In an op-ed in today's Wall Street Journal pg. A21-it is available here but only for subscribers of which I'm not one-Alan Blinder hits the nail on the head.
http://online.wsj.com/article/SB10001424052970203430404577094313707190708.html?mod=googlenews_wsj- Germany has really gotten to have its cake and eat it too here. Before the current Euro system started, Germany was the sick man of Europe, now that it is the healthy man of Europe it has revised history. Germany's whole ideology seems to be this: "we played by the rules and we are benefiting. You would too if you did. Start now."
Part of the fallacy of this is the simple fallacy of composition-if I can see the game better when I stand up, everyone ought to follow my lead. This is Germany's prescription essentially. What they always leave out of account is the fact that Germany was the first country that the fiscal rules about deficits had to be bent in order to admit it in and that in 2002 they and the French played a game of quid pro quo where each voted not to discipline the other for missing budget targets.
Right now Germany has a trade surplus while the other countries have a deficit. How exactly can they all at the same time have a surplus? Fallacy of composition. At Naked Capitalism, Yves Smith had a very good video by some high ranking official at the U.N. who was previously a German finance minister and he gives it to you straight. He says that the French were mistaken to join German against the periphery, that they should have joined the other nations against Germany-with France's stronger political clout it might have had a chance in getting the Germans to back off a little.
http://www.nakedcapitalism.com/2011/12/class-war-low-wages-and-beggar-thy-neighbor.html
It's a very interesting 15 minute speech where the ex finance minister shows that that the currency problem that is at the heart of the current EU was present prior to 1998-back then the other European countries all wanted to peg their currencies to the German mark. So for those who say go back to the old system-though an understandable sentiment-it must be kept in mind this was far from problem free.
Still he shows how his own country has practiced beggar thy neighbor wage policies that are at the heart of the German trade surplus. Simply economic math dictates that this is not simply repeatable in every Euro country.
The sick man of Europe then, has largely gotten well at the expense of its Euro trading partners. France should have sided with Greece and Italy as what Germany does to them it has done to France even if this is only becoming clear now.
However not only has Germany gotten well at the expense of its trading partners but also at the expense of German workers. The enforced austerity with the attendant social unrest and protests are due to Germany trying to force other countries to depress their wages all at once while Germany has been depressing its own wages over a period of over 10 years.
This is why the currently low German unemployment rate has come at the expense of most of the German people. This is the trouble with the debate over high minimum wage laws-thinking of San Fransisco that is set to see $10 minimum wage in January. The conservatives like Scott Sumner will argue that that wage doesn't mean much if many can't find work. While there's some truth in this there is no use in a low unemployment rate if a large swath of the jobs are at poverty level wages. Maybe a Scott Sumner is right that if we dropped the minimum wage to $3.50 tomorrow there would be many people what would be hired at that level but what good would it do for anyone who had to live off such wages?
Blinder boils the trouble in the Euro to this. The short term problem (Greece) is in theory easy, though the EU hasn't gotten it right yet-have the ECB make massive bond purchases.
The short term Greek problem is simpler that the more long term German problem. This problem is the competitive problem. "In order for a currency union to succeed, its member nations need to register approximately equal productivity growth and approximately equal wage and price inflation. While there has been something of an inflation gap-lower inflation in Germany though not gigantic, are still problematic.
Much worse even though is the productivity gap. This gap can be made up three ways:
"First, Germany can volunteer for higher inflation than its euro partners by, for example, implementing a large fiscal stimulus or ending its wage restraint. How do you say "ain't gonna happen" in German?"
"Second, the other countries can engineer German-like productivity miracles through structural reforms while Germany, relatively speaking stands still. Good luck with that. And even if it somehow happens, the timing is all wrong. Reforms take years to bear fruit while financial markets count time in seconds."
"Third, the other countries can experience deflation, meaning a prolonged decline in both wages and prices, which is incredibly difficult and painful-and generally only happens in protracted recessions. Sadly, the may be the most likely way out."
Certainly it seems to be the way Germany and ECB President Mario Draghii prefers. Certainly haven't convinceed me however tat it's the best way. Because Germany is not doing any of the sacrifice this is how things are shaping out. I really wonder what it would look like individually for a country like Greece to simply leave the Euro. As big a hit as it along with the EU would take might it not for Greece at least be preferable? How do you get worse than "incredibly difficult and painful-and generally only happens in protracted recessions?"
As Blinder puts it the structural problem is that while the Euro project is about making Europe the "United States of Europe" they are trying to fix their problems with no strong central government-they have the equivalent of the Articles of Confederation rather than the Constitution. Maybe we should call them not the United States of Europe but the Confederate States of Europe.
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