Should Germany focus less on austerity and more on reforms?
German Chancellor Angela Merkel has insisted on tough austerity measures from debt-ridden countries seeking loans.
June 25th, 2012
09:57 AM ET

Should Germany focus less on austerity and more on reforms?

Editor’s note: Will Marshall is the president and founder of the Progressive Policy Institute. The views in this article are solely those of Will Marshall.

By Will Marshall, Special to CNN

Despite all the attention lavished on the Greek election, the outcome barely registered in Europe’s financial markets. Everyone knows the eurozone’s fate won’t be decided by the shimmering Aegean Sea, but in drizzly Berlin.

Germany is the key, but it’s torn by conflicting impulses. As the main engine of European economic integration, Germany is determined to preserve the 17-nation eurozone. But as Europe’s lender of last resort, it’s loath to bail out countries that took advantage of the euro to borrow extravagantly and live beyond their means.

To avoid such “moral hazard,” German Chancellor Angela Merkel sternly insists that Greece and other debt-ridden nations, notably Spain and Italy, commit to stringent fiscal discipline in return for the loans they need to service their enormous debts and pay their bills. Greek voters were incensed by these Teutonic demands for spending cuts and tax hikes, but they narrowly chose to stick with the euro rather than risking a “Grexit” from the eurozone.

What the “Club Med” countries really need, however, is not a morally bracing dose of austerity, but the kind of structural adjustments that Germany itself undertook during its “Third Way” phase  to meet the challenges of globalization. The fundamental problem isn’t that these countries are profligate, though some have been. It’s that their economies are uncompetitive, a reality masked until now by a strong common currency.

In the early 2000s, after a long spell of anemic growth and high unemployment averaging nearly 10%, Germany confronted its competitive problems head-on. A government led by Chancellor Gerhard Schroeder enacted Agenda 2010, a set of reforms that reduced taxes, cut pension benefits and revamped the unemployment system. Sweeping labor market reforms, known as the “Hartz concept,” proved especially contentious in Schroeder’s Social Democratic Party, sparking street demonstrations in 2004.

But the treatment worked. After reaching a high of 12% in 2005, unemployment in Germany has fallen to 6.7%, a 20-year low. Its economy grew a robust 3% last year (though it has slowed this year), and the country remains an export powerhouse despite its relatively high labor costs.

Germany is not alone; Holland and the Scandinavian countries have also adapted reasonably well to the new economic globalization. The basic formula includes negotiations with labor to moderate wage hikes; stronger work incentives and more flexible labor markets; constraints in public spending on health and pensions; and efforts to lower tax and regulatory obstacles to entrepreneurship.

To stay in the eurozone, countries like Greece, Spain and Italy  and even France  will need to restructure their economies along similar lines. Otherwise, they won’t be able to attract the investment they need to grow and start whittling down their mammoth debts.

The catch is that the shift from debt-fueled prosperity to a sustainable-growth model based on productivity will be painful and unpopular. In the short term, at least, it will mean lower wages, falling living standards and a reallocation of public investment from consumption to investment.

These changes are inevitable. The only question is whether they will happen abruptly or gradually.

For both economic and political reasons, it’s better they happen gradually. That’s the best argument for Germany to drop its insistence on austerity as well as its resistance to monetary expansion and euro bonds that would socialize sovereign debt so strapped countries like Spain and Italy can borrow again at a reasonable cost. In return, Berlin should press for structural economic reforms to put those countries on a firmer competitive footing.

In a widely noted article from German magazine Der Speigel, Niall Ferguson and Nouriel Roubini warned that the eurozone’s collapse, like the economic crisis of the 1930s, could discredit democracy and breed political extremism. In Europe, the number of democracies fell by more than half between 1920 and 1939 as fascism and communism arose in the ruins. "The EU was created to avoid repeating the disasters of the 1930s,” the article says. “It is time Europe's leaders  and especially Germany's  understood how perilously close they are to doing just that."

The analogy may seem overwrought. After all, today’s Germany, with six decades of market democracy under its belt, is no Weimar Republic. But it’s hardly inconceivable that countries that embraced democracy more recently  Greece, Portugal, Spain, not to mention former Soviet bloc nations – could be destabilized by a prolonged economic crisis.

In short, Germany also has to make some painful adjustments to salvage the faltering project of European integration. It will have to save and export less and spend and import more so that less competitive countries will have the chance to grow. And it will also have to overcome its historic fear of inflation, which now is the least of Europe’s worries.

The views in this article are solely those of Will Marshall.

