Greece and the other countries in the troubled “PIGS” quartet—Portugal, Ireland and Spain—have been the focus of recent debate about the eurozone’s survival. It was, after all, the relative weakness of their economies that exposed the eurozone’s limitations. But the future of Europe will be determined by Germany, not the PIGS.
Because of its relative economic strength, Germany is the place where the real decisions are made in the eurozone—an increasingly undemocratic project. At the same time, Germany’s relative economic weakness is blocking solutions to this protracted debt saga. Although Germany is strong in comparison to the other eurozone members, it is weak relative to its own performance post-reunification in the early 1990s. And it is certainly not strong enough to maintain the living standards of hundreds of millions people in struggling eurozone countries.
Germany’s slowdown began to manifest itself soon after its early 1990s heyday—when productivity levels first exceeded those of the US, and the country ran a significant trade surplus. Output growth fell in real terms from an average of 2.5 per cent in the 1980s to 1.8 per cent in the 1990s. This can’t be solely ascribed to the costs of German reunification. The substantial industries of the former West Germany—cars, machine tools and chemical products—were slowing down too. Germany’s trade surplus had almost disappeared by the end of the 1990s and productivity growth was faltering, so that its per-hour output dropped below US levels again in the early 2000s.