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Pay up, Germany
Germany long profited from the euro system that bankrupted Greece. Now it's time to pay for it
 
David Frum
David Frum

The other day, a financial friend repeated a joke. "A Greek, an Italian, a Spaniard, and a German walk into a bar. Who pays? The German of course …"

Bzzzt. Let's stop the tape right there.

That joke — and many comments like it — reveals a broad misunderstanding in the U.S. about the currency crisis destabilizing Europe. Since that same crisis is ravaging U.S. financial markets, Americans ought to understand better.

The euro currency was not a favor done by Germany to the rest of Europe. In fact, you could much more convincingly argue that Germany was the biggest single winner from the euro — and that the time has come for Germany to pay for it.

Imagine if today's Federal Reserve governors were jointly appointed by the governments of China and Saudi Arabia, and you get some idea of why Greeks riot in the streets.

Imagine a world in which Europe had proceeded with economic unification, but did not create the euro.

In such a world, as in our world, goods and workers would move freely from Warsaw to Lisbon. Europe's internal investment barriers would have largely vanished.

What then?

In such a world, Germany as the most productive economy would have begun to rack up large trade surpluses. As those surpluses accumulated, the value of the Deutsche Mark would have appreciated against Europe's other currencies. The cost of doing business in Germany would rise relative to, say, the Czech Republic or Slovenia. Investors would shift their operations out of Germany. Jobs would be created outside Germany and destroyed inside Germany.

The poorer European countries would face a very different environment in our non-euro world.

Investors worried about currency risk would charge significantly higher interest rates to countries like Greece. More expensive credit would have constrained their ability to run budget deficits.

Now back to the real world.

By folding all of Europe's currencies into the euro, Germany prevented its neighbors from reducing their costs — thus enhancing German exports and preserving German jobs.

In the decade from 2000 to 2010, Germany's share of world trade rose by almost 9 percent (most of that being exports to other European countries).

The same currency that made German exports more competitive also made the exports of other European countries less competitive. Their shares of world trade declined over that same decade — in France's case, by a spectacular 23 percent.

But the less competitive countries did get something out of the euro: Lower interest rates. The currency arrangement that enabled Germany to sell more enabled Greece, Italy, Spain, and France to borrow more.

Germany got the jobs. Greece and the others got the debts.

American ears may prick up with recognition here, because the deal explicitly struck between Germany and the rest of Europe in the 2000s looks a lot like the arrangement tacitly accepted by the United States and China over the same period.

An artificially cheap Chinese currency stimulated Chinese exports and jobs. An artificially expensive American currency stimulated American borrowing and consumption.

Americans don't take it very patiently when the Chinese present themselves as the virtuous victim of American extravagance. Nor should Americans do so. It was Chinese currency manipulation that called forth the American credit bubble.

Southern Europe faces an even starker predicament. Not only did the euro inhibit their job creation and enable their borrowing — but it also adds greatly to the difficulties of repaying their debts. Unlike the U.S., which can at least repay in a currency it controls, southern Europe must repay in a currency it does not control — and that is not managed in southern Europe's interest.

Imagine if today's Federal Reserve governors were jointly appointed by the governments of China and Saudi Arabia, and you get some idea of why Greeks riot in the streets.

So my friend's joke needs to be amended.

What the German is being asked to pay for is not the drinks. He (and the other surplus countries adjoining Germany) are being asked to help pay for the cleanup after a party at which they had most of the fun.

Don't worry. The Greeks and the other indebted southern Europeans will suffer — and are suffering — plenty. But to ask the Greeks and the other southern Europeans to suffer exclusively is to forget how this crisis was created in the first place.

 

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