Euro Crisis Grexit Aside, Reform Must Happen

Regardless of what happens with Greece, the euro zone will continue to be buffeted by currency woes, says the head of the Handelsblatt Research Institute.
What's ahead?

A bankruptcy of the Greek government can scarcely be avoided.

The creditor countries can, in consideration of their voters, agree to provide further financial assistance only if it’s linked to tough austerity measures. But the current Greek government was elected on its promise to refuse to implement such measures.

Financial markets seem prepared for the so-called Grexit. At least the agitation about news from Greece isn’t getting out of hand. The crucial question is: What comes afterward?

With the euro rescue package, the no-bail-out clause in the treaties of the European Union was to all intents and purposes canceled. And the fiscal package agreed upon in 2012 is no guarantee that euro countries will maintain budgetary discipline in the future. Because of numerous special rules, the European Commission can practically decide as it wishes about introducing punitive measures; sanctions will remain the exception.

Thus even after a Grexit, the euro zone will remain a problem, because its member states’ economic heterogeneity has increased over the last 15 years. No way exists around a further intensification of cooperation if the euro-zone community is to endure in the long term.

To be the member of a currency union means renouncing national sovereignty over prime and exchange rates. It’s no longer possible to cushion disparate developments in wages and prices through monetary and exchange-rate policies. The real exchange rate becomes the decisive factor in maintaining price competitiveness.

Internal devaluation through lower unit labor costs remain a relatively short-term instrument for stimulating growth and employment  — as was the case in Germany at the start of the previous decade. Not only was Germany's then-chancellor, Gerhard Schröder, forced to recognize how difficult that is, but Greece’s last few governments also fell apart over that issue.

The euro crisis has increased the disparities. Southern Europe has fallen behind in relation to its northern neighbors. How do things go from here? One possibility would be a United States of Europe with a finance ministry having its own tax revenues and the right to intervene in national budgets. But this option is detached from reality.

So really only two options remain for making the euro zone secure for the future: a “financial compensation scheme between countries” or a “solidarity-based wages policy.”

A solidarity-based wages policy would admittedly shift the focus of the German business model somewhat away from exports toward domestic demand.

A financial compensation scheme is a feasible path for equaling out living standards, akin to the sharing of revenues between richer and poor states in Germany. It’s questionable, however, whether the weaker countries’ economic performances could be enhanced in this way. Foreign money can create sluggishness; the competitiveness of the recipient nations could decline further.

If one looks at the tug-of-war over the comparatively modest sums with regard to Germany’s national financial compensation scheme, it becomes clear that an equivalent procedure on the E.U. level would, from a German point of view, be purely a theoretical option.

A solidarity-based wages policy seems more realistic. This would mean the southern countries wouldn’t renounce the moderate wages policy of recent years, and northern nations would have to respond with more vigorous wage increases.

This would level out the differences in competitiveness more quickly. This wouldn’t mean Germany had to risk losing its competitiveness with regard to prices. Even if wages had increased 5 percent in Germany last year, the drop in the euro’s value would have made the work factor cheaper in comparison with all the important target countries for German exports outside the euro zone.

A solidarity-based wages policy would admittedly shift the focus of the German business model somewhat away from exports toward domestic demand. Negotiations about remuneration for work are, of course, the prerogative of the bargaining partners. They would have to be won over to a solidarity-based wages policy. That’s not easy.

The shock of mass unemployment during the previous decade remains in the heads of the rank and file and its representatives. Guarantees of employment and additional jobs are more popular than steep rises in wages. It’s possible this will change in view of the boom in the labor market and an increasing lack of skilled workers, but no quick success could be guaranteed for this option either.

In 1998, Mr. Schröder called the euro a premature birth. He forgot that premature births require special care. And because no golden path exists for rapidly reducing the economic heterogeneity of a euro community of sovereign democracies, the Greek fiasco will most surely not be its last crisis.


 To contact the author: [email protected]