
I think it is a big mistake to demand that Germany should increase wages and inflation in order to strenghten other European states that are currently in trouble. The solution of this problem should not be making Germany weaker and less competitive but making the struggling countries more competitive and stronger. In economics there is a theory of raising rival’s cost and this is what is currently tried with Germany.
Germany has undertaken quite painful reforms in the last decade liberalising its labour market, modernizing the social benefit system, etc. while some other countries increased their wages, enjoyed making debts at low interest rates and feeded their overgrowing bureaucracy.
And now Germany is going to be blamed for all of this because they went a different way? That is absurd.
Moreover it is a myth that the relativlely good German figures are just the counterparty and the result of the bad economic figures in the GIPS. The importance of the Eurozone for German exports has permanently declined in the last 20 years from 51.6% in 1991 and 43.8% in 2007 to 37,5% in 2012. The big increases we have seen in German exports in the recent years do not go to the Eurozone but to China and other emerging markets.
I know that the Theory of Optimal Currency Areas claims that there needs to be a certain degree of convergency within a monetary union. But if this means that Germany has to abandon the characteristics which made it successful it might be better to go to back to the north European monetary union we effectively had before the Euro was introduced (when the currencies of Austria, Denmark, Finland and the Netherlands were de facto pegged to the Deutsche Mark).
I concede that Germany has done much to make itself competitive over the last decade, but it has also enabled and encouraged the periphery to become uncompetitive through the actions of its banks (together with other banks in the core nations and in the UK). It was core banks that over-inflated the periphery economies and treated periphery debt as if it was equivalent to core debt. This enabled the periphery to falsely believe its growth was healthy, rather than inflation-induced.
The decline in the percentage of exports going to the Eurozone from 2007 to 2012 is in part produced by the collapse of the periphery economies. These markets no longer have the demand to support the imports from Germany that they were able to support in 2007.
I’m not blaming Germany–its behaviour has been rational and in its own interest, but Europe as a whole is better off with a strong periphery. Just as US policy must be made in the collective interests of all the states, even if isolated states are made to sacrifice for the common good, so must the European core states sacrifice if Europe as a whole is to prosper. Otherwise, European policy is serving Germany rather than Europe.
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