Home >Opinion >The European crisis is not about nations

Narratives of the Greek crisis are usually framed as a clash of nations. At one extreme is the industrious German ant versus the lazy Greek grasshopper theme, which blames the entire crisis on the dissolute Greeks. At the other is end is the talk of Germany’s intransigent attitude, with unflattering historical references to Germany’s past, such as “Deutschland über alles", thrown in. In the middle is a lot of hand-wringing about how much money to give the Greeks and how much of a burden it would be for other European countries, and how best to come to a compromise.

The ant-and-grasshopper story seems, at first glance, to be very plausible. Germany saved 18.9% of its income in 2001, which went up to a high of 26.7% in 2007, just before the financial crisis hit. Greece, on the other hand, had gross savings of 18.7% of gross domestic product in 2001, which went down to a mere 12.6% by 2007. Clearly, it seems, the Greeks were living beyond their means, while the prudent Germans were stocking up for a rainy day.

What was the impact of these higher savings rates in Germany? Did it result in higher investment in the country? It did nothing of the sort. Investment as a percentage of GDP fell sharply from the level it was at in 2001. With a higher savings rate and a lower investment rate, the result was a high current account surplus. Between 2001 and 2007, Germany’s current account improved from a deficit of 0.4% of its GDP to a surplus of 6.9%.

The situation in Greece was the mirror image of that in Germany.

The German current account surpluses had to be invested somewhere and some of it found its way into the European periphery, in countries such as Greece. The euro helped the German export machine, because it was lower than what it would have been if Germany had a currency for itself. The surpluses were lent to countries like Greece, whose savings were much lower than its investments and which had huge current account deficits.

Greece, on the other hand, found the euro pegged too high to be competitive. Economists have pointed out that by ruling out external devaluation, the euro functioned much as the gold standard used to do earlier, forcing “internal devaluations" on countries, lowering their growth, cutting wages and social services and allowing unemployment to soar.

Those who don’t buy the German morality tale point out that Germany’s current account surplus resulted in a corresponding deficit in countries like Greece. Germany wasn’t doing anybody a favour by lending money—it needed an outlet for its surpluses.

But what if there’s more to it than a clash of nations? There’s another way to look at the issue. To what extent, for instance, have German workers benefited from the European Union? The Organisation for Economic Co-operation and Development (OECD), the rich countries’ club, has recorded the continuous fall in the labour share of income among its members. The International Labour Organization (ILO) has said that while German productivity has surged by almost a quarter in the last two decades, real wages have remained flat. The share of profits in income, on the other hand, has been going up consistently.

Why did this happen? It’s part of a worldwide trend, as capital becomes increasingly footloose, able to pack up and move shop if the workers become too restive. But the EU project was an early example of this ability of capital to turn supra-national. Elites in individual countries found it a convenient ploy to escape the demands for social justice in their own states and look for help from the EU. For example, in 2001, the year in which Greece joined the currency union, Greece lowered the top rate of taxation on corporate profits from 40% to 20%. In short, the European Union, far from being the misty-eyed idealist dream its leaders say it is, could well be just a smart scheme to increase capital accumulation.

Because of the wage repression in Germany, consumption growth was tepid and the country had to look to markets abroad. What better place to export than to the peripheral economies of Europe? But countries in the periphery, like Greece, were also seeing a smaller labour share in their economies. How would they finance their imports then? By borrowing, of course.

Here’s what Professor Michael Pettis, professor of finance at Peking University, wrote in his blog on the European crisis, referring to Spain: “...if you separate those who benefited the most from European policies before the crisis from those who benefited the least, and are now expected to pay the bulk of the adjustment costs, rather than posit a conflict between Germans and Spaniards, it might be far more accurate to posit a conflict between the business and financial elite on one side (along with EU officials) and workers and middle class savers on the other. This is a conflict among economic groups, in other words, and not a national conflict, although it is increasingly hard to prevent it from becoming a national conflict." He adds emphatically, "Above all, this is not a story about nations. Before the crisis, German workers were forced to pay to inflate the Spanish bubble by accepting very low wage growth, even as the European economy boomed. After the crisis, Spanish workers were forced to absorb the cost of deflating the bubble in the form of soaring unemployment." The same logic, of course, applies to Greece.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com

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