It’s an awkward question but one that must be raised repeatedly. Does Germany really want the euro to survive? Was the beloved DM sacrificed for unification? The German public—like their counterparts around the world—appear to be unduly influenced by their jingoistic press, one which tends to see Germans as the much-maligned victims of a Eurozone (EZ) crisis weighing increasingly on the country’s taxpayers. Mainstream German economists in particular have reinforced this view: in early July, 172 of them published a letter in the Frankfurter Allgemeine Zeitung denouncing the recently proposed EZ banking union, a union which they see as making Germany liable for the debts of Eurozone banks amounting to three times the size of EZ public debt.
Hans-Werner Sinn, who chairs Cesifo, a powerful group of research institutes, is perhaps the best-known staunchly conservative economist who signed the above letter—see Paul Krugman on Sinn’s brand of economics. But anti-euro discourse has been spurred by social-democratic SPD members too. One is the ex-central banker, Thilo Sarazzin , whose 2012 book Europa braucht den Euro nicht (Europe doesn’t need the euro) has been a best-seller.
With a general election due in the coming year, the various partners of Social Europe Journal have valiantly endeavoured to promote a constructive dialogue on the future of the EZ, one expression of which is a number of recent articles and interviews to be found on this site. Below I examine one of these: an interview with the Oxford-based economist, Clemens Fuest. The interview is of particular interest because it represents the centre ground, the path along which we can expect German opinion to converge in future.
Fuest is in German terms a moderate. A professor at the Oxford Centre for Business Taxation, he is a member of the Academic Advisory Board of the German Federal Ministry of Finance and sits on the Academic Advisory Board of Ernst and Young AG. Fundamentally, he sees the main flaw in the design of the euro as the ‘one-size-fits-all’ interest rate which resulted in the capital flows from the centre to the periphery. These flows, far from generating productive investment, set off building booms in Spain and Ireland and the resulting busts have shattered financial market confidence. Apparently, unlike many others, he does not see the crisis as primarily driven by the German export-led growth model.
Growth in the periphery might help restore budgetary positions, he argues, but growth alone would exacerbate ‘structural problems’ (eg, bubbles, low productivity). Therefore the current ‘squeeze’ must continue and real wages must fall in periphery until ‘productivity’ (and thus market confidence) is restored. No country can ‘grow its way’ out of crisis.
Fuest is dismissive of any demand-side solution—he treats deficient aggregate demand as a symptom rather than a cause of crisis. Increasing aggregate demand in the periphery would ‘slow down structural adjustment’. He sees Ireland as the exemplar of successful structural adjustment, with [net] exports growing and access to capital markets now re-established. As to promoting and restructuring peripheral industry, he makes it clear that ‘state-led industrial strategy’ is a non-starter and that ‘the market must decide’.
As for inflation, he argues that prices must come down in the periphery; ie, ‘internal devaluation’ is the answer, and must be accompanied by service sector and labour market deregulation. In fairness, Fuest recognises that nominal wage reduction is difficult. Some inflation may be acceptable in the core countries since, if the entire burden of adjustment falls on periphery, adjustment will take a very long time.
Turning to the future finance of public expenditure in the EZ, Fuest argues that mutualising of debt (Eurobonds) is morally hazardous. In principle moral hazard could be overcome with strict oversight by Brussels and Frankfurt, but enforcing such oversight might be politically impossible to implement. In consequence, he rejects ‘mutualisation’. The future EZ is probably one in which several small countries leave while the remaining members enjoy somewhat closer union.
In short, Fuest’s middle-of-the –road position is that austerity is necessary despite resulting in five or six more years of stagnation, while slightly higher inflation in Germany will help ‘share the burden’, and greater financial regulation is desirable although not debt mutualisation.
For all his apparent moderation in contrast to economists like Hans-Werner Sinn, Clemens Fuest is very much an ordo-liberal economist. At the root of the crisis is mal-investment; managing the crisis means above all avoiding moral hazard and restoring [financial] market confidence through more austerity. Despite all evidence to the contrary, Fuest believes that internal devaluation can work through wage-cuts and supply side reform.
Ireland’s export-led recovery to which he alludes is now faltering as world-wide growth slows; even assuming Irish growth were to continue at its current rate (1.8% annualised), it would take the country several decades to return to the pre-crisis level of output. Nor can the Irish model be generalised even in the best of circumstances, since it is logically impossible for all EZ countries to run a trade surplus with each other.
If Fuest is sceptical about more ‘rules’ (aka the Stability Pact), it is because politics cannot generate market discipline. Eurobonds are out because of moral hazard— ie, the perceived high risk to Germany—but he allows that Germany can play its part by raising real wages, and thus marginally relieving the pressure of its export-led model on the rest of the EZ.
There is precious little here to suggest that the euro will be saved by the economic vision emerging from the moderate centre of German politics.