How Germany Gamed the Euro and Worsened the Crisis

The country's policies, intended to boost exports, have hurt the eurozone as a whole. Fortunately, there may be a solution.

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German Chancellor Angela Merkel speaks at party convention in Leipzig / Reuters

BERLIN -- On a recent trip to Greece, I visited my aunt in her Athens apartment. I'd arrived from Berlin, and she, like many Greeks these days, wanted to talk about Germany in not the nicest terms.

"The Germans are so strict!" she said, feeling, as do most of her compatriots, under the thumb of German-backed austerity measures. After all, she added, Greeks had for long been such loyal buyers of German products.

In order to illustrate this point, she pinched the collar on her button-up blouse. The shirt, she said, was made in Germany. She then pointed to the pot in which she was warming up the lunch she had prepared for us. It was also made in Germany. So was the oven, for that matter, and the refrigerator too. And as she pointed out later, even the porcelain cup with which she was drinking her coffee. "But what," my aunt asked, "do the Greeks sell back?"

She was alluding to a very important and often overlooked point. Since the advent of the euro currency, Germany has maintained a trade surplus, with about 40 percent of its exports going to other eurozone nations. But German policies meant to bolster these exports are now increasingly coming under the scrutiny of some economists, who blame German practices for some of the structural problems at the core of the eurozone's problems.

"The German conversation is obsessed with export and national competitiveness."

The issue is not so much that Germany sells a lot of stuff to other nations in the euro zone, as much as it doesn't buy back as much as it should.

"The problem is not Germany's high exports, it's the export surplus," says Till van Treeck, an economist with the Germany-based Macroeconomic Policy Institute. "Imports have been particularly low because domestic demand has been so weak." In real terms, he points out, private consumption in Germany over the past decade has barely increased.

Germany's aversion to debt and overspending has, of course, spared the nation from the sovereign debt rating reductions and credit bubbles that have troubled its neighbors. In addition, the German tendency to save for a rainy day -- a consequence, it's often thought, of  collective angst and the ingrained trauma of repeated war and economic collapse -- also helps keep consumption proportionately lower than in other nations. These traits are, of course, nothing to criticize.

But add stagnating wages  as part of Germany's export-oriented growth policy to the equation, and you get  an economy increasingly dependent on selling goods abroad, rather than consuming at home. Since Germany is the largest economy in Europe, accounting for a quarter of the GDP of the entire eurozone, this has a huge impact on its struggling neighbors, who'd like to sell more of their wares in Germany.

If you compare wage growth across the different eurozone nations, the result is startling. From 2000 until 2010, Germany's average annual growth rate of hourly private sector labor costs was 1.7 percent, the lowest in all of Europe and nearly half the European Union average.This represents, according to a recent Macroeconomic Policy Institute report, a "blatant downward deviation" from the eurozone average.

This phenomenon is largely the result of German government deregulation of its labor market shortly after the euro was introduced, making it possible, for instance, for German companies to hire temporary workers and pay them less than their full-time colleagues.

Germany's lower labor costs are meant to lower unemployment and add fuel to the nation's growth engine: manufacturing and exports. If the cost of producing goods is cheaper, they can be sold abroad cheaper as well, undercutting competitor's prices.

Germany, with its design and manufacturing prowess, has long been a proud exporter of automobiles and machinery. But this didn't always necessarily come at the expense of its neighbors. The introduction of the euro complicated matters. Beforehand, due to flexible exchange rates, a comparatively lower German wage growth, says Sabine Stephan, an economist at the Macroeconomic Policy Institute, would have led to a higher medium-run Deutsch Mark valuation, naturally offsetting any price-competitive export advantage. Meanwhile, less competitive nations with weaker currencies, like Greece, would still have been able to sell their goods on the German market relatively cheaply.

The euro changed all that. I can see signs of this when I go food shopping in Berlin. As my aunt asked, what do Greeks sell back? Perhaps feta cheese? But even when I've seen Greek feta for sale in a German supermarket, it's virtually always next to a German-made competitor that is nearly half the price. The Greek version might taste better, but because Germans have less expendable income, not all that many are likely to buy it. Even some headache-inducing, poor-quality Greek wines are much more expensive in Germany than better domestic wines.

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James Angelos is a freelance journalist who writes frequently about Europe from his current base in Berlin.

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