What Ptolemy tells us about Germany and Greece

by Stephen King

Financial Times
February 20, 2012

Ptolemy’s theory of the universe held that the earth was at its centre. All other celestial objects – including the sun – rotated around it. It was, of course, nonsense. Aristarchus had more than 300 years earlier come up with a heliocentric model of the solar system. And much later Copernicus came along with his far superior system. Luckily, he died before anyone could be offended by his theory. Galileo, a supporter of Copernicanism, was not so fortunate, ending up under house arrest under suspicion of heresy.

Now, the eurozone is in danger of shifting towards a Ptolemaic system with Germany at its centre. Like Ptolemy’s theory, a German-centric eurozone may wilt under scrutiny. It requires economic adjustment by others to protect the interests of German taxpayers and voters. That, however, makes the system as a whole increasingly unstable.

Consider, for example, the need for the so-called peripheral nations to improve their competitiveness. What does this actually mean? Presumably, the likes of Italy and Spain would have to have inflation rates – both of prices and of wages – significantly below the eurozone average. That, in turn, would require countries such as Germany to accept inflation rates well above the average.

In a Ptolemaic system, however, the good men and women of Berlin, Bremen and Bonn might simply dig their heels in, refusing to tolerate what they could regard as an unacceptable loss of price stability in Germany. The competitive adjustment within the eurozone would then either fail to materialise or, instead, be associated with excessively low inflation, particularly in those peripheral nations desperately trying to improve their competitiveness.

More