In spite of the great gnashing of Teutonic teeth about the debt crisis, the view from Berlin looks far from disastrous. German exports are booming and economic growth in 2011 shamed almost every other European country, as well as the United States. All of which makes you wonder whether Germany's go-slow approach to fixing the crisis is more devised than accidental. Repeat in 2012?
Germany is an export machine – the world's third-largest, after China and the United States – and exports continue to climb. For that, it can thank the debt crisis. In 2008, just before the collapse of Lehman Brothers shredded the global financial system, the euro went as high as $1.60 (U.S.) and Germany was worried that its products, from Mercedes to machine tools, would be priced out of the global market. Greece, of course, fixed that little problem.
Today, the euro trades at about $1.31 – a fall of 18 per cent from the peak – much to the relief of German manufacturers. Now imagine that the debt crisis had not happened, and that Greece, Ireland and Portugal escaped the bailouts that triggered an existential crisis for the common currency. To be sure, the euro would be trading higher, but how much higher?
Royal Bank of Canada's investment arm has an estimate. In a conference call out of London and Toronto this week, currency strategist Elsa Lignos said she constructed a "synthetic euro to mimic where the real euro might have been trading" if the crisis had been absent: Its level would have been $1.60, peaking at $1.70. Given that the euro and the dollar were more or less equally valued a decade ago, that's a huge difference. German exporters would have been writhing in pain if the euro had gone that high.
No wonder Germany's gross domestic product is forecast to expand 3.1 per cent in 2011, outpaced only by Sweden (a European Union member that does not use the euro). According to Deutsche Bank, growth should be merely flat next year, which is a remarkable achievement given the crunch everywhere else. No euro zone country of any size will escape economic contraction in 2012; Italy is already drowning in the recession tank.
Germany did not become an economic superstar by accident. After the Second World War, the country decided that pinning is economic future on exports was the best way to eliminate poverty and generate high-value jobs. It worked. By 1960, West Germany alone had captured almost 9 per cent of global trade, or more than half the U.S. share. By 1990, the newly united Germany had replaced the United States as the world's top exporter.
The cost of unification, however, hit the new Germany hard. From the late 1990s until six or seven years ago, when growth rates were on average 0.5 per cent a year, Germany was known as the "sick man of Europe." The solution was a sort of internal devaluation, combined with massive amounts of investment, to make Germany more competitive.
That worked too. The Organization for Economic Co-operation and Development said that average German labour costs fell by 0.5 per cent from 2000 to 2008, while those in other euro-zone countries soared. Exports took off. So did the current account surplus, to the point it was second only to China's.
As Germany's trade and current account surpluses went through the rafters, those of most other European countries turned negative. It's impossible for every country to run surpluses. The "debt" crisis is only partly about excessive debt; it's really about current account extremes. Germany's current account surplus is too high; ditto the deficits in Italy, Spain, Greece and Europe's other weaklings.
Germany now finds itself in an awkward position. If the crisis is to be fixed, Germany has to convince the euro zone and the wider EU to become more like itself. That means budget deficits will have to come down and pro-growth measures, such as shrinking business taxes and less bureaucratic red tape, put in place. Labour costs will have to decline. As the weak countries become more productive – it's already happening, though ever so slowly – Germany Inc. is bound to suffer as the competition heats up.
Germany publicly decries the debt crisis. It resents its status as the prime sponsor of the bailouts of Greece, Ireland and Portugal. It is putting pressure on the rich euro zone countries, among them Finland and the Netherlands, to pump money into the International Monetary Fund so that the IMF, not Germany, takes on a more prominent crisis-fighting role.
Germany protests too much. It is enjoying the low euro. It knows that the deficits in most of the euro zone have been the result of its own roaring export success.
If the euro reverses course, and the struggling euro zone economies get their act together, the debt crisis that Germany so professes to loathe and despise may, perversely, be seen as a benign era. To be sure, the last two years have hardly been torture for Germany, in spite of the dire headlines.
Eric Reguly