Mathew D. Rose: Hello European Deflation! Good-bye Periphery!

By Mathew D. Rose, a freelance journalist in Berlin

What do the Catholic Church and the Eurozone have in common? More than one thinks. The former has left the reign of German dogmatism behind it. The Papal Ferula is sprouting green much like Tannhäuser’s staff to signify salvation. The Eurozone on the other hand continues to languish under the pall of German hegemonic ultra-conservative financial dogma and is heading inexorably towards a deepening social disaster and probably a renewed economic debacle.

“We are the pope!” declared Germany’s largest circulating tabloid Bild jubilantly as Josef Ratzinger was designated Pope Benedikt XVI in 2005. The Teutonic ecstasy was matched by the Schadenfreude of the opponents of the Holy See. They knew that the euphoria was as evanescent as the white smoke from the Vatican’s chimney. The damage visited upon the Catholic Church by the ultra-conservative dogmatist Ratzinger would surpass the best efforts of any anti-clerical movement.

With the coronation of Pope Francis many Catholics may well sense that their church has left a dark age behind it. Suddenly it has become an institution of non-commercial, humanitarian values like joy, hope and social justice. The shepherd of the Church seems more concerned about nurturing his flock than regimenting and shearing it.

While most of the world’s Catholics are celebrating, much of the Eurozone’s secular flock is being driven over the cliff into the abyss of deflation thanks to German financial dogmatism. A political Francis unfortunately is not on the horizon.

As if things were not bad enough already, unexpected and sobering news has come from Germany: real wages sank 0.2 percent in 2013. Before the introduction of the Euro, nations like Greece, Italy and Spain used to devalue their currency to rebalance disparities in productivity with their tramontane neighbours, like Germany. Nowadays with their fortunes bound to the Euro, this option has ceased to exist.

A rebalancing in the financially troubled Euro-periphery countries can only be achieved by wage deflation – a very bitter medicine for those affected, including prolonged high unemployment. The architects of this strategy had assumed simultaneous wage increases in the North would serve, especially in Germany, as locomotive of the Eurozone recovery. Under the best of conditions, rebalancing would have been a drawn out process and the question has been how long the citizens of the periphery would tolerate an austerity imposed by the North. Not part of the script was a real wage decrease in Germany. Not only is that unpopular domestically, but it also demands still higher wage deflation and increased austerity in the Eurozone periphery. In fact, as many critics have decried, deflation makes a recovery virtually impossible, as national debts become increasingly onerous.

This newest development is part of the German obsession with a massive positive trade balance, which brings us back to the German tabloid Bild, the bellwether of German idiosyncrasies, bigotry, inferiority complex or however one wishes to term it. Whereas “We are the Pope!” is a rare headline, “We are the World-Export Champion” is rather common. This is again true for 2013, as Germany’s trade surplus reached the record sum of 200 billion Euros ($277 billion). China was second with a surplus close to $260 billion.

Without a doubt, a positive trade balance can be achieved due to the high quality of products and innovation, which is the case in Germany; it can also be influenced by low wages and a paucity of investment, which is also the case in Germany. The latter does not fit into the German’s perception of their “success” and is surely not the sort of thing one would expect nor wish from a nation of Germany’s financial standing. What Germans also prefer to ignore is that one nation’s trade surplus is another’s deficit.

Germany’s “success story” is much the tale of the export of German unemployment. As most of the Euro-nations had increased real wages following the introduction of the Euro (until the Eurozone crisis in 2009), those in Germany have decreased since 2000. Were it not for real wage increases in 2010, 2011 and 2012 this decline would have been pretty dramatic.

Simultaneously there has been a significant increase in the number of Germans with low-paid, part-time and temporary jobs, many of whose wages are subsidised by the state to reach the equivalent of unemployment insurance. 25 percent of workers belong to the low-wage sector in Germany, the second highest among the EU nations. Germany has thus maintained high employment figures (“job miracle”) thanks to a period of austerity at home. At the same time total gross fixed investment has been neglected, falling from 24 percent in 1990 to 18 percent currently. Obviously Germany is relying ever less upon research and development or capital investment to remain competitive and ever more on cheap domestic labour.

These factors have depressed domestic market demand, which has a negative influence upon imports, which in turn increases the trade surplus. Even in 2013 as Germany’s exports fell slightly, imports sank even more, increasing the trade imbalance. Should you be a nation wishing to increase its employment and wages via export, Germany is not going to be much of a help. This policy, the product of German labour laws and government expenditure has a name: “Beggar thy neighbour”.

Was not there once talk of the Euro being a partnership and not a dictatorship, which it is de facto becoming? The US Treasury and International Monetary Fund have already criticised Germany’s one-sided policy, much to the ire of Germans. This month even the ineffectual EU Commission has found its voice – well at least a whisper – on this issue, meekly citing the adverse effects of Germany’s massive trade imbalance on the Euro area.

