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The EU's flawed design

THE European Commission (EC) in Brussels – the “government” of the European Union (EU) – this week ticked off Germany.

Not because the Germans were doing anything immoral or wrong: they found themselves in the dog box for being too successful.

According to figures released by the European Central Bank (ECB), Germany’s current account surplus is now in excess of €20bn. In other words, the country earns much more by selling goods and services abroad than it does by importing them.

This means that the German economy is towering above the rest of the 17-member eurozone. The ECB says that the current account surplus of the eurozone countries is €13.7bn, considerably less than that of Germany alone. This means, of course, that some of the eurozone members have a deficit.

Being too successful is, in a sense, against the EU rules. These stipulate that countries’ current account deficits may not exceed 4% for three consecutive years, or its current account surplus may not exceed 6%. The Germans are presently running at around 7%.

On the face of it, the warning sounded by the EC and the ECB may sound a little strange. After all, how can you criticise a country for being successful, especially at a time when the European continent is tentatively picking up its head after a horrendous economic crisis?

The German economy grew by just 0.3% in the third quarter of the year, better than the French and Italian -0.1%, but not as good as the British growth of 0.8%.

This makes it clear that the German recovery rests on its export sector alone. The ECB thus has a point when it says that the Germans should do more to stimulate consumer spending.

The lack of consumer spending is indeed a major problem all over the EU. The economic crisis has devastated the economy. Unemployment has skyrocketed. Because people are unsure about their own immediate future, they cut back on spending, and that prevents the economy from growing properly.

In fact, there is more than enough money in people’s bank accounts and investment portfolios. But that is where it is staying - it is not circulating in the economy.

Various governments are trying to make spending more attractive but as yet, this is not succeeding.

It has become a conundrum. As long as people do not spend, the recovery is held back. And because the recovery is so hard to see in people’s personal lives, they do not spend more.

In this difficult situation the perennial debate about the future of the euro has again picked up.

French heavyweight commentator François Heisbourg (he is chairperson of the London International Institute of Strategic Studies and of the Geneva Centre for Security Policy) has just published a book, La Fin du Rêve Européen (The end of the European dream). He says that the “euro cancer” must be cut from the European body before it is too late.

“The dream has given way to nightmare. We must face the reality that the EU itself is now threatened by the euro. The current efforts to save it are endangering the Union yet further.”

In an interview with Dutch newspaper NRC Handelsblad, he also said: “I will gladly sacrifice the euro if the EU can thereby be saved.”

The fact is that the German export success has much to do with its culture. Traditionally, the Germans – as the other peoples in northwest Europe, those in the Netherlands and the Scandinavian countries – have a culture which combines frugality with hard and conscientious work.

In the Romanic south (and this is, of course, a generalisation), people like their siesta more than an honest day’s work, and they tend to spend much more freely than their northern counterparts. They also tend to be more corrupt - with the result that their governments have pulled these countries into a morass of debt. Which, in turn, meant that the northerners have had to bail them out repeatedly with loans worth billions which everybody knows they will never be able to pay back.

The fact is that the euro was sumperimposed on a Europe with disparate political and economic cultures which made it, in effect, a mismatch. That there were sound political reasons – to neutralise Germany after two world wars – did not take away this fact.

This makes it much, much harder to drag Europe out of the crisis. And therefore, the German export success has the unintentional effect of disadvantaging its southern neighbours, which is why the ECB addressed the government in Berlin.

Heisbourg, of course, has a point. But what he perhaps underestimates, is that his medicine may be much worse than the illness he quite correctly diagnosed.

All in all, it seems that Europe’s economic troubles are not over, the tentative recovery notwithstanding. The continent’s economic structure has a design flaw, but the world will have to live with it. There is no other choice.

 - Fin24

*Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.



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