If you wake up early in Frankfurt, you can drive to Madrid in time to have a late beer, without encountering a border crossing or a currency change along the way. Yet you will traverse an imaginary border between economic miracle and financial catastrophe, between booming Germany, the world’s second-largest exporter, and crisis-ridden Spain, a country so debt-troubled that it is in danger of crashing the euro.
You may notice that many more truckloads of German goods are headed through France to Spain than are going in the opposite direction – a one-way flow of goods and services that is the root cause of this continent-wide crisis, the reason why debt piled up along the Mediterranean coast in the first place.
Europe is now in a war, possibly unwinnable, against that debt, much as the United States has spent four years battling crisis levels of private-sector debt rooted in its trade imbalances with China. The root problem, however, is not borrowing or banks, but one of the most dangerous dilemmas of our age: People who live in exporting nations don’t spend money. They’re not paid enough to buy imports, so inequality soars and debt piles up.
Germans prefer a different explanation. Those Europeans along the Mediterranean coast, the story goes, simply gorged themselves on borrowed money and public-sector spending, their economies larded with corruption and inefficiency, and never learned to save money or have a proper private-sector economy. The two economic cultures were incompatible from the beginning, this theory goes, and should never have shared a currency.
That story might be believable if you were driving to Athens. The tiny Greek economy, largely irrelevant to this drama now, did live up to some of those stereotypes. When you come to much larger Spain, you realize it doesn’t tell the whole truth.
There is no obvious reason why Spain should be an economic disaster. It was not a country with high government debt – in fact, it ran surpluses. It was not a country with out-of-control public-sector employment or corruption; in fact, it was considered a lean, clean model country. It was not a corrupt or difficult place to do business, as anyone who has shopped at a Zara clothes store or used the ubiquitous Repsol gas stations will tell you. Its big banks were very solid; one of them, Santander, has bought some of the failed British banks. (Spain’s local mortgage-lending banks are another story.) And its citizens weren’t spendthrifts – Spain’s household savings rate is 18 per cent, higher than Germany’s.
But now Spain is in huge trouble. Its unemployment rate is 24 per cent, with 5.6 million people jobless. A private-sector mortgage debt crisis, caused by the cheap debt flooding in from the north to cover those imbalances, had to be bailed out by the government, adding public debt to the crisis. Borrowing costs have soared and commercial lenders won’t touch Spain, making it almost impossible to pay down the debt or get the productive economy going again.
It should be obvious that Spain’s problems won’t be solved by slashing government spending – it wasn’t the cause, and cutting it will stall the economy further. Nor will they be solved, in a fundamental way, by increasing it. So the debate over austerity, thrust into the mainstream by the election of French president François Hollande, is somewhat beside the point.
His alternative – “growth” – is something almost everyone agrees upon, albeit not enough to renegotiate the austerity-based bailout pact. But they’re talking about different things. For German leaders, it means making the Mediterranean economies more efficient and productive. While countries like Spain do need some reforms, this really misses the point.
What Germany needs, urgently, is to become a consuming nation. It built its post-1990s export boom on artificially low wages. That’s partly why Germans aren’t enjoying their boom as much as you’d think: They’re sitting on a $200-billion pile of cash that grows by almost $25-billion a year as export and debt payments pour in, unable to use it. As the International Monetary Fund has noted, this surplus is a core cause of the continent’s inequality and debt.
Germany needs to follow the Chinese. Beijing, facing a ruinous surplus four years ago, allowed inflation to take place, wages to rise, and consumerism to become prevalent and therefore its trade surplus to fall close to zero – a much healthier position for everyone.
Germany needs to follow this lead. The exporting nations need to inflate their economies, raise their wages, pour investment money abroad, creating markets for the prior victims of their debt. When those victims start selling, the others need to start buying. Those trucks need to start moving in the opposite direction.