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.