Economic success at Europe’s expense?

“Millions of rapacious Germans are coming every year as tourists and eating us out of house and home, tearing up our first class roads, taking shameless advantage of our cheap services, fantastic food and boundless hospitality. … And rapacious Germans forced people to invest their capital in German industry. Germany thrives on the capital and human resources of the three most advanced countries in Europe: Albania, Moldova and Slovakia.”

This is a free translation of a sarcastic comment from a Slovakian netizen in Central European netizen.

A similar but more sophisticated view  you could find in FutureChallenge’s article “What’s the matter with European Socialism“: “The trouble is that many economists believe this [German] economic success came at the expense of other European countries.”

But it’s not sure from what he’s saying whether the author wants just to criticize trouble-making economists. So let’s make it a bit clearer: “And it has been catastrophic for the rest of the eurozone as Germany has acted, in effect, as a drag on demand.”

What’s making the Germans such scapegoats? The author of this article says: “labor costs in Germany no longer rose in line with the European average, so investment moved from other eurozone countries to Germany, and German growth was driven by exports to the peripheral countries’ unsustainable deficits and economic bubbles.”

In simple language, Germans avoided wages growing faster than the growth of their productivity, and even blindly sponsored peripheral countries in the eurozone.

Unit labour costs “are the ratio of total labour costs to real output”. So their growth in the peripheral countries could indicate that their productivity grows slower than wages. Thanks to this investment naturally “moved from other eurozone countries to Germany”, with a threat to leave the eurozone.

In the public sector growing income (together with other social expenditures) created “unsustainable deficits”, often paid for by bubbles or loans from abroad, let’s say from Germany.

In fact this was one the reasons why Greece collapsed sooner than other more indebted economies, which hold their debts in their own hands.
Related debt forgiveness created loses (also) for German investment funds. After the fall of German real income over the last decade (which, for example, forced more Germans to take on second jobs) this marks the second loss for Germany.

The current issues facing the euro could have been avoided. The establishment of the eurozone went hand in hand with strict rules to avoid easy government debts. 3% of a country’s GDP was seen as the maximum annual rate of debt a country could incur. The safe limit for total accumulated debt was set at 60%.
All of these limits were exceeded – by Germany as well – and south countries soon flet the effect of growing interest rates on their debt.

Another rule also broken during the recent crisis was that countries can’t be funded by the European Central Bank. Look at the Japanese example, which was surprisingly cited positively in the article, Japanese accumulated debt is over 200% of GDP.

“It has been catastrophic for the rest of the eurozone” as countries acted against effective control of these  rules. Not to mention that Greece had entered the eurozone on the strength of falsified numbers and is now paying for it.

Recently there has been “criticism of the eurozone’s new fiscal discipline treaty”. But it is hard to name any country with debt slightly below 3% of its GDP that has been disciplined. Government income is not 100% of GDP but several times less which means that real debt is a double digit percentage of its income.

In the game of balancing government budgets, there is also the question of how efficient the tax collection is  – a problem Slovakia faces along with the countries of the south.

The article correctly states that direct income cuts are problematic. But a way must be found to balance wages and productivity in peripheral countries.

The article also mentioned that losing the possibility of a fall in wages by local currency devaluation could be a minus but is not necessary KO criteria. One of the arguments against this is the negative influence of devaluation given  the high dependancy of south Europe on their energy=oil imports.

High unemployment, especially among young people, is another problem afflicting the countries of Europe’s ‘periphery’. This has to be addressed by utilizing unused Euro-funds where just small Slovakia could theoretically receive 2.3 billion Euro to support job creation for people under thirty. In a first concrete step the Slovak government is going to spend 270 millions euros. The unemployed and taxpayers can just hope that this state investment will have a better fate than the so-called “social enterprises” established in Slovakia which ended up generating private profits from Euro-funds.