Berlin – Wolfgang Münchau’s opinion piece on the Greek crisis in the Financial Times, Monday, February 16 is unequi- vocal: “Athens must stand firm against Eurozone’s failed policies”. Syriza has a mandate to overturn“ a dysfunctional policy regime that has proven economically illiterate”, and must honour it. That policy regime is austerity. Austerity plays to certain stereotypes of discipline and orderliness that we think of as characteristically German. We associate it with the work ethic that facilitated the rise of capitalism, according to Max Weber. We associate it with German pietism and the thoughtful frugality of the class of lesser aristocrats which produced the Enlightenment and Romantic movements. We associate it with the iron-clad discipline that allowed the rise of Prussia and its contribution to National Socialism. And we associate it with the practice of saving that produced the German economic miracle after World War II. All these are manifestations of Deutsche Ordnung and its signature norm, austerity. The German word for debt, “Schuld” is heavily freighted, being also the name for guilt, and “Schuld” is the punishment for those who do not practice austerity.
What we should know is that although German austerity as a post-World War II policy trades off all these associations, and is carefully crafted by modern political elites to do so, it is a matter of Realpolitik and an economic strategy for competitive advantage on a grand scale, and there is nothing ethical or heroic about it. Quite the reverse. Germany took a leaf out of America’s book, which went from recycling its own surpluses (prior to the collapse of Bretton Woods in 1971, due to the fact that its appetite for war quickly devoured those surpluses), to the recycling of other peoples‘ surpluses in the form of debt (which took the form of bonds, derivatives and increasingly sophisticated and opaque financial instruments). The US has racked up a debt of over $18 trillion, or $56,569 per person and $154,000 per tax payer. Greek debt, at nearly €250 billion, is on a similar scale at €29,800 per person, and is a mountain Greece can never get out from under, as Professor Ngaire Woods, Oxford professor and consultant to the IMF suggested on the BBC this week.
How could little Greece with a population of 11 million possibly have accumulated debt on this scale? As we shall see, it is not due primarily to corruption, sloth peculiar to Mediterranean countries, or other fairy tales. It is mostly a story about the structural deficiencies and misguided policies of the Eurozone, catalyzed when the question of the solvency of the peripheral EU countries was raised in 2007-8, and exacerbated by capital flight (estimated at €4 billion a week) and the high costs of debt servicing caused by increasing interest rate spreads characterizing the crisis itself.
How this could happen on such a scale cannot be answered by any of the stories we are currently being told about inefficiency, tax evasion and corruption. Greek bureaucracy is bloated, but “feather-bedding” is a feature of European bureaucracies, and none more so than the German, where the administrative structure of Bismark’s Reich has been more or less replicated in each of the 16 Bundesländer, large and small; and where officials still fly daily from Bonn to Berlin under a sweetheart deal done when the capital moved. Corruption and tax evasion exist across the EU, varying greatly in scale, as the CDs supplied by Swiss banks to the German tax office, and the revelations last week of the tax avoidance services offered by HSBC Switzerland to oligarchs and money launderers, suggest. It is true that the Greek tax office more or less exempted the shipping business, its main business, as the UK tax office more or less exempts the City of London, its main business, on the specious grounds that their institutions will take their business elsewhere! But even these factors cannot account for possible default.
Let us look then at the unfolding of the story. In the case of Germany, given the destruction of its economy in WWII, recycling its own surpluses was not initially an issue, but debt creation was indeed a necessary part of its strategy. After the initial stimulus of the Marshall plan and debt reduction agreed by the Allies at the London conference of 1953, Germany based growth on its superiority in technical fields like engineering, automobile manufacture and the manufacture of machine tools. This strategy was always dependent on an expanding appetite for its products in a Europe which saw a higher rate of growth in terms of wages and disposable income that in Germany itself. For Germany’s focus was not wage growth so much as accumulated surpluses, which were then invested outside Germany to develop new markets. This strategy could only succeed as long as European markets (the primary destination for German goods) continued to grow, and as long as Germany itself followed a policy of austerity by depressing real wages for competitive export advantage at home. In other words, German success since WWII, and that of the Nordic countries and Austria who followed the model, was dependent on recycling the surpluses of its competitors in the form of debt.
This is what is known as “the new mercantilism”, or the war of nations played out through trade, spelled out in a series of compelling articles by Joseph Halevi, Yanis Varoufakis’s co-author and fellow economist from the University of Sydney, which the new Greek Finance Minister has posted on his blog. Halevi’s ongoing analysis, beginning with papers published at the time of Maastricht up through the Eurocrisis, focuses on European debt creation as the necessary consequence of German austerity (Halevi 1995). It blows a large hole in most of the myths surrounding the creation and development of the European Union, calling into question the German strategy of austerity as it has evolved. For this reason Varoufakis, Tsipras and Syriza cannot accept a simple debt rescheduling, and not just because they are listening to their constituencies. Varoufakis, Halevi and his Australian colleagues address institutional deficiencies of the Eurozone and its policies, the fact that it is a common market with a foreign currency, but lacks essential features of a federation, like political and fiscal union. The euro crisis was caused by policy failures laid bare when the crisis of American banks in 2007 spread to the financial sector in general. It has become incurable because the member states of the EU are intransigent in defending and maintaining these very policies.
