Abstract
Section 2 of the paper describes some peculiar features of the German socio-economic model and argues that there is a widespread consent in Germany on preserving it in the face of global, European and national challenges. Essential components of this model are the export-oriented manufacturing sectors. Painful reforms were implemented in the first half of the 2000s with a view to strengthening the international competitiveness of these sectors and the German ability to penetrate the fast growing emerging markets. The second section of the paper addresses the intra-euro imbalances and discusses the thesis according to which the creation of the euro ended up acting as an asymmetric shock that put in motion a process of real divergence between the member countries, exacerbating the historical core-periphery divide. The elimination of the intra-euro interest differentials made easier for the periphery countries to borrow and to postpone the adjustment necessary to close the gap from the core. By reference to Sects. 2 and 3, Sect. 4 discusses the economic rationale underlying the popularity among German commentators and public opinion of the moral hazard issue related to the bailing-out of the periphery countries. This discussion allows us to outline the dilemma faced by the Germans: incurring the relevant costs implied by the virtual renunciation to the no-bailout principle and the dissolution of the euro. To shed some light on the terms of this dilemma, the paper seeks to clarify how the German objective to remain also in the future a leading player in the world economy and to preserve its socio-economic model may be compatible with the political need to accommodate the requests of its stagnating euro-periphery partners (and save the euro).
JEL codes: F41; F42; F43; F51.
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Notes
- 1.
Dullien and Guerot (2012) discuss the impact of ordoliberal ideas on the main German political parties and their positions on economic issues.
- 2.
This package of reforms took the name of the Volkswagen's personnel director, i.e. the Hartz reforms. See Burda and Hunt (2011) for a balanced discussion of the reforms and their effects.
- 3.
As thoroughly discussed in Siebert (2005), the combination of social principles, ordoliberal tenets, and a paternal state did lead to inner conflicts and inconsistencies in the past, and it still does so. This notwithstanding, as argued in the main text, the main pillars of the socio-economic German model remain solid and visible.
- 4.
As can be seen in Fig. 8, wage moderation has always been compatible with a very high compensation per hour of work, due to the high productivity of firms and to the specialization in high-quality manufacturing and capital goods.
- 5.
In an article for the “Welt am Sonntag” in 2009, Norbert Walter, chief economist at the Deutsche Bank from 1990 to 2009, wrote: “we don’t need to accept the short-sighted remedies proffered by Harvard economists and the advocates of the purchasing power theory of wages. There are more sensible options, but above all ones that are more sustainable. Since we Germans—like other societies—will soon experience the long-term ageing of our population, we are structurally on track to import more than we produce and export. Thus, our problem is not so much one of too little consumption at present, but rather of reliably financing our consumption in future, when pensioners are in abundance and there is a shortage of labour (i.e. for at least 2 decades after 2015).”
- 6.
As observed also by Allen (2005), however, not all the key features of the ordoliberal, social market economy were transferred from the German to the EU level. The EU’s resistance to adopt a Social Charter, for instance, made impossible to export the wage-coordinating institutions able to support monetary policy and to ensure structural adjustment.
- 7.
Clearly, the OECD and IMF suggestions are inspired by reasonable concerns for ensuring that growth in the long run has solid determinants. Yet it should also be noted that the very same countries that adopted the IMF-advocated model in the past are now trying to mimic Germany: strengthening their manufacturing sector, smoothing the transition of students to work, and enhancing social cohesion while preserving some flexibility in the labor market. More on this in Sect. 3.
- 8.
- 9.
- 10.
Precisely 7 % in 1996–1998, 19.5 % in 1999–2001 and 2002–2004, 23.5 % in 2005–2007, 18 % in 2008–2010, and 14.7 % in 2011—our elaboration on UN Comtrade data.
- 11.
Guerrieri and Esposito (2012) discuss the similarities and the differences between the both outward-oriented German and Italian industrial sectors and investigate the determinants of the German relative strength.
- 12.
Norbert Walter, in the article mentioned before, wrote: “Germany would be well-advised to deploy its strengths where its markets are. We cannot sell either our cars, our airplanes, our pills, our CAT scanners or our trucks in the domestic market. The volumes required for effective production can only be achieved if we view the whole world as our market.”
- 13.
Clearly, the European members are key commercial partners of Germany, whose remarkable export performance in the global markets remains also determined (for about 20 % of Germans’ total net exports in the mid-2000s) by the absorption of German merchandise from the rest of Europe. Should the euro collapse and the periphery devalue, it has been argued, Germany will certainly lose some of its price competitiveness and be hit. Still, it should be recalled that German production is specialized in sectors which do not directly compete with the periphery ones (as also shown by the egregious German export performance in the pre-EMU period).
- 14.
This should not hide the tremendous impact of large multinationals such as E.ON, Volkswagen Group, Siemens, Daimler, Deutsche Telekom, BMW, BASF, Bayer, Thyssenkrupp, RWE, among the others.
- 15.
