Wednesday, March 17, 2010

One stone, four birds... Greece, Germany and the European Union

Thomas Meaney (Columbia University) and Harris Mylonas (George Washington University) have an interesting take on the Greek tragedy in the European Community:

"What hasn't yet shattered the EU just might make it stronger."

This is particularly true for Germany. They argue that the German dithering over what to do about the financial crisis of Greece - and by extension, the Eurozone - was actually strategic. Allowing the crisis to come to a head - threatening to tear the European Union apart - actually benefits Germany in four ways:

(1) The crisis has caused the Euro to depreciate which will help German exports:
"Germany has been hamstrung by a weak dollar and even weaker Chinese yuan. The devaluation of the euro relative to the dollar in the last three months by more than 10% has helped German exports recover from a devastating 19% drop in 2009."

(2) The crisis may help Germany see one of their own nationals elected to head the European Central Bank:
"The candidacy of the longtime favorite, Italy's Mario Draghi, has been severely compromised by his close ties with Goldman Sachs and its role in helping the Greek government's attempt to conceal the full extent of its debt. Now Axel Weber, the current Bundesbank president, leads in the running, putting the Germans in a much better position to have one of their own head Europe's leading financial institution."

(3) The crisis - especially the fact that Europe allowed Greece to languish before agreeing to come to the rescue - has sharpened the German whip it's been cracking at other debtor countries like Spain and Portugal:
"Germany now stands on much firmer ground when it comes to haranguing debtor nations in the Eurozone to get their books in order."

(4) The crisis had increased support for the German stand against expanding the Eurozone:
"EU nations such as Estonia, Latvia, Lithuania and Denmark, which have not made it into the inner sanctum of the Eurozone, will now face a much longer wait."

So while Germany seemed to struggle on the world stage as the financial meltdown in Greece threatened to wreak havoc on the rest of the German-led Eurozone, Germany may actually stand to improve its position in Europe. And if what's good for Germany is good for the European Union, then this story may yet have a happy ending.

The piece by Meaney & Mylonas appeared March 15, 2010 in the Los Angeles Times.


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  4. Actually it's not "one stone, four birds," but "one stone, THREE birds."

    It's an open secret that Mr. Axel Weber will get the top job at the helm of the ECB. It has nothing to do with the current Greek crisis or with Mr. Draghi. This was the secret deal behind the selection of the perfect couple of "nobodies" - Van Rompuy and Ashton - to lead the EU. German Chancellor Merkel had agreed to pick these two on the condition of having a German official head the ECB.

    This is an ominous sign, to say the least. Mr. Weber is a renowned inflation "hawk." Perhaps it's not a surprise that German officials at the Bundesbank are all inflation hawks, with memories of the horrible hyperinflation of the 1920s still lingering in the minds of policymakers in Berlin.

    If Mr. Weber really gets the job, many EU countries will suffer grinding deflation for years. And the PIIGS won't be the only countries at the receiving end.

    Mr. Vreeland points out that "if what's good for Germany is good for the European Union, then this story may yet have a happy eending." But I'm afraid we will witness a parting of the ways between "what's good for Germany" and "what's good for the European Union" in the coming months and years. In order to advance the EU project, you need member countries that are economically healthy and politically stable. But if some countries enjoy high growth rates (e.g. Germany) while others suffer deflation and high unemployment (e.g. Greece), the diverging growth differentials will not only undermine the political consensus behind the EU project, but will completely tear the EU apart.

    Unfortunately, German policymakers seem not to be aware of the problems that are plaguing the EU in general and the euro in particular.

    The road ahead for the EU is a bumpy one...

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