Topics: Economy • Europe • Germany • Greece • Italy • Spain

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soundoff (28 Responses)
  1. j. von hettlingen

    Angela Merkel's paternalistic instinct tells her that the survival of the single currency should be her vocation. She was the – political – darling of Helmut Kohl, German chancellor between 1982-1998, who – together with France's first socialist president François Mitterand – were also the architects of the single currency. Their ideas were that the new currency would knit Europe together. Economists warned Helmut Kohl that the currency simply could not work, because a monetary union in the absence of a fiscal union was inherently unstable. Profligate nations would free ride and use the low interest rates to overborrow, and the whole edifice would come tumbling down. Kohl was dismissive and told the small-minded economists that the euro was not about economics, it was about peace, about creating a Europe that would never again go to war. The euro architects believed that, unlike the U.S.A., where political union preceded monetary union, Europe could do it the other way around. It looks as if this belief could only work if Germany proved willing to trade financial support for the South in exchange for greater control over the finances of eurozone member countries.

    June 25, 2012 at 12:46 pm | Reply
    • Dave

      When will Germany stop kissing Russias backside and condemn them for the aggressive pushy nuts that they are? Is the value of trade worth more than all your principles -or have you lost them?

      July 21, 2014 at 2:26 am | Reply
  2. Z. Van Cliff

    The Indian Debacle could overshadow the European crisis. GDP that has dropped off the cliff (4% est), budget deficits, collapse of Indian rupiah, rampant poverty, unemployment, FDI reversal, companies leaving town are some of the disastrous events that are threatening the Indian state. The downward spiralling is so severe that the Indian government has been unable to control it. Even the Americans have been unable to help and several trips by the treasury secretary were not helpful. This also has security repercussions for India and US defense secretary and secretary of state have flown in to counsel india on how to protect its borders with the help of Israel/IDF. Rumors have it that the breakup of India along the lines of Soviet Union is a very plausible scenario that I am sure intelligence agencies all over the world are factoring in their political stress tests.

    June 25, 2012 at 12:48 pm | Reply
  3. Against the Grain

    There is a new social, economic, and political way of thinking; it’s called the Third Way politics. It offers something other than a "Left/Right" alignment. Left or Right assumes supporters on either side lean toward either socialism or capitalism. But these two economic systems do not exhaust all possible forms of political economy. There is still many good things about the previous modes of economics and this “new modern way” may help people who are wary of anything too different then the status quo. "Third Way" economics is based primarily on the simple idea of economic democracy: extending democratic control to the economic sphere. While capitalism and socialism seem to be poles apart, they are really quite similar in some distressing ways. Both capitalism and socialism rely on unsustainable growth for their goals. Both systems rely on centralization of control of production – either in government bureaucracies or in monopolistic multinationals. The Third Way represents a way out of these trends. Current socioeconomic systems emphasize centralization of economic and political power; the Third Way emphasizes decentralization.

    June 25, 2012 at 12:49 pm | Reply
    • Z. Van Cliff

      Interesting thoughts. My sense is that you can't have economic democracy without political democracy. UN is obsolete. The concept of "Veto" is hyypocritical and against the grain of current democratic thinking. First, we need to evolve a centralized Democratic World Government. Then we need to decentralize control (economics etc) under this global umbrella to enable autonomy.

      June 25, 2012 at 1:14 pm | Reply
  4. Z. Van Cliff

    These politicians, economists, experts and pundits can't find their behinds with hands. What gives? Have not they learned from the American experience? Has not Sorbonne, Harvard etc taught them enough? It is not rocket science.
    I am of the school of thought that a Democratic World Government needs to evolve in lieu of UN et al. To think that some of these countries have veto power is mind boggling. No wonder the world is in a mess. No wonder we can't figure out solutions to decades old problems hanging out there. Let us do something before it is too late.

    June 25, 2012 at 12:59 pm | Reply
    • Z. Van Cliff

      The theory behind this thought is that the world has become too complicated to govern and UN is not the answer.

      June 25, 2012 at 1:04 pm | Reply
    • Samuel Brinckerhoff PhD

      As you peruse the span of comments posted herein, it is quite obvious that UN, NATO, Eurozone have all played their roles but have become redundant in current times. "Z. Van Cliff" is quite right that we need to think out of the box. His call for a global democratic body embodies our political aspirations. We can't go back to the old paradigm that gave us several world wars. Present setup is more of a dictatorship with General America leading the charge. We need to consolidate and then decentralize under democratic principles.

      June 25, 2012 at 6:31 pm | Reply
      • Willie12345

        Thank you, Samuel. Nothing could be closer to the truth!

        June 27, 2012 at 9:13 am |
  5. JAL

    Is Germany in need for social reform? If so, they need to focus on themselves and not the Euro. The Euro will be thier scapegoat.

    June 25, 2012 at 1:32 pm | Reply
  6. Poul

    Estonia has economic growth over 7.5%. How did they do it? Public-sector wages got a 10 percent cut. They're raising the retirement age from 61 to 65 over the next 14 years. They reduced eligibility for government health benefits instead of broadening them. They're working on cutting the income tax.

