Germans Nix Fiscal Transfers in Election Year

germany-current-account-to-gdp spain-current-account-to-gdp

Merkel Rebuffs Rajoy’s Call to Do More to Boost Euro Stimulus – Bloomberg.

Spanish Prime Minister Mariano Rajoy has quite the set to ask the Germans for fiscal stimulus in a German election year. While there was no question that Chancellor Merkel would say, “Nein,” actually making a public plea was an excellent political move. At least he can show Spaniards that he tried.

The Eurozone’s problems do not reside exclusively in the periphery. Germans believe that running a large trade surplus is a virtue, but it is not. Germany has arcane, restrictive laws that limit its consumer economy. As a result, Germany does not share its wealth with its workers who must spend their euros in an uncompetitive retail sector.

This structure also hurts the periphery. A freer retail sector would benefit the Mediterranean countries that specialize in products like wine and fashion. Only  by restricting the consumer, Germany manages to run a large trade surplus at the expense of its Eurozone partners.

The FANG could offer fiscal transfers to their poorer brethren like in a real currency union, i.e. the United States dollar zone, but these would become permanent. Poor American states have relied on fiscal transfers from the federal government for years, and this shows no signs of abating.

The problem in the Eurozone is that the FANG have a weak euro that benefits exports while the PIIGS are stuck with a strong euro that hurts their competitiveness in world markets.

Everyone has two reasons for choosing a course of action, a good reason and the real reason. The good reason Germany maintains the euro with drips and drops of aid is that it is supposedly fostering European cooperation and other lofty ideals. The real reason is that Germany is getting a cheap currency. If the union dissolved, the German mark would render its export machine must less competitive.

If the Germans cared about European unification, they would be putting their money where their mouths are. When the 13 states unified to form the United States, the Federal government assumed all the states’ war debts. Until the Eurozone countries accept joint and several liability for each other’s debts a closer European Union is just talk.


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