One frequently aired proposal for overcoming the ever more dangerous strains in European monetary union is to encourage Germany, which enjoys a large current account surplus, to buy more from Greece and other southern European countries struggling with large deficits. This, so the argument goes, would rectify the imbalances that are destabilising the eurozone and would demonstrate Germany’s sense of responsibility and solidarity with its 15 euro area partners.
None other than Christine Lagarde, France’s respected finance minister, put forward the idea in a Financial Times interview in March. It has support from many eminent economists with no axes to grind, as well. So it deserves to be taken seriously. But I confess I have never felt entirely comfortable with this line of thinking. How exactly do you make German companies and individuals buy products and services that they may not want? What if, fundamentally, the strategy is not in Germany’s self-interest?
An important piece of research by Gilles Moec, an economist at Deutsche Bank, suggests that such efforts at rebalancing trade flows inside the eurozone may be completely futile in the first place. Moec draws attention to the fact that, since Germany’s reunification in 1990, German trade has become increasingly less dependent on the rest of the eurozone. In 1991, what is now the euro area absorbed 51.3 per cent of total German exports. This fell to 45.1 per cent in 1998, just before the euro’s launch. It went down again to 43.7 per cent in 2007.
German trade is less and less integrated with the rest of the eurozone in terms of imports, too. Contrary to popular myth, the volume of imports of goods and services has expanded far more in Germany (48.1 per cent) than in France (39.5 per cent) since the euro’s debut in 1999. But Germany is increasingly buying its imports from countries outside the euro area.
The obvious conclusion is that German businesses see ever more promising opportunities in trading with China, other Asian countries and the US than with many of their counterparts in Europe. Why should this be so? It comes down to the cost of rebuilding eastern Germany after reunification and the loss of competitiveness that this astronomical financial burden inflicted on German companies. They regained international competitiveness partly by grinding down domestic labour costs, but also by turning to cheap non-European suppliers for their inputs.
Moreover, countries such as Greece, Italy, Portugal and Spain have each lost much competitive ground against Germany over the euro’s 11-year lifespan. It presumably makes more commercial sense to German business to source goods from sharp-witted exporters in China and elsewhere than to buy them from suppliers in southern Europe who charge prices that are too high.
As Europe’s sovereign debt crisis gathers pace, Germany is coming under ever stronger criticism for alleged selfishness and an inability to take rapid, decisive action. Some of the criticism is justified: the response to the Greek crisis was confused and painfully slow. But selfishness? I don’t think so. The plain fact is that German companies are ruthlessly focused on their objectives and are simply too strong for their counterparts in certain other European countries.
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