Europe Expects Germany to Provide Easy Answers to Difficult Questions

The Euro crisis has brought trouble for many counties including Germany. It has brought the country in a situation it never intended to be in i.e. being considered the sole leader of the 27 nation block. 20^th century plagued Europe with devastating wars and conflicts and this forced France and Germany to join hands to promote European integration and as a part of the whole scheme the Euro was born. Media dutifully serving its role hailed the collaboration as Franco-German excel responsible for driving Europe to prosperity. Germany was comfortable in the collaboration but recently things have started to change. France has somehow lagged behind and Germany has been bestowed with titles like “European Powerhouse”, “Engine of Growth”, “Champion of High End Manufacturing” and many more. These titles were coined after the 2008 crisis and to the discomfort of the Germans have brought unnecessary attention. Further, Germany finds itself in a position where delivering easy answers to difficult questions is expected and demanded.

  
The formation of the Euro zone was pitched as necessary for small (in size) European nations to counter big economic zones like the US and China. Euro was supposed to reduce trade barriers and facilitate a big market place envisioned to serve everybody’s good. Invariably it has tuned out that everybody’s good showed various colours. With the hindsight benefit it becomes clear that some of the countries and their institutions enjoyed the cheap capital sloshing around in the market for purposes not necessarily leading to productivity and economic gains. However, in this entire media frenzy about the crisis, certain things are seldom reported. 

•   The crisis didn’t originate in Europe it was a result of influential Americans institutions collapsing due to unsustainable business practices and debt levels. This didn’t change American approach as they have chosen to continue living on cheap capital and have left on destiny to choose a generation to pay all the incurred debt. The “15-TRillion-Debt-Can” has been kicked down a bumpy road to stumble in an unknown pit, and is being prayed not to be discovered.  

•  The problem is not with Euro as a currency but with certain countries (although list expanding) using   Euro as their currency.

•   The last and the most important is the fact that people/media/institutions looking for easy answers have linked the Euro (and Germany to an extent) to the plight of countries in recent news. I am not sure if the situation would have been any different had some of these countries kept their own currencies with unsustainable policies. Consider this for an example; in pre-crisis era Cypriot banks were giving up to 5% interest rates to their depositors whereas their counterparts in France and Germany hardly offer anything to their customers. Further, the same banks bought Greek government bonds in lure of attractive yields relying on a full European bailout which never happened. Any institution based in any country and operating with a currency of choice could have placed this bet and easily ended up with a catastrophic result. 

Point is if the policy makers are not committed to implementing efficient policies or long term well-being then irrespective of the currency used trouble is inevitable.  I think Euro for some has definitely brought the consequences of inefficient policies forward by at least a decade but has very limited role in originating the consequences at the first place. Recent rhetoric to blame Euro and Germany is not completely valid. In the full blown crisis after 2008 nobody can predict what the situation had been in case the common currency in Europe was not in place. The credit/asset bubble didn’t originate because of the Euro but because of wider global imbalances in the world economy. Further, it has to be kept in mind that nations without being part of a “weak monitory union” have got into troubles earlier as well (e.g. Argentina around year 2000). I don’t intend to defend the EU monitory union here but want to discuss what is going on and why Germany has to answer some tricky questions.

Europe and America have responded to the economic crisis in very different fashions. America fearing a liquidity crunch of the late 1920’s leading to great depression has continued to pump unlimited supply of dollars in form of quantitative easing sponsored by the Federal Reserve. Europe has taken the other way and has gone to adopt fiscal consolidation and strict austerity measures. This European action has been driven by the European Central Bank (ECB) based in Frankfurt. Germany owns a hefty 27% stake in the ECB so understandably has a significant clout on its policies. Germany fears hyperinflation of the 1940’s which led to the rise of Hitler and so has a very conservative approach towards money printing. Here exactly the trouble starts and with following questions arising from various quarters:  

•   Austerity being pushed by Germany is not helping to fuel any kind of growth. All the forced salary cuts, tax increases have not lead to any productivity gains simply because Euro has been able to maintain a strong value because of the unlimited amount of money being printed in US and the UK (Pound has lost its value significantly). To make the matters worse, recently Japan joined the printing party as well. Germany’s policy towards austerity shall not yield any comfort in Europe with money being printed 24/7 in other influential economies. Therefore, Germany’s solution (in the short term) is not expected to produce any benefits for nations being pushed to brink of a social collapse producing conditions to incubate right wing politicians (what Germans dread of). Recent inconclusive elections in Italy are a close example.  In a nut shell, it’s a tough road for Germany ahead. 

•   Markets inherently never differentiated significantly between a German Euro and a Greek Euro according to the message from the politicians. This became the reason for easy capital at low interest rates made available to all member states. As of today, Germany supported by other countries definitely don’t see this anymore but the vision for a big Euro block is intact with new countries being considered to be added into the Euro block. Is this policy consistent? Can this be explained?

•  Countries are increasingly becoming opinionated that Germany has reaped great economic benefits from the Euro and is using its position to force its diktat. Economists have published research that in case Germany moves out of the Euro its own currency would appreciate significantly and Germany would lose its competitive edge. Therefore, with this reason, Germany has self-interest to contribute to massive bailouts and accept a transfer of payments to different Euro zone member states. Interesting to note is that Switzerland, Canada and Australia have seen their currencies appreciate significantly in recent years but have not necessarily lost their edge (although there are repercussions) in things they produce and services they deliver. How Germany explains this to rest of the world is an interesting one actually? 

•  Germany itself has a disciplined government budget (this year deficit expected to be around 1%) but this tough requirement has become a sore medicine for the Euro states in trouble. Austerity medicine is tough for so-called peripheral nations used to big governments, good social infrastructure and national programs generating employment. It is to be noted that Germany had budget deficits in early 2000s but the money wasn’t necessarily used to finance expansive motorways and bridges, modern metro stations, unused airports and incomplete houses. How does Germany explain this is a headache actually?

Questions, opinions and frustration are rightfully brewing in different quarters. It is not difficult to find Angela Merkel with the Hitler moustache these days in newspapers and sign boards. Opinions should always be expressed but will somebody acknowledge that people like easy answers to difficult questions?