    June 25, 2012 at 1:52 pm | Reply
  7. Joseph McCarthy

    First of all, Germany needs to rid itself of Angie Merkel and the "Christian" Democrats who are like a millstone around Europe's neck and replace them with more moderate Socialists. Secondly, Germany would help both itself and the rest of Europe by simply leaving the Eurozone and going back to the strong Deutschmark. Let China bail out the PIIGS countries since they have the money to do it with for a change!

    June 25, 2012 at 2:09 pm | Reply
    • Willie12345

      Now yours is the most sensible post I've seen here yet. Thank you, Joseph.

      June 27, 2012 at 9:15 am | Reply
  8. John F. Phillips

    I think all of the comments presented so far have some merit. The euro is a dead elephant that needs to be sent to the ash heap of history. I agree that there can be no monetary integration until there is political integation. Unfortunately, political integration will prove to be extremely difficult because of the cultural and political nationalism that still exists in Europe. The long term solution to Europe's economic problems lies in a return to the former national currencies, an intense effort at some sort of meaningful political and economic integration that will be a win/ win for Europe as a whole as well as for each individual state and then a possible common currency. The euro, while admirable, was a concept that put the cart before the horse.

    June 25, 2012 at 2:21 pm | Reply
    • Quigley

      Of all the comments that I've read here John, Joseph McCarthy's is the most sensible one. The unification of Europe has never been a good idea and never will be as Napoleon Bonaperte, Adolf Hitler and the Communists of Eastern Europe have all learned the hard way! Besides, the political integration of Europe will concentrate all political power into the hands of the very few!

      June 25, 2012 at 5:21 pm | Reply
      • Hanging Chad !

        Been there, Done that. It won't work. We can't be spinnin' wheels anymore. Time to elect a universal democratic government. One vote. Simple and straightforward. No caucuses .. no electoral system as in USA as it is not truly representative and disenfranchises the individual.

        June 25, 2012 at 6:39 pm |
  9. Possibilianp

    I find it somewhat disturbing that so much blame is put on people who borrowed too much (both in Europe and the US). They must have borrowed the money from lenders, and if the borrowers borrowed too much, it stands to reason that the lenders lent too much. Aren't the lenders in the business of lending? Aren't the lenders experts at what they do? Don't they know a heck of a lot more about lending than most borrowers know about borrowing? And didn't the lenders (US and German banks as well as the US "shadow banking" system) get bailed out by the taxpayers, while the borrowers got nothing? Something does not compute. It seems very hipocritical.

    June 25, 2012 at 8:16 pm | Reply
  10. Ck09

    Most of the German commentary I have read these past weeks has resorted to name-calling the Greeks as lazy, spoiled, ignorant, etc., and strongly wagging their fingers and demanding austerity as the only way to solve this. This solves nothing. Although it is absolutely the case that the Greeks have made poor decisions, I believe that the Germans are at fault also in that they needed to play a different role. What did they think would happen to a country like Greece, with no industry and no exports, to whom all this money was being given? Where was the due-diligence by Germany when they brought Greece into the EuroZone? I have worked in American industry for many years, and I see this somewhat like a large successful company acquiring a much smaller unsuccessful company with very limited resources and know-how. If the acquiring company does nothing ... does not apply resources and know-how to help the acquired company, what will the result likely be? ... Failure, of course! Mr. Marshall is right, if Germany is serious about keeping countries like Greece in the EuroZone, then they must help the problem they helped create by turning a blind eye to the inevitable ... As painful and unfair as it sounds, they must help Greece to build industry and infrastructure and buy some of their exports.

    June 25, 2012 at 10:51 pm | Reply
  11. gr8

    Damm nazis ..they will not get out of greece s throat . don't want your help please leave us alone.

    June 27, 2012 at 3:41 am | Reply
    • sue-helen

      Do you have anyone else in mind to pay for your dinner? Since Greece lied to be able to join the Eurozone, I think they should eat some humble pie now, don't you?

      June 28, 2012 at 4:32 pm | Reply
  12. izlumuk11

    Germany should leave the Euro to the rest of the euro-Marxists.

    June 27, 2012 at 8:02 am | Reply
    • Ian


      June 27, 2012 at 5:39 pm | Reply
  13. izlumuk11

    Germany should leave the Euro to the euro-Marxists.

    June 27, 2012 at 8:24 am | Reply
    • Ian

      Most illogical.

      June 27, 2012 at 5:39 pm | Reply
  14. Lion Tamer

    Real estate devalued to 10 cents on a dollar, so the banks that lost money can buy in cheap from everyone who wants out.

    The money/value will flow to the banks, otherwise troops will march to take it all.

    July 2, 2012 at 8:54 pm | Reply

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