Germany and the euro

May the best man share

What the Germans see as economic virtue, some of its partners see as vice

Angela prepares for battle

IT WAS Greece that let public spending rip, lied about it and is now trying to stave off default. But the Greek crisis has somehow morphed into the German problem. Angela Merkel, the German chancellor, led resistance to a bail-out of Greece. For her pains, she was lionised at home (Bild, a tabloid, depicted her as a sword-bearing reincarnation of Bismarck) but denounced by her neighbours. “Angela, have a little courage,” pleaded Viviane Reding, vice-president of the European Commission. Other countries see Germany’s huge current-account surpluses as almost as big a problem as Greece’s deficits. They keep expecting a history-chastened Germany to contribute generously to the European project and to demand less than its due. Now it stands accused of turning away.

On March 25th European leaders patched up their differences over Greece. Under a deal cooked up by Mrs Merkel and the French president, Nicolas Sarkozy, Greece’s euro partners will come to its aid as a last resort (see article). That would be the bail-out that Mrs Merkel wanted to avoid, but it may never happen. Any help will require the unanimous approval of the 16 euro-area members, giving Germany a veto. IMF involvement will shield Germany from blame for imposing tough conditions. The hope is that the mere talk of a rescue will be enough to ease speculative attacks on Greece.

Yet the contradictions that caused the crisis, which go back to the euro’s birth in 1999, remain unresolved. Germany greeted the single currency as a levelling of the commercial playing-field and has been honing its competitiveness ever since. Greece and other Mediterranean countries saw the euro as an opportunity to engage in business as usual, but with the benefit of lower interest rates. There is broad agreement that Greece and the rest must change. The question is, must Germany, Europe’s biggest economy, change too?

To most Germans the idea verges on the ridiculous. Germany entered the single currency handicapped, they say, by a strong D-mark and the cost of unification. Employers and trade unions co-operated to keep a lid on labour costs. The government contributed by liberalising the jobs market. It also cut social-security contributions, partly making up the shortfall with higher value-added tax. Between 2000 and 2008 unit labour costs declined by 1.4% a year in Germany while rising by nearly 1% a year in France and Britain. Germany breached the euro’s budget-deficit ceiling of 3% of GDP, but eliminated its deficit by the eve of the crisis.

But this abundance of virtue looks like vice to several of Germany’s EU partners. Germany’s duel with China to be the world’s top exporter demands that it suppress incomes and so Germans’ ability to consume. Its current-account surpluses—and the mirror-image deficits of others—are a prime cause of instability. When France’s finance minister, Christine Lagarde, recently called for surplus countries to “do a little something” to promote European growth, she was casting doubt on Germany’s export-driven model.

She did not explicitly propose France as a role model but IMK, a German research institute close to the unions, does. France’s wage growth has kept up with productivity and inflation. Its exports have grown more slowly than Germany’s, but private consumption has advanced at almost triple the rate. Between 1999 and 2007 French GDP grew a third faster and employment twice as fast as Germany’s. Gustav Horn of IMK reckons that Germany’s focus on exports created 400,000 jobs, but weak demand cost another 1m.

Many Germans detect a plot to nobble their exporters. A sprinter should not have to “put lead weights in his shorts”, snarled the economy minister, Rainer Brüderle. The idea of imitating France, with its budget deficits and sickly manufacturing sector, seems bizarre. German officials reject the most obvious ways of shrinking the current-account surplus. Markets, not governments, set wages, they say. To push them up artificially would merely raise unemployment, which would depress consumption and imports still further.

One answer, Mrs Lagarde argues, would be to cut taxes, an idea supposedly favoured by Germany’s coalition government, which combines Mrs Merkel’s Christian Democratic Union with the Free Democratic Party. But a new balanced-budget amendment to the constitution will force Germany to slash spending or raise taxes next year—the opposite of what is needed to correct Europe’s imbalances and shore up growth.

There are other ways to shrink the gap between Germany’s high savings rate and relatively low investment, the underlying reason for its current-account surplus. A new OECD survey of Germany says the key is to boost investment, for example by encouraging innovation, which Mrs Merkel is keen to do; and by liberalising entry into professions such as law and accounting, which she may not want. But these are not quick fixes. Europe will be stuck with Germany’s surpluses for years to come.