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April 29, 2010

Save Greece, Protect Germany

By FLOYD NORRIS
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 MOR
makes it wildly unpopular, but it provides money at very low rates. Europe wants strict
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austerity and high rates. Subsidizing the irresponsible Greeks is simply wrong, or so they say
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in Germany. Read

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 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 MOR
payroll rather than fix problems that led to unemployment. Off
Were the country not in the euro zone, a devaluation of the drachma — perhaps several of
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them — would have taken place long before now. The country would have paid higher Rea

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 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 MOR
lied about its economic condition to get into the euro zone, Greece now has no easy way out,
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even though it badly needs one.
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