It may not be able to afford a neighbourly intevention now. Instead,it should be called to lead a true fiscal union,a United States of Europe
With Greece once again nearing default,calls are going out this week for Germany to step in to help. And many Germans are responding with indignity,saying they shouldnt have to bail out their profligate neighbours. But there is another reason Germany should resist demands to intervene,one that Chancellor Angela Merkel can hardly express publicly. Though Germany is undeniably Europes strongest economy,its outlook is not nearly as rosy as people imagine.
A quick checkup of Germany in early 2012 would give the country a clean bill of health: it grew at about 3.5 per cent in 2010 and 2011,outperforming the rest of the Group of 8 countries. Despite the recession,the number of people unemployed has been cut by almost half. German companies continued to increase their market share in world exports.
But Germanys position is hardly permanent. Its labour force is growing older,and as we have seen in Japan,a country with a high savings rate and a current account surplus can quickly turn into a low-savings and current-account-deficit country as its population ages.
Moreover,the view that Germany must reduce its current account surplus ignores the interconnectedness of European economies. If Germany is successful in exporting investment goods to emerging markets,it pulls its neighbours along. This view also ignores the fact that a strong German export sector acts as a sponge for surplus labour in other countries.
But even without a German-led bailout,the German economy is poised for a slowdown. Many economists expect growth to be well below 3 per cent this year; my own guess is that it will come in around 1 per cent. Such expectations reinforce the German publics fear of aggressive action right now. The international community appears unaware of the sobering experiences that Germanys taxpayers have gone through in the last two decades. By the middle of this decade,the equivalent of up to 100 per cent of Germanys annual GDP will have been spent to finance German reunification alone.Most of it is being financed through a slowdown in government investment in western Germany and limits on social spending,higher taxes and social contributions. A third of that investment,however,has been shifted onto the shoulders of the next generation as debt. In fact,the countrys debt-to-GDP ratio has risen from just below 60 per cent to almost 80 per cent,a bearable number in a strong economy but dangerously high should things slow down.
Is Germany the star performer,the role model to be emulated? Or is the start of 2012 just a snapshot,showing a series of lucky coincidences that should not be misread as structural strengths? With some qualifications,I believe it is the latter. Germany should not squander its recent gains through ill-advised macroeconomic policies. It should strive for sober policies,promoting sustainable reforms in Greece like privatisation,an efficient tax collection system and modernisation of the tourist industry.
Germany has learned the hard way that monetary union without some unification of fiscal policy making,and without political union,does not work. While today on average national parliaments control 50 per cent of the European Unions GDP via the public sector,the budget of the union itself amounts to just 1 per cent of GDP. To work,the European Parliament needs to command about a tenth of the national budgets,or about 5 per cent of GDP.
Instead of looking to Germany for short-term bailouts,Europe should demand that Germany lead the way to a true fiscal union. It is a challenging task,but one that Chancellor Merkel and the German public are willing and able to meet.
The writer is chief economist emeritus for Deutsche Bank
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