The latest bestseller by German economist Thilo Sarrazin, a former member of the Bundesbank executive board, is a rambling critique of the eurozone. His book Deutschland braucht den Euro nicht (Germany does not need the euro) tells you everything you might want to know about why the eurozone is collapsing.
The countries that formed the eurozone did not show the same monetary restraints or the same willingness to keep state expenditures within 60% of their annual gross national product, as was the practice in Sarrazin’s homeland. Given these circumstances, the only way that the eurozone would have worked is if all its members were integrated into a political as well as monetary union.
Since this did not happen, perhaps contrary to the present German government’s wishes, the signatories of 1992’s Maastricht Treaty gave their countrymen a deadly combination. Sovereign states were free to do with the euro what they wanted without having to submit to enforced monetary discipline. This freedom included raising state and private loans at low interest rates thanks to an originally solid currency.
This disastrous monetary union’s worst victims were the “south lands”: Spain, Portugal, Italy, and most egregiously Greece, which reaped disaster with the transition to a unitary currency. All of these countries depended on low production costs in their own currencies to maintain and expand exports. But once they began doing business in the same currency as their northern neighbors, they were at a disadvantage. As production costs have risen, poorer or less efficient countries have shown an increasing imbalance of trade in favor of their richer currency partners.
Sarrazin discusses the partial truth, that Germany benefited enormously from the declining balance of trade among the poorer members of the Eurozone. He show that the favorable effects for Germany of this growing imbalance of trade were particularly evident from 2005 to 2009. Nonetheless, in the same time period German foreign trade became increasingly dependent on countries outside the Eurozone, so that the effects of the imblance with the South lands became less and less significant for German commerce. Moreover, the growth of the German economy after the monetary conversion (except during the year 2009) was more sluggish than it had generally been under the D-Mark; and it was far less impressive than the growth rate in England, Sweden, Switzerland and other Northern European countries that resisted the siren call of a unitary currency.
Almost all the southern states have gone into debt as they have taken advantage of what were initially low-interest loans in a onetime stable currency. Sarrazin argues that if these countries returned to their national currencies, they might be able to reduce their trade imbalance by selling cheaply on the international market. As a further advantage, they would be able to make a dent in their mountain of internal debts by paying off domestic creditors in an indigenous currency. Trying to improve their competitiveness with the euro has been a disaster for the eurozone’s less economically disciplined members.
According to Sarrazin, his initial willingness to go along with the eurozone stemmed from the fact that at least on paper it appeared to be as sound as the Bundesbank. Like the German central bank, the European Central Bank, which would help manage the monetary union under Maastricht, was forbidden to provide loans to governments to pay for their debts. The bank could, however, make money available to private ventures if they met certain standards. All member states were committed to keeping government costs within an annual growth rate of 2% and to avoid carrying a national debt exceeding 60%. The US carries a huge public debt, but the US has had little trouble thus far selling its bonds overseas, most notably to the Chinese, because of the prestige and power associated with our country.
This is not the case with Greece, which runs up increasing annual government debt. The Greek case may be the straw that is breaking the camel’s back. For unlike the debts owed by another country with a declining economy—namely Spain, which is feeling a real-estate bubble’s effects—Greece is saddled with growing public debt. The loans it has received from the European Central Bank in violation of the established rules have made matters worse. The Greek government has taken gigantic loans in billions of euros (much of which has come from Merkel’s government) but has adamantly refused to submit to the fiscal discipline the Central Bank has tried to impose.
Sarrazin does not call for the eurozone’s immediate dissolution, although he says he would be delighted if his country could return to the Deutsche Mark, which he celebrates as perhaps postwar Germany’s greatest economic achievement. He also favors pushing the weak sisters out of the eurozone as fast as circumstances permit. His ideal partner for a monetary union is Estonia, a Baltic country with slightly over a million people which has flourished by adhering to the Maastricht rules. Sarrazin is not sufficiently bothered by PC to avoid bringing up the cultural habits that have allowed Estonia and other Baltic states to prosper after decades of grim Soviet oppression.
The Atlantic says Sarrazin is trying to divert attention from German guilt for Nazi crimes by complaining about his government being “blackmailed” into ponying up bad loans. Having read the entire work, I can find only two and a half sentences that bear any relation to The Atlantic’s wild charge: one where Sarrazin speaks about Merkel’s feeling blackmailed, and another passage suggesting that the German Greens have no desire to let their countrymen run their own affairs.
There isn’t the slightest trace of German patriotic feeling in Sarrazin’s work. The author is a technocrat who spent most of his career in a leftist party and who would not be opposed to seeing Germany disappear into a properly run European administration.
Sarrazin clearly notices how Germany’s preoccupation with overcoming the past has pushed it toward questionable economic decisions. Meanwhile the British media’s attempts to embarrass the Germans into making further bad loans are despicable. Although the British wisely avoided joining the eurozone, their journalists and leaders are trying to push Germany into “bailing out” Greece once again. The Economist and its devotees may believe this will help British trade and that the Germans owe them something because they benefited immensely by abandoning the Deutsche Mark (a contention that Sarrazin proves is not true). We also have the spectacle of the German Chancellor and Finance Minister trying to show the world they’re “good Germans” by throwing good money after bad. But such tactics merely delay the inevitable. In this case what’s inevitable is for the delinquent nations to declare bankruptcy and then return to their national currencies.