Friday, 31 January 2014

The austerity of others

Still preparing the foreword for the German edition of 'Austerity. The great failure'. Another comment often heard in German debates about austerity is this:  'Why should we care about austerity in Greece and other distant places? That's their problem. We're doing fine and that's all that matters.'

Below are 7 reasons--in no particular order--why Germans should care about what's going on in the European periphery. (As discussed in the previous post the claim that Germany is doing well is rather dubious in itself. But won't rehash this here.)

(1) Much of German growth depends on exports and most German exports are to European countries. If Germany's main trading partners don't grow the market for German exports is smaller and Germany grows less. Germany is doing better if everyone else is doing better.

(2) The crisis in the European periphery has in part the result of German export surpluses. The German trade surpluses correspond to trade deficits in the crisis countries. These deficits were financed with credits (taken out by the private sector). When the credit bubble burst, governments stepped in, their borrowing costs rose and this led to the Euro crisis. The trade imbalances need to be limited to have a stable Euro. A stable Euro is in Germany's economic interest because only with a common currency is a European free trade zone a truly integrated market.

(3) Since German exports were financed by credits in the periphery Germany has a strong interest that these countries do not default on their debt. Otherwise all the beautiful things that Germany has sold to these countries will ultimately not be paid for. Germany's economy needs a stable financial framework with solvent trading partners.

(4) Strong imbalances in the standard of living in an area where people are free to move will lead to significant migration. In other words, if the crisis in the periphery will be deep and long enough people will move from there to Germany. Often that's hailed as flexibility and a solution to Europe's unemployment problem. But this solution is not without problems. First of all, there are not enough jobs in Germany to employ everyone who moves there in the hope of getting a job. Second, large scale immigration creates social and economic problems. Even the very limited immigration from Romania and Bulgaria that is taking place now is extremely controversial in Germany. One might wonder if German society would really be able to handle large scale immigration without creating a dangerous political backlash. Third, it can hardly be in Germany's interest to empty the European periphery of the most skilled and ambitious individuals. That would harm the long term growth prospects of these countries and make it harder to every overcome unequal levels of economic development in Europe.

(5) Economics is not everything: if the economic and social crisis in the European periphery is not solved then it may well turn into a political crisis. There are signs of political instability in Greece, Italy and to a lesser extent in Spain. Germans ought to know from their own history how quickly an economic downturn can lead to the collapse of democracy. Today, the danger of political collapse and conflict in Western Europe is often underestimated. During the last 50 years the European Union has delivered on its main promise: keeping peace and stability in Europe. But this task was made easier by growing prosperity and a stable geopolitical context. The cold war was a period of tension but it also had a stabilizing effect. This macro conflict overshadowed and repressed other possible conflicts. Now the cold war is over and we live in a multi polar world that is a lot more fragile. As others have pointed out our world resembles that before World War I in many ways. If you add economic decline to this new international complexity a new era of instability and conflict may be the consequence.

(6) Germany could use this opportunity to polish its historical record. Modern Germany was created in the late 19th century and since that time its main contribution to European history were violence, instability and destruction. That's not uncommon for European nations but Germany still stands out. There were more benign periods in Germany's history but now would be an occasion to go down into history for once as the nation that brought peace and prosperity to Europe instead of the usual war and destruction.

(7) Compassion, perhaps? This is a somewhat old fashioned argument that many in today's debates brush aside all too easily. However, the notion that caring about your fellow human beings is a precondition to creating a good society and leading a fulfilling and happy life is central to European culture. It can be found in the writings of the pagan philosophers of antiquity, in the religious traditions of Europe and even in the thoughts of the hard-nosed writers of the enlightenment. Political decision need to take into consideration these ethical norms and values on which out societies are built.

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