Greece is running out of cash and is raiding municipal funds to pay its bills, enraging mayors throughout the country. Given Greece’s increasingly dire financial state, you would presume that the game has finally ended. It seems inevitable that Greece will default, crash out of the euro zone, reprint the drachma and, after a suitable period of economic mayhem, pull its act together, as Argentina did after it defaulted more than a decade ago.
Forget it. Greece will get a deal of some sort that will keep it within the euro zone, preserving the notion that the euro is “irreversible,” to use the description beloved by European Central Bank president Mario Draghi. But would that be good news for Greece? On the contrary, it might well doom it to an eternity of misery and hard work that goes nowhere, like Sisyphus, rolling his boulder to the top of the hill, only to have it roll down again.
Blame Germany, Europe’s self-perpetuating economic miracle. Germany is a juggernaut of endless current-account and trade surpluses, which are making it impossible for the euro zone to achieve any balance and symmetry. Those gorgeous (to the Germans) surpluses are making the euro zone’s weaklings – Greece, Spain, Portugal, Italy, even France – do most of the structural and fiscal adjustments. They grind away, getting nowhere, while Germany goes from strength to strength.
There is no doubt that Germany’s love affair with the euro is deep and passionate. Since the common currency was launched as an accounting currency in 1999 (the notes and coins came three years later), German exports, the trade surplus and the current account surplus – the positive difference between a country’s savings and investment – have soared. In 2014, the current account surplus stood at a record 7.4 per cent of gross domestic product, up from 6.7 per cent in 2013, which itself was extremely high.
There’s more. Germany derived 46 per cent of GDP in 2013 from exports. That makes it the global export champion among the industrialized countries. The equivalent figure in China is 26 per cent. In the United States, it’s a mere 13 per cent. As the euro sinks, German exports will grow. A euro valued at $1.60 (U.S.) or more might reflect the true strength of the German economy. Luckily for Germany, the euro now trades a $1.07. If that weren’t gift enough, German sovereign bonds have been the prime beneficiaries of the flight to safety. This week, the yield on German 10-year bonds was 0.1 per cent, down 1.4 percentage points in a year. That’s money for nothing. At the rate the bonds are trending, it won’t be long before the yields turn negative, meaning investors will be paying the German treasury for the privilege of owning its paper.
For the health of the euro zone, Germany would, ideally, save less, invest more, raise wages and let inflation take off. That would stoke up domestic demand and suck in imports from the rest of Europe, poor little Greece included. But that’s not the German style, never has been, never will be. Germans are allergic to inflation. The country spends relatively little on infrastructure. It is only now, begrudgingly, raising wages after a long period of austerity after the reunification of East and West Germany, in which time wage growth went nowhere.
The entire German machine seems geared to surpluses. In a Stratfor note published on April 21, George Friedman, who has written a book on the European crisis called Flashpoints, said: “Comparative advantage assumes [Germany] will want to export those things that it produces most efficiently. It is instead exporting any product that it can export competitively regardless of the relative internal advantage … whatever problem [Greece] has in maximizing its own exports, doing so in an environment where Germany is pursuing all export possibilities that have any advantage decreases Greece’s opportunity to export, thereby creating long-term dysfunction in Greece.”
Indeed, which brings us back to the new Greek crisis, deepening by the minute. Greece owes billions of euros to creditors, from the International Monetary Fund to the owners of Hellenic Railways bonds, in the next few months. It can’t possibly pay the bills without another tanker load of cash from the euro zone countries. But the euro zone countries are demanding extensive economic reforms, many of which Greece’s radical left Syriza government is unable or unwilling to meet.
The negotiations will go to the wire, as they always do, and some “extend and pretend” compromise will be found that will allow Greece to stumble along inside the euro zone, this time with even more debt and austerity. Germany will not allow Greece to leave, even though Germany in no way believes that little, uncompetitive, tax-evading Greece deserves euro zone membership. As Mr. Friedman pointed out, Germany fears a Greek exit because Greece, on its own, would no doubt install tariffs and other barriers designed to shield its economy from ruthless exporters. Germany needs to protect its surplus model, which depends on European free trade. Never mind that guaranteeing the German success model means turning Greece into Sisyphus.Report Typo/Error