The Myth of Germany’s Gain

Gunnar Beck argues that Germany has suffered immensely because of the euro and supporting failing European economies like Greece is against its self-interest.

William Rees-Mogg wrote in the venerable London publication, The Times on June 8 that he could “not see how German policy on the single currency can be defended.  They enjoyed the restaurant meal but they do not want to pay the bill.  Now the bill has been left lying on the table.”  With this quote (those with an online subscription to The Times can read the full article here), the former editor of The Times articulated a familiar view.  Leaving aside Rees-Mogg’s thinly disguised anti-German sentiment and blatantly fallacious assertions that he does not back up with evidence, the idea behind his article is simple: Germany has been the principal beneficiary of the euro.  For this reason Germany ought to show solidarity with those euro zone members in crisis.  In the long run, German generosity could put the euro zone back on its feet, and Germany would be again the main beneficiary.  Moral duty and enlightened self-interest thus both point in the same direction: a German bail-out underwriting ever larger rescue funds and communal government debt instruments, so-called Eurobonds, and the sooner the better.

Many hold that Germany has been the winner of the euro, almost always resting their case on Germany’s export surpluses.  Thoughtful proponents of this view make their argument far more rigorously than Rees-Mogg and claim that the euro created stability, eliminated exchange rate risks, appreciated less than the deutschmark would have, and thus aided German exports.

But has the euro benefited Germany more than other countries?

Between 1998 – the year in which the European Monetary Union was effectively introduced (although euro currencies and bills were not introduced until 2002) – and 2011, Germany’s total exports rose from €488bn to €1.06tr, an increase of 117%.  Most of this increase, however, consisted of exports to countries outside the euro zone.  German exports rose by only 89% to euro zone members, by 116% to the non-euro zone EU, and by 154%, to the rest of the world.  In 1998, the euro zone accounted for 45% of all German exports; by 2011 that share had declined to 39%.  These trends are continuing.  The euro zone remains very important to Germany’s export trade, but it is hardly the motor of growth.

It might be argued that the euro was more important in preventing price appreciation for German exports outside the euro zone than in promoting trade within the euro zone, but the validity of this assertion is difficult to assess.  Until recently, the euro remained strong against the US dollar, which remains, by far, the most important currency in international trade.  Thus, it is not clear whether, until very recently, the deutschmark would have performed much more strongly than the euro.  Further, demand elasticity for many German exports is not nearly as much a function of price as is often assumed.  Germany’s exports grew particularly strongly to the non-European economies with the strongest growth and in those industries that are Germany’s particular strengths.   Finally, Sweden, which is outside the euro zone and thus did not benefit from currency stability within and alleged low price exports to other markets, recorded export growth which, as a percentage of GDP, significantly surpassed the increase in German exports.  Sweden also outperformed Germany by a big margin in almost every other important economic indicator.

Between 1995 and 2008, Germany had a markedly higher savings rate than the US, France, Italy, or the euro zone as a whole.  However, by far the largest share of German savings flowed to other countries, instead of being invested at home.  On average, from 1995 to 2008, 76% of aggregate German savings (private, governmental and corporate) were invested abroad, while only 24% were invested in the domestic economy.  As Hans-Werner Sinn of the Ifo Institute in Munich has demonstrated, Germany bled capital in the years before the euro crisis – a capital which fuelled not just the economies of Europe’s south-western rim, but also the Anglo-Saxon countries and France. This blood transfusion contributed to an unprecedented economic boom in the southern euro zone, a boom that spread from real estate markets to the general economy. Germany saved more than most, yet she exhibited the lowest net investment rate of all OECD countries, together with the second-lowest growth rate among all European countries.  This is not the performance of a euro-winner.  Rather, Germany was the sick man of Europe.

