German middle class must save the euro

10/12/2012

By Nicolas Berggruen and Nathan Gardels

The country needs a stable eurozone to prosper, write Nicolas Berggruen and Nathan Gardels

It is one of the truisms of the eurozone crisis: the reluctance of Germany to foot the bill for saving the single currency. Few of us actually enjoy picking up the tab for others. In the case of Germany, however, the stance of “not one more cent for Europe” is short-sighted and runs counter to their actual interests. The truth is that if the euro fails, Germany’s middle class will pay the highest price.

A good part of German middle-class prosperity derives from the dividends of labour market and structural reforms made in the first decade of this century. These helped counter the kind of hollowing out of the country’s industrial base that the US and Japan have experienced. Today manufacturing in Germany still accounts for more than 25 per cent of the economy. In the US it has fallen to a little more than 12 per cent; in Japan it stands at about 20 per cent, down from 35 per cent in the 1970s.

What never seems to be debated in Germany is how the industrial foundation of the country’s prosperity would be threatened if the euro fails. If that happened, Germany would be forced to return to the Deutschmark – which would almost certainly soar in value, causing the competitiveness of manufacturing to plummet.

In such circumstances, Germany’s multinational companies would be quick to develop survival strategies. Yes, there would be a short-term hit from the falling income of other Europeans who buy German goods. However, German manufacturers would waste little time shifting production abroad to take advantage of lower labour costs and capacity for quality production elsewhere. Design and research might remain at home, but the production and assembly associated with plentiful high-wage jobs will move away.

Precisely because of its historically strong manufacturing economy Germany has become less orientated to financial markets than others. This has led in turn to a certain deafness by political elites to the effect of Germany’s policies on global bond markets. Today, however, the reality is that bond markets will dictate not only whether the euro will survive – but also the costs the German middle class will pay.

If Germany wants to remain a broadly prosperous and fair society in a globalised world, it can only do so within a stable eurozone and all that entails – starting with, a banking union, then fiscal union and ultimately a federal political union.

If the euro fails, Germany’s financial sector would also take a hit and further damage the economy. The domino effect of default in the European periphery would ultimately end up hitting German banks and savers alike, since they are among the major creditors owning those troubled debts.

On top of these calamitous consequences, a failure of the eurozone due to the hesitations in Berlin would place the blame for the ruin of Europe on Germany. At a recent meeting hosted by the Berggruen Institute of Governance in Berlin, the financier George Soros warned that German insistence on austerity over growth is dividing Europe once again – this time fostering a permanent division between creditors and debtors.

If a financial curtain imposed by creditors descends on Europe, Germans will pay a high price of political and historical opprobrium.

To sustain the euro, Germany has to help correct today’s destabilising imbalances by accepting a decline in its external surplus, which currently undermines the ability of others to generate the demand needed to sustain their economies. Indeed with a diminished surplus, the transfer union that so many Germans oppose would be unnecessary.

But if Germany continues to run big external surpluses, a transfer union will become indispensable. Only then can Germany ensure its customers can finance the purchase of its goods.

These manifold implications of a failed euro make it clear that the real issue for Germany today is not about bailing out the rest, but about saving itself before it is too late.

Recent policy moves suggest that Angela Merkel may realise this. Getting Germany’s middle class to do so is one of the biggest challenges facing the chancellor as she heads towards federal elections next September.

The writers are co-authors of ‘Intelligent Governance for the 21st century: A Middle Way Between West and East’

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