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EU: Family Ties with Rich Cousin Germany Turn Bittersweet

Julio Godoy

BERLIN, Feb 24 2011 (IPS) - In terms of economics, the European Union (EU) includes one country – Germany – that is both friend and foe to the 27-member community, and their relationship has turned markedly bittersweet on the road to recovery after the global economic crisis.

On the one hand, German economic strength, as expressed by the country’s international trade surplus, is only possible at the cost of most of its EU partners. They are weaker than ever before after the crisis as many of them were on the brink of collapse.

On the other hand, without Germany’s massive financial support – in terms of bailing out Irish banks and avoiding Greece’s state bankruptcy – the European continent would have fallen into an economic abyss.

Germany’s Janus-faced partnership within the EU and, in particular, within the 17-member European Monetary Union (EMU), also known as the Euro zone, is even more noticeable now.

Recently official data has confirmed that Germany came out of the 2009 recession stronger than before. In 2009, as a consequence of the global economic crisis, the German gross domestic product (GDP) shrank by almost five percent, making it one of the most severe recessions in the industrialised world. But only one year later, Germany began growing again – by 3.3 percent – and is likely to continue at the same pace into the foreseeable future.

Most forecasts predict an economic growth in Germany between 2.5 and 3 percent in 2011.

This strong recovery has been possible thanks to the proverbial might of German industrial exports. While domestic demand continues to stagnate, German exports have soared. And the clients are mostly its EMU partners.

Even in the crisis year of 2009, Germany exported goods and services worth 1.1 trillion U.S. dollars – some 125 billion dollars higher than U.S. exports. This enormous export strength is even more impressive considering that Germany has a population of 82 million compared with the U.S. population of 310 million.

In 2009, Germany scored trade surpluses with practically all members of the Euro zone, with the exception of the Republic of Ireland, the Netherlands and Slovakia. In effect, the German trade surplus within the Euro zone means that almost all other member countries had a trade deficit.

In addition, because of the common currency they share with Germany, Euro zone members cannot take the most obvious route to international competitiveness – automatic devaluation in floating exchange rates.

For most Euro zone country members, sharing a common currency with Germany is a trap. For Germany, it guarantees that the country can continue exporting without fearing retaliation by way of competitive devaluation.

This explains why Germany is willing to pay the lion’s share of the European bailout package set last May to support state finances in several EU member countries such as Spain, Greece, Ireland, and Portugal. It contributes to financial stability across Europe.

The bailout package was revised this month by European heads of government. The mechanism will become permanent beginning in 2013, and amount to 500 billion Euros.

At the same time, the EU has been searching for a way out of this dilemma – a way to cope with German industrial production and trade hegemony within the region, and simultaneously guarantee that state deficits in more fragile member countries remain controllable.

Numerous economists have, in the recent past, remarked that Germany has increased its industrial pre-eminence within the EU thanks to the so-called “internal devaluation”. That means German export competitiveness is based on paying workers low wages.

As Frédéric Lemaître, correspondent in Germany for the French daily newspaper Le Monde, noted, “There are some five million German employees who have only a part-time job, and yet another five million workers who have only a so-called mini-job – that is, a 20-hours-per-week position, earning a monthly salary of 400 Euros (less than 550 U.S. dollars).”

Additionally, there are at least another one million people working temporarily, earning less than the half a normal salary. All in all, these workers represent almost 20 percent of the active German population.

“This means that while Germany is getting richer, income inequalities are rising,” Lemaître said.

Another consequence of this labour policy is that German domestic consumption has stagnated for several years, thus reducing demand for imports from European partners.

Now there are concerns about EU copying the German model.

Earlier this month, German Chancellor Angela Merkel, in cooperation with French President Nicolas Sarkozy, proposed a ‘European pact of competitiveness’ for the whole of the EU, based on the German model.

“We need to increase competitiveness and the yardstick should be the member state that is leading the way,” Merkel said on Feb. 4 in Brussels.

If applied, this pact would put an end to the indexing of salaries to the rate of inflation that is common in many European countries. The French-German plan also foresees an increase in the average working life, to benefit the aging population.

Both measures would represent a reduction of net income to workers.

The pact is set to be approved during a special summit of European heads of state scheduled for next March, and implemented within one year.

But the French-German proposals are facing considerable opposition, both at the EU and national levels. Some heads of state and unions reject ending the indexation of salaries. Others oppose increasing the corporate tax, fearing that it would harm their capacity to attract investment

“What the German leaders don’t seem to realise is that their model could only succeed thanks to high consumption and borrowing in Greece, Spain and Ireland,” Guillaume Duval, head economist at the Paris-based monthly review Alternatives Économiques, told IPS.

“If the German model were to be applied all over Europe, national domestic demand in all countries would contract, reducing trade within the EU, and leading to a continental economic downturn, to higher unemployment and higher state deficits,” Duval added. “That would be a catastrophe.”