But none of this was inevitable. Halevi and Kriesler pointed out in their article “Stagnation and Economic Conflict in Europe” (2004) that the original European Coal and Steel Community (SCEC) set up in 1952, a blueprint for the common market was a brilliant invention, mainly promoted by the US, but built on a steel cartel set up among European countries in the 1930s to protect their companies from price wars following the Great Depression. Its “novelty was not just the coordinated protection of monopolistic interests” but “a strategy for oligopolistic growth”, coal and steel being the motors of industrialization at the time. The US and its network of multinationals set up across Europe in the 50s and 60s treated Europe as a common market, helping to bring that very phenomenon into being. Moreover, the SCEC had at its disposal what its successor, the EU, lacks, an international clearing house for the recycling of surpluses of the sort Keynes envisioned for Bretton Woods. The European Payments Union (EPU), set up by the US in 1949 to receive the counterpart funds of the Marshall Plan, worked both to smooth out trade imbalances between the member states and to foster growth: “countries in surplus – usually Germany – would deposit their surpluses in the EPU, which would quickly recycle them into commercial credits”. This solved the balance of payments problem for which there is no solution in the current structure of the Eurozone, one of the direct causes of the growing asymmetry between debtor and creditor EU countries that is epitomized by the Greek crisis.
This systemic imbalance has worked itself out only over time. The rise of German industrial power was in fact not exactly meteoric. By the end of the 1970s Italy had the highest growth rate in Europe and a strong export surplus in balance with Germany; while in France, fuelled by the demand created by wage increases following 1968, Pompidou embarked on a huge infrastructural development project. Two unanticipated events are the deep-background causes of the current Eurozone crisis. First, German Reunification, which caused Germany to deplete its surpluses by the reconstruction of the former East and embark on an aggressive growth policy under the Schröder government based on depressing real wages; and second, the US banking crisis of 2007-8, which caused a liquidity crisis.
Jan Toporowski, political economist at SOAS, in “Not a Very Greek Tragedy” (2010), already noted that if the crisis had not broken out in Greece it would have broken out elsewhere, and that Greece was being blamed for the defective institutional structure and mistaken policies of the Eurozone in general. The exponential growth of Greek debt was predictable and predictions have been accurate. In 2009 Greece’s government indebtedness relative to national income was not much higher than in Scandinavia, Germany, Austria, Benelux and France (e.g., in the Netherlands at 99% of GDP compared with Greece’s 108%). Under the current IMF programme the debt/GDP ratio of Greece was predicted to rise to 145% by the end of 2011 (still below Japan’s at 192%). Taken together with “fiscal austerity, civil disorder and reduced business investment”, Greek GDP was projected to fall by 12% by the end of 2011, which would bring the government debt to GDP ratio up to 155% (it now stands at 177%). But only 11% of the €240 billion bail-out so far disbursed has gone to the Greek government, the rest going to private investors including German banks. It is therefore logically impossible to reduce the Greek ratio of debt to GDP by further cutting expenditure.
Short term solutions to the debt crisis are hard to find, especially given the different rhetorics coming out of Germany and Greece. But the long term solution is obvious, and that is that the Germans should ease up on austerity and spend more at home. The European Central Bank’s first Household Finance and Consumption Survey (HFCS) for the Eurozone of April 2013 reported Germany with the lowest median household net wealth of the 15 euro area members for which data is available, at just €51,400, less than half the Eurozone average median household net wealth at €109,200 and several multiples below many of the Mediterranean countries that are its debtors. The single greatest family asset is a family home, and the HFCS survey shows Germany with the lowest home ownership ratio at 44%, dropping to 31% in the lower 60 percent of the income scale, whereas in many southern Eurozone countries, the same rate is above 70 percent. The flip-side of low home ownership is hypersensitivity to “headline inflation”, given that rents feature large in any customer price index (CPI) basket. This has political implications because lower middle-income swing voters are likely to be renters; and centre-left and leftist voters are more likely to be renters than the centre-right, home-ownership being higher among the wealthy and in rural areas (dropping to 37% in the former East). This means that German politicians (and central bankers in Frankfurt who need their political support) are forced to minimize headline inflation and austerity is their path!
There are great hazards to austerity as a strategy for Germany itself, because the decline of real wages, hastened by wage-cuts and “kurzer Arbeit” policies introduced under the Schröder government, mean that pensions are now so low they will barely cover rent. In 20 years more Germans are estimated to go on pension than graduate from high school and one can only guess what a tax burden workers will face. The hazard is increased by the internationalization of the property market in cities like Berlin, which most working Germans cannot afford, but where Eurosceptic foreigners, especially Italians, French and Greeks, now park their money, as they do in London and New York. They do not intend to live there, but at 5% they get a higher return on rents than from a bank, with future anticipated capital gains. “What goes around comes around” we say. If austerity is not a virtue for others it is not a virtue for Germany either!
The author: Patricia Springborg (D. Phil. Oxon) was foundation “professore ordinario” in Political Science at the Free University of Bozen from 2007 to 2013. She previously held a personal chair in Political Theory in the Economics Faculty at the University of Sydney. Since her retirement in November 2013 she is guest professor at the Centre for British Studies of the Humboldt University in Berlin.