Save Greece, Protect Germany
China is to the world as Germany is to Europe.
Industries in both countries are much better equipped to compete in export markets than are most of their rivals. That is due in part to fixed exchange rates that they zealously protect.
Both countries tend to see their advantage as the result of their own moral superiority: They save; others spend too much.
Germany’s fixed exchange rate is the euro zone, which legally includes 16 countries but in practice includes a number of others that seek to tie their currencies to the euro. It is enshrined in treaties and laws that assume that no country that adopts the euro can ever change its mind.
Now the world is riveted on the spectacle of Greece being forced to choose between default and seemingly permanent austerity. Other European countries, most particularly Germany, want to see many Greeks take pay cuts. If, that is, they hang onto their jobs. They also think unemployment should rise, and that many Greeks should consider moving to more economically attractive countries.
Sympathy and solidarity are in scarce supply. A few weeks ago, one German who has been involved in some of the talks regarding Greece put it simply: “They had their fun.”
The euro states have been talking about bailing out Greece for months now, hoping that a simple promise to do that would calm markets and reassure investors. But they are remarkably hesitant to actually part with the money.
About the only thing Europe has so far accomplished is to make the International Monetary Fund look good. When the I.M.F. does a bailout, it imposes strict austerity terms, which makes it wildly unpopular, but it provides money at very low rates. Europe wants strict austerity and high rates. Subsidizing the irresponsible Greeks is simply wrong, or so they say in Germany.
Angela Merkel, the German chancellor, made clear this week what she believed to be the primary purpose of the European rescue package. It was not to spare Greeks pain, or even to help that country’s economy regain competitiveness.
“When Greece accepts these tough measures, not for one year but several, then we have a chance for a stable euro,” she said.
All this brings to mind the American politician William Jennings Bryan, who was nominated for president three times more than a century ago. He campaigned against the “cross of gold,” arguing that American prosperity was being sacrificed so the country could stick to a gold standard.
Now the Greeks — and soon, perhaps, the Portuguese or the Spaniards or the Irish — are being told to accept higher unemployment and lower wages for the indefinite future. Not for their own good, necessarily, but to preserve a currency.
At the moment, the euro has weakened because of the Greek crisis. For Germany, that is another bonus. Its already competitive manufacturing industries get an extra boost.
Valéry Giscard d’Estaing, the former president of France, has said that his dream is to see Europeans subsume their national identities, so that a woman might say, “I am a European from Italy,” not an Italian. This crisis has made it crystal clear that the people running the more successful parts of Europe do not think in that way.
Greece needs many things, including labor market reforms and large reductions in government payrolls, some of which may come from the austerity being enforced from Brussels, Frankfurt and Berlin. But none of those will help the country’s industries regain competitiveness. Instead, domestic demand has been slashed by the austerity, while export demand remains weak.
Throughout most of Europe, manufacturers report a surge of new orders as the global recovery takes hold. But in Greece orders continue to plunge.
European markets were shocked this week when a bond rating agency, Standard & Poor’s, talked of Greek bond investors losing half their money. But it is hard to see a way out for the country without some kind of debt restructuring — and without a way to be freed from the harsh strictures of the euro.
The euro is not, of course, directly to blame for creating Greece’s problems. The country borrowed too much and spent too much. It has a tax system that is inefficient at collecting revenue, and a political system that has encouraged politicians to put people on the national payroll rather than fix problems that led to unemployment.
Were the country not in the euro zone, a devaluation of the drachma — perhaps several of them — would have taken place long before now. The country would have paid higher interest rates for years, not just recently, and the crisis would have hit earlier.
Competitiveness gained from devaluations can be a temporary thing, as Italy showed repeatedly before the euro came into being more than a decade ago. But with the euro, the devaluation alternative is not available as a partial fix. That makes the other possible actions less powerful and more painful.
Normally, a country in a deep recession would have a loose monetary policy. But Greece cannot have its own loose monetary policy; that is up to the European Central Bank, which must pay attention to the entire euro zone, not just to Greece’s problems.
The Chinese fixed exchange rate regime is, by contrast, less official and more flexible. But it, too, faces strains that come from the country’s difficulties in maintaining its own monetary policy.
China ties its currency to the dollar, and despite American jawboning, there is little that the United States can do about that. China has taken in so many dollars that it now owns a significant slice of Treasury securities issued by the Americans to finance the federal budget deficit.
When, or if, the Chinese currency is allowed to appreciate against the dollar, that will produce losses for China in that portfolio. But China has so far considered that cost to be well worth it for the stimulus it gives to export industries.
There have recently been hints that China would soon allow a gentle appreciation in the value of its currency against the dollar. Just how much that will do to relieve political pressures from America and Europe is unclear, but it would do little to cut into China’s trade advantages.
For China, the exchange rate policy has stimulated exports and employment. But there is a cost for the Chinese.
China has been trying to slow its own economy, but the fixed exchange rate regime has made that a lot harder. By tying itself to the dollar, it effectively appointed Ben Bernanke, the chairman of the Federal Reserve Board in Washington, to run Chinese monetary policy.
China will eventually have to deal with problems created by having a wildly inflationary monetary policy — a policy chosen based on American conditions, not Chinese ones. But for now the pressure is elsewhere.
Greece, it appears, has good reason to be fearful of Germans bearing bailouts. But having lied about its economic condition to get into the euro zone, Greece now has no easy way out, even though it badly needs one.