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EUROPE: Economists Blame Germany for Mediterranean Crisis

Julio Godoy

BERLIN, Mar 4 2010 (IPS) - Germany’s obsession with maintaining a trade surplus, in line with its mercantilist traditions, is one cause for the severe economic crisis that has gripped several Euro-Mediterranean countries, say economists.

Germany, the largest economy in the European Union (EU), has been for more than two decades one of the world’s leading exporting nations. Germany’s continued positive balance of trade means that most of its commercial partners around the world, and especially in Europe, suffer a bilateral trade deficit.

“Germany’s obsession with maintaining a positive balance of trade makes it a predatory nation,” French economist Guillaume Duval, editor-in-chief of the Paris-based monthly ‘Alternative Economiques’, told IPS.

Duval said that Germany has reached a constant positive balance of trade through systematic repression of its own production costs, especially on labour, in its industrial and services sectors.

“Germany has the second lowest cost per unit of production in the whole industrialised world,” Duval said. “The only other country which has lower unit cost of production is Japan.”

Official figures confirm Duval’s assertion. According to Eurostat, the European statistics agency, German salaries grew by only 9.5 percent between 1995 and 2006. During the same period, salaries in France grew by 49 percent, in Spain by 103 percent, and in Britain by 128 percent.

This policy of reduction of labour costs has led to a continued repression of the German domestic demand, and thus of the country’s imports. In the period mentioned, the German domestic demand grew by nine percent to current prices; in France by 29 percent; in Spain by 61 percent, and in Britain by 43 percent.

“In Germany, the country’s performance in international trade is seen as a success of the economic model,” Duval said. “But actually, this model has led to an impoverishment of the German people. What Germany practices is social dumping,” he added.

To prove his claim, Duval compared the French and the German gross national product (GNP) per capita. “In 1995, Germany had a GNP per capita of 23,600 euros (32,079 US dollars), while that of France amounted to 20,200 euros (27,457 dollars). That is, the French GNP per capita was 17 percent lower than that of Germany,” Duval said.

In 2009, while the French GNP per capita reached 29,900 euros, that of Germany was only 29,100 euros.

The German economic policy has led to growing social inequality: Ten years ago, the income of the richest 20 percent of the German population was 3.5 times higher than that of the poorest 20 percent. This ratio jumped to five times in 2007. In the same period, the number of people living in poverty jumped from 10 percent to 15 percent of the population.

“In a nutshell: The German policy of achieving a positive balance of trade through the systematic repression of domestic salaries has made most of the German people poorer, but is also a heavy burden for the rest of Europe,” Duval said.

Duval explained that the German trade surplus has led to a further deindustrialisation of other European countries. “France for instance has an enormous bilateral trade deficit with Germany, comparable with that with China,” Duval added.

As of December 2009, Germany reported a balance of trade surplus equivalent to 13.5 billion euros (18.3 billion dollars). Exports account for more than one-third of the German national output. Trade with EU partners makes 60 percent of the German total trade.

Other leading European economists agree with Duval’s criticism of the German international trade and domestic labour policies. Yet another French economist, Patrick Artus, said that the German policy of tax cuts since the mid-1990s has also supported German industries, and helped to cement their strategic superiority compared with competing European industries.

“The German tax load fell from 47 percent of the GNP in 1999 to 43.6 percent in 2009,” Artus told IPS. “The German non-wage labour costs also felt from 19 to 16 percent in the same period.”

Thus, while in 1999 the tax load in Germany was similar to that of the EU, it is now one percent lower than the European average. Similarly, the non-wage labour costs have fallen by three percent relatively to the European average.

As consequence of such policies, Artus said, “The German trade surplus vis-à-vis the European partners has skyrocketed, from 20 billion euros (27.4 billion dollars) per year in 1996, to 100 billion euros (135.7 billion dollars) in 2008.”

All these policies “make Germany a non-cooperative partner towards the rest of Europe. In addition,” Artus said, “Germany insists on fighting inflation, even at times of deflation, thus leading to an overvaluation of the euro. But because German industries are by far more competitive than their European competitors, the overvaluation of the euro only affects the other European countries.”

Joachim Becker, professor for international economy and development at the University of Vienna, also said that the German trade policy has helped to aggravate the structural problems faced by Greece, Portugal, and Spain.

“These three countries have been facing structural problems since their entry into the EU, back in the 1980s,” Becker said.

“All three countries suffer a process of deindustrialisation since many years,” Becker explained. “In Spain, the entry into the EU led to a low interest rate policy which encouraged credit-financed consumption and real estate boom. But the Spanish industry – more so the Portugese and Greek – was never able to cope with aggressive German export policies.”

Now, with the financial crisis leading to the bursting of the real estate speculative bubble in all three countries, “the German predatory trade policy aggravates these countries’ structural problems. This is also the case with France,” Becker said.

Becker said that the continued surplus in the German balance of trade is “the mirror image of the deficits in France, Greece, Portugal, and Spain, and makes the recession and the fiscal deficits in these countries even more difficult.”

Becker complained that the EU has imposed “an adjustment policy upon Greece similar to what the International Monetary Fund, in the 1980s and 1990s, imposed upon Latin American countries. This adjustment policy does not take into consideration the terrible consequences it provokes on employment, wages and living standards in countries already facing a dramatic social and economic crisis.”

Instead, Becker added, the EU should consider a policy of reducing the German trade surplus by stimulating the German domestic demand. “High increases of salaries in Germany would lead to a higher consumption of goods and services produced in the crisis [-ridden] Mediterranean countries,” Becker said.

The EU should sanction the “countries with a large trade surplus, such as Germany, and not the countries sinning in their budget policies.”