Between 1995 – the year when the details for monetary union were finalised and the single currency effectively launched – and 2011, German growth has been significantly below average compared to the EU and the euro zone.  It might be objected that, in the mid-1990’s, Germany was experiencing the immediate and most severe after-shocks of reunification.  However, growth was also below the European/EU average for the period 1998 - 2011: Germany grew at an average annual rate of 1.4%, compared to 1.7% for France, 2% for the Netherlands and 1.6% for the euro zone as a whole.  The performance of the German economy seems even less impressive in the wider European and transatlantic context: during the reference period Sweden grew by 2.8%, Britain by 2.1%, and the EU as whole by 1.8%.  Germany also lagged significantly behind the US, which grew at an annualised rate of 2.2%.  Over the period from 1998 to 2011, among the industrialized countries of the world only Japan, Italy, Portugal and Greece performed worse than Germany.

Germany’s relative economic performance within the euro zone only began to improve in 2006, when the German economy proved more resilient than many euro zone economies as a result of structural reforms, better management of public finances, and her strength in particular sectors for which world-wide demand was riding high.  Nonetheless, Germany’s annual growth rate between 2006 and 2011 remained below that of a number of other EU member states, most notably Sweden and Austria, and was broadly in line with the Netherlands, Finland and the US.

The recent upturn in Germany’s economic performance is also reflected in a fall in unemployment.  During the first decade of the euro, German unemployment tended to be higher, at times markedly higher, than the euro zone average, let alone for the EU as whole.  It then began to decline to levels well below the euro zone average, although it is rarely noted that it remains significantly higher than the unemployment rate of many countries inside and outside the euro zone, including Austria, the Netherlands, Switzerland and Japan.  It must similarly not be forgotten that Germany has no minimum wage, that there are many very poorly paid jobs, notably in Eastern Germany, and that many immigrants and asylum seekers and their families would not be registered as unemployed although they will always depend on benefits.  Membership in the euro zone also does not affect intra-EU free movement or international immigration and asylum law and thus has had no effect in alleviating Germany’s failure to attract high-skilled foreign migrants.  Finally, German wages and living standards did not rise for a decade and a half from the mid-1990’s, in sharp contrast with southern Europe, Britain, and indeed most of the world except Japan.

Perhaps most importantly of all, Germany’s public debt – at 82% of GDP –  is higher than that of most euro zone countries, although it is slightly lower than France’s debt and significantly lower than that of most PIIGS (Portugal, Italy, Ireland, Greece and Spain) countries except for Spain.  However, except for small adjustments, Germany’s guarantees and loans to governments and banks in the euro zone have not been counted as losses. Similarly, no account has been taken of Germany’s potential losses and liabilities, which are likely to result from the ECB’s purchases of bad government debt and €1bn long-term loans to private banks, and of the poor odds of Germany recovering most or all of the more than £350bn the credits Bundesbank is currently owed by other central banks in terms of Target2, an interbank payment system for the real-time processing of cross-border transfers throughout the European Union.  According to Professor Sinn, Germany’s total exposure currently amounts to over 700bn euros or about one third of Germany’s total public debt of around 2.09tr euros.  In a recent New York Times op-ed, he makes the case that Greece has been given the equivalent of 115 Marshall Plans in GDP terms and yet the situation has not improved. If and when German losses have to be realised, Germany’s aggregate public debt could quickly approach Portuguese or Italian levels and rise to over 110% of GDP.

The Verdict

In conclusion the euro has bled Germany of capital. Until 2008, the euro fuelled growth in southern Europe and, till then, Germany performed worse than any other country in the euro zone and the EU.  From 2008, Germany began to perform better than southern Europe and even France, but, over the last fifteen year period, Germany has been one of the worst performing economies in northern and central Europe.  Germany has been the loser, not the winner of the euro. 

Since 2006, Germany has benefited, relatively, from non-European demand for German capital goods and cars, and moderately rising internal demand.  These benefits, however, are precarious, and will quickly be eroded and reversed by escalating transfer payments to the PIIGS countries, with potentially dramatic knock-on effects for public finances, and internal and external demand.  Germany’s recent relative gains will soon be forgotten when the country is asked to pay the bill for the meal it never had – a bill it cannot afford, which Germans never incurred, and which the German government would be insane to pay.
The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.

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