“Euro Zone Crisis is Germany’s Fault”

Now, this is an interesting point of view: According to Director of the Division on Globalization and Development Strategies at UNCTAD, Heiner Flassbeck, the European financial crisis are all Germany‘s fault. Here at econoTwist’s, however, we belive that the responsibility should be shared among several others – like the incompetent EU parliament and the ridiculous artificial institution called the EU Council. But Mr. Flassbeck makes some valid arguments, and it’s certainly a theory worth taking into account.

“Since the end of Bretton Woods, Germany’s economic policy has been based on two main pillars: competition of nations and monetarism. Both are irreconcilable with a monetary union.”

Heiner Flassbeck

“There is no solution to the current euro zone crisis as long as no one effectively challenges the consistency of Germany’s economic policy strategy with the logic of a monetary union. Captain Merkozy’s boat approaches the rocks at high speed,” Heiner Flassbeck writes.

This commentary is syndicated by www.eurointelligence.com:

A German End to the Euro Vision

Once upon a time European leaders believed in a step-by-step approach of European integration.

Each step would bring Europe closer to the target of closely related but still independent states.

According to this vision states would be willing to relinquish more and more of their independence, in order to gain advantages of peace, global strength through political cooperation and economic strength as a result of a big common market.

“Germany is considered by many as the role model for the rest of the union. That is the biggest mistake and the real reason why Europe is committing economic suicide instead of tackling its problem at the root.”

In this approach, the creation of a monetary union was just one of these consecutive and unavoidable steps on the path to strengthen political cooperation and to completethe common market with its indisputable advantages for all European citizens.

Unfortunately, twelve years after the start of the European Monetary Union (EMU) reality tells a different story.

EMU is in troubled water and captain Merkozy is steering the boat towards some dangerous rocks that could mark the end to a long and peaceful ride of a formerly war torn region.

Much has been said about the folly of pushing countries to cut public expenditure, increase taxes and put pressure on wages in the middle of one of the deepest recessions in modern history.

However, even the outspoken critics of the Merkozy approach rarely discuss Germany’s economic policy approach.

To the contrary, Germany is considered by many as the role model for the rest of the union. That is the biggest mistake and the real reason why Europe is committing economic suicide instead of tackling its problem at the root.

“Since the end of Bretton Woods, Germany’s economic policy has been based on two main pillars: competition of nations and monetarism. Both are irreconcilable with a monetary union.”

A monetary union is in essence a union of countries willing to harmonize their rates of inflation and to sacrifice national monetary policies.

A country like Germany, fighting for higher market shares in international markets, tries to achieve the opposite. It has to undercut the cost and price level of its main trading partners by all means.

A monetary union formed by already closely integrated countries becomes a rather closed economy and needs domestic policy instruments like monetary policy to stimulate growth time and again.

German monetarism asks for the opposite, the absence of any discretionary action of central banks and relies solely on flexibility of prices, in particular wages.

Along these lines the story of EMU’s failure is quickly told. From the very beginning of the monetary union, German politicians put enormous pressure on trade unions to help realise an increase of unit labour cost and prices that was less than in other countries.

Since member states no longer could devalue their currencies to maintain competitiveness as they had done hitherto this was a rather easy task. The effects got stronger as small annual effects accumulated over time and, after ten years, created a huge gap in competitiveness in favour of Germany.

“Germany built up huge current account surpluses and Southern Europe and France accumulated the complementary deficits.”

The ECB, in good German monetarist tradition, celebrated the achievement of the two percent inflation target, while ignoring the fact that this was built on two-sided violation of the inflation target.

Without Germany’s undershooting of the target the overshooting in Southern European countries would not have been compatible with two percent overall.

The result is disastrous for the southern European economies as they are losing permanently market shares without being able to successfully retaliate the German attack. They would need a number of years with falling wages to come back into the markets.

However, the time to do that is not available.

Falling wages mean falling domestic demand and recession especially in countries like Italy or Spain with small export shares of some 25% of GDP. The resulting depression would be politically unbearable.

“Even a political tour de force would in vain as long as Germany is blocking the indispensable short and medium term relief measures.”

Until EMU as a whole recovers strongly, deficit countries will remain in current account deficits and will not be able to reduce their budget deficits.

What would be required is direct intervention by the ECB to bring down bond yields as well as Eurobonds to bridge the time until the deficit countries’ competitiveness is restored.

These measures are blocked by the German economic policy doctrine.

There is no solution to the current euro zone crisis as long as no one effectively challenges the consistency of Germany’s economic policy strategy with the logic of a monetary union.