The head of Germany’s Bundesbank and one of the leading ultra-conservative financial figures in German politics, Jens Weidmann, criticised the EU finding in a press conference recently, calling is “absurd”. He opposes any measures; including a minimum wage for Germany that would hamper Germany maintain its export surplus. “Germany’s soccer premier league would not be more competitive if the first place team had to wear rucksacks”, was his metaphorical analogy.

Wiedmann is in good company. Angry reaction in German media and blogs followed the repeated criticism of its disproportionate trade imbalance. The tenor was that Germans shall now be forced to buy second rate cars from Italy and France or produce shoddy items to make the Eurozone periphery nations more competitive. That German workers might profit from the introduction of a minimum wage or better education, which would help to rectify the problem, does not seem to belong to the German discourse.

What do German wage earners have from being the “World export champion”? A decrease or stagnation of real wages, an increase in poorly paid jobs, a lack of investment in infrastructure and education, which is a threat to future employment.

For Germans – and not only wage-earners – the title of “World Export Champion” confirms their conviction that they are more hardworking, more intelligent and more disciplined than their indolent and corrupt neighbours in the South and East and for that matter anyone else in the world. Facts, such as that French workers are more productive than their German counterparts, are irrelevant.

This conviction may well sound racist, or even reminiscent of the Übermensch philosophy of Nazi Germany. That is not really surprising. Chauvinism and racism normally have deep rooted histories and keep reappearing in different intensities and manifestations.

The Germans might have swallowed the bitter pill of considering the French equals in order to form the EU, but what about the so-called periphery? In Anglo-Saxon circles the term is currently applied to the Eurozone nations bordering the northern Mediterranean. When however the idea of a core EU is mooted, as during the sovereign debt crisis of the past couple of years – not only by Germans – it runs from the Baltic southwards along the German border, turning west including Austria and Switzerland continuing to the Bay of Biscay. Add to this Scandinavia and the British Isles. This core EU runs well and truly along racist lines, although racism is a non-word in the EU.

There also remains the lingering suspicion that the consequent bail-in policy used by the EU and IMF a year ago for Cyprus as a condition for the 10 billion Euro rescue plan was influenced by the fact that Russian oligarchs and companies had large funds parked in banks there. Implicit was the fact that they were using the island as a tax haven. There was certainly no talk of a bail-in for the rescue packages for Ireland (which is a huge tax haven for American companies such as Apple) and Spain. There it would have been large western finance institutes, especially German and French, who would have been penalised, not the tax-payer.

Harsh German criticism followed the ECB’s decision to reduce its interest rate in November of last year to 0.25 percent to check a deflationary threat – a very real threat unlike the hyperinflation predicted by the Germans. For Hans-Werner Sinn, Germany’s Austerity Pope, “Our land was the great loser due to the lowering of the interest rate, while the crisis-nations, who are all net debtors, are the clear winners”. For most Germans it was a clear case of the Italian ECB President, Mario Draghi stealing money from German savers to support decrepit banks in his home country with cheap credit. That Draghi, who will probably go down as a very weak ECB President, has a responsibility to the whole of the Eurozone seems to be beyond the comprehension of Germans.

There is another element of the German mindset. Occasionally there are sarcastic references to Ms. Merkel’s “Swabian housewife mentality” with regard to the current financial crisis, referring to a parochial simplistic outlook concerning finance. Ms. Merkel is possibly no expert on the topic, but she need not be and is certainly not calling the shots. That is the responsibility of her finance-minister Wolfgang Schäuble.

Following the crisis in 2008 of Ireland’s six domestic banks – these were private banks – German and French banks were dangerously exposed due to imprudent lending to these institutions. The Irish government was dragooned into accepting these private bank debts, probably saving the Germans and French financial institutes from a financial meltdown. It will be seen if the Irish will ever be able to repay these debts, an excessive burden, having increased the public debt by over threefold to 110 percent of GDP. Schäuble’s response to a query if making taxpayers stump up for the irresponsibility of the finance sector was simply: “If everyone sweeps in front of their own house then the whole neighbourhood will be clean”. Just as The One Percent do not have sidewalks in front of their mansions, yachts and penthouse apartments, nor are they obviously to be held responsible for their financial recklessness.

Schäuble’s current project is balancing the German government’s budget for next year, although the nation’s economic recovery can at best be termed anaemic and deflation a real threat. With the current low interest rates Germany could invest in its infrastructure, which if meaningfully done would support growth and the creation of better paid jobs, while remaining within Germany’s self-imposed debt brake. This would also contribute to a more rapid German and Eurozone recovery. Schäuble’s policy bodes poorly for the rest of the Eurozone, many nations of which are still in recession or just hovering above it and deflation is already reality. That is however of little concern to the Germans, who cannot see further than the front of their house.

It is this sort of simplified German conservative dogma of ultra-conservative figures like Sinn, Wiedmann and Schäuble that is leading Europe into a very dangerous situation. What most Germans do not comprehend (and they do not seem to comprehend much these days): If worse comes to worse – and it is certainly going in that direction – their nation will not be spared.