Germany Has Won the Euro War

The focus of Germany’s export economy has shifted from Europe to China – and Germany has emerged as the biggest beneficiary of austerity.

The new media strategy of Angela Merkel is reminiscent of a Monty Python episode: outright denial is key. If the German chancellor is asked anything about that “damn little thing called austerity,” she opts for semantics: “You know, in Germany we did not have this word until recently.” This precious quote was given to reporters at a press conference last week after Mrs. Merkel met with Italy’s freshly minted prime minister Enrico Letta. Yet there is reason to believe that Germany’s iron lady knows quite well what austerity is. Austerity is her business. Austerity is the strategy that explains Germany’s present success. Austerity is what allowed Germany to win the “Euro War.”

Let’s begin with a simple observation: Germans are less and less interested in Southern Europe as a market for exports. The driver of German exports abroad are emerging markets (and the United States, to a lesser degree). Italy is only the seventh-largest importer of German goods, and Greece, Spain and Portugal are even further down the list. Nonwithstanding a collapse of German exports to the “olive oil countries” (a definition I picked up some days ago in Germany), global German exports have remained steady. Berlin has to thank Beijing: In 2004, the Chinese purchased 20 billion euros worth of German products. Last year, they purchased 67 billion worth of goods.

Austerity is a slam dunk for Germany

This is no coincidence. Several years ago, the no-nonsense German leadership inaugurated the so-called “Exportoffensive,” or export offensive, to leverage political and industrial resources towards emerging markets. The strategy already anticipated the declining importance of European markets for German exports. The reasons behind this trend are monetary and industrial: The “olive oil countries” now import more than they export, which has contributed to a depreciation of the euro. This allows Germany – a country with higher exports than imports – to offer its products at better prices in US dollars or Chinese renminbi. In the area of industrial policy, Germany substituted traditional Southern suppliers with Polish and Chinese partners. In the case of Poland, it could exploit the commercial advantages granted by the fact that Poland is an EU member (and might soon join the euro).

In this context, austerity exerts multiple effects. Austerity policies prevent countries from increasing their debt, thereby preventing a situation in which a Southern European deficit perennially sucks up German savings. Those savings are invested in Germany instead. Moreover, the austerity-induced recession has led to a transfer of foreign savings to Germany, thus stimulating Germany’s growth as well. I have lost count of how many Italian friends near their retirement age have bought a “studio” in Berlin. Austerity also means that the investments of German banks in the PIGS countries (Portugal, Italy, Greece and Spain) are relatively safe – the burden will instead fall on the shoulders of the tax-paying citizens from Europe’s South.

Austerity has rendered reforms impossible (since reforms would cost money in social assistance and industrial aid, as Germany knows well from its own reform attempts between 2002 and 2007), and it has prevented a return to competitiveness in Italy and Spain, which remain unfit for global exports. This is at least partially in Germany’s interest: competition from the South would lead to an appreciation of the common currency and increase the competitive pressure on the German Mittelstand. Austerity has also reduced the cost of the German energy bill: As oil and gas consumption in the PIGSs falls, energy prices fall, and Germany’s energy-reliant industry stands to benefit.

Austerity is a slam dunk for Germany. It guarantees that debts are paid, it avoids that international competitors emerge, keeps the euro low, keeps energy prices low, keeps savings in Germany and attracts funds from abroad. The German choice to sacrifice Southern Europe for the sake of exports to China is based on the belief that European markets are beyond maturity, and that it should be Germany’s priority to establish a reliable presence in the emerging BRICS. Giving up austerity would allow the re-emergence of markets, in Spain and Greece, that have always been secondary for Germany. Berlin prefers a slow decline or a stagnation of the PIGS if it means that Germany can proficiently enter China and other booming markets.

Germany fears a Southern exit

This approach has obvious limits, but not those commonly mentioned. It is known that a deeper and longer economic crisis in Southern Europe might affect German and Chinese exports and thus influence the Beijing-Berlin connection. Yet Germany will not give up austerity: austerity will evolve. Germany will try to stimulate domestic demand, which is relatively low compared to other countries in the industrialized world. China is attempting the same. Germany might also use its present advantage to lower taxes, stimulate private consumption, and increase the gap with the rest of Europe.

A new “first world” is on the rise, and it will include Germany, China, and the US. The Mediterranean quadrant will be out of the game. Germany is pursuing – with merit – a “Victorian Strategy” that entails the sacrifice of the continent for the benefit of Asian commercial routes. But what is forcing the “olive oil countries” to play along? Simply put, the lack of political leadership capable of renegotiating a position with Germany. As George Soros put it, (credibly) threatening to break the euro might be the strongest argument available to Southern Europe. Evanescent technocratic governments have had their time, and they have learned a lesson: Chasing the ghost of German aid will never help. Berlin simply isn’t interested.

Read more in this column Stefano Casertano: Steady as she goes

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