German export growth – the fastest in 20 years – gave recent cause for celebration. Nonetheless, the eurozone will not survive.
Remember the eurozone’s big crisis? The one that everyone thought had blown over?
Well, it isn’t over. Like a multi-act play, it’s simply been in a period of "intermission." And the next act is going to be much, much worse than the first. In due time, the eurozone will disintegrate. And Germany will be the cause.
This may seem a strange assertion, because recently we’ve heard cheery news from Europe – and from Germany in particular. Just over a week ago, Germany reported its fastest economic growth in 20 years. At 2.2% quarter over quarter, that’s a blistering annualized growth rate of almost 9%.
We are used to emerging market powerhouses like China and India growing that fast… but staid old Deutschland? Wow.
As usual, though, the headlines don’t tell the whole story. The Panglossian optimists, ever determined to look on the sunny side of everything, have as usual gotten the key elements wrong. To understand why – and to explain why the eurozone is still headed for a crack-up – let’s begin with Greece.
Greece: Still Burning
Image courtesy of AU Herald Sun
When the Greek debt crisis hit the front pages earlier this year, the story was encapsulated in photographs. As fiscal austerity measures descended, riots broke out in the capital. "Firebombs in the streets of Athens" told the world what it need to know.
Since then, economic conditions on the ground in Greece have not improved. In fact they have grown far worse. And some believe it is only a matter of time before the whole of Greece, not just Athens, bursts into metaphorical flames of rage.
The German publication Spiegel Online openly questions whether Greece could be "Entering a Death Spiral." With brutal frankness, Spiegel writes:
The entire country is in the grip of a depression. Everything seems to be going downhill. The spiral is continuing unabated, and there is no clear way out. The worse part, however, is the fact that hardly anyone still hopes that things will improve one day.
Menelaos Givalos, a faculty member with the University of Athens, foresees "extreme social consequences" when a new wave of Greek layoffs begins in September.
Nikos Meletis, a shipbuilder quoted by Spiegel, warns that "If you take away my family’s bread I’ll take you down – the government needs to know that."
"Things are starting to simmer here," Meletis adds. "And at some point they’re going to explode."
Implying, of course, that things haven’t exploded already… which they haven’t. At least not on the scale we could see sometime in the near future.
The economic pain in Greece compares to Great Depression levels. The IMF has forecasted 14.8% unemployment in Greece by 2012, but other forecasters see unemployment as high as 20%.
Worse still, as reported by a University of Piraeus study, Greek unemployment in some areas has risen as high as 70%. Think of that – seven out of 10 men (and women) without jobs. It is perhaps no wonder that, on walking through Athens, one can find streets where a quarter of the shops are closed.
These are the fruits of forced austerity, and the straitjacket of a rigid currency union that Greece cannot abide. At the 1896 Democratic National Convention in Chicago, William Jennings Bryan made political history in declaring "you shall not crucify mankind upon a cross of gold."
Greece is now being crucified on a cross of euros.
The Odd Silence of Schumer
Now, to pick up another thread before tying them together, let us turn back to Germany.
Until recently, Germany was known as the world’s largest exporter. The dragon wrested that crown earlier this year, on reports that Chinese exports overtook German ones in 2009.
So this begs an interesting question: Why isn’t Chuck Schumer angry with Germany?
Senator Schumer, as you likely know, is the protectionist politician from New York who loves to make sport of China bashing. The esteemed senator is one of the most strident voices in Washington, calling for China to give up its state-supported export policies so that other countries can compete… and muttering dark threats when China fails to comply.
And yet, as loudly as Senator Schumer champions the "lopsided China" cause, he says nothing about the Teutonic doppelganger.
It’s a head-scratcher because, when it comes to mercantilist export policies, China and Germany are bosom buddies. Consider the following (via stats compiled by Bloomberg):
- Exports accounted for 41% of German GDP in 2009.
- For Japan – a major exporter – that number was only 13%.
- For the U.S. – also a major exporter – it was a mere 11%.
- The IMF projects China’s 2010 GDP surplus at 6.5%.
- Germany’s surplus is projected at 5.5%.
So, in other words, Germany is somewhere between three and four times as reliant on exports as Japan and the United States, no export slouches themselves. At the same time, Germany’s surplus – a measure of the import-export gap – is almost as big as China’s.
"Anybody who believes China is a problem has to believe Germany is a problem," says economist Joseph Stiglitz.
"Germany has got to work on its domestic demand," adds PIMCO portfolio manager Andrew Bosomworth. "Not everybody can export. Somebody has to import."
In one of life’s little ironies, Germany’s aggressive export policies serve to make neighbors like Greece poorer. This is because Greece (or whomever) has little to sell Germany in return… and so German surpluses become additional deficits for lesser eurozone trading partners.
So here is the bottom line: When it comes to mercantilist trade policies, there is very little daylight between China and Germany.
They both want to export a damn sight more than they import… both are dangerously dependent on exports for economic growth… and both arguably operate to the fiscal detriment of their counterparties, who are encouraged to spend without reciprocal goods purchased in return.
Says the defiant German Chancellor, Angela Merkel: "We won’t surrender our strengths just because our exports are purchased more than those of other countries. That would be the wrong European answer to the competitiveness of our continent."
A-ha! Competitiveness. That’s the word we were looking for. "Competitiveness" gets us closer to the heart of things – and the reason why the eurozone is still doomed.
"Not Even a Group"
Under former CEO Michael Eisner, the executive suite of the Walt Disney Company was famously dysfunctional. Upon seeking help to encourage more teamwork, one outside consultant famously reported: "the results of my research indicate that you guys are not a good team. You’re not a team at all. You’re not even a group."
That’s a fairly accurate way to assess the 16 common currency members of the eurozone. Collectively speaking, these countries are not a team. They aren’t even a group.
In one corner of the room you have Germany, fiercely cutting costs at home while pumping out exports abroad. In the opposite corner of the room you have the "Southern" European countries, who don’t export much of consequence and find themselves wallowing in debt.
Meanwhile, as the lesser members of the eurozone struggle and wheeze under the weight of an austerity regime they cannot handle, like a weak man straining under a loaded barbell, Germany is the red-faced drill instructor shouting "toughen up!"
As with overly ambitious exercise programs, severe austerity measures can be disastrous. And what could speak louder of the "separate ways" problem than Germany hitting 20-year highs of economic growth, even as the engine of that growth – unreciprocated exports – does its part in driving Greece further into depression.
The whole thing is lunacy. Currency union without political and economic union is unworkable, and the true politico-economic correlation between Germany and the PIGS is zero.
A Foolish Fantasy
The euro was always a currency built on dreams – fantasy made real, rather than an outgrowth of hard-edged objective assessment. The problems that terminally threaten the eurozone now were known well in advance, at least in theoretical terms. But it was always just "assumed" that such problems could be worked out.
The problems cannot be worked out. The euro experiment only lasted as long as it did because flush economic times allowed the weaker economies of Southern Europe to boost themselves up with cheap debt. The good vibrations lasted as long as the credit flowed freely.
But now, with tough times here again, we can see the truly irreconcilable differences between Germany and the others. The experiment will have to end.
Slovakia Says No
In a preview of what is to come, Slovakia last week voted to reject paying its allotted share of Greek bailout funds. "Slovakia’s politicians have questioned the fairness of calling on taxpayers in the euro area’s poorest state," The New York Times reported, "to aid wealthier countries that failed to control their debt."
It only makes sense, does it not? Why should dirt-poor Slovakia have to pay for richer Greece’s mistakes – especially given the bailout money will simply go down a rat hole? (Greece is still going to experience some form of default. That reality has only been delayed, not denied.)
In time, too, ordinary Germans will regain the willpower to say "nein." As George Soros has put it, Germany’s politicians may be comfortable acting as the "deep pocket" of Europe, but ordinary German citizens will not tolerate this forever – especially since German austerity measures are making life hard at home even as exports boom.
Then too there are the banks to think of – those wonderfully leveraged European banks – who only passed the joke of a "stress test" because sovereign defaults were not properly factored into the scenarios. If things get as bad as they easily could in the coming quarters, Europe’s banking system is still going to blow. When this happens, "every man for himself" will be the order of the day. And the U.S. dollar could skyrocket.
Let’s Call the Whole Thing Off
In reality, the best solution would be some kind of semi-orderly breakup of the eurozone, so that mercantilist Germany and the suffocating Southern European countries can go their separate ways. The noble idea of the euro, which never accounted for political and economic realities, should be gently consigned to the dustbin of history.
It won’t happen this way, though, because it is too late for orderly solutions, and Europe’s politicians would go through hell in such a scenario. In trying to fight the inevitable, they will get hell anyway.
The real problems of the eurozone were never actually solved, just papered over. Nor is mighty Germany’s heavy reliance on exports a sure thing in a wobbling global economy. As with China, the dangers of such a strategy could soon become clear.
Say what you will about the United States, but at least the dollar has a single country behind it (rather than 16 squabblers). As the old saying goes, "united we stand, divided we fall." The eurozone is a house divided, and the deep divisions of the 16 member countries – as made worse by Germany’s mercantilist export regime – will eventually tear it apart.
Article brought to you by Taipan Publishing Group.
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by Nancy Morgan 
My generation never learned this lesson. As Steele writes, "The sixties generation of youth is very likely the first generation in American history to have won its adolescent rebellion against its elders." 
by Nancy Morgan
