The problem now is not the weaknesses of the periphery, it's the excessive competitive strength of Germany. Not only is the German economy inherently strong as a result of the high productivity of its workforce, its exports have added competitiveness because the euro is undervalued as far as Germany is concerned. Because it is the common currency of the eurozone countries, the value of the euro reflects the average of their combined competitiveness. But Germany's competitiveness is far above the average. So, for Germany, the euro is too weak. This is why Germany has been accumulating chronic trade surpluses on the scale of the Chinese.This is the arrogant, disingenuous and thoroughly misguided position that Chancellor Angela Merkel's Germany has been taking: the other nations of the eurozone could improve themselves by copying us. But since most of Germany's exports are to other European nations, having every country in the eurozone run net export balance with other eurozone countries isn't possible.
As long as the rest of the eurozone countries are locked in the euro with Germany, the only way for them to become more competitive is to become, well, more Germanic, through austerity measures that cut government spending, reduce welfare budgets, cut wages and raise unemployment. This is, of course, what they have been doing for the past two years.
The aim has been to achieve export-led growth. But because Germany is so hypercompetitive and has been unwilling to stimulate its own economy to achieve higher consumption, its eurozone partners have not been able to increase exports to it and have had thus to compete with it in exporting to the likes of China and the United States. [my emphasis]
Unless, of course, countries like Ireland, Italy, Greece, Spain and Portugal drive down their own standards of living through "internal devaluation" to levels that will devastate their economies far more than Angie's austerity policies have done already.
Part of that portion just quoted could be misleading. The program of "cut government spending, reduce welfare budgets, cut wages and raise unemployment" is primarily "Germanic" in that Germany under Angela Merkel is forcing those ruinous policies on other nations. to the extent Germany is doing any of those, it's nothing like on the scale they are insisting that Angie is forcing Ireland, Italy, Greece, Spain and Portugal to do to themselves.
Prestowitz and Prout actually seem to be serious about their proposal, which isn't realistic, either. Even if Germany left the currency bloc, the remaining countries would still be stuck with the same basic weaknesses of the eurozone. Prestowitz and Prout think that with Germany out of the eurozone, they might be able to adopt measures like eurobonds which Germany currently opposes.
But their discussion of the negative effects on Germany itself of leaving the eurozone give a good idea of the advantages Germany is currently getting from the eurozone:
The alternative is for Germany to revert to the deutsche mark. That would immediately result in appreciation of the German currency and competitive devaluation of the euro for the remaining eurozone countries. Germany would tend to buy more while selling less, and vice versa for the rest of the eurozone. The extra consumption that Germany will not deliver via stimulus policies would be automatically delivered by currency revaluation.In other words, since a high portion of Germany's exports go to eurozone countries and the euro is valued lower than a new deutschmark would be, a switch off the euro would be an immediate blow to German exports.
Tags: angela merkel, austerity economics, eu, euro, european union, germany, greece