Monday 2 July 2012

The Roots of the Crisis

After watching a lecture by Professor Heiner Flassbeck at the University of Leipzig, I felt the need to share some thoughts with you. Brieler’s central thesis was that Germany is largely to blame for the development of the debt crisis that is continuing to haunt Europe. An economy that on the one hand praises its cheap and high-quality products, but that on the other hand expects its southern neighbours to boost their competitiveness, should not wonder if its expectations are anything but met. Germany runs the largest export surplus in Europe, and the sum of its exports in terms of absolute value surpasses those of all countries except China – a country more than 15 times larger. Brieler argued with convincing clarity, that if a country runs its economy in this manner, there must inevitably also be a country that buy its products. That is the case not only because the sum of the values in a closed system must be zero, but also because the low wage policy of several consecutive German governments has killed off the last remaining shreds of a German domestic market. We may produce products cheaply, but in return, wages are necessarily low, causing domestic demand to shrink to insignificance compared to external demand. Germany’s costumers live in the south of Europe, but instead of supporting their economies to ensure the success of the monetary union, Germany has lowered its wages even further. Germany has outcompeted its own costumers! This would in itself not be a problem, if those costumers weren’t countries. In the business world, the demise of one company will give rise to another. With states, this process doesn’t work. Who will come to replace Greece, Spain, Portugal and to some extent even France? Surely no different nations will rise in the south of Europe, taking their place.

Public awareness of these easily understandable concepts would assist the elimination of prejudices that are beginning to undermine the future of the European project. The tabloid press is full of articles feeding into stereotypes about the lazy Greeks and the Nazi Germans. If only the most primitive of economic concepts, such as the ones outlined above were understood by the general public, and if policy-makes and economists were the use simple logic, many of these concerns could be resolved, revealing the reality of a continent that is exposed to a capitalist system that has seized to function and that has learned nothing from the turmoil of the financial crisis. Germany, being the economic giant that it is, needs to boost the spending capabilities of its own population by raising its wages. There may be some truth to the idea that the south has lived above its standards, as wages were high, while productivity was low (cutting wages and pensions is nevertheless the last thing one should do, but more about that another time). However, what is even more striking is the extent to which Europe’s ‘core’, with its high productivity and low wages, has lived below its standards.

Harald Köpping

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