Thursday, October 20, 2011

Germany's Role in the Eurozone Crisis

I agree with Kantoos that Germany's influence over ECB monetary is problematic.  I, however, question his  his claim that Germany is not the main impediment to resolving the Eurozone crisis.  Germany's  influence over the Eurozone is vast and broad, of which its pull on the ECB is just one manifestation.  Ryan Avent sums this up nicely:
Germany, through its sheer size, its political clout, and its influence on the ECB, can make sure the money is there to end the crisis. No other euro-zone economy can. It's my understanding that Germany enjoyed its strength within the euro zone when times were good, surpluses were huge, and it was splashing out cash to the periphery. Now it seems to want to shrug and pretend it never asked for its dominant position. At a minimum, it seems willing to use the crisis and its strength to force as much of the cost of adjustment on others as possible, in a fashion that's clearly dangerous for the global financial system... Germany has a unique ability to bring the crisis to an end, and it is not accepting the responsibility that falls to it given its role, economically and politically, in the euro zone.
Germany's inordinate influence in the Eurozone has been felt since day one.  And more often than not, it has wielded its influence in a manner that best served Germany rather than the Eurozone as a whole.  This tendency is clearly seen in the figures below which show that ECB monetary policy has been rather effective in stabilizing the trend path of nominal spending in Germany, but not elsewhere in the Eurozone:

This discussion reinforces what seems obvious to me.  The Eurozone cannot go on with one nation having such a dominant role.  Even if the current debt and bank capitalization problems were to be resolved, the currency union would still have the German influence hanging over it.  That means Eurozone policies would continue to be shaped by German preferences.  For example, the real exchange rate imbalances in the currency union (that are behind many of the current problems) would be difficult to address with Germany calling the shots since it requires either painful deflation in the periphery or politically unacceptable inflation in the core.  It is hard to believe that Germany will really ever acquiesce its influence.  If I were a German leader I wouldn't want to give it up.  For these reasons, the most sustainable path going forward I see is Germany and the Eurozone parting ways.

1 comment:

  1. Another good article on the subject -