Merkel plays risky game

Hürriyet Daily News

German Finance Minister Wolfgang Schaeuble (L) and Chancellor Angela Merkel. AFP photo

The contrast between two sets of data that were revealed yesterday could not be starker: The unemployment rate in the 17-member eurozone reached 10.4 percent, the highest level in the common currency area’s history, in December. Yet, for the same month, the jobless rate in Germany, in seasonally adjusted terms, has dropped to 6.7 percent, the lowest rate since German reunification in 1991.

A cursory glance into other figures displays the huge discrepancy within the eurozone: The jobless rate in Austria, for example, stands at 4.1 percent, as opposed to 22.9 percent in Spain. Only 4.9 percent of the working age population in Netherlands is officially without a job – compare that to Greece, at 19.2 percent, and to Portugal, at 13.6 percent.

Similar contrasts could be found in other sets of data. How about a current account surplus in Germany that nears $200 billion (6 percent of economic output), versus an estimated deficit of nearly $250 billion for Italy, France, Spain, Greece and Portugal combined?

What the two sets of data display is that the overspending of peripheral eurozone economies such as Greece is financed by the surplus capital of “northern” eurozone economies such as Germany and the Netherlands. The Greeks and Spaniards of the pre-crisis times were encouraged to spend and spend, as this was exactly what created jobs for the Germans and the Austrians, and also because the huge capital accumulation in the “north” had to find a place to invest in, preferably within the eurozone, and mainly in the form of loans.

That’s precisely why because until the end of 2007, the spread between 10-year Greek and German government bonds were at an appalling low of below 0.3 percent, meaning that investors saw no difference in buying Greek government debt and German government debt. For the record, the spread today is over 31 percent!

As the eurozone periphery drowned in public and private debt, the center, which attained ultra-high competitiveness thanks to the pressure that kept labor costs low, increasingly depended on high exports of goods and capital, as selling to and investing in a domestic population whose life standards were on a downward slope made little sense.

The “German miracle” is inexorably linked with the “Greek drama” – and that would bring us to the conclusion that all the austerity in the world will not cure the ills of the eurozone economy. The problem is “structural,” and is about the “core” as much as it is about the “periphery.” As Kemal Derviş of the Brookings Institution emphasizes in a Jan. 11 article, China’s and Germany’s current-account surpluses are obstacles to recovery, as they “subtract from potential world effective demand and contribute to global planned savings exceeding planned investments – a recipe for recessionary pressure.”

The EU “fiscal compact,” agreed upon on Jan. 30, is just another step in Berlin’s policy to impose recession on the rest of the eurozone – a recession that would sort out current account problems temporarily while sowing the seeds of further economic and political trouble for Europe.

It seems that Chancellor Angela Merkel is willing to gamble the future of Europe for the sake of increasing Germany’s clout in Europe and the world. This could prove to be a very dangerous and unpredictable game.