When discussing the German role in the euro-crisis these days in Berlin, relevant policy makers usually argue that Germany is willing to do all what it will take to save the euro. When guest from abroad raise their eyebrows (as they might have perceived the German position differently before), German representatives are quick to add that, however, the crisis countries have to do first what is in their power to overcome their problems. Only when full efforts have been made, Germany can be expected to pitch in. Needless to say, that the partners’ efforts so far are seen as insufficient.
This position fits nicely into the narrative that we Germans have undertaken very comprehensive and painful reforms in the 2000s and that the current good economic situation in Germany is the reward for these struggles. Implicit to this narrative is that Greece, Spain or Portugal have just not made similar efforts yet and can be expected to do much more before they ask for more support.
While this narrative is very popular here in Berlin, a look into economic data shows that it is highly questionable. Compared to the adjustments already made in Greece, Portugal, Ireland or Spain, the consolidation and reform efforts in Germany actually look laughable.
Let us first look at fiscal consolidation. According to current data from the OECD, Germany has violated the 3-percent-threshold of the Stability and Growth Pact from 2001 onwards with a peak in its deficit-to-GDP ratio of 4.1 percent in 2003. The deficit then fell and Germany recorded a roughly balanced budget for 2007. However, measuring efforts of fiscal consolidation usually is not done looking at the headline deficit as this data is distorted by the influence of the business cycle (a strong upturn can give you good headline figures even if you have structural problems – see Spain prior to the crisis) and by one-off effects such as privatization proceeds. Instead, economists usually look at the structural deficit.
According to the data on “underlying budget balances” (adjusted for the business cycle and one-offs) from the OECD, Germany has reduced the structural deficit from a peak of 3.5 percent of GDP in 2002 to 0.6 percent in 2007, a total reduction of 2.9 percentage points or about 0.6 percentage points annually.
This actually is laughable compared to what Greece has gone through: According to the OECD, Athen’s structural deficit has been 12.8 percent of GDP in 2009 and 1.8 percent in 2011. This translates to an average annual reduction of almost 6 percentage points. Or in other words: In one year Greece consolidated about twice as much as the Germans did over half a decade.
The story is similar for Portugal and Spain: Spain’s structural deficit is set to fall from 9.5 percent in 2009 to 1.9 percent in 2012, Portugal's from 9.5 in 2010 to 2.2 in 2012. Just from 2010 to 2011, each of these countries consolidated more than Germany in its five years of consolidation.
A similar point holds for wage restraint: According to data from the EU commission, from 2002 to 2007, real wages per employee in Germany fell by 3.3 percent or an average annual 0.7 percent. In Greece, real wages from 2009 to 2011 fell by 13 percent. Again, Greece corrected real wages in one year twice as much as the Germans did over half a decade of “painful reforms”. In Portugal, real wages fell by 10 percent over two years, in Spain by 7 percent over three years – all far in excess of the German achievements.
These extreme austerity and adjustment measures might explain why the euro crisis has deepened over the past months. Current economic research by the investment bank Goldman Sachs hints that there is a speed-limit of consolidation above which further budget cuts just produce a deeper recession, but not less debt.
The problem so far has not been unwillingness by the Greek, Spaniards or Portuguese to correct their budget problems. Instead, the problem has been that growth projections have proved to be grossly overoptimistic in the wake of budget cuts. As we see in the figures on the structural deficits, this is the real reason for the fiscal troubles these countries are in now.
So, what would have happened if the rest of the euro-area had been “a little more German”? Well, judging by the empirics of German adjustment of the past decade, this would have implied a much more pragmatic interpretation of the European fiscal rules and hence a much softer, slower and more growth friendly consolidation path. It is very likely that countries such as Spain or Portugal would have prevented the deep recessions they are now in (Germany managed to get through its consolidation with “only” several years of stagnation, not a deep recession) and we might have averted a full-blown banking crisis in Spain (German banks also had problems in the 2000s and a full-blown recession certainly would have pushed some of them over the edge).
Unfortunately, the German government does not seem to allow the rest of Europe to do as the Germans did. Instead, they are forced to conduct the unfortunate experiment of as-brutal-as-possible austerity without compromise – with the sorry outcomes we are now observing all over Europe.
Read more on: