Europe tries to learn German

Germany wants the rest of Europe to follow its path of root-and-branch economic reforms. But Europeans say Berlin’s austerity demands have made such reforms politically suicidal, writes Pramit Pal Chaudhuri.The unfolding Eurozone crisis

business Updated: Apr 14, 2013 01:07 IST
Pramit Pal Chaudhuri
Pramit Pal Chaudhuri
Hindustan Times
austerity demands,hindustantimes,news

Largely excited at the idea of Borussia Dortmund possibly winning European football’s highest award, the Champions League, the Berlin minivan driver did get around to assuring that the euro was good for Germany.

“We make money selling things to other Europeans. We know this. [German Chancellor Angela] Merkel know this,” he said. “I hope she win again. We don’t need macho leader now. She is quiet type. That good.”

There is a certain philosophical acceptance among most Germans that for better or worse, in sickness and health, they are wedded to the single European currency.

In other parts of Europe, mainly south of the Alps, the line “for richer, for poorer” seem more applicable – with the former applying to Germans, the latter to the rest.

The eurozone is a marriage whose problems are from over, though it can be said they are being better managed and causing less hysteria than before.

Cyprus’s going for a second bailout of 10 billion euro just a week after everyone thought it was out of intensive care barely evinces a murmur in the rest of Europe.

Germans just shrug when the long line of other eurozone nations on the watchlist is laid out before them.

Slovenia, tucked away on the northern Adriatic shore, has a banking sector heading for insolvency, with a quarter of assets being declared by the OECD as “nonperforming.”

Then there’s Malta. Another island tax haven, its banks bulge with deposits equal to 800% of its GDP.

“Deutsche Bank’s Malta branch alone is believed to have deposits equal to 150% of the country’s GDP,” says Jacob Kierkegaard of the Peterson Institute of International Economics.

But the plight of the minnow is not what the German establishment furrows its brows over, the country spoken about with hushed tones is France.

The eurocrisis is a set of liquidity and debt problems that can, ultimately, be financed by printing or loaning enough money until the problem is over.

France is seen as reflective of a much more fundamental issue: that swathes of the world’s largest economic entity are simply unable to compete in the world.

South Europe has a similar economic profile. Unfortunately, for the Mediterraneans the easy capital access that being a euro member and the largesse of north Europe, meant a Madrid or Rome could live well and reform never. Or so they thought.

France is much more diversified economy than its southern neighbours. But its products and inputs are increasingly seen as too expensive to make a mark on the global market.

Says Christian Wagner of German Institute for International and Security Affairs, “The French are in denial about this. But Germans can tell: when they cross the border they find even milk to be absurdly expensive and all because of archaic laws designed to preserve small retailers.”

The European Commission this week warned 13 European Union countries to shape up or become the next euro-victim.

Whatever the eurozone crisis is doing, it is forcing a lot Europe to retool their economies. Rigid labour laws, entrepreneur-strangling red tape and a bloated state structure are under the knife.

Spain is arguably the furthest on the reform path. Italy, which was doing well, has literally brought the clowns to Rome.

However, that is why the Eurozone crisis is proving so hot to handle. One on side, it is a fiscal problem of governments that have built up huge mountains of debt.

On the other, it is about economies that need to make themselves lean and mean again.

The mainstream economic view would be to inflict reforms and then spend a bit of money to soothe the social pangs the first part would cause. When growth returned, there would be jobs, money and smiles all around.

But that’s where the German problem arises. The southern European states have to turn to Germany to give them the money to cover their bad debts.

But Berlin, with elections coming, has tied the dole to austerity. Cutting their government debts has driven these economies into recession — making it very difficult for these states to then also go for structural reforms as well.

It’s a double whammy that has led some, like economist Paul Krugman, to excoriate Merkel. She’s in Wolkenkuckucksheim — cloud-cuckoo land — he argues.

But Merkel knows full well that German voters would turn on her if she unconditionally handed over their savings to Cypriots and Italians.

Krugman may see bad economics. She sees good politics. Neither is in the wrong, the real issue is that Europe is a single economy, not a single polity.

So, in the euro-crisis, the politics has been painfully local while the problems are painfully continental.

Germans are not unsympathetic to what their fellow Europeans are suffering. But they point out that Germany is a success because it took its medicine earlier.

They underwent recession and joblessness when Chancellor Gerhard Schroeder injected the market into their economy over a decade ago.

Today, Germans of all kinds say Schroeder is the reason they are prospering now. That’s the lesson Germany holds out to Europe – and to France in particular.

Mind you German voters threw Schroeder out of office for all the bitter pills he fed them. Which, of course, is the other lesson that embattled leaders from Spain to Slovenia, and presumably France’s Francois Hollande, have drawn.

First Published: Apr 13, 2013 23:27 IST