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Prof. Hans-Werner Sinn with his 2003 book: Ist Deutschland noch zu retten? (Can Germany be Saved?). The book's jacket had the summary: Taxes keep rising, the pension and health insurance systems are ailing. More and more companies are going bankrupt or are leaving the country. Unemployment has reached alarming levels. Germany is outperformed by its neighbours. It’s growth rates are in the cellar, and it can’t keep up with Austria, the Netherlands, Britain or France. Germany has become the sick man of Europe. How times have changed!
Germany has profited from the euro just as all other member countries of the
The euro created an area of stability in Europe and protected its member
countries from currency exchange turbulences. It boasted a lower inflation rate
than the deutschemark had enjoyed over its fifty-year history. It also
stimulated trade and represented a major step towards further political
integration in Europe. But did it help Germany more than the other countries?
Many think so, when they consider Germany’s export surpluses. Timothy
Geithner (US Treasury secretary) argued in a letter to the G-20 that
surplus countries such as Germany should carry out structural reforms so as to
reduce their surpluses. The EU even contemplates forcing Germany to raise its
wages. But the fact should not be overlooked that, by definition, export
surpluses in trade are actually net capital exports. Capital is the life elixir
of the capitalist system. Wherever it flows to, the economy flourishes; wherever
it flows away from, the economy flags. It is therefore misguided to interpret
export surpluses as a trading gain.
Germany bled capital in the years before the crisis, capital that fuelled the
economies of Europe’s south-western rim, but also the Anglo-Saxon countries and
France. The blood transfusion helped to bring about an unprecedented economic
boom in those countries, a boom that spread out from their real-estate markets
to the general economy, while Germany slumbered.
Germany became the second-largest capital exporter after China since the euro
announcement in the mid-1990s. The lion’s share of its savings flowed to other
countries, instead of being invested at home. On average, from 1995 to 2008
no less than 76% of aggregate German savings (private, governmental and
corporate) were invested abroad, while only 24% found their way into the
domestic economy. Germany exhibited the lowest net investment rate of all
OECD countries, together with the second-lowest growth rate among all European
countries. The performance of a euro-winner ought to actually look a bit
different than this.
The domestic economic boom that the capital flows brought to countries such
as Greece, Spain, Portugal, Ireland and to a lesser extent even France, resulted
from an explosive growth of the construction industry. Construction workers had
no problem finding jobs and had money to spend on consumption goods. Property
owners, in turn, could look forward to steadily rising wealth, which encouraged
them to acquire further credit-financed real estate. This all added up to a high
real economic growth, but also to an inflationary overheating that reduced
competitiveness and led to huge trade deficits. These deficits were the
unavoidable counterpart to the capital imports.
The opposite occurred in Germany. The capital outflows made the domestic
economy lose impetus and led to a slump in real estate prices. Consumer prices
and wages rose only marginally, much more slowly than in the neighbouring
countries. From 1995 to 2008, Germany underwent a real internal devaluation
of 18% compared to its EU partners. This devaluation made Germany’s export
surpluses possible. Such surpluses were a welcome substitute for the
deteriorating domestic economic activity. But they were not an indicator of
economic strength; instead, they were the result of an internal weakness brought
about by years of bleeding. This is the crucial misinterpretation of those
who assert that Germany was a winner of the euro.
The German capital outflows were not the result of the euro alone. In the
past few years, I have repeatedly raised the issue of Germany’s weaknesses as a
location for business and industry, in particular its excessive regulation of
the labour market and its welfare policies. These weaknesses were exacerbated
after the introduction of the euro, since it created a single capital market in
Europe and wiped out the hitherto large interest rate differences.
Capital could now flow unhindered across borders, and apparently free of
risk, in order to finance higher-yield projects abroad. That brought an enormous
advantage to the capital importing countries. German investors profited as well,
or so they thought at least. But the German workers, whose productivity and wage
levels depend crucially on domestic capital investment, suffered painful losses
that placed enormous strains on the German society.
Now the European debt crisis shows that some of the promised yields will not
materialise. Many German investors will never see their money again. This has
led them to think again. Interest spreads are rising, and savings are being
invested at home once more. A construction boom is just starting in Germany, and
the country’s economic growth, after a long time, again tops the league in the
Now the opposite of what happened in Europe’s south-western rim over the past
fifteen years is occurring. While the former capital importers stagnate, Germany
booms. However, wages and prices will, as a result, rise faster in Germany in
the coming years. This will decrease Germany’s competitiveness and reduce the
country’s export surpluses, with no need of prodding by the EU or the US Finance
There is only one major obstacle against such a development: a potential
prolongation of the EU rescue package for countries at risk, which currently is
meant to expire in a little more than two years’ time. Should this package be
extended, capital will continue to flow out of Germany, and the trade surplus
will persist. Thus the most important structural reform, to use Geithner’s
words, that Germany can make to contribute to a reduction of trade imbalances is
not to agree to an extension of the European rescue packages.