A Germans’ dilemma: save the euro or preserve their socio-economic model

The first part of this paper describes some peculiar features of the German socio-economic model and argues that there is a widespread consent in Germany on preserving it in the face of global, European and national challenges. Essential components of this model are the export-oriented manufacturing sectors specialized in the production of those capital goods and consumer durables in which Germany has traditionally enjoyed a comparative advantage. Painful reforms were implemented in the first half of the 2000s, a period in which Germany exhibited lower GDP growth than the countries of the euro-periphery (with the exception of Italy) with a view to strengthening the international competitiveness of these sectors and the German ability to penetrate the fast growing emerging markets. The second part of the paper treats the intra-euro imbalances and discusses the thesis according to which the creation of the euro ended up acting as an asymmetric shock that put in motion a process of real divergence between the member countries, exacerbating the historical core-periphery divide. Paradoxically, this divergence was fed by the optimistic conviction that the elimination of the nominal exchange rate as an instrument of adjustment within the euro area would have forced the peripheral European countries with a history of higher price and wage inflation to uniform their price and wage dynamics to the more disciplined core countries like Germany. Indeed, it was this expectation that convinced the financial markets to neglect country-specific default risks, thus leading the interest-rate spreads between core and periphery securities at record low levels. In its turn, the availability of cheap and abundant credit permitted the peripheral countries to postpone the structural reforms necessary for long-lasting convergence in productivity levels and competitiveness, to interrupt the effort aimed at lowering the public debt-GDP ratio, and to expand domestic demand to the benefit of importers and non-tradable sectors of the economy (in particular, of the construction sector). The elimination of significant intra-euro interest differentials facilitated the large capital outflows affecting Germany from the introduction of the euro, which are deemed to be among the main culprit of the stagnant real wages and low growth characterizing the country in the first half of the 2000s. Part three addresses some implications of the crisis that broke up in Europe after that the revelation concerning the true entity of Greece’s public deficit had provoked a drastic change in market sentiment and a more pessimistic assessment of the default risk inherent in the debt of peripheral countries. In particular, this part discusses the economic rationale underlying the popularity among German commentators and public opinion of the moral hazard issue related to the bailing-out of the peripheral countries. This discussion allows us to outline the dilemma faced by the German authorities in dealing with the choice between incurring the relevant costs implied by the virtual renunciation to the no-bailout principle and the dissolution of the euro. To shed some light on the terms of this dilemma, the paper seeks to clarify how the German objective to remain also in the future a leading player in the world economy and to preserve its socio-economic model may be compatible with the political need to accommodate the requests of its stagnating euro-periphery partners and save the euro. The concluding remarks summarize and elaborate more on the implications of the dilemma mentioned above.