The Corner

Germany & Sweden

Veronique, as you point out, both Germany and Sweden have got quite a bit right, but it’s worth noting that both have economies with unusually large export sectors, in each case amounting to roughly half their GDP.  By contrast exports of goods and services only account for 24 percent of Greek GDP, 27 percent of Italy’s and 31 percent of Portugal’s (2010 data), meaning that the level of domestic demand is proportionately much more important for the latter three’s economic progress.

If we go back to Sweden, the roots of its current (qualified, but that’s a different discussion) success lie in a massive (twenty percent or so) devaluation in the late 1990s which (unlike some earlier Swedish devaluations) was not seen as a get-out-of-jail-free card. Also in the mix were hard-nosed state support for a broken banking sector (it didn’t come cheap for the banks), significant spending cuts, and a degree of liberalization of the economy that would have been almost unthinkable a decade earlier. All played their part in Sweden’s recovery in the years that have followed, but the boost given to the economy by a depreciated currency—an option not open to Greece so long as it sticks with the euro—was an essential part of this process.

If you look at Germany, it’s a not dissimilar story. The country‘s tougher budgetary approach (not so evident in the mid-2000s, incidentally) has been greatly assisted by the strength of its export sector. This has been boosted by the combination of improved productivity and contained labor costs and, yes, a devaluation, albeit one that was concealed within the switch to the euro. This operated in two ways. Firstly, a retained Deutschmark would almost certainly been a harder currency than the euro. Secondly the adoption of a single currency removed the ability of Germany’s competitors within the euro zone to devalue ‘against’ Germany. The immense surpluses that Germany has built up since the formation of the euro zone tell their own story, and so does the alarm with which German exporters view the possibility of its dissolution.

Angela Merkel does not have an easy job.


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