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In this picture taken with a fish-eye lens, the Church of Our Lady is photographed during the traditional opening of the world-famous Christmas market at the Old Town in Nuremberg, southern Germany, on Nov. 29, 2013. (Matthias Schrader/AP)
In this picture taken with a fish-eye lens, the Church of Our Lady is photographed during the traditional opening of the world-famous Christmas market at the Old Town in Nuremberg, southern Germany, on Nov. 29, 2013. (Matthias Schrader/AP)

Germany justified in leaving Europe behind Add to ...

Bashing Germany is all the rage.

Economists and commentators are doing it. So is the U.S. government and the leading politicians in recession-whacked countries. Germany’s success, they insist, is coming at the expense of the rest of Europe. It exports too much, runs an excessively fat current-account surplus and suppresses domestic demand, meaning it is not buying enough products from Italy, France, Spain, Greece and Portugal, and thus reinforcing their downturns.

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The bashers’ solution? In effect, they want to make the strong weak to make the weak strong.

This is teeter-totter economics, an attempt to drop the elevation of Germany, at one end of the board, to increase the elevation of all the countries on the other side of the fulcrum.

It won’t work. It is absurd to think that Germany will willingly dilute a formula that has made it Europe’s economic powerhouse, a marvel of efficiency and productivity compared with its hapless neighbours. Germany worked hard to learn how to compete with the United States, Japan, South Korea and, lately, China, and sees no reason to punish itself because France, Italy, Spain and the other feckless European countries did almost nothing to make themselves globally competitive.

Germany’s view: If the Italians want an economy based on mass tourism and a few mom-and-pop espresso machine factories, that’s their choice. Fiat is no longer investing in Italy because Italy is an unproductive, overtaxed mess that seems bent on destroying its status as Germany’s leading manufacturing rival (Fiat’s leading model, the 500, is made in Serbia and Poland, not Italy). Berlin will not take the blame for that, nor should it.

In the 1990s, Germany – then paying the enormous cost of stitching together western and eastern Germany after the fall of the Berlin Wall – was the sick man of Europe. In the next decade, as China vaulted onto the global manufacturing and trading stage, it pulled its act together. It introduced flexible work practices and eliminated country-wide wage negotiations.

Mostly, it ensured that productivity climbed faster than pay. Wage suppression worked wonders for its manufacturers and exporters at the expense of their slower moving rivals.

According to a recent study published on the website voxeu.org by Paolo Manasse, professor of international economic policy at the University of Bologna, Italian unit labour costs rose 23 percentage points more than its major trading partners between 2001 and 2011. Germany’s costs fell by 9.7 percentage points over the same period. Italy’s labour productivity rose only 2.7 per cent over that entire decade; Germany’s went up by 16.7 per cent.

That, in essence, is Germany’s competitive advantage and Italy’s competitive downfall. France is also guilty of the Italian disease, although to a lesser extent.

Prof. Manasse’s conclusion is that it is facile to blame German Chancellor Angela Merkel and her demands for endless austerity for the woes of Italy and its hapless economic siblings. Italy’s parlous state, he says, “is the legacy of more than a decade of lack of reforms in credit, product and labour markets [which] suffocated innovation and productivity growth, resulting in wage dynamics that are completely decoupled from labour productivity and demand conditions.”

Germany Inc. is unlikely to gut its economic model to bail out deadbeat European friends. Italy, France and Spain are getting crushed by efficient German industrial power. “The trading goods sector with the highest productivity destroys the trading goods sector of the one with the lowest productivity,” Charles Gave, chairman of GK Research, said in a November note. “It cannot be otherwise.”

There are two solutions. The first is for the industrial slugs to embark on a productivity revolution. But that is not happening; they are tinkering while praying for an economic miracle. Meanwhile, the cashed-up Germans are investing in their export industry, while the cashless Italians, French and Spanish can’t afford to invest. The efficiency gap is widening.

Barring reform in Europe’s dud regions, and Germany’s refusal to tamper with a good thing (although it just agreed to introduce a national minimum wage), the next option is to watch the euro zone reach breaking point as the economies diverge. At some point, the ever-poorer Italians will have to consider a negotiated exit from the euro zone. Reprinting the old lira would allow them to devalue their way to prosperity, or at least try to.

Italy’s exit may not happen, although it could as the pain level increases. In the meantime, as Germany gets stronger and everyone else gets weaker, the anti-German rage will build along with euro-skeptic political parties, such as Greece’s Golden Dawn and Austria’s Team Stronach. It is far too early to say the euro zone crisis is over.

Follow on Twitter: @ereguly

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