The Agenda

The Case for a German Exit from the Euro

Cameron Abadi profiles Thilo Sarrazin, a German intellectual and social-democratic politician who has stirred controversy by arguing that Muslim immigrants are incapable of assimilating into German culture and, more recently, calling for a German exit from the euro. Cameron (a friend) casts Sarrazin’s work in a harshly negative light:

Europa Braucht den Euro Nicht [Europe Doesn’t Need the Euro] also suffers from sloppy analysis, fuzzy math, and an adherence to a crude form of mercantilism. Throughout the book, there’s an implication that international economics is a zero-sum game: Sarrazin seems to be only interested in how economies are performing relative to one another, rather than whether those economies have improved in absolute terms. As evidence for his claim that Germany hasn’t profited from the euro, Sarrazin cites statistics showing that the percentage of German exports to European countries dropped over a period of 10 years. He doesn’t mention that Germany’s exports to Asia, and above all China, increased dramatically in that period.

Similarly, when Sarrazin discusses another of his central claims—that the euro has caused massive economic harm across southern Europe—among his main evidence is that France’s median per-capita income in 1999 was 15 percent higher than the European Union average and only 8 percent higher in 2010. He fails to mention that the country’s per-capita gross domestic product in that same period nonetheless improved by an annual average of 1.5 percent (better, it’s worth noting, than Germany’s 1.22 percent). Then there are the questions about the euro crisis that Sarrazin avoids completely—for instance, whether budget surpluses in the German economy helped inflate the real estate bubbles that eventually popped in Ireland and Spain.

Not having read Sarrazin’s book, I can’t speak to whether or not he makes his effectively. But the case for a German exit from the eurozone, and the case against the euro more broadly, is rock-solid for precisely the reason Cameron raises at the end of that last paragraph, as Michael Pettis, a finance professor at Peking University and author of The Great Rebalancing, explains:

To insist that the Spanish crisis is the consequence of venality, stupidity, greed, moral obtuseness and/or political short-sightedness, which has become the preferred explanation of moralizers across Europe begs the question as to why these unflattering qualities only manifested themselves after Spain joined the euro. Were the Spanish people notably more virtuous in the 20th century than in the 21st? It also begs the question as to why vice suddenly trumped virtue in every one of the countries that entered the euro with a history of relatively higher inflation, while those eastern European countries with a history of relatively higher inflation that did not join the euro managed to remain virtuous.

The European crisis, in other words, had almost nothing to do with thrifty Germans and spendthrift Spaniards. It had to do with policies aimed at boosting German employment, the secondary impact of which was to force up German national savings rates excessively. These excess savings had to be absorbed within Europe, and the subsequent imbalances were so large (because German’s savings imbalance was so large) that they led almost inevitably to the circumstances in which we are today.

For this reason the European crisis cannot be resolved except by forcing down the German savings rate. And not only must German savings rates drop, they must drop substantially, enough to give Germany a large current account deficit. This is the only way the rest of Europe can unwind the imbalances forced upon the region in a way that is least damaging to Europe as a whole. Only in this way can countries like Spain stay within the euro while bringing down unemployment.

But lower German savings don’t mean that German families should become less thrifty, only that the average German household should be allowed to retain a much larger share of what Germany produces. If Berlin were to cut consumption taxes, or cut income taxes for the lower and middle classes, or force up wages, total German consumption would rise relative to GDP and so national savings would fall – without requiring any change in the prudent behavior of German households.

To ask Spanish households to be more “German” by saving more is not only impractical in an economy with 25 percent unemployment (it is hard for unemployed workers to increase their savings), it is counterproductive. Lower Spanish consumption can only cause even higher Spanish unemployment, until eventually Spain will be forced to abandon the euro and so regain control of its ability to absorb or reject German imbalances. [Emphasis added]

It is much easier to argue that Germany has gained at the expense of peripheral Europe since the creation of the euro than it is to argue the opposite. And so Sarrazin’s moralistic critique of southern Europe is misplaced. But the upshot — than Germany ought to leave the eurozone — remains the same, not least because Germany would benefit from having stronger trading partners. One of the more exciting developments in German politics has been the rise of Alternative für Deutschland (Alternative for Germany), a centrist political movement that calls for the restoration of the deutsche mark. Though its support remains modest, it has, like Sarrazin, forced a conversation about the alternatives to a toxic economic status quo. Without such a conversation, the danger of a truly ugly political turn steadily increases.


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