How Germans Get The Euro Crisis Wrong

FRANKFURT AM MAIN, GERMANY - NOVEMBER 03: Mario Draghi, new President of the European Central Bank (ECB), arrives for a news conference following the first meeting of the ECB Governing Council with Draghi at the helm on November 3, 2011 in Frankfurt am Main, Germany.

Photo by Ralph Orlowski/Getty Images

Josef Joffe perfectly sums up the misguided German conventional wisdom that Eurozone problems are all “microeconomic” in nature rather than reflecting misguided macroeconomic policy. The logic goes basically that Germany’s doing great with the same monetary policy and fiscal constraints as the rest of the Eurozone, so the problem can’t be the monetary and fiscal constraints. If everyone just imitated [German policy X] then we’d all be fine. In Joffe’s case, [German policy X] “is ‘Agenda 2010,’ a package of reforms laid out by the government of Chancellor Gerhard Schroeder” that reoriented the welfare state away from supporting jobless people toward helping connect jobless people with work.

Agenda 2010 was a fine initiative, though if anything citing it as a model for others deeply understates the nature of dysfunctional Italian service markets (I know less about Spain) where rules often straightforwardly prevent firms from expanding and competing with one another. But lots of countries have lots of dysfunctional policies at all times. If Germany were in a severe recession, we could point to any number of rules (restricting shop closure times, severe restrictions on M&A activity) that introduce distortion and inefficiency. But Germany’s not in a severe recession. And to explain that we really do need to shift back to the macroeconomic policy variables. Consider the implications of Joffe’s remarks on the need for reform. Basic economic conditions in Germany are not the same as those in Italy or Spain. And yet monetary policy should be appropriate to the conditions that exist. Is the European Central Bank doing what’s right for Germany/Austria/Netherlands or for the similar number of people who live in Spain/Italy/Portugal? If it were the latter, then inflation in the former countries would be uncomfortably high. If it were the former, then unemployment in the latter countries would be catastrophically high. The situation that prevails, in other words, is the one we would expect if Spain, Italy, and Portugal are being made to live with monetary policy that’s appropriate to German conditions.

Don’t read that as blaming Germany—naturally Germans would rather have monetary policy that’s appropriate to Germany than monetary policy that’s appropriate to Italy. But this is what turns the currency union into a mechanism of doom. Instead of pushing Europe toward ever closer union it creates intractable conflict.