Emmanuel Macron and the German disease

Flickr/Lorie Shaull
Emmanuel Macron

The speech was good for the history books. There is no way the European currency union could possibly continue in its present form, explained the speaker at Berlin’s Humboldt University in January. The fault lines in its construction “benefited only Germany”. That is why “(a continuation of) the status quo will mean an end to the euro within 10 years,” he cautioned. Emmanuel Macron could hardly have articulated his warning more starkly, but at the time it didn’t even merit a comment from Germany’s governing politicians.

Now, five months later, the speaker is
the new French president, and the German chancellor, her ministers and
indeed the whole population have to listen. That is why the centre-right
Christian Democratic Union (CDU) and its Bavarian sister party, the
Christian Social Union (CSU) and their coalition partner, the Social
Democratic Party (SPD) are now arguing about the “fiscal integration” of
the euro zone with its own budget, its own finance minister and
parliamentary control, as called for by Mr. Macron. And it didn’t take
long for the media – those guardians of Germany’s chauvinistic
affluence, from the tabloid daily “Bild” to the weekly news magazine
“Spiegel” – to issue their favourite warnings about a euro partner
trying to plunder Germany’s state coffers.

But again, the discourse is not focusing
on the real problem. It is not about milking the poor German taxpayer
for the benefit of irresponsible foreign debtors. On the contrary, it is
crucial that the Germans get to grips with the mismanagement of their
own economy. Because at the core of the euro system’s instability is the
unequal development of wages and inflation in member states. That was
only recently shown by a study of the Bruegel Institute, Europe’s
leading think tank. Its authors were able to show that it was the
Germans who continually break the central rule of a currency union:
adherence to a joint inflation goal. For this to happen, wages and
salaries would always have to increase in line with productivity: the
value of production per hour worked, plus the 2 percent inflation
prescribed by the European Central Bank (ECB).

The French have adhered to this, while in
Germany, since the start of the euro, wages and salaries have risen
much more slowly than productivity. Companies departing the collective
bargaining agreements and the unemployed being forced to accept any job
offer however badly paid it may be – a decree euphemistically described
as a “reform” – conspired to depress wage structures. The lower 40
percent of wage earners were hit hardest. Their real hourly wages were
lower in 2015 than 20 years before, as documented by the poverty and
wealth report of the federal government. In other words, a substantial
part of the population has not participated in the country’s economic
progress for two decades.

But this is also the reason for the
German economy’s extremely high surplus in the international trade of
goods and services and the corresponding deficits of other euro
countries – France in particular. The Germans profit from the purchasing
power of other countries, but themselves buy and invest too little in
their own country, thus exporting unemployment elsewhere. The flow of
capital is a mirror image of this. The countries with trade deficits
pile up debts while the Germans amass correspondingly high assets
abroad.

For this imbalance the chancellor and her
finance minister know only one cure: everyone should act like the
Germans, so they can become “competitive”, as Angela Merkel likes to put
it. But that is economic nonsense. Companies should be in competition
with one another, but not states, and certainly not states whithin a
currency union. That can only lead to greater divisions. Whenever euro
governments have actually operated this policy of reducing wages and
expenditure – euphemistically called “internal devaluation” – they have
succeeded in balancing their trade deficit at the cost of plunging
deeper into recession and increased unemployment. So France was well
within its rights to resist and Mr. Macron is right: the currency union
cannot survive if it forces all members to take part in a race to the
bottom with wages and prices. That can only escalate inequality and
drive citizens into the arms of nationalists.

But a budget and an investment fund for
the euro zone can only serve as a sticking plaster against this danger.
It would be much more important to combat the German disease of the euro
where it comes from. And the key to this, apart from reasonable wage
increases, is to spend more on public investment in Germany. Since 2003
investment has not even been enough to halt the decay of existing
infrastructure, and the state’s own capital stock has been shrinking
ever since. All over the country roads, bridges, railway tracks and all
the other public infrastructure have been rotting, not to mention
deficiencies in the education and health systems. If federal and state
governments were to seize the opportunity and put a stop to the decay
with zero-interest loans, it would be a blessing for the entire euro
zone. Such an investment offensive on its own, according to recent
calculations by the Institute for Macroeconomics of the Hans Böckler
Foundation, could lead to a sufficient increase of incomes and demand
for foreign goods and services to correct current account imbalances.

If everything remains as it is, however,
it would also force Mr. Macron and his government into a downward spiral
of falling wages, revenues and state spending. And victory for the
Front National in the next elections would be guaranteed.

This article was first published in German via “Der Tagesspiegel”.