This is a very interesting academic paper which suggests that Germany efficiency in driving down wages may be responsible for the Euro crisis. What this did was increase German competitiveness, enabling Germany to be a net exporter, i.e. run a (very) large current account surplus.
Having such a large net exporter within the Eurozone creates havoc because it requires other countries to be net importers, i.e. run current-account deficits. Now, it is a simple accounting fact that countries that run current account deficits must have public sector and/or private sector deficits. In other words either public sector and/or private borrowing must increase. In Greece and Italy it was primarily public sector borrowing. In Spain and Ireland it was private sector borrowing.
The point to understand is that this is a zero-sum game. Germany can only be a net exporter within the Eurozone if other countries are net importers. Germans can only be frugal if other countries are not frugal.
Another way of looking at it is to say the Germans could only keep their public sector and private sector borrowing as low as it has been by running a large current account surplus and forcing other countries to do the opposite.
This is like old-fashioned mercantilism under the gold standard, where countries try to be net exporters in order to get their hands on the limited supply of gold and accumulate large gold reserves. One could bankrupt other countries through exports.
Mercantilism was one of the reasons why the gold standard was eventually abandoned and replaced by fiat currencies and floating exchange rates.
This meant that mercantilism was no longer possible. With floating exchange rates if countries were net exporters their currencies would appreciate in values which would, by increasing the cost of their exports and decreasing the cost of their imports, function to reverse or rebalance this trade imbalance.
However the introduction of the Euro re-introduced the zero-sum game of mercantilism within the Eurozone. Germany could aggressively export and essentially suck Euro's out of the rest of the Eurozone, forcing these countries to go into public and private debt.
Clearly this is not sustainable, and so the Eurocrisis was inevitable. If Greece had not been in the Eurozone other countries would be affected. If Greece leaves the Eurozone, other countries will be in the firing line as long as Germany is allowed to run such a large current account surplus.
Either Germany must rebalance its economy or it should leave the Eurozone.
The EU now recognises that these trade imbalances are harmful and introduced (potentially punitive) measures to correct them through its Macroeconomic Imbalance Procedure. It is interesting that the threshold for the current account deficit is set at -4% whereas the threshold for current account surplus is set at +6%. If you think about this for a moment you will appreciate that it is outrageously unfair. It is MUCH easier and less painful to reduce a surplus than it is to reduce a deficit. All you do is encourage your population to buy more nice imported stuff by paying them higher wages or reducing taxes. And yet surpluses are given a higher threshold, meaning that most of the adjustment will need to be done by the deficit countries. So why this irrational difference? Here is a clue: Germany's surplus is 5.9%, so setting the threshold at 6 percent means Germany needs to make no adjustment, event though it would be almost painless. Instead everyone else has to subject their people to painful changes, which will be made much harder by the fact that Germany is not having to adjust. A more logical and fairer system would make the surplus threshold lower than the deficit threshold so that most of the adjustment is done by surplus countries.
Having such a large net exporter within the Eurozone creates havoc because it requires other countries to be net importers, i.e. run current-account deficits. Now, it is a simple accounting fact that countries that run current account deficits must have public sector and/or private sector deficits. In other words either public sector and/or private borrowing must increase. In Greece and Italy it was primarily public sector borrowing. In Spain and Ireland it was private sector borrowing.
The point to understand is that this is a zero-sum game. Germany can only be a net exporter within the Eurozone if other countries are net importers. Germans can only be frugal if other countries are not frugal.
Another way of looking at it is to say the Germans could only keep their public sector and private sector borrowing as low as it has been by running a large current account surplus and forcing other countries to do the opposite.
This is like old-fashioned mercantilism under the gold standard, where countries try to be net exporters in order to get their hands on the limited supply of gold and accumulate large gold reserves. One could bankrupt other countries through exports.
Mercantilism was one of the reasons why the gold standard was eventually abandoned and replaced by fiat currencies and floating exchange rates.
This meant that mercantilism was no longer possible. With floating exchange rates if countries were net exporters their currencies would appreciate in values which would, by increasing the cost of their exports and decreasing the cost of their imports, function to reverse or rebalance this trade imbalance.
However the introduction of the Euro re-introduced the zero-sum game of mercantilism within the Eurozone. Germany could aggressively export and essentially suck Euro's out of the rest of the Eurozone, forcing these countries to go into public and private debt.
Clearly this is not sustainable, and so the Eurocrisis was inevitable. If Greece had not been in the Eurozone other countries would be affected. If Greece leaves the Eurozone, other countries will be in the firing line as long as Germany is allowed to run such a large current account surplus.
Either Germany must rebalance its economy or it should leave the Eurozone.
The EU now recognises that these trade imbalances are harmful and introduced (potentially punitive) measures to correct them through its Macroeconomic Imbalance Procedure. It is interesting that the threshold for the current account deficit is set at -4% whereas the threshold for current account surplus is set at +6%. If you think about this for a moment you will appreciate that it is outrageously unfair. It is MUCH easier and less painful to reduce a surplus than it is to reduce a deficit. All you do is encourage your population to buy more nice imported stuff by paying them higher wages or reducing taxes. And yet surpluses are given a higher threshold, meaning that most of the adjustment will need to be done by the deficit countries. So why this irrational difference? Here is a clue: Germany's surplus is 5.9%, so setting the threshold at 6 percent means Germany needs to make no adjustment, event though it would be almost painless. Instead everyone else has to subject their people to painful changes, which will be made much harder by the fact that Germany is not having to adjust. A more logical and fairer system would make the surplus threshold lower than the deficit threshold so that most of the adjustment is done by surplus countries.
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