Although it has been argued that household saving did not increase much if looked at in terms of the German GDP, it should be noted that the declining share of value added accruing to labor (due to the compression of the wages) would have suggested a reduction of saving.
- 16.
Facing a question regarding the possible changes to make in order to overcome the European current troubles, only 21 % of the interviewed Germans chose the answer “One can only obtain important changes in our society by acting quickly, even if it means sometimes being radical”, against the 33 % at the EU27 level (European Commission 2012).
- 17.
Positive evidence on this pattern is shown by Abiad et al. (2010), where Europe is shown to be the only area where capital flows “downwill” (i.e., from richer to poorer members).
- 18.
For a regional-wide discussion of the current account imbalances, see Barnes et al. (2010). The IMF country report on Spain, released in mid 2011, focuses on the experience of the Iberian country and illustrates how the combination of various factors (regulatory, fiscal, monetary) contributed to the building up of the imbalances (IMF 2011b).
- 19.
In 2003, on his blog, even an experienced economist such as Brad DeLong wrote: ``If development on the European periphery is successful, and if growth on the European periphery is rapid, then inflation on the European periphery will be rapid too. This means that, if euro zone-wide inflation is to be low, there must be deflation—falling prices—in the German-Belgian-French industrial core of the euro zone. [..] Yet as long as the ECB takes its goal to be low inflation euro zone-wide—rather than low inflation in the euro zone’s industrial core, with the developing periphery seen as a special case—it seems that the ECB has committed itself to a much more contractionary monetary policy than even the Bundesbank would have ever dared impose on the Bundesrepublik.” (3 April 2003, available at http://www.j-bradford-delong.net/movable_type/2003_archives/001264.html).
- 20.
It goes beyond the scope of this work to determine which countries are most responsible for the ill-designed institutional setting of the euro zone. Some politicians and scholars argue that Germany played a major role in shaping the system; on this basis, they also claim, Germany should now be more flexible and handful. Being it as it may, we recall than this work focuses on Germans, not on their political leaders. The German citizens may rebut to the criticism by observing that such ill-designed system did not cause the same troubles in all countries in the euro area, which reveals the role played by pre-existing country-specific weaknesses.
- 21.
We acknowledge that, as argued by those advocating a change in the German stance, moral hazard concerns cannot be easily applied in the presence of systemic financial troubles, global economic contraction, and self-enforcing negative feedback effects. In this paper, however, we do not assess but rather interpret the arguments animating the current debate.
- 22.
Paul Krugman effectively summarized the situation in the following terms: “What could turn this dangerous situation around? The answer is fairly clear: policy makers would have to (a) do something to bring southern Europe’s borrowing costs down and (b) give Europe’s debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years—that is, create a boom in Germany that mirrors the boom in southern Europe between 1999 and 2007. (And yes, that would mean a temporary rise in German inflation.) The trouble is that Europe’s policy makers seem reluctant to do (a) and completely unwilling to do (b)” (Krugman 2012).
- 23.
Many observers, in particular Germans, pointed out that the SGP did neither contain the right incentives to adjust public finances in good times, nor operationalize the debt-related provisions in the Treaty of Maastricht. But that the Treaty and the Protocol failed to introduce means to fix structural differences within the EMU was not the subject of an equally intense debate.
- 24.
Neither was Europe endowed with a system of fiscal and financial transfers to smooth cyclical fluctuations and share financial risks. These shortcomings, though critical for the current debt-bank crisis, are only partially related with the lack of response to the prolonged real divergence. In this paper we intentionally focus on competitiveness-related issues as the current account imbalances would not be closed, but most probably enlarged, by a bail out of the periphery not associated with any adjustment. While cyclical fluctuations in a common currency area can be easily smoothed by a system of automatic transfers (even with no conditionality attached), entrenched structural differences would be crystallized by the adoption of a cost-sharing system that does not ensure any adjustment.
- 25.
Asked about the main challenges for the EU in the future, Spanish, Portuguese and Greek people appear to be mainly concerned about unemployment (which indeed particularly afflicts their countries) and little with public debt; Germans instead are overwhelmingly worried about public debt (which does not appear a real burden of their country); Irish and Italian respondents are equally and significantly concerned for both. (Question QA14, European Commission 2012). Notably, though worried by domestic unemployment, the great majority of Spaniards and Portuguese (75Â % e 82Â %) maintains that, to tackle it, more decision making at the European level should be welcome whereas only 57Â % of the Germans are of the same opinion (with a EU average of 64Â %).
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Acknowledgments
We are grateful to the participants in the Villa Mondragone Economics Seminar 2012 in Rome for helpful comments and suggestions. In particular, we would like to thank Daniele Fano, Paolo Guerrieri, Francesco Mongelli, and Andreas Wörgötter. All errors and omissions remain ours.
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Bonatti, L., Fracasso, A. (2013). Germans at the Crossroad: Preserve Their Socio-Economic Model or Save the Euro?. In: Paganetto, L. (eds) Public Debt, Global Governance and Economic Dynamism. Springer, Milano. https://doi.org/10.1007/978-88-470-5331-1_16
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