Germany owes more to prodigal periphery

by Olivier Jeanne, Arvind Subramanian and John Williamson

Financial Times
May 25, 2011

The narrative in Europe on the recent crisis has taken the form of a morality play, pitting the profligate periphery (particularly Greece and Ireland) against a responsible core (Germany in particular). This narrative has become so entrenched that it has allowed Germany to play a decisive role in shaping the response to the crisis, and to emphasise that belt-tightening and reforms by the periphery are the key components of that response. Adjustment by the prodigals and (some) financing by the prudents is the mantra today.

This picture is undoubtedly true, as far as it goes: Greece, Ireland and Portugal followed unsustainable policies and were living beyond their means. But it is not the whole truth: the euro is good for Germany, especially German exports, because it is weaker than the D-Mark would have been – precisely because it includes countries such as Greece and Ireland. The key question is this: “Where would the DM have been before the crisis and today if there were no euro?” The fact is that the German economy would not be purring along at 4 per cent growth in the absence of the euro.

It is worth remembering that Germany cares deeply about exports too and has always been concerned about losing exports to other countries. In one of his early works, the development economist Albert Hirschman reviewed the history of policy discussions on German trade since the late 19th century and noted that exports were viewed as vital for the country’s economic dynamism. Current arrangements, in effect if not design, sustain that dynamism.

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