To listen to some German businessmen singing the praises of the euro, you could be forgiven for thinking that life must have been hell beforehand. In fact, it was just the opposite. It was under the deutschemark that Germany achieved its “economic miracle”. True, there was a persistent tendency for the deutschemark to rise. But Germany still tended to run a current account surplus, albeit smaller than today – less than 1pc of GDP, on average, between 1970 and 1998. Meanwhile, consumer spending grew by 2.5pc per annum.
It was the same Germans then as now. They were well trained, good at engineering – and good at keeping costs down. The difference is that the rising deutschemark prevented these admirable qualities from resulting in a massive trade surplus – and ensured that German workers got a good deal of the spoils.
What’s more, the flipside of the rising currency for Germany was a tendency for those countries which are now peripheral euro members to undergo periodic bouts of currency weakness. They were the same then as now – rather bad at keeping costs down and not as successful as the Germans at manufacturing. But their weak currencies kept them in the game and ensured that they enjoyed decent growth of exports as well as consumption. The result was that they had something with which to pay for imports from Germany.
If, one way or another, the link between Germany and the southern euro member countries is broken, for Germany this would not be a trip into the unknown so much as a return to the days of the deutschemark. By reducing the domestic price of exports and imports, a stronger currency would transfer income from producers to consumers. The result would be increased consumption….
I know that devaluation is not a magic cure. It won’t cure fundamental structural ills or transform your country overnight into a brilliant manufacturer. But what has gone wrong between Germany and the peripheral members of the eurozone is not a “real” phenomenon of this sort. Contrary to much German propaganda, Germany’s success in keeping down unit labour costs is not due to rapid productivity growth. In fact, during the euro period its productivity growth has been rather low – lower than Greece’s.
Rather, its success has been due to tight control of wages. In other words, what Germany has done relative to its trading partners is to stage an internal devaluation. In the end, though, this will have achieved little for Germany because a large chunk of the customer base will not be able to pay.
To operate a successful monetary union, Germany must merge only with countries which are able to keep their costs in step with hers. That is not the position in the eurozone today.