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.
The 1999 eurozone launch came at just the right time for Germany. It created a huge new “home” market for its stuttering manufacturers, boosted by a lower exchange rate than it could have expected with the old Deutsche Mark (DM). Germany also sharpened its competitive edge by keeping wages lower than its competitors. The country’s subsequent export successes—within Europe and then further afield—have helped to compensate for the slowing productivity it shares with other advanced economies.
Although membership of the eurozone did not reverse Germany’s slowdown—real GDP only averaged 1.2 per cent growth between 2001 and 2008—it would have been much worse without the export boom. Some estimate that 80 per cent of GDP growth came from net exports during this period. So while Greece and the other weaker members are often…