It is said that a picture is worth a thousand words and an economist would probably agree that a chart has similar value. And if one chart can make the claim that Germany has been the single country in the Eurozone to most benefit from the common currency, then this is it: the current account balances of all Eurozone states over the past two decades. The implications of this chart are staggering. Since the Euro was adopted in the year 1999, Germany’s current account balance (which basically sums up the balances of trade in goods and services, as well as income and transfers) has ballooned from a mild deficit into a colossal surplus – in absolute terms it is now the second largest surplus in the world, only behind China’s. German policymakers will not stop boasting that the country’s surplus is actually a reflection of its competitiveness, itself a consequence of the efficiency of its export-based manufacturing base, as well as in the self-sacrifice of the German labor force who accepted a decade of stagnant real wages and consumption in order to stay competitive. This is partly true. Yet in the last decade before adopting the Euro, Germany was actually running a deficit. Looking at the other side of the line is equally interesting, for those countries now running massive deficits were actually doing quite well during the 1990s: Italy and France all had surpluses and Spain’s deficits were negligible. Is this all just one giant coincidence or did the Euro have a fundamental role in widening the imbalances of the Eurozone to critical proportions?
To answer that question, it’s important to recall the ways in which unproductive economies (mainly the southern European periphery), stayed competitive in the bygone days of national currencies: by devaluation. The constant debasement of their currencies would offset the productivity differences with their more efficient trading partners (such as Germany), and also offset the differentials in inflation rates which worked against them (a country with higher inflation sees its currency strengthen in real terms to its partners). By keeping their currencies weak, they kept their exports strong, the flip side being that little effort was made to address the structural issues behind their lack of competitiveness since there was such an easy way out of the trap. But the Euro changed all this. By having the same currency as their main trading partners, the easy route of instant competitiveness disappeared. This was exactly what the Germans wanted, for according to Germanic logic such limits would naturally push these countries into “turning German”, i.e. becoming competitive the right way, through increased productivity. The Eurozone would therefore turn into a hyper-competitive economic giant to rival, if not surpass, the United States which since the 1980s had widened the productivity gap with its trans-Atlantic rivals